international journal of commerce and finance, vol. 5, issue 2, 2019, 206-210 206 future of the crypto currencies mustafa özyeşi̇l i̇stanbul aydın university, turkey abstract the main purpose of this study is to contribute to the literature by performing an original research. the main subject of the study is to investigate the future position of cryptocurrencies included in the sample. in this study, we tried to predict the future expected the popularity of 6 cryptocurrencies. for this purpose, we collect internet search data of each cryptocurrency included in the sample. popularity variable is determined by the frequency of searched numbers of crypto coins on the internet. we created graphs in the form of scatter plots by using ms excel 2016. in order to determine the ideal curve that provides the highest specificity coefficients (r2) of related to equations was preferred. according to the results of the analysis, it was determined that ripple-xrp may be taken out of the circulation in the market by november 2020. keywords: crypto currency, internet search numbers, popularity, ms excel, scatter plots graphs, google trends jel classification: c13, c20 1. introduction nowadays, crypto currencies have been grabbing more attention. they are gaining more importance day by day thanks to their price movements particularly bitcoin’s price performance. the crypto currency is a money concept that differs from conventional money term is subject to physical circulation. unlike usual money term, the attractive side of crypto currency is that they are traded, issued and circulated in the digital platforms. however the most important feature of crypto currencies is that they are not governed or regulated by a central authority. bitcoin, the first example of crypto currencies and others that followed bitcoin are totally are peer to peer electronic cash system and in this system online payments will be sent directly from a party to another without requirement of financial institutions (nakamato, 2008 : 1-2) in this study, in order to contribute to the literature, we tried to determine which crypto money could be removed from the circulation by using the number of searches on internet of each crypto money. 2. literature review darlington (2014), analyzed bitcoin’s both strong and weak sides and make conclusion about bitcoin’s future. firstly the main issue is described as infrastructure of bitcoin’s system. it is emphasized that this is hindering bitcoin adoption. it is noted that 2014 a flaw was detected in bitcoin’s transactions and this raised concerns about fraud in bitcoin. despite of this disadvantages, many type of benefits that bitcoin provide are mentioned such as leading economic change, having remarkable potential to help some countries and providing a chance to reduce transaction costs etc. luther (2016), underlines competition between crypto currencies and existing government based money concepts and shows possible ways for crypto currencies to win this competition. according to his study, the crypto currencies should reduce costs of consumers related to switching to new payments. he found out that the most important problem that crypto currencies should solve is incumbent-monies problem. devries (2016), claims that crypto currencies are not replace conventional money term but they can change the way of interaction of internet based global markets and clear the way for national currencies and exchange rates. the author conducted a swot analysis to see bitcoin’s role in shifting in economic paradigms. according to results of the analysis, author claims that crypto currencies are still in infancy period and it will take a time to see that they can find sustainable place in world markets. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e future of the crypto currencies 207 3. data and sample structure main aim of this study to estimate future positions of each crypto currencies included in the sample. for the purpose of obtaining internet search numbers, index data indicating the degree of importance (popularity) generated by google's google.trends.com (google, 2019) based on the number of monthly searches of the crypto currencies were used. this index gets values in the range of [0-100] and the increase in the index value indicates that the relevant crypto money is very searched on the internet. crypto currencies analyzed and the data periods available for these moneys are shown in table 1. table 1: crypto currencies used in analysis no crypto money analysis period 1 bitcoin 2010:m07-2019:m05 2 ripple-xrp 2015:m01-2019:m05 3 ethereum 2016:m03-2019:m05 4 ethereum classic 2016:m06-2019:m05 5 litecoin 2016:m08-2019:m05 6 zcash 2016:m10-2019:m05 note: the data in the table are organized in the order in which the relevant currency is traded on the market. as it can be observed in table 1, since the initial date of trading of crypto currency is different, a separate time series analysis will be made for each crypto money and the findings will be compared. although there are 13 crypto currencies in the first form of the sample, crypto coins with less than 30 observations were excluded from the analysis in order to perform a reliable time series analysis. 3. method in this study, we perform analysis to find out changes observed in search numbers of crypto currencies over the time. based on our findings on change of number of searches, we tried to figure popularity of currencies out for the next future. 3.1. analysis to determine the future of crypto coins here, the graphs related to the search numbers of the each cryptocurrency will be plotted, and based on these graphs it will be inferred that the crypto money from may become more popular over time or taken out of circulation over time. the graphs were created as scatter plots by using ms office excel and different experiments were performed to determine the ideal curve between these lines and the curve with the highest specificity coefficients (r2) of related to equations was preferred. in this context, the graph obtained for bitcoin and the equation of this graph are provided in figure 1 as follows. mustafa özyeşi̇l 208 figure 1. number of searches for bitcoin note : although r2 responses in a increasing way when degree of the function is increased, since parabolic graph (quadratic) represents most recent periods best, this graph type was chosen. according to figure 1, the number of searches for bitcoin reached its highest value in december 2017, after this point although it fell for a while, it started to increase again since april 2019. therefore, we don't foreseen that bitcoin will be out of circulation in the short term. ripple-xrp graph and the related equation of this graph are provided in figure 2 below: figure 2. number of searches for ripple-xrp note: although r2 responses in a increasing way when degree of the function is increased, in order to determine the cut-off point of the horizontal axis (x axis), parabolic (quadratic) graph was preferred. as it can be seen in figure 2, ripple-xrp, which started to be traded in january 2015, reached the highest number of searches in january 2018 and then it started to decrease. when the quadratic equation is solved, it can be expected that number of searches of the ripple-xrp will decrease to zero by november 2020 and it may be out of the market after that date. ethereum graph and the related equation of this graph are provided in figure 3 below. figure 3. number of searches for ethereum according to figure 3, ethereum has reached the highest number of searches in december 2017, then downward movement was seen in the number of searches, but it achieved a stability in 8-9 index level monthly basis. as a result, it is considered that ethereum will not be out of circulation in the near term. ethereum classic graph and the related equation of this graph are provided in figure 4 below. future of the crypto currencies 209 figure 4. number of searches for ethereum classic according to figure 4, similar to ethereum, ethereum classic also has reached the highest number of searches in december 2017, after that it started to decline but achieved a stability in 15-20 index level monthly basis. therefore, ethereum classic also will not be subject to be out of circulation in the short term. litecoin graph and the related equation of this graph are provided in figure 5 below. figure 5. number of searches for litecoin according to figure 5, litecoin reached the highest level of internet searches in december 2017, after that it started to decrease but achieved a stability in 5-6 index level monthly basis. therefore, litecoin is not expected to be out of circulation in the short term. zcash graph and the related equation of this graph are provided in figure 6 below. figure 6. number of searches for zcash mustafa özyeşi̇l 210 according to figure 6, zcash reached the highest number of internet searches in december 2017, after that it started to decrease but achieved a stability in 5-10 index level monthly basis. therefore, similarly zcash is not expected to be out of circulation in the short term. 4. conclusion in this study, trend analysis was performed to determine future movement of search numbers of the crypto currencies. we aimed to foreseen each crypto currency’s future position. therefore, we used monthly internet searches of 6 crypto currencies with the longest data period. since crypto currencies have different trading dates, the largest data period available for each currency is included in the analysis. in this study, firstly scatter distribution graphs are drawn by using index data of monthly search numbers of each crypto currency. the functions that best represent the points in the graph have been tried to be determined and by using these functions, we tried to predict the date of being out of the market of relevant crypto money. as a result of these analyzes; it is determined that ripple-xrp may be out of the market by november 2020 but such a situation does not seen the case for other currencies. these graphs also showed that the highest number of searches for all crypto coins was reached in december 2017, and based on this observation it may be concluded that there was a speculative attack on crypto coins on this date. references darlington, j.k.(2014). the future of bitcoin: mapping the global adoption of world’s largest cryptocurrency through benefit analysis, university of tennessee honors thesis projects. devries, p.d. (2016). an analysis of cryptocurrency, bitcoin and the future, international journal of business management and commerce, 1(2),1-9. dikmen, n. (2012). ekonometri temel kavramlar ve uygulamalar. dora yayınevi, bursa. google (2019). google.trends.com, (erişim tarihi: 25.05.2019). göçer, i̇. (2016). lisans ve lisansüstü i̇çin ekonometri. lider yayınları, i̇zmir. granger, c.w.j. (1969). investigating causal relations by econometric models and cross spectral methods. econometrica, 37, 424-438. gujarati, n. g. ve porter, d. c. (2012). temel ekonometri, çev. ümit şenesen ve gülay günlük şenesen, (orijinali: 5. basım), literatür yayıncılık, i̇stanbul. luther, w. j. (2016). bitcoin and the future of digital payments. independent review, 20(3), 397-404. nakamoto, s.(2008). bitcoin: a peer-to-peer electronic cash system, n.p.: bitcoin.org, nov. pdf. tarı, r. (2012). ekonometri. umuttepe yayınları, kocaeli. international journal of commerce and finance, vol. 5, issue 2, 2019, 158-166 158 risk management in viet nam tourism industry under the impact of a two factor model during and after the global crisis dinh tran ngoc huy binh duong university, vietnam du quoc dao binh duong university, vietnam abstract over past few years, the global financial crisis shows certain influence on emerging financial markets including viet nam. therefore, this study chooses an analytical approach to give some systematic opinions on how much some certain determinants such as income tax and leverage, affect the level of market risk in listed tourism companies.first, it calculates equity and asset beta values in three (3) different scenarios of changing tax rates and changing the level of financial leverage.second, under 3 different scenarios of changing tax rates (20%, 25% and 28%), we recognized that there is not large disperse in equity beta values, estimated at 0,753 for current leverage situation.third, by changing tax rates in 3 scenarios (25%, 20% and 28%), we recognized both equity and asset beta mean values have positive relationship with the increasing level of tax rate.last but not least, this paper covers some ideas and policy suggestions.. keywords: risk management, asset beta, financial crisis, corporate tax, leverage jel classification numbers: g00, g3, g30 1. introduction after financial crisis and reactions in financial industry taking place recently, we find out that there are signals of impacts of tax rates and the level of financial leverage on the fluctuations of market risk, measured by both equity and asset beta values. this leads to a question on using external debt of management team in a hope that the business market value can be recovered. despite of trying to select an easy-reading writing style, there is still some academic words need to be explained in further. the organization of paper contents is as following. as our previous series of paper, research literature, issues, methodology and theories are covered in the first two sessions. next, it followed by introduction of our empirical findings in session 3 (3rd). continuously, session four (4) covers conclusion and policy suggestion. before last, there are exhibit session which covers some calculated results of this paper’s analysis and comparison. 2. preliminary notes 2.1 research issues this research aims to figure out two (2) issues: issue 1: what happen to asset beta if both fl and tax rate change in 3 scenarios issue 2: what happen to equity beta if both fl and tax rate change in 3 scenarios 2.2 literature review john (1999) mentions a two-rate tax system where land is taxed at a higher rate than structures in his research on two-rate property tax effects on land development. anderson (2009) recognized that the user cost tax elasticities are relatively small while the expected house price inflation elasticity is substantially larger and therefore plays a greater role in affecting housing market demand. beside, modigliani and mill (1963) show that firm value is an increasing function of leverage due to the tax deductibility of interest payments at the corporate level. carr and wu (2011) stated that equity volatility increases in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e risk management in viet nam tourism industry under the impact of a two factor model during and after the global crisis 159 proportionally with the level of financial leverage, the variation of which is dictated by managerial decisions on a company's capital structure based on economic conditions. and, irrespective of financial leverage, a positive shock to business risk increases the cost of capital and reduces the valuation of future cash flows, generating an instantaneous negative correlation between asset returns and asset volatility. mccarty (2012) stated there is evidence which suggests that for the most tax risky firms investors also apply a higher discount rate to estimations of future cash flows. then, vello and martinez (2012) indicated there is a negative and significant relation between the market risk and the tax planning efficiency index of firms that have good governance practices. next, madhou (2012) found out, for australia firms over the period 2003-2008, those with low leverage appear to hold higher cash holdings than high leverage ones. then, mccauley (2013) pointed that during calm periods, portfolio investment by real money and leveraged investors in advanced countries flow into emerging markets, leading to an asymmetric asset swap (risky emerging market assets against safe reserve currency assets) and leveraging up by emerging market central banks. last but not least, gunarathna (2013) found out in different industries in sri lanka, firm size does not significantly affect the financial risk, but the degree of financial leverage has a significant positive correlation with financial risk. 2.3 conceptual theories the tax system not only responds to the globalization but also affects national income, investment levels and risks of doing business. furthermore, tax system can affect the investment return and the ratio of re-investment and business growth. the using of leverage also could create both negative and positive effects on business operational results. a firm will make decision on significant amount of debt when it hopes roa will be higher than the lending interest. using leverage might affect both company performance and its risk. 2.4 methodology in this research, analytical research method is used, philosophical method is used and specially, scenario analysis method is used. analytical data is from the situation of listed banking industry firms in vn stock exchange and applied current tax rate is 25%. 3. main results 3.1. empirical research findings and discussion data used are from total 10 listed tourism industry companies on vn stock exchange (hose and hnx mainly). in the scenario 1, current tax rate is kept as 25% as in the 2011 financial statements which is used to calculate market risk (beta) while leverage degree is kept as current, then changed from 30% up to 20% down. then, two (2) fl scenarios are changed up when tax rate is up to 30% and down to 20%. in summary, the below table 1 shows three (3) scenarios used for analyzing the risk level of these listed firms. market risk (beta) under the impact of tax rate, includes: 1) equity beta; and 2) asset beta. table 1 – analyzing market risk under three (3) scenarios (made by author) tax rate as current (25%) tax rate up to 30% tax rate down to 20% leverage as current scenario 1 scenario 2 scenario 3 aylin gözen & prof. dr. beliz ülgen 160 leverage up 30% leverage down 20% a. scenario 1: current tax rate 25% and leverage kept as current, 20% down and 30% up in this case, all beta values of 10 listed firms on vn airline and tourism industry market as following: table 2 – market risk of listed companies on vn airline and tourism industry market under a two factors model (case 1) (source: vn stock exchange 2012) order no. company stock code leverage as current leverage down 20% leverage up 30% equity beta asset beta (assume debt beta = 0) equity beta asset beta (assume debt beta = 0) equity beta asset beta (assume debt beta = 0) 1 ctc 0,226 0,072 0,226 0,103 0,226 0,026 2 dlc 0,475 0,281 0,684 0,461 0,200 0,094 3 dlv 0,719 0,264 0,932 0,460 0,368 0,065 4 fdt 0,764 0,300 0,965 0,496 0,433 0,091 5 hot 1,447 1,222 1,489 1,303 1,384 1,104 6 pdc 2,035 1,298 2,035 1,445 2,035 1,077 7 pgt 1,648 1,532 1,648 1,555 1,648 1,497 8 tct 1,016 0,913 1,016 0,934 1,016 0,882 9 ttr -1,060 -0,888 -1,060 -0,922 -1,060 -0,836 10 mas 0,382 0,143 0,382 0,190 0,382 0,071 b. scenario 2: tax rate increases up to 28% and leverage kept as current, 20% down and 30% up all beta values of total 10 listed firms on vn airline and tourism industry market as below: table 3 – market risks of listed airline and tourism industry firms under a two factors model (case 2) (source: vn stock exchange 2012) order no. company stock code leverage as current leverage down 20% leverage up 30% equity beta asset beta (assume debt beta = 0) equity beta asset beta (assume debt beta = 0) equity beta asset beta (assume debt beta = 0) 1 ctc 0,226 0,072 0,226 0,103 0,226 0,026 2 dlc 0,492 0,292 0,704 0,474 0,210 0,099 risk management in viet nam tourism industry under the impact of a two factor model during and after the global crisis 161 3 dlv 0,735 0,270 0,948 0,468 0,380 0,067 4 fdt 0,780 0,307 0,981 0,505 0,446 0,094 5 hot 1,455 1,228 1,495 1,308 1,393 1,111 6 pdc 2,035 1,298 2,035 1,445 2,035 1,077 7 pgt 1,648 1,532 1,648 1,555 1,648 1,497 8 tct 1,016 0,913 1,016 0,934 1,016 0,882 9 ttr -1,060 -0,888 -1,060 -0,922 -1,060 -0,836 10 mas 0,382 0,143 0,382 0,190 0,382 0,071 c. scenario 3: tax rate decreases down to 20% and leverage kept as current, 20% down and 30% up all beta values of total 10 listed firms on vn airline and tourism industry market as below: table 4 – market risks of listed airline and tourism industry firms under a two factors model (case 3) (source: vn stock exchange 2012) order no. company stock code leverage as current leverage down 20% leverage up 30% equity beta asset beta (assume debt beta = 0) equity beta asset beta (assume debt beta = 0) equity beta asset beta (assume debt beta = 0) 1 ctc 0,226 0,072 0,226 0,103 0,226 0,026 2 dlc 0,447 0,265 0,653 0,440 0,184 0,087 3 dlv 0,693 0,254 0,905 0,447 0,350 0,062 4 fdt 0,737 0,290 0,939 0,483 0,413 0,087 5 hot 1,436 1,212 1,479 1,295 1,369 1,092 6 pdc 2,035 1,298 2,035 1,445 2,035 1,077 7 pgt 1,648 1,532 1,648 1,555 1,648 1,497 8 tct 1,016 0,913 1,016 0,934 1,016 0,882 9 ttr -1,060 -0,888 -1,060 -0,922 -1,060 -0,836 10 mas 0,382 0,143 0,382 0,190 0,382 0,071 all three above tables and data show that there are just tiny changes in the values of equity beta and there are bigger fluctuations in the values of asset beta in the three (3) cases. aylin gözen & prof. dr. beliz ülgen 162 3.2. comparing statistical results in 3 scenarios of changing leverage: table 5 statistical results (fl in case 1) (source: vn stock exchange 2012) leverage as current leverage down 20% leverage up 30% statistic results equity beta asset beta (assume debt beta = 0) differenc e equity beta asset beta (assume debt beta = 0) differenc e equity beta asset beta (assum e debt beta = 0) differe nce max 2,035 1,532 0,503 2,035 1,555 0,480 2,035 1,497 0,538 min -1,060 -0,888 -0,173 -1,060 -0,922 -0,138 -1,060 -0,836 -0,225 mean 0,765 0,514 0,251 0,831 0,603 0,229 0,663 0,603 0,060 var 0,7530 0,5302 0,223 0,7532 0,5572 0,196 0,7879 0,4962 0,292 note: sample size : 10 firms table 6 – statistical results (fl in case 2) (source: vn stock exchange 2012) leverage as current leverage down 20% leverage up 30% statisti c results equity beta asset beta (assume debt beta = 0) differenc e equity beta asset beta (assume debt beta = 0) differenc e equity beta asset beta (assu me debt beta = 0) differe nce max 2,035 1,532 0,503 2,035 1,555 0,480 2,035 1,497 0,538 min -1,060 -0,888 -0,173 -1,060 -0,922 -0,138 -1,060 -0,836 -0,225 mean 0,771 0,517 0,254 0,837 0,606 0,231 0,667 0,606 0,061 var 0,7528 0,5299 0,223 0,7543 0,5571 0,197 0,7869 0,4966 0,290 note: sample size : 10 firms table 7statistical results (fl in case 3) (source: vn stock exchange 2012) leverage as current leverage down 20% leverage up 30% statisti c results equity beta asset beta (assume debt beta = 0) differenc e equity beta asset beta (assume debt beta = 0) differenc e equity beta asset beta (assum e debt beta = 0) differen ce max 2,035 1,532 0,503 2,035 1,555 0,480 2,035 1,497 0,538 min -1,060 -0,888 -0,173 -1,060 -0,922 -0,138 -1,060 -0,836 -0,225 mean 0,756 0,509 0,247 0,822 0,597 0,225 0,656 0,597 0,059 risk management in viet nam tourism industry under the impact of a two factor model during and after the global crisis 163 var 0,7534 0,5305 0,223 0,7516 0,5573 0,194 0,7895 0,4954 0,294 note: sample size : 10 firms the above calculated figures generate some following results: first of all, equity beta mean values in all 3 scenarios are acceptable (< 0,9) and asset beta mean values are also small (< 0,7). if leverage increases to 30%, asset beta max values keep the same value of 1,497 when tax rate is up to 28% or down to 20%. finally, when leverage decreases down to 20%, asset beta max values keep the same value of 1,555 in both cases: tax rate up and down. the below chart 1 shows us : when leverage degree decreases down to 20%, if tax rate is up to 28%, average equity beta value increases slightly (0,837) compared to that at the decrease of tax rate of 20% (0,822). however, equity beta var is 0,754 (tax rate up), little higher than 0,752 (tax rate down). then, when leverage degree increases up to 30%, if tax rate is up to 28%, average equity beta increases little (to 0,667) compared to that at the decrease of tax rate of 20% (0,656). however, in case the tax rate up, the equity beta var is 0,787, smaller than 0,790 (tax rate down). the below chart 2 shows us : when leverage degree decreases down to 20%, if tax rate is up to 28%, average asset beta value increases slightly (0,606) compared to that at the decrease of tax rate of 20% (0,597). however, asset beta var is 0,557 (tax rate up), the same as that in the case of tax rate down. then, when leverage degree increases up to 30%, if tax rate is up to 28%, average asset beta also increases little more (to 0,606) compared to that at the decrease of tax rate of 20% (0,597). however, in case the tax rate up, the asset beta var is 0,497, higher than 0,495 (tax rate down). chart 1 – comparing statistical results of equity beta var and mean in three (3) scenarios of changing fl and tax rate (source: vn stock exchange 2012) aylin gözen & prof. dr. beliz ülgen 164 chart 2 – comparing statistical results of asset beta var and mean in three (3) scenarios of changing fl and tax rate (source: vn stock exchange 2012) 4. conclusion and policy suggestion in summary, the government has to consider the impacts on the movement of market risk in the markets when it changes the macro policies and the legal system and regulation for developing the tourism market. the ministry of finance continues to increase the effectiveness of fiscal policies and tax policies which are needed to combine with other macro policies at the same time. the state bank of viet nam continues to increase the effectiveness of capital providing channels for tourism companies as we might note that in this study when leverage is going to increase up to 30%, the risk level decreases (asset beta mean decreases to 0,597 if tax rate moves down to 20%). furthermore, the entire efforts among many different government bodies need to be coordinated. tourism and hotel industry in vietnam also need to establish risk warning system (for environment, human resource, financial, business, unexpected risk and technology risk). vietnam tourism school also enhance training programs to meet the market demand while hotel industry has to improve quality of service and reduce risk in 4.0 technology era. finally, this paper suggests implications for further research and policy suggestion for the viet nam government and relevant organizations, economists and investors from current market conditions. 5. acknowledgements i would like to take this opportunity to express my warm thanks to board of editors and colleagues at citibank – hcmc, scb and bidv-hcmc, dr. chen and dr. yu hai-chin at chung yuan christian university for class lectures, also dr chet borucki, dr jay and my ex-corporate governance sensei, dr. shingo takahashi at international university of japan. my sincere thanks are for the editorial office, for their work during my research. also, my warm thanks are for dr. ngo huong, dr. ho dieu, dr. ly h. anh, dr nguyen v. phuc and my lecturers at banking university – hcmc, viet nam for their help. lastly, thank you very much for my family, colleagues, and brother in assisting convenient conditions for my research paper. references allen, f., and gale, d., stock price manipulation, review of financial studies, (1992). ameer, beenish., and jamil, moazzam., (2013), a test of fama and french three factor model in pakistan equity market, global journal of management and business research, vol.13, issue 7, pp. 24-28 baker, kent h., singleton, clay j., and veit, theodore e., (2011), survey research in corporate finance: bridging the gap between theory and practice, oxford university press basu, devraj., streme, alexander., (2007), capm and time-varying beta: the cross-section of expected returns, ssrn working paper series risk management in viet nam tourism industry under the impact of a two factor model during and after the global crisis 165 chatterjea, arkadev., jerian, joseph a., and jarrow, robert a., market manipulation and corporate finance: a new perspectives, 1994 annual meeting review, southwestern finance association, texas, usa, (2001). degennaro, ramon p., kim, sangphill., (2003), the capm and beta in an imperfect market, ssrn working paper series flifel, kaouther., (2012), financial markets between efficiency and persistence : empirical evidence on daily data, asian journal of finance and accounting galagedera, d.u.a., (2007),an alternative perspective on the relationship between downside beta and capm beta, emerging markets review huy, dinh t.n., (2013), whether the risk level of viet nam real estate firms under the different changing tax rates increase or decrease so much, international journal of research in business and technology khwaja, asim ijaz., mian, atif., unchecked intermediaries:price manipulation in an emerging stock market, journal of financial economics 78, (2005), 243 241 marchesi, michael favere., the impact of tax services on auditors’ fraud risk assessments, advances in accounting research ang, a., chen, j., (2007), capm over the long run: 1926-2001, journal of empirical finance adb and viet nam fact sheet, 2010 other web sources http://www.ifc.org/ifcext/mekongpsdf.nsf/content/psdp22 http://www.construction-int.com/article/vietnam-construction-market.html http://fia.mpi.gov.vn/default.aspx?ctl=article&menuid=170&aid=185&pagesize=10&page=0 http://kientruc.vn/tin_trong_nuoc/nganh-bat-dong-san-rui-ro-va-co-hoi/4881.html http://www.bbc.co.uk/vietnamese/vietnam/story/2008/12/081226_vietnam_gdp_down.shtml http://www.mofa.gov.vn/vi/ exhibit exhibit 1vni index and other stock market index during crisis 2006-2010 http://www.mofa.gov.vn/vi/ aylin gözen & prof. dr. beliz ülgen 166 (source: global stock exchange 2012) exhibit 2comparable firms and changing leverage for viet nam airline and tourism firms order no. company stock code comparable firm fl as current fl up 30% fl down 20% 1 ctc 68,1% 88,5% 54,5% 2 dlc dlv as comparable 40,7% 52,9% 32,6% 3 dlv pgt as comparable 63,3% 82,3% 50,6% 4 fdt pgt as comparable 60,7% 78,9% 48,6% 5 hot pgt as comparable 15,6% 20,3% 12,5% 6 pdc 36,2% 47,0% 29,0% 7 pgt 7,1% 9,2% 5,6% 8 tct 10,1% 13,2% 8,1% 9 ttr 16,3% 21,2% 13,0% 10 mas 62,6% 81,4% 50,1% average 38,1% 49,5% 30,5% (source: viet nam stock exchange 2012) international journal of commerce and finance, vol. 7, issue 2, 2021, 122-139 122 effects of taxation on the gross turnover of sme's in uganda ismail dirie, (ma.) istanbul commerce university, turkey submitted: 17.07.2021 accepted: 20.08.2021 published: 02.12.2021 abstract: this study was undertaken to assess the relationship between tax liability and gross turnover of small and medium enterprises over a period from 2002 to 2018 in uganda. it aimed to determine the relationship between taxation and gross turnover of small and medium enterprises, as well as economic growth. the specific objective of the research was to evaluate the effect of tax rates on the gross turnover of small and medium enterprises. primary data was obtained from respondents inform of surveys while the secondary data, tax liability and gross turnover, was collected from uganda's revenue authority sources. the study adopted the granger causality test, unit root test, and stability test and the following findings were determined: first, taxation negatively affects the gross turnover of smes.the outcome of the granger causality test indicates that there is a statically significant negative relationship from taxation to gross turnover by 0.0372 at a 95% significance level. second, there is a negative relationship between taxation and gross turnover which hurts the growth of the economy. this means an increase in taxation causes a decrease in economic growth. the study concluded that the effect of taxation on the gross turnover of smes is due to high rates of tax on one hand and taxpayers who don't know their tax obligation on the other hand. the study provides evidence that help policy makers and the state to balance the requirements and the objective of smes for profit and growth. there is a need for tax restructuring, as well as tax education to taxpayers. i̇smail dirie 123 key words: taxation, gross turnover, granger causality test jel code: m13, h25, and f30. 1. introduction economic growth is an increase in the total production or revenue in a country during a particular time (poulson, 2008). taxes are money received from residents of a country, who have a taxable income.nsmall and medium enterprises in uganda account for 90 percent of total establishments in three key economic sectors, namely manufacturing, services, and agriculture. large establishments account for 10 percent. . the presence of small and medium enterprises in the manufacturing, service, and agriculture sectors are 49 percent, 33 percent, and 8 percent respectively. (balunyawa, 2006). the employment generated by small and medium enterprises was approximately 2.5 million workers of total employment of 4.0 million in the three main sectors. the role of small and medium enterprises is demonstrated by their contribution to the output and value-added, ush 500 million and ush 200 million respectively. in terms of share contribution, small and medium enterprises accounted for 68.4 percent of the total output and 49 percent of value-added. it is noted that small and medium enterprises in the agriculture sector contributed the largest share, 88.8 percent, and 65.3 percent respectively. smes in the manufacturing sector saw a 40 percent contribution in output and 29.1 percent in value-added. (balunyawa, 2006). 1.1. statement of the problem despite the profound contribution of small and medium enterprises to the economic growth in uganda, the growth of these businesses continued facing risks that limit other entrepreneurs. though these businesses have succeeded in reducing overall unemployment, the number of small and medium enterprises going out of business has been increasing over the years effects of taxation on the gross turnover of sme's in uganda 124 (nsubuga, 2008). the case can be justified to higher tax rates or other factors which restrain the growth of these firms. the study is primarily carried out to test the relationship between tax rates and gross turnover of small and medium enterprises. why do tax rates cause firms to go out of business and reduce economic growth in uganda? we were interested in answering this research question. evidence on the relationships between taxation and gross turnover and economic growth put forward that taxation hurts gross turnover and economic growth. this is in line with the results of (atems, 2015), (stoilova, 2017), and (badri and allahyari, 2013). they have established that higher taxes do hurt economic growth in 48 states of the united states and 28 european union countries. 1.2 hypothesis of the study we test the bellow hypotheses linking taxation, gross turnover, and economic growth. theoretically, gross turnover serves as a vital source through which positive taxation transmits to economic growth. a premise follows that increased gross turnover of small and medium enterprises create employment and increase output level then contribute positively to productivity and growth. improving taxation systems, in turn, creates more opportunities, thereby increasing contributions to economic growth. therefore, the study develops the following null hypotheses for this study:  taxation does not granger cause gross turnover of small and medium enterprises of uganda;  gross turnover does not granger cause taxation on small and medium enterprises in uganda. 1.3 objectives of the study i̇smail dirie 125 the specific goal of the study is to determine the relationship between the gross turnover of small and medium-sized firms and taxation in uganda, using yearly data over the period from 2002 to 2018. specifically, the following issues were addressed;  assessing the effect of taxation on gross turnover of small and medium enterprises in uganda;  estimating impact of taxation on economic growth in uganda;  analyzing causal relations between taxation and gross turnover of small and medium enterprises. 2. literature review several studies were carried out to examine the relationship that exists between taxation, gross turnover, and economic growth. this section of the study looks at various empirical studies which investigated the relationship between taxation, gross turnover, as well as economic growth. the study carried out by skinner (1987) examined the relationship between taxation and gross turnover of small and medium firms to economic growth by using cross data and then it found out that there is a negative relationship which exists between taxes and gross turnover. other studies have the same outcome and these include (dowrick, 1992), (easterly and rebelo ,1993), (badri and allahyari ,2013), (zellner and ngoie, 2015), (canicio and zachary ,1975), (atems, 2015), (szarowska, 2010) and (stoilova ,2017). dowrick (1992) conducted a study on the organization for economic co-operation and development (oecd) countries from 1960 to 1985. the study established that there is a strong negative effect of taxation on gross turnover. (easterly and rebelo, 1993) discovered some effects of taxation on the gross turnover of sme's in uganda 126 measures of tax distortion to be negatively related to economic growth, however other tax distortions were less important when it comes to economic growth. badri and allahyagri (2013) examined the effect that taxation and gross domestic product render on employment by using iranian data from 1976 to 2007 basses on the autoregressive distribution model (ardl). the findings from the estimation of long-term and short-term patterns show that taxation does cause a negative effect on employment, while the gross domestic product does have a positive effect on employment. zellner and ngoie (2015) carried out a study to examine the impact of tax on economic growth by using the marshallian macroeconomic model in the united states from 1987 to 2008. the outcome showed that taxes tend to harm the growth of the economy. canicio and zachary (1975) examined the effects of taxation in zimbabwe using data over the period 1980 to 2012. the study used the granger causality test and vector error model to find out the existing relationship. the findings revealed that taxes affect resource allocation and cause distortion to the growth of the economy. szarowska (2010) carried out a study to examine the changes in taxation and the impact those changes have on economic growth in european union. the analysis was conducted using yearly panel data of twenty-four countries in the european union over the period from 1995 to 2008. the outcome revealed that there exists a significant negative relationship between taxation and gross domestic product. the study shows that a reduction of direct tax by 1% causes a growth rate of 0.43% in gross domestic product. stoilova (2017) researched to determine the relationship between tax structure and economic growth using data from 28 european union countries over the period from 1996 to 2013. the study used barro's endogenous model and discovered that total revenue affects the economy. i̇smail dirie 127 the study revealed that personal income tax has a positive impact on economic growth but corporate taxes have a negative impact on the growth of the economy. chigbu (2012) investigated the causality between small business gross turnover and taxation in nigeria for the period 1970-2009. the data gathered were analyzed with the help of econometric models such as augmented dickey-fuller, diagnostic tests, granger causality and johansen co-integration. the outcome from the econometric analysis showed that taxation as an instrument of fiscal policy affects the economic growth and taxation granger causes economic growth of nigeria. 3. data and methodology in this study, the effect of taxation on the gross turnover of small and medium enterprises and economic growth in uganda is analyzed using yearly data over the period 2002 to 2018. different sources were used to collect data on the variables that are used for this study. primary data was collected using surveys. the study picked 100 population of small and medium enterprises and afterward came up with a suitable sample size of 80 participants. gross turnover and tax liability were gathered from the uganda revenue authority. the study used the granger causality test to analyze the causal relationship between taxation and gross turnover. to test the relationship and the effect taxation has on gross turnover, the study used the granger causality test. a simple granger causality test involving two variables, taxation and gross turnover is written as 𝐺𝑇 = ∑ 𝑎𝑖𝑇𝐿𝑡−𝑖 𝑛 𝑖=2 + ∑ 𝐵𝑗 𝐺𝑇𝑡−𝑗 + 𝑈1𝑡 𝑛 𝑗=1 𝑇𝐿 = ∑ 𝑛𝑖 𝑇𝐿𝑡−𝑖 𝑛 𝑖=2 + ∑ 𝛿𝑗 𝐺𝑇𝑡−𝑗 + 𝑈2𝑡 𝑛 𝑗=1 effects of taxation on the gross turnover of sme's in uganda 128 testing the null hypothesis: h0: α= 0, this hypothesis means that tax liability does not granger cause gross turnover against the alternative hypothesis h1: α ≠ 0, this hypothesis means that tax liability does granger cause economic growth. similarly, testing h0: δ = 0, this hypothesis means that gross turnover does not granger cause tax liability against h1: δ ≠ 0, which means that gross turnover does granger cause tax liability. the study also used another econometric model to determine the impact of taxation on economic growth. the model runs a multiple regression analysis between gross domestic products, taxation, and gross turnover, and trade openness. linear regression equation 𝐼𝑁𝐺𝐷𝑃𝑡 = 𝑎 + 𝛽1𝐿𝑇𝑋𝑡 + 𝛽2𝐿𝑇𝑅𝑡 + 𝛽3𝐿𝐾𝑡 + 𝑢𝑡 (3.1) 𝐺𝐷𝑃𝑡 = gross domestic product 𝑇𝑋𝑡 = tax on gross turnover 𝑇𝑅𝑡 = trade openness 𝑘𝑡 = capital 𝛼 = constant 𝛽1, 𝛽2 𝑎𝑛𝑑 𝛽3 = slope coefficients the study undertook a test to see whether variables are stationary or non-stationary to exam the long-run relationship between variables. the augmented dickey fuller was used to examine the non-stationarity of the series variable in the levels and the first difference. the augmented dickey fuller is a modification of the dickey fuller test and the lagged values are part of the estimation of an equation as follows: ∆𝑍𝑡 = 𝜃 + (𝑃 − 1)𝑍𝑡−1 + 𝛾𝑇 + 𝛿∆𝑍𝑇−1 + 2𝑡 (3.2) i̇smail dirie 129 in the empirical analysis, the study used the philips and perron (pp) test because the adf tests do not take into account cases of heteroscedasticity and non-normality. the pp test is more suitable when the time series has serial correlation, as well as structural breaks. this test is based on the form of the equation below. ∆𝑍𝑡 = 𝜃 + (𝑃 − 1)𝑍𝑡−1 + 𝛾 (𝑡 − 𝑇 2 ) + 𝛿∆𝑍𝑟−1 + 3𝑡 (3.3) the study applied the ardl bounds testing to examine the relationship between economic growth and taxation in uganda. the ardl bounds testing to co-integration was invented by pesaran, shin, and smith (2001). this technique is employed to examine the long-run linkage between series of a different order of integration (pesaran, 1999) and (pesaran et al. 2001). co-integration mimics an existence of a long-run equilibrium among the economic time series of interest which cover over time. to keep long-run information intact, modeling time series is carried out with the help of co-integration. this model has become a frequently used model due to its advantages. it is advantageous when there is a single long-run relationship because the procedure of ardl can identify between dependent and explanatory variables. it assumes the relationship that exists between dependent variables and exogenous variables is a single reduced form of an equation. (pesaran, 2001). the model estimates the below conditional error correction models: ∆lgdp𝑡 = 𝛼1 + 𝛼𝑡 𝑇 + 𝛼𝐺𝐷𝑃 𝐿𝐺𝐷𝑃𝑡−1 + 𝛼𝑇𝑋 𝐿𝑇𝑋𝑡−1 + 𝛼𝑇𝑅 𝐿𝑇𝑅𝑇−1 + 𝛼𝑘 𝐿𝐾𝑡−1 + ∑ = 𝑝 𝑖 1𝛼𝑖 ∆𝐿𝐺𝐷𝑃𝑡 −1 + ∑ = 𝛼 𝑗 0 𝛼𝑗 ∆𝑇𝑋𝑡−𝑗 + ∑ = 𝑟 𝑘 0 𝑎𝑘 ∆𝑡𝑟𝑡−𝑘 + ∑ = 𝑠 𝑠 0𝛼𝑠 ∆𝐾𝑡−𝑠 + 1𝑡 (3.4) ∆ is the first difference operator. in the equation, t is the time trend, ∆gdpt is the gross domestic product, logtxt is the taxation inform of a logarithm, the trade openness is logtr and logkt is the capital. effects of taxation on the gross turnover of sme's in uganda 130 the procedure when it comes to the bound test, the f-test is used for examining the existence of a long-run relationship. it tests the joint significance of lagged level variables. below is the null hypothesis of the equation for the nonexistence of co-integration; 𝐻0 = 𝛼𝐺𝐷𝑃 = 𝛼𝑇𝑋 = 𝛼𝑇𝑅 𝑎𝑘 = 0 this is tested against the alternation hypothesis. 𝐻1 = 𝛼𝐺𝐷𝑃 ≠ 𝛼𝑇𝑋 ≠ 𝛼𝑇𝑅 ≠ 𝛼𝑘 ≠ 0 𝐻0 is rejected if the f-statistics exceed the upper critical value. but it is accepted if the fstatistics fall below the lower critical value. for the first case, the result is concluded in favor of co-integration but when the f-statistic occurs within two bounds, afterward the cointegration test turns out inconclusive. 4. findings 4.1 survey results table 1. effects of taxation on small business detail no. of respondents percentage greatly 40 50 moderately 25 31.25 fairly 0 0 does not affect 15 18.75 total 80 100 source: primary data taxes affect the profitability of business resources (mutebı, 2004). sales tax on small businesses greatly reduces it is profitability, limits it as leverage of growth, and creates poor i̇smail dirie 131 revenue performance, (asıo, 2004). as depicted in table 1, the findings indicate that 50% of the respondents saıd it affects greatly the survival of their businesses while 31.25% of the respondents asserted that sales tax moderately affects the survival of their business. 4.2 inferential analysis 4.2.1 unit root tests the study carried out unit root tests to check the validity of ardl method of cointegeration. ardl cointegeration method can be valid if the variables are stationary in the case of i(0) or i(1) or a mixed integrating order. the unit root teststhe augmented dickeyfuller test (adf) and the philips-perron test (pp) – are usually applied to verify whether each variable is stationary or not. as shown in table 2, the variables are not stationary at level form for both adf and pp tests. the result of first difference indicate that the variables in question are stationary at 1%, 5% and 10% levels of significance for both adf and pp tests. this implies that ardl model is valid. table 2: unit root test results level levels first difference vari variable adf p pp adf pp lgd lgdp -2.11 -2.11 pp -2.24 -3.96 -3.96** -3.88 -3.88** lk l lk -2.37 -2.37 -3.98 -3.98 -4.67 -4.67* -4.58 -4.58* ltr -3.51 -3.51 -3.57 -3.57 -5.00 -5.00* -5.35 -5.35* lta ltax -3.23 3.23 -2.66 -2.66 -5.28 -5.28* -9.97 -9.97* 4.2.2 bounds test to co-integration the ardl bound test is applied to check the existence of a cointegeration relationship among the variables. the findings are presented in table 3. the upper bound assumes that all regressors are i(1) and lower bound assumes that the regressors are 1(0). here, the null effects of taxation on the gross turnover of sme's in uganda 132 hypothesis of f-bounds test is that there is no cointegeration among variables. if the findings of the f-statistics is below the lower bound, the null hypothesis will be accepted. if the fstatistics is higher than the upper bound, the null hypothesis will be rejected and cointegeration among the variables is verified. since the calculated value of f-statistics is 8.53 which is higher than the upper bound at all levels of significance, the null hypothesis is rejected. the result indicate the existence of long-run cointegeration among the variables. table 3: bound test test statistics value significance i (0) i (0) i (1) i (1) f-statistics 8.531916 1% 3.66 3.66 4.67 4.67 k 5% 5% 2.77 2.77 3.66 3.66 10% 10% 2.38 2.38 3.3 3.3 4.2.3 estimation results of long-run and short-run elasticities as shown in table 4, the sign of the long-run coefficients of capital and trade openness are positive whereas the one of tax on gross turnover is negative. this means that capital and trade openness increase and tax on gross turnover decrease. the long-run elasticity for capital, trade openness and tax on gross turnover are 0.21, 0.48 and – 0.01 respectively, meaning a 1% increase in capital and trade openness is expected to increase economic growth by 0.21 and 0.48 respectively whereas 1% increase in taxes is expected to decrease economic growth by -0.01. this is in line with the results found by khobia, abel and le roux (2016). table 4: long run results variables coefficient t-statistics probability c 9.63 15.37 0.0013 lcapital 0.21 3.56 0.00 ltrade 0.48 7.67 0.00 i̇smail dirie 133 as shown in table 5 of short-run results, capital has a negative impact on economic growth and it is not significant at all levels of significance. it also shows that trade openness impacts economic growth positively and this is not the case at all levels of significance. also, the outcomes reveal that taxes have a negative impact on economic growth and are significant at 5% levels of significance. in table 5 of short-run results, the value of ecm is negative at a 5% level of significance. the estimate is of ecm (-1) tends to be -0.12. if the ecm is negative, it is said to support the results of the long-run relationship. as shown by the results, the deviations of short-run from long-run equilibrium are correct by 12.24 toward long-run equilibrium annually. table 5. short-run results variable coefficient t-statistics probability c lcapital -0.027 -1.25 0.22 ltrade openness 0.0343 1.697 0.10 ltax on gross turnover -0.0037 -2.206 0.03 ecm(-1) -0.1223 -1.98 0.05 openness ltax on gross turnover -0.01 -2.76 0.0094 𝑅2 0.98 dw 1.32 effects of taxation on the gross turnover of sme's in uganda 134 4.2.4. short-run diagnostics the study used the breush-godfrey test to examine serial correlation because the p-value of the serial correlation test tends to be insignificant. this implies that in the residuals of the models, there is no serial correlation. with the help of the breush-godfrey test, the study found out that in the residuals of the model, there is no heteroscedasticity since the p-value is significant. the test also was done to check for normality and the results show that the p-value of jarque-bera tends to be greater than 0.1. it means that the residuals are normally distributed. the results indicate the short run not to be spurious because of durbin-watson statistics which was found to be greater than 𝑅2 . table 6. diagnostic test 4.2.5 stability test the study applied the cumulative sum of recursive residuals (cusum) and cusum of recursive residuals to examine the stability of long-run parameters. the null hypothesis cannot be rejected at a 5% level of significance if the plot of the test is within the critical limits. here the short-run and long-run estimates tend to be efficient and reliable because the test lies between the upper and lower critical limits. it indicates the model is stable. f f-statistics p probability test bg serial correlation test 1.55 1.55 0.22 0 .22 bpg heteroscedasticity test 1.63 1.63 0.17 0.17 normality 0.168 0.93 0.93 i̇smail dirie 135 figure 1: plot of cumulative sum of recursive residuals 16 12 8 4 0 -4 -8 -12 -16 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 effects of taxation on the gross turnover of sme's in uganda 136 figure 2: plot of cumulative sum of squares of recursive residuals 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 4.2.6 granger causality test table 7. causality test the outcome of the granger causality test indicates that there is a statically significant negative relationship from taxation to gross turnover by 0.0372 at a 95% significance level. i̇smail dirie 137 as shown in the table there exist a causal relationship between tax liability and gross turnover at 0.0372 but in one direction so that changes in tax liability have effects on gross turnover and not vice versa, where tests showed causal there was no effect of changes in gross turnover on tax liability. this means that an increase or a decrease in tax liability can affect and causes gross turnover at a 95 % significant level. on the other hand, gross turnover does not seem to granger cause tax liability. this suggests that information about gross turnover in past periods cannot explain the behavior of tax liability in the present time. 5. conclusion this paper has examined the relationship between tax liability and gross turnover of small and medium enterprises in kampala using descriptive statistics from the primary sourced data.it as well as used secondary data obtained from uganda revenue authority for causality tests over the period from 2002 to 2018. the outcome revealed that the majority of small and medium business owners in kampala city are male, literate, and also it was observed that the majority of the businesses of this kind do not last for more than three years in operation. the study also employed the autoregressive distribution lag (ardl) approach to cointegration to examine the short-run and long-run relation among the variables in the question. the outcome shows that taxes have a negative impact on economic growth and are significant in the shortrun and long –run. this is in line with atems (2015), stoilova (2017), and badri and allahyari (2013) the results showed that most small and medium enterprises are not registered for tax and the ones that are registered for taxes get low after-tax returns. due to a lack of awareness of tax obligation upon small and medium enterprises, these businesses fail to meet their obligations and as result this they go out of business. effects of taxation on the gross turnover of sme's in uganda 138 granger causality was used to test the causal relationship between taxation and the contribution of the gross turnover of small and medium enterprises to economic growth. the results show that there is evidence of unidirectional causality between tax liability and the gross turn of small and medium enterprises in kampala. the direction of causality runs strictly from taxation to gross turnover to economic growth. finally, for the case of kampala, this paper provides a suggestion for policymakers that taxation substantially affect the economic growth. the study recommends that government authorities should consider tax restructuring to help small and medium enterprises so as for these firms to contribute to economic growth. it also suggests that authorities responsible for tax collection and administration like ura (uganda revenue authority) play important role in providing tax educatıon programs to taxpayers, especially small business enterprises. this should be done through various platforms such as newspapers, local radio, and television stations. the tax education should be carried out in languages that taxpayers can understand. the tax collectıng body should also undertake a nationwide registration exercise for all small firms since a majorıty of them are not registered. references atems, b. (2015), “another look at tax policy and state economic growth”, economic letters, 127(1), 64-67. badri, a. and allahyari, s. (2013), “an analysis of the effects of taxes and gdp on employment in iran’s economy”, european journal of natural and social science, 3(3), 1546 1553. balunyawa, w. (2006), ıncome tax administration ın uganda, prentice, kampala. canicio et al., (2014), “causal relationship between government tax revenue growth and economic growth”, journal of economics and sustainable development , 5, (17), 10-21. chigbu, e. et al., (2012), “an empirical study on the causality between economic growth and taxation in nigeria”, journal of economic theory, 4,(2), 29-38. dowrick, s. (1992), “estimating the impact of government consumption on growth”, growth accounting and optimizing models, australian national university. mimeo.economics letter, 116(2), 161-165. i̇smail dirie 139 easterly, w. and rebelo, s. (1993), “fiscal policy and economic growth, journal of monetary economics”, 32(3), 417-458. nsubuga, d (2008), the role of small-scale busıness ın uganda's economy, prentice publishing, kampala. pesaran, m. and shin, y. (1999) “an autoregressive distributed lag modeling approach to cointgeration analysis”, in s. strom (ed.), poulson ,w. and kaplan , g. (2008), “state income taxes and economic growth”, cato journal, 28(1), 53-71. skinner, j. (1987), “taxation and output growth”, nber working paper series, nber, massachusetts, usa, 2000. stoilova, d. (2017), “tax structure and economic growth”, contaduría y administración, 62, (3), 1041–1057 szarowska, i. (2010), “changes in taxation and their impact on economic growth in the european union”, acta universitatis agriculturae et silviculturae mendeleianae brunensis, vol. 59, no. 2, pp. 325-332. zellner, a. and ngoie k. (2015), “evaluation of the effect of reduced personal and corporate tax rates on growth rates of the u.s economy”, econometric reviews, 34(1), 56-81. international journal of commerce and finance, vol. 5, issue 2, 2019, 22-30 22 financial inclusion in africa through mobile money services: a swot analysis of mobile money services: evidence from bukavu in dr congo kulondwa safari universite evangelique en afrique, the democratic republic of the congo lukogo chanceline universite evangelique en afrique, the democratic republic of the congo abstract financial inclusion has been proved as a strategy to fight poverty. africa is a continent where the poverty rate is high and the financial sector is not developed. the continent needs more financial innovation and an increase of financial access to fight these problems. mobile money, a mobile based financial service has been including more and more people in the financial system and the sector is growing. a lot of studies grew interest in this new financial service but none studied the system strategically. this study uses the strategic approach swot, completed by tows matrix to ascertain the current status and the future of mobile money services. the results revealed several strengths and significant opportunities for the system as well as its weaknesses and threats. several strategies are proposed afterward. keywords: mobile money, swot analysis, financial inclusion, africa 1. introduction according to data from the findex survey of the world bank, financial inclusion in sub-saharan africa increased significantly from 23% in 2011 to 43% in 2017. the rate of financial inclusion in africa is low compared to the other continents (zins and weill, 2016). the region-wise examination of financial inclusion by region index prove that the northern african nations have the highest financial inclusion rate, the east african nations follow which are among the poorest economies in the world (sankaramuthukumar and alamelu, no date).providing more people with access to financial services is considered as a way to alleviate poverty as well as boosting economies (owen and pereira, 2018). the increasing use of mobile phones and internet is significantly impacting financial inclusion through different services offered (evans, 2018) (gosavi, 2015). the use of mobile phones to provide financial services in africa has become a way of enabling unbanked people to access financial services (alfred, maureen and were, 2017).mobile phone has become an instrument that allows users to access financial transactions through a system called m-pesa (munyegera and matsumoto, 2016). with the use of mobile phone based technology, in the past 10 years mobile money has provided a safe and fast peer-to-peer money transfer transactions, saving facilities as well as cash payment systems to people who did not have access to financial services before (lepoutre and oguntoye, 2018). m-pesa is a mobile money service with its first success in kenya. after its success several private and public actors copied its business model across africa (lepoutre and oguntoye, 2018). without any doubt, mobile banking is an instrument in boosting economies to allow the unbanked to access financial services (mwangi and brown, 2015). providing financial services through mobile phones is considered as the missing channel by development economists whose access to payments, credits and savings using this new technology is an opportunity for people previously difficult to serve to access financial services (suárez, 2016). mobile money services are increasing and expanding in countries, however the literature did not sufficiently provide a full strategic analysis of mobile money services. this study sought to fill this information gap by assessing the current status and future of mobile money in a strategic approach. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e financial inclusion in africa through mobile money services: a swot analysis of mobile money services: evidence from bukavu in dr congo 23 objective of the research:this study intends to carry out the strategic analysis swot of mobile money services in africa, to ascertain its viability and to propose solutions to strengthen it. the paper is organized as follows: section 1 present the introduction, section 2 present the literature review, section 3 present data and methods, the results and findings of the study are presented in section 4 and finally section 5 conclude the paper. 2. literature review 2.1 definition and origin of mobile money services mobile money is a mobile phone based technology that provides financial transactions in a safer and quicker way across a vast geographical space (gosavi, 2018). it’s not easy to appreciate evolution of retail electronic payments systems. for approximately 50 years, most of the industrialized countries have been using plastic credit cards and other payment tools. back in 1900 most people used cheques, cash, bank drafts, store credit recorded in a paper ledger as well as a merchant’s memory for their payments. mobile money came out from the past 50 years of looking for a value chain in the payment transactions: developing new payment systems to promote ‘efficiencies’ as well as to produce revenue through different transaction fees. (mas and radcliffe, 2010) cited by (maurer and maurer, 2012). safaricom in kenya is the pioneer of mobile money services in africa with the introduction of m-pesa. m-pesa is a money transfer service using text messages that allows users to send, deposit, and withdraw money with their mobile phones. a bank account is not needed to carry out the different transactions, which they could perform at any mobile money provider agent’s place of activity. enrollment and deposits are free of charges while other transactions are charged to make the system affordable for every user. this system was the first program using that business model in kenya and did not face competition for almost two years after its creation. the idea behind m-pesa was created by vodafone in the united kingdom to enhance financial inclusion and provide financial services to the “unbanked.” safaricom launched a pilot program in 2005 and 2006 with less than 500 users in the region of nairobi( sarit m., charlotte s.r, 2017b) several authors got interest in mobile money services: use of mobile money based on the gender (ngumbu and mulu-mutuku, 2018), mobile money and development (meniago and asongu, 2018), (meniago and asongu, 2018), intention and adoption of mobile money (osei-assibey and osei-assibey, 2015), attitude towards using m-money (chauhan, 2015), user continuance intention towards m-pesa (parijat u., saeed j., 2016) (osah o.mickael k., 2017) mobile money and productivity(gosavi, 2018),… in line with our research problem, we present below some studies on the growing of mobile financial services and mobile money. 2.2.growing of mobile financial services & mobile money omigie, zo, rho, & ciganek, (2017) pointed out that mobile financial service market is expanding and is replacing traditional financial services. it is important therefore to deeper understand the underlying service value that determines customer choice behavior to use mobile financial for market success and sustainability. their study results are relevant for attracting prospective users and give insights for managers to attain and sustain competitiveness in the mobile financial services market. mutsonziwa (2016) find out that mobile money in the sadc (southern africa development community) region is significantly increasing financial inclusion. while some people are benefiting mobile money services, it is crucial to point out that there are people who do not have access to services from formal financial system. poverty is a main explanatory factor for not using mobile money services. mutsonziwa & maposa (2016) revealed that mobile money in zimbabwe came out at the good moment and users are now enabled to access financial services in an efficient, reliable, secure and cost effective manner. kulondwa safari 24 3. data and methods 3.1. data collection we used questionnaires and interview as data collection instruments. 100 people who are using mobile money services were interviewed within the city of bukavu and the choice of the person to interview was random. they filled the questionnaires themselves or with the help of the interviewer. 3.2. analysis of data approach having regard to the gaps in the literature, the objective of this paper is to conduct and report the findings of a swot analysis of mobile money services in drc. the acronym swot represents strengths, weaknesses, opportunities, and threats (azubuike et al., 2018). we carried out a swot analysis to analyze the positive and negative factors as well as internal and external factors that might have affected the growth of mobile money use in drc. this method has been used by many authors in their studies. a swot analysis (also called swot matrix) is a structured planning method used to examine the strengths, weaknesses, opportunities, and threats associated with a project, a firm or any other business activity (shi, 2016). piercy, giles, piercy, & giles (1998) argued that swot analysis is the most used practical analytical tool for strategic planning by executives and consultants. 4. results and discussion this section presents the different outcomes from our study in line with our research objectives. the characteristics of our respondents, the swot matrix as well as the tows matrix are presented in this section. 4.1. characteristics of respondents 4.1.1. demographic characteristics table 4.1. variables frequency percentage marital status married 30 30% single 59 59% divorced 11 11% total 100 100% education primary school 3 3% high school 22 22% university 75 75% total 100 100% sex male 68 68% female 32 32% total 100 100% figure 1 the table below shows that 30% of the people surveyed were married while 59% were single. the majority 75% hold a university degree, while 22% hold only a high school degree. the male was 68%, while the female was 32%. financial inclusion in africa through mobile money services: a swot analysis of mobile money services: evidence from bukavu in dr congo 25 4.1.2. economic characteristics table 4.2. variables frequency percentage employment status employed 8 8% self employment 29 29% unemployed 15 15% student 48 48% total 100 100% monthly income 0 to 100$ 58 58% 101 to 250$ 18 18% 251$ to 500$ 15 15% 501 tp 1000$ 5 5% 1000$ and more 4 4% total 100 100% the figure shows that 66% of people interviewed were employed and 15% unemployed, 48% were student. most of people in our sample are earning less than 100$ per month. this is because mobile money is mostly used by low income people. table 4.3. variables frequency minimum maximum mean numbers of years as user 100 1 5 2,27 amount of transanction 100 1 200 19,73 amount of savings 100 1 500 34,06 this table shows that the average years of use of mobile money services is 2.27, this indicates that the services money is a new service in the area. the maximum of transactions is valued to 200 us dollar, this prove that until now mobile money service is used mostly for transactions with limited amount and small transactions. 4.2. usage of mobile money services table 4.4. variables frequency percentage mobile money services provider airtel money 67 50% orange money 16 16% m-pesa 17 34% total 100 100% mobile money transaction used mostly money transfer 30 30% deposit/ savings/withdrawls 44 44% purchase of goods and services 8 8% buying airtime 18 18% total 100 100% kulondwa safari 26 raison of using mobile money speed in use 25 25% its accessibility 39 39% its low cost 11 11% more easy to use 17 17% get discount and bonus 8 8% total 100 100% owning a bank account yes 53 35% no 47 65% total 100 100% mobile money providers operating in bukavu are airtel money, m-pesa, orange money respectively for 50%, 34%, and 16%. airtel money is the service which is mostly used in bukavu town. people use mobile money services mostly for savings followed by money transfert, purchase airtime and last purchase goods/services. okello et al., (2018) find out that savings and withdrawls transactions are leading financial services transacted through mobile money in uganda; while narteh, mahmoud, & amoh (2017) find out that in ghana money transfert via mobile money is the most used service. most of people use mobile money services for its accessibility. many people interviewed own also a bank account, this show that they are using mobile money not to substitute bank services, but to complete them. 4.3. swot matrix analysis the responses from interviews were compiled to get the matrix below. table 4.5. variables frequency percentage strenghts speed services 33 33% low cost of transaction 12 12% availability 36 36% accessibility 15 15% total 100 100% most people interviewed (36%) find that it is easy to use mobile money services anytime and anywhere using their mobile phones. the transaction reflects directly in the phone of customers. the availability of the service anywhere is also relevant for customers and the service can be used anywhere depending of the availability of the network. some customers consider also the service as cheap. weaknesses difficulty of access 22 22% high transaction cost 28 28% liquidity problems 17 17% lack of information 33 33% total 100 100% according to 33% of our respondents the first weakness of mobile money is the lack of information for non-users. most of people are not enough informed about mobile money services. our respondents argued that the service is expensive. the charge for sending money or withdrawal money is expensive. in some areas it’s difficult to access mobile money services, especially deposits and withdrawal due to the long-distance needed to cover in order to reach an agent of mobile money services for that particular purpose. the problem of liquidity is also relevant due to the fact that a customer who needs to deposit or withdraw money have to visit many agents sometimes because the first agent doesn’t have enough money in his account or enough cash to deliver. financial inclusion in africa through mobile money services: a swot analysis of mobile money services: evidence from bukavu in dr congo 27 table 4.6. variables frequency percentage opportunities quick growth 16 16% easy adoption 16 16% possibility of diversification 27 27% change of attitude/mentality 41 41% total 100 100% the first opportunity of mobile money services is the change of customer’s attitudes according to our respondents (41%). people have understood the advantage of the service and have adopted it easily. our respondents argued that the mobile money services are growing, people adopt it easily and accounts are easily created, hence there is a huge potential for the market to grow. they explained that mobile money services providers can diversify the activity and add other services like loans, payment methods… threats exchange rate instability 21 21,0 network disturbance 39 39,0 cyber attack 19 19,0 bankrupt of financial institutions 21 21,0 total 100 100% according to 39% of our respondents, disturbance of the network could lead people to abandon the service. it happens to not access airtime balance check for a while when there is a network disturbance. respondents are expecting the same risk for their mobile money accounts. the instability of the exchange rate could discourage people to use mobile money services especially the account in national currency. people fear cyber-attack and are expecting risks related to cyber-attack for mobile money services, they are not very sure about the security of the system. it happens in the past for some network operators to go bankrupt or to be sold in the region. using financial services based on a network operators sound very secured for customers. 4.4 tows matrix with regards to the swot matrix, it’s relevant to propose some strategies to make the mobile money services more efficient. tows matrix is used to ascertain the different strategies. according to suhana m., sedigheh m.i, suhaiza z.i, (2017) the matrix could be used by managers and consultants to examine the situation and develop key strategies as well as actions to undertake. the dimensions of tows matrix are shown as below:  s-o (strengths-opportunities): give key strategies that could maximize the strengths by taking advantage of external opportunities.  w-o (weaknesses-opportunities): give key strategies to overcome weaknesses by taking advantage of external opportunities.  s-t (strength-threats): give key strategies to enhance strengths through decreasing the impact of external threat. kulondwa safari 28  w-t (weaknesses-threats): give key strategies with the objective of reducing internal weaknesses and external threats. table 4.7. so strategies mobile money services providers should take advantage of the growing of the sector to improve the accessibility and availability of the service through the facilitation of creation of more agents’ offices/access point. the service should also diversify in order to increase the access for more people to financial services via mobile money. st strategies mobile money services providers should make sure there is no network disturbance in order to guarantee speed services. wo strategies mobile money services providers should take advantage of the growing of the sector to reduce the difficulty in accessing the service as well as the transaction cost. the change of attitudes should help the mobile money service providers to advertise more about their services in order to get more subscribers/customers. wt strategies mobile money services should improve their risk management (technical, cyber and finance) and make sure there is no problem of liquidity in the agent’s offices/points. 5. conclusion it has been proved that financial access can help to fight poverty. africa is facing problems of poverty and mobile money is a tool of financial inclusion. understanding the current status and analyzing the future of mobile money services strategically is relevant. this study used the strategical analysis tool swot to achieve its objective. our main findings can be summarized as follow. mobile money services have strengths and weaknesses as well as opportunities and threats. to begin with, the answers of our respondents compiled shown consistently that the mobile money services strengths are the speed of services, the low cost of transaction, the availability of the service, the accessibility of the service those strengths are dealing with the following weaknesses: the difficulty of access to the service in some areas, the high transaction cost, the problems of liquidity for agents and the lack of information for non-users. secondly the opportunity of the service are the growing sector of mobile money services, the facility to adopt the service, the possibility for diversification as well as the change of customers attitude in the future, the following facts could threaten the mobile money services: the exchange rate instability, the network disturbance, the risk of cyber-attack, and the risk of bankrupt from the service provider. several strategies were proposed through a tows analysis among others the creation of more agent offices/access point, advertisement, and the creation of risk management positions within services providers’ organization. acknowledgements special thanks to kwindja q. for the comments. all errors and omissions are ours. funding this research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. financial inclusion in africa through mobile money services: a swot analysis of mobile money services: evidence from bukavu in dr congo 29 references alfred, s., maureen, t. and were, m. 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(2016) ‘the determinants of financial inclusion in africa’, journal of advanced research. university of cairo., 6(1), pp. 46–57. doi: 10.1016/j.rdf.2016.05.001. world bank findex survey international journal of commerce and finance, vol. 3, issue 1, 2017, 51-58 a strategic differentiator in global competition: talent management mehmet saim aşçı, (phd) istanbul medipol university, istanbul abstract: when the gift called talent meets success, it becomes so intense that no force in the world can stop it. if one works with a team with the right talents, the decision-making and implementation processes will be much faster. companies focus on capital, information technologies, equipment and top quality processes and act accordingly, but the most important factor of all is “human”. what makes good companies truly big is their ability to attract and keep the right talents. it is difficult to find young talents, and it is even more difficult to retain them. to maintain a competitive advantage in today’s world, retaining the best talents in the organization with commitment is just as important as finding them. today, the best and the brightest must be included in the team to maintain a competitive advantage. companies that lose their key employees may miss very important business opportunities. the realization that the most important source that feeds the sustainable competitive advantage is talent has led the management to focus all its attention on talents. the increase in the importance attached to talent has helped employees have improved self-confidence and allowed them to turn their creativity into a competitive advantage. from this perspective, talents have allowed for the introduction of new approaches for employees in the management process. this study attempts to explain concepts of functionality, vitality, developing commitment, creating engagement, accountability, which are the key success factors of talent management processes, as well as obstacles to and disadvantages of talent management. keywords: talent management, competitive advantage, human resources management 1. introduction a literature review shows that the word talent has been used to mean different things for centuries and transformed in time. the word talent refers to individuals who have special skills. in a business context, these skills are important for the organization. the lack of such skills may cause an actual crisis for the organization. also, these skills are difficult to copy for other organizations and improving skills takes time (born and heers – dea, 2009: 2). in an individual context, talent is defined as “the set of superior capabilities, the inherent power which determines the thinking, feeling and acting quality of the individual, is reflected in productive practices when turned into behavior, potentially raises the individual to a level of mastery, and manifests itself as high performance and success” (akar, 2012: 32). in business life, on the other hand, talent is defined by mckinsey & company managementconsulting firm as “the sum of a person's abilities… his or her intrinsic gifts, skills, knowledge, experience, intelligence, judgment, attitude, character and drive. it also includes his or her ability to learn and grow” (beechler and woodward, 2009: in an individual context, talent is defined as “the set of superior capabilities, the inherent power which determines the thinking, feeling and acting quality of the individual, is reflected in productive practices when turned into behavior, potentially raises the individual to a level of mastery, and manifests itself as high performance and success” (akar, 2012: 32). in business life, on the other hand, talent is defined by mckinsey & company management-consulting firm as “the sum of a person's abilities… his or her intrinsic gifts, skills, knowledge, experience, intelligence, judgment, attitude, character and drive. it also includes his or her ability to learn and grow” (beechler and woodward, 2009: 274). most large international businesses consistently define talent as employees who exhibit high potential for both today and tomorrow. talents are those who show a high performance and keep improving in their current position, they are mobile and have potential and desire to improve more in other significant positions as well (makela, björkman and ehrnrooth, 2010 : 137). today, market conditions change constantly, the phenomenon of globalization spreads in waves and extraordinary developments in information technologies and multinational growth and competition strategies in business make it necessary to develop new approaches in fields of management and organization (çavuş, 2008: 21). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 52 mehmet saim aşçı http://ijcf.ticaret.edu.tr new concepts have emerged with the development of contemporary management techniques. new practices are seen in the field of science and business. although it is not possible to draw exact boundaries, contemporary management approaches and techniques such as total quality management, change management, crisis management, downsizing, learning organization, restructuring, conflict management, stress management, outsourcing, empowerment, cross cultural management (çavuş, 2008: 22) and the talent management approach have been gaining traction since 1990s (şahin, 2015: 8). in spite of the information available on the importance of talent development and large sums of money allocated for systems and processes to supper talent management, a surprising number of companies still have difficulty in filling key positions, which limits their growth potential considerably. shortcomings experienced in finding high-potential employees to fill strategic management positions in the company lead to significant problems. although companies possess talent processes, these practices may have lost the relevance with what the company needs to grow and spread in new markets. practices and supplementary technical systems of a company may be strong and up-to-date, but if senior managers do not show a strong commitment to the purpose, talent management will not be successful. passion must start from the top and be a part of the company culture. otherwise, talent management processes may deteriorate easily and turn into bureaucratic routines. today, defective processes and indifference of managers have tangible costs. companies may lose new deals worth millions of dollars to their new competitors due to their inability to find talents to implement their growth strategies (ready and conger, 2008 : 72 – 73). companies which see the future with confidence marry functionality, rigorous talent processes that support strategic and cultural objectives, and vitality, an emotional commitment by management that is reflected in daily actions. this enables them to develop and keep key employees and fill positions quickly to meet evolving business needs. this requires companies to work hard to incorporate talent processes into their dna (ready and conger, 2008 : 74 – 75). 2. functionality processes must strongly support objectives such as driving performance and creating an effective climate. performance and climate are inseparably connected. if the company fails to create the appropriate climate internally and live up to its promises, it will not be able to achieve strategic objectives and reach the desired growth. functionality refers to the processes themselves; i.e. the tools and systems which enable a company to put the right people with the right skills in the right place at the right time. at this point, it is very important to link processes to the company’s objectives. the talent management process should start with creating talent pools to monitor and manage careers of highpotential employees within the company and employees in these pools should have the potential to be promoted to senior management roles within three to five years and then to top management roles in the long run. individuals in these pools should be selected from those who work in positions which require high potential, going beyond usual job definitions, forcing oneself and acquiring new skills (ready and conger, 2008 : 75 – 80). as high-potential employees climb the ladders, they should move through a portfolio of high-level jobs which are categorized based on strategic challenges, the size of the business and complexity of the market. each role should serve as a springboard for leaders who show the potential to become top managers. however, the lion’s share of development takes place on the job, with the support of immediate manager and help from mentors and teammates. for example, a typical marketing manager will have worked with many brands over a certain period. a finance manager will have gone through various assignments, ranging from financial analysis to treasury to auditing to accounting. most managers should also be placed on important multifunctional task forces or project teams. new postings and task force participation challenge employees and signal to managers that the company will always offer new opportunities. also, upper-management employees should be tracked using a technology-based talent management system. the system should capture information about succession planning at the country, business category, and regional levels; include career histories and capabilities, as well as education and community affiliations; identify top talent and their development needs, and track diversity. an ethical talent management practice requires close attention to the effectiveness of recruiting processes. also, the system requires an evaluation of the success rate of key promotions. a strategic differentiator in global competition: talent management 53 http://ijcf.ticaret.edu.tr 3. vitality while functionality is about focusing the company’s talent management processes on producing certain outcomes; vitality is about the attitudes and mindsets of the people responsible for those processes. unlike processes, which can be copied by competitors with some effort, passion is very difficult to duplicate. it is possible to say that the vitality of a company’s talent management processes is a product of three characteristics: commitment, engagement, and accountability (ready and conger, 2008 : 86 – 90). 4. developing commitment principles such as hiring at entry level and building from within have undeniable effects on developing commitment. it is a useful practice to establish a college intern program that offers the chance to assume real responsibility by working on important projects with the full resources of the company to gain commitment early. extensive intern programs can be a drain on an organization because of the time that managers must spend sponsoring, coaching, and advice the interns. however, converting interns to full-time employees at a high percentage compensates for the investment with high-quality hires who can hit the ground running. 5. creating engagement engagement reflects the degree to which company leaders show their commitment to the details of talent management. within the context of talent management, the company should engage employees in their career development the day they start with the company. they should work with their hiring managers to plot moves that will build their career. the purpose is to view job assignments through a career development lens. university recruiting is an important activity, and senior managers should personally monitor the whole process. these executives should bolster ties with educational institutions to hire only graduates with outstanding track records in both academic and nonacademic performance.to this end, the company may fund research, make technology gifts, participate in the classroom, and judge case study competitions. sending new hires to events organized by the company will give them a chance not just to meet one another and members of the leadership team, but also to share their ideas about the company. 6. ensuring accountability all stakeholders should be held accountable for doing their part to make talent management systems and processes robust. because talent management is both a leadership responsibility and a business process. all executives should be held accountable for identifying and developing the company’s current and future leaders.they should be evaluated and compensated for their contributions to building organizational competence, not just on their performance.executives should also be held accountable for maintaining honesty in the talent management process. leaders have long said that people are their companies’ most important assets, but making the most of them has acquired a new urgency. any company aiming to grow has little hope of achieving its goals without the ability to put the right people on the ground, and fast. companies focus on capital, information technologies, equipment and top quality processes and act accordingly, but the most important factor of all is human. decisions related to individuals in the company are the most -perhaps the onlyimportant control mechanism of the organization. the performance capacity of an organization is determined by individuals in the organization. the organization cannot achieve more than the capacity of individuals in the organization allows. the efficiency of the human resource is the factor that determines the performance of the organization. the efficiency of the human resource depends on basic decisions related to employees such as who the company hires, who the company dismisses, who the company assigns to which task (drucker , 2004: 117). the executive should not depend on his or her insight and knowledge about individuals but apply the process which consists of dull and careful steps (drucker, 2004: 117). 54 mehmet saim aşçı http://ijcf.ticaret.edu.tr when it comes to decisions related to people, there is no such thing as flawless decision-making. the executive should accept the failure of any recruitment, assignment or promotion decision. blaming the employee with low performance means avoiding responsibility. the management is responsible for removing the employee with low performance. if the incompetent or weak employee is allowed to continue his or her job, this will lead to low morale in the entire organization and other employees are punished, so to say. however, an individual is not a bad employee who needs to be dismissed from the company just because he or she failed to show the desired performance. it merely means he or she is the wrong person for the job (drucker, 2004: 121). 7. authority and responsibility in talent management a company’s talent management process consists of certain stages, and it is only as strong as the weakest link of these executive process (ready and conger, 2008: 78). for this reason, responsibilities of the top management and also the middleand low-level management and the talent management are important. leaders should develop a mentality to build the momentum to grow talent and enhance performance within the organization and adopt a clear attitude which will allow everyone in the organization understand talent is required for the performance of the job (cheesese et al., 2008 : 222). human resources departments are also responsible for talent management. talent management should be one of the top priorities within specific strategies set out by the human resources management so that the organization may achieve the objective of “winning the war for talent” (armstrong, 2006: 126). talent management should be the vision and mission of human resources managers (atlı, 2010: 12) and one of the main responsibilities of the human resources team should be effective communication and coordination with topand middle-level management and talent managers about talent management practices (akar, 2012 : 63). today, companies seek ways to benefit from not only employees’ labor or knowledge, but also their mental power, available skills, and potential skills as much as possible. throughout the world, top executives attach more importance to efforts to this end. for this reason, a change and transformation process is now taking place about companies’ perspective and practices related to employees. it seems that talent management stands out as one of the most significant and critical fields of practice for human resources management so that the change and transformation process may achieve its goals promptly (alayoğlu, 2010: 77). a strategic differentiator in global competition: talent management 55 http://ijcf.ticaret.edu.tr 8. talent and company environment as we have pointed out above, performance and climate are intertwined, and if the company fails to create the appropriate climate internally and live up to its promises, it will not be able to achieve strategic objectives and reach the desired growth. executives aiming to ensure employee satisfaction and high performance should not ignore the socialization and cooperation level of the company. executives may take the following measures to improve socialization (goffee and jones, 1999: 38 – 40): • recruiting compatible people -people who naturally seem likely to become friendswill promote the sharing of ideas, interests, and emotions. before hiring a candidate, for instance, a manager might arrange for him or her to have lunch with several current employees to get a sense of the chemistry among them. trying to find employees who share interests and attitudes can even be stated as an explicit goal. • arranging casual gatherings inside and outside the office, such as parties, excursions or even book dubs will increasing social interaction among employees. these events might be awkward at first, as employees question their purpose or simply feel odd associating outside a business setting. one way around this problem is to schedule such gatherings during work hours so that attendance is essentially mandatory. it is also critical to make these interactions enjoyable so that they create their own positive, self-reinforcing dynamic. sometimes this orchestrated socializing requires spending money. however, managers can consider the expenditure a good investment in long-term profitability. • reducing formality between employees will encourage socializing. managers can encourage informal dress codes, arrange offices differently, or designate spaces where employees can mingle on equal terms, such as the lunchroom or gym. • the will to win should be stimulated. managers can hire and promote individuals with drive or ambition, set high standards for performance, and celebrate success in high-profile ways. • commitment to shared corporate goals should be encouraged. to do so, managers can move people between functions, businesses, and countries to reduce strong subcultures and create a sense of one company. candidates that show promise carry the organization's larger strategic picture and purpose with them throughout their later positions, pollinating each division in the process. 9. advantages of talent management alent management practices identify those with potential and provide the basis for career planning and development by ensuring that talented people have the sequence of experience supplemented by coaching and learning programs that will fit them to carry out more demanding roles in the future. these practices can also be used to indicate the possible danger of talented people is leaving and what action may need to be taken to retain them (armstrong, 2006: 392). the advantages of talent management may be listed as follows: • talent management has statistically proven effects on profitability. • talent management has the highest effect on talent level. • talent management illuminates the learning process. • talent management is significant in terms of increasing work quality and competency acquisition (bethke – langenegger et al. 2010: 16). • talent management show organizations how their human capital is used (whelan, collings & donellan, 2010 : 491). • rewards given to those with exceptional performance within the framework of talent management have an important role in establishing behavior patterns and ensuring behavioral change (russo, 2010 : 61). another advantage of talent management is the elimination of subjective treatment. one of the most important problems experienced within a company is favoritism in promotions and placements. favoritism or suspicion of favoritism within a company or any organization leads to considerably negative results. it is possible to avoid such negative situations by evaluating performance according to objective and transparent criteria and methods. talent management contributes to the elimination of the favoritism problem when implemented successfully in both public and private sectors or both smes and large corporations (şahin, 2012 : 69). 56 mehmet saim aşçı http://ijcf.ticaret.edu.tr 10. disadvantages of talent management as well as its advantages, talent management may cause disadvantages as well. the most significant disadvantages for companies emerge when the company fails to build loyalty and commitment. institutionalization is important for the success of talent management. failure to assimilate talents discovered and developed into the company may cause talented employees to transfer to other companies, and thus the company loses talent, which is one of the components of competitive advantage. in this context, management must build commitment between the company and employees by accurately identifying material and moral values, needs and expectations of the human resource (altuntuğ, 2009: 458). seeking talented employees through comprehensive recruiting and advertising efforts may create the impression that talented individuals outside the company are targeted primarily. the tendency to underestimate skills and traits of current employees may lead to low motivation and lose employees. employees tagged as b or c players realize that the company has low expectations from them, may participate in a lower number of training programs and be unwilling to receive coaching or guidance. employees who are viewed as ordinary may be discouraged, which may lead to a drop in productivity and an increase in workforce turnover (anne, 2007: 36). talent management may lead to ethical problems as well (swailes, 2013). the higher dimension of the human resources practice, talent management is a strong tool, but subjective actions of applicators may lead to problems related to work ethics, which may be addressed as a disadvantage (şahin, 2012 : 70). 11. obstacles to talent management in a research conducted for mckinsey quarterly with 98 business and human resources leaders from 46 organizations, obstacles to talent management were collected under seven titles (guthridge et al., 2008 : 51). • senior managers do not spend enough high-quality time on talent management; 59% • organization does not encourage collaboration and sharing of resources; 48% • line managers are not sufficiently committed to development of people’s capabilities and careers; 45% • line managers are not willing to differentiate their people as top-, averageand underperformers; 40% • senior leaders are not sufficiently involved in shaping talent management strategies; 39% • senior leaders do not align talent management strategy with business strategy; 37% • line managers do not address underperformance effectively, even when chronic; %37 12. discussion and conclusion increasing complexity of and structural changes in the economy and institutions enhances the importance of talent management further. the uniform management and employee retainment methods of old are not applicable anymore. today, employers have to respond fluctuating business demands and changing competitive scenes quickly. in spite of the slow and variable global recovery and permanently high of level unemployment, organizations still have difficulty to find the right talent when needed (castellano, 2016: 59). the worst global talent scarcities have not been experienced yet, according to the report issued by the world economic forum (wef, 2011:35). the report mentions that studies conducted in the last two years provide evidence for talent crisis which is expected to emerge in coming years and affect all regions. the supply-demand analysis in the report also emphasizes that a widespread talent scarcity will be experienced for decades. in today’s global economy, talent is a significant differentiator for many organizations. young talents are difficult to find, and yet even more difficult to retain. the difficulty arises from how to use these talents which come with a wide range of skills, preferences, and values. the best and the brightest must be included in the team to maintain a competitive advantage in today’s world. losing talented employees in key roles may mean missing very important business opportunities. a strategic differentiator in global competition: talent management 57 http://ijcf.ticaret.edu.tr what is that makes a company with high employee commitment and engagement different from other companies? the difference arises from the ability to communicate values which make the company unique to employees. the secret is to establish and maintain a system which will turn employees, promising talents in particular, into happy, productive and committed team members. the 21st century presents unique difficulties for both individuals and institutions. we seem to move at an incredible speed while social and economic texture changes in under our eyes. it is possible to question all those who used to serve as a foundation for us. the only way for individuals to be successful in the world is to improve their skills and talent, and become compatible. the same goes for institutions. in order to achieve success in the new world, organizations need sophisticated strategic planning competencies which will help them find their way in turbulent markets and an encouraging culture about continuous learning and compatibility. strategic human resources (hr) management competencies necessary to support the culture of an organization and create the workforce which can achieve strategic business goals are equally important (castellano, 2016: 215). references akar, f.(2012). yetenek yönetiminin bazı türk üniversitelerinde uygulanmasına i̇lişkin öğretim üyelerinin görüş ve önerileri, yayınlanmamış doktora tezi, ankara üniversitesi eğitim bilimleri enstitüsü. alayoğlu, n. 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(2010). effectiveness of talent management strategies in swiss companies effectiveness of talent management strategies. universität zürich, institut für strategie und unternehmensökonomik, diskussionspapier,16, 1-20. born, m. ve heers, m. (2009). talent management: alternatives to the single – ladder approach. faculty report (pp. 1 – 108). (july). copenhagen denmark: dea – danish business research academy. castellano, g. w. (2016). 21. yüzyıl i̇şgücü adanmışlığı i̇çin uygulamalar değişen i̇ş yerinde yetenek yönetiminin zorlukları, çev. özlem kunday, vd., nobel yayıncılık, yayın no. 1672. ankara. cheese, p., thomas, r. j., and craig, e. (2008). the talent powered organization, strategies for globalization, talent management and high performance. uk: mpg books. 58 mehmet saim aşçı http://ijcf.ticaret.edu.tr çavuş, ş. (2008). yönetim sürecinin tarihsel gelişimi ve turizm i̇şletmelerinde çağdaş yönetim tekniklerine geçiş. okumuş, f. ve avcı, u. 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(2015). yetenek yönetimi ve yenilik performansı i̇lişkisi: konaklama i̇şletmelerinde bir araştırma, yayınlanmamış doktora tezi, adnan menderes üniversitesi sbe. whelan, e., collings, d. g., and donnellan, b. (2010). managing talent in knowledge-intensive settings. journal of knowledge management, 14 (3), 486-504. international journal of commerce and finance, vol. 4, issue 2, 2018, 108-117 108 a new way of management: a scrum management ahu tuğba karabulut, (phd) istanbul commerce university, turkey esra ergun, (phd candidate) istanbul commerce university, turkey abstract a scrum is widely used since 1990s in software development industry which is a fast changing and demanding industry so companies need to hire qualified employees who can manage themselves in a team based organizational structure to meet and exceed customer expectations. a scrum management offers advantages to software development companies to have and sustain competitive advantages. its adaptations into other industries may be worthwhile to be explored from a management perspective to make contributions to both software d evelopment industry and other industries. the purpose of this paper is to shed a light to a new way of management which is a scrum management to make contributions to both software development industry and other industries. the concept, roles, objects, ceremonies, process and challenges of a scrum will be explained respectively in this paper which provides a comprehensive understanding of a scrum management.. keywords: scrum, agile, team jel classification: m10 1. introduction nowadays, companies are trying to be more dynamic and agile to meet and exceed customer expectations. thus, they are transforming their organizational structures to team oriented and lean organizational structures. teams are autonomous, self-managed and self-controlled. companies need to hire qualified employees to work in teams and manage themselves. they need to motivate their employees beyond traditional monetary and non-monetary rewards. a scrum management is a new way of management initiated in 1990s in the software development industry to meet dynamic customer expectations. major industrial players have applied a scrum management successfully. an agile and a scrum management is a new way of team based management in the management literature which has attracted the attention of management scholars. its adaptations into other industries may be worthwhile to be explored from a management perspective to make contributions to both software development industry and other industries. the purpose of this paper is to shed a light to a new way of management which is a scrum management to make contributions to both software development industry and other industries. firstly, the concepts of an agile and a scrum will be explained. secondly, roles in a scrum team will be stated. thirdly, objects, ceremonies, and process of a scrum will be explained respectively. fourthly challenges of an agile and a scrum will be highlighted. finally, the paper will end with the conclusion. 2. the concept of an agile agility is a popular concept for organizations which operate in fast changing environments. companies should adapt to changes, improve themselves and be responsive to customer expectations. they can only achieve these objectives by being agile organizations. the concept of an agile was coined as an agile manufacturing in 1991. its focus was creating an adaptive organization to changing market conditions. agility was transferred into software development sector with an initiation of the agile manifesto in 2001 (crişan et al, 2015, p. 62). qumer and henderson-sellers (2006) believe that agile organizations are flexible to adapt to changes. they are lean, responsive and learning oriented. also they have a velocity. beck et al. (2001) acknowledge that the agile manifesto has combined principles in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e a new way of management: a scrum management 109 and values from agile approaches and methods, made the agile movement organized and stronger in the software development industry (campanelli and parreiras, 2015, p. 86). the agile manifesto defines an agile software development as “an iterative and incremental (evolutionary) approach to software development which is performed in a highly collaborative manner by self-organizing teams within an effective governance framework with "just enough" ceremony that produces high quality solutions in a cost effective and timely manner which meets the changing needs of its stakeholders” (moniruzzaman and hossain, 2013) (crişan et al, 2015, p. 63). dove (2005) believes that the core of agility is expected to be a rapid response. jacobson (2007) highlighted the following characteristics of agility: (1) agility which is a part of social science focuses on an effective teamwork. (2) agility is lightweight process which focuses on more an implicit knowledge than an explicit knowledge. since the agility is a “lightweight” process, agile methods focus on a team communication, a continuous delivery of products, an immediate feedback to users and embrace changes (yang et al., 2010, p. 889). beck et al. (2001) state that the agile values are as follows (campanelli and parreiras, 2015, p. 86): • people and interactions • developing a working software • collaborating with a customer • responding to a change characteristics of agile methods are as follows: handling changing requirements, delivering a high quality and an under budget working software in short time intervals (jyothi and rao, 2011). agile methods are widely used in the software development industry (qumer and henderson-sellers, 2006; deemer et al., 2010; nishijima and dos santos, 2013). they have advantages such as enhancing flexibility, increasing quality and productivity, accelerating time to market the software, and improving an information technology/business alignment compared to traditional software development methods (qumer and henderson-sellers, 2006; deemer et al., 2010; jyothi and rao, 2011; nishijima and dos santos, 2013; versionone, 2013). agile software development methods are viable and interesting options to align with a business strategy, control a project budget, improve the quality, and deliver the value continuously (nerur et al., 2005; de azevedo santos et al., 2011; glaiel et al., 2013) (campanelli and parreiras, 2015, pp. 85-86). the characteristics of an agile software development methods are agility, collaboration, flexibility in a requirement definition, self-organizing teams, repetitive and an incremental development. creators of these methods join the agile movement publishing the agile manifesto which explains principles and a philosophy of agile methods (http://en.wikipedia.org/wiki/scrum_(software_development);http://www.scrumalliance.org/why-scrum/corescrum-valuesroles) (pozgaj et al., 2014, p. 893). reasons to adopt an agile are presented in diagram 1. diagram 1. reasons to adopt an agile a.tuğba karabulut & esra ergun 110 resource: versionone, 2017, p. 8 as it is shown in diagram 1, accelerating product delivery is the main reason to adopt an agile. according to a survey, 98% of respondents acknowledged that their organizations achieved agile projects. respondents highlighted the following benefits to adopt an agile: an accelerated product delivery, better project visibility, an improved team productivity, and the management of changing priorities (versionone, 2017, p. 2). 3. the concept of a scrum a scrum is a team based organizational structure which is commonly used in software development industry. like other organizations, software companies need to apply team based organizational structures to have competitive advantages, meet and exceed customer expectations and improve themselves. a scrum management offers software companies a new dynamic team based management to survive and succeed in a fast changing industry. it is a way of transformation for these companies and its adaptations into other industries could be explored. schwaber proposed the scrum development method in 1995. at that time, many professionals thought that the development of software could not be planned, estimated and completed by applying “heavy” methods (vlaanderen et al., 2009, p. 2). schwaber (1996) described a scrum as a process accepting that “the development process is unpredictable” and formalizing the “do what it takes” thinking style. the scrum has become successful with several software vendors (liubchenko, 2016, p. 169). schwaber and sutherland believe that a scrum is a process framework which manages a complex product development and where several techniques and processes can be applied to develop products (pozgaj et al., 2014, p. 894). a scrum is based on the mentality that many software development processes cannot be predicted. thus, it facilitates software development flexibly. only the planning and the closure phases are defined in software development project. sprints are series of flexible blurred stages where the software is developed by several teams. customers can not require changes during sprints. this ensures the successful development of the software in a turbulent environment which has competitions and financial and time pressures (vlaanderen et al., 2009, p. 2). a scrum has been used in the world to (schwaber and sutherland, 2017, p. 4): 1. research and identify viable technologies, markets, and product capabilities 2. develop products and enhancements 3. release products and enhancements frequently 4. develop and sustain cloud and other operational environments 5. sustain and renew products a scrum’s utility to deal with a complexity is proven everyday when environmental, technological and market complexities and their interactions have increased rapidly. a scrum is effective in an incremental and an iterative knowledge transfer. a scrum is used for services, products, managing headquarters and organizational operations, and developing software, embedded software, hardware, and interacting function networks. it is also used for autonomous vehicles, governments, marketing purposes, schools etc. (schwaber and sutherland, 2017, p. 4). the a new way of management: a scrum management 111 concept of a scrum is based on a team work, an ongoing research, taking feedbacks, meeting customer demands continuously, create and improve an output. thus, it seems it could be applied in some industries where there are changing environmental factors and customer demands, continuous product or service providing and improvement. 4. roles in a scrum team scrum teams are designed to succeed. there are main roles in a scrum team to succeed such as a leader, a scrum master, a product owner and a team member. success factors of a scrum are as follows (dikert et al., 2016, pp. 103-104): • leadership and management support • agile approach customization • piloting • coaching and training • people engagement • transparency and communication • alignment and mindset • autonomy of teams • management of requirements 4.1. the leader capital leadership responsibilities in a scrum are as follows (https://www.scribd.com/document/385806389/csmjsv20, 27.8.2018, p. 68). • providing challenging team goals • creating a working business plan and organization • eliminating an organizational debt • providing required resources for teams • identifying and removing impediments for teams • knowing the team velocity • removing a waste and eliminating a technical debt • holding product owners accountable for a delivered value • holding scrum masters accountable for the team happiness and a process improvement. 4.2. the scrum master the scrum master is a servant-leader of the scrum team. the scrum master helps outsiders to distinguish helpful interactions with the scrum team (schwaber and sutherland, 2017, p. 7). the scrum master responsibilities are as follows (https://www.scribd.com/document/385806389/csmjsv20, 27.8.2018, p. 61). • being a facilitator • being knowledgeable about the scrum process • coaching the team and the product owner to enhance the team performance • removing impediments • protecing the team from interruptions • holding scrum practices and values • making the work visible the scrum master works with the product owner to do the following (https://www.scribd.com/document/385806389/csmjsv20, 27.8.2018, p. 65): a.tuğba karabulut & esra ergun 112 • finding techniques for managing the product backlog effectively • communicating vision, goals, and product backlog items to the team • teaching the scrum team to create concise and clear product backlog items • understanding long-term planning for a product in a scrum environment • understanding and implementing the agile manifesto values • facilitating scrum ceremonies such as a release planning. 4.3 the product owner product owner should have the following characteristics ((https://www.scribd.com/document/385806389/csmjsv20, 27.8.2018, p. 63): • having a compelling and an executable product vision which generates a high income and initiates passion in the team, the organization and customers • building a roadmap for executing the vision which people can see and sign up for • building an adequate and a timely product backlog • spend half of his/her time with marketing, sales and customers • spend other half of his/her time working with the team to clarify specifications the development team the development team has members who deliver a releasable increment of “done” product at the end of a sprint. a “done” increment is required at the sprint review and can only be created by the development team (schwaber and sutherland, 2017, p. 7). the development team has the following characteristics (schwaber and sutherland, 2017, p. 7): • it is self-organizing. no one can tell the development team how to turn the product backlog into increments of a releasable functionality • it is cross-functional with skills to create a product increment • a scrum does not recognize titles for team members whatever the work they perform • a scrum does not form any sub-teams whatever the domain is addressed • members of the development team can have specialized skills and focus areas, but the development team is accountable • optimal development team size is large enough to complete the work within a sprint and small enough to remain nimble as it is explained, the roles in a scrum can be applied to some industries because these roles are actually the roles in most of the teams. thus, if there is a team project, team members can handle these roles to achieve objectives in various sectors. 5. scrum objects a scrum has the following objects to operate successfully; a sprint, a product backlog, a sprint backlog, and a user story. 5.1. sprint a scrum’s target is delivering high quality software products after a defined period series which are called sprints. the development cycle consists of demand, analysis, design, iteration and production stages. the demand, analysis and design stages need a sprint whereas an iteration and production stages need 3-5 sprints. every sprint has a mission. four elements of a scrum are a task library, a team, a sprint and a scrum meeting. the demand’s priority is determined first and defined as work items for being enrolled in a task library. work items are selected from a task library and assigned to members of the team through the scrum meeting at the initial stage of the sprint. members of the team agree with task quality at the end of the sprint. they are aware of and update the schedule of the work through the scrum meeting every weekday. they will exhibit a progress of the work and collect new customer demands for an upcoming sprint at the end of the sprint (yang et al., 2010, pp. 889-890). a new way of management: a scrum management 113 a sprint has one calendar month duration. if a sprint’s duration is long, the definition of the product may change, a risk may increase and a complexity may rise. a sprint lets predictability by ensuring a progress inspection and an adaptation toward its goal at least each calendar month. a sprint limits the risk to the cost of one month (schwaber and sutherland, 2017, p. 9).a planning starts whereas a review ends a sprint. a sprint planning is a time-boxed meeting up to 4 hours. it is conducted to develop comprehensive plans for the sprint. the project’s stakeholders attend sprint review meetings which can continue 4 hours to review the business, the technology and the market. a retrospective meeting can be conducted for the teamwork’s assessment in the completed sprints. a daily scrum meeting is 15-minute long and team members address three questions: what did i do yesterday? what will i do today and what impediments are in my way? (hossain et al., 2009, pp. 175-176). 5.2. product backlog a scrum consists of an instrument called a product backlog which is a requirement set for a project provided by stakeholders. the team’s goal is reinforced during a scrum meeting. the team moves on another sprint after the sprint finishes. a sprint is an iterative cycle where major functionality of the project is developed, new deficiencies and developments are defined, and the plan is modified (crişan et al., 2015, p. 64). a product backlog can be used as a new requirement container to replace old requirements, repair bugs, and get rid of features. elements which are at the top of the backlog are prioritized as refined items (cohn, 2010). a planning is a continuous activity concurrent to development activities to "execute and deliver sprints" and "prepare product backlog" in a scrum. when the members of the team are progressive for executing and delivering sprints, they look for an increased speed of the "preparation of product backlog" process (jakobsen and sutherland, 2009) (alsalemi and yeoh, 2015, pp. 189-190). the product backlog which is an ordered list of the change requirements in the product evolves when the product and its environment evolves. it is dynamic and changes for identifying the product needs which are competitive, useful, and appropriate. the product backlog lists functions, features, requirements, fixes and enhancements to change the product in further releases. product backlog items have the attributes of an order, a description, a value and an estimate. they have test descriptions which prove their completeness when “done” (schwaber and sutherland, 2017, p. 15). 5.3 sprint backlog the sprint backlog is a plan to deliver the product increment and realize the sprint goal and the set of product backlog items for the sprint. the sprint backlog highlights the work which the development team considers as necessary to meet the sprint goals. it has at least one high priority process improvement which was identified in the last retrospective meeting to make sure a continuous improvement (schwaber and sutherland, 2017, p. 16). 5.4 user story a user story is a story of the user for specifying how the system should work. it is written on a card and permits an estimation of the implementation duration. a user story reveals a comprehensive conversation to give the details of the demand. the cards are used as tokens in the planning stage after a business risk and a value assessments. the customer focuses on user stories and schedules them to implement (https://www.scribd.com/document/385806389/csmjsv20, 27.8.2018, p. 114). objects of the scrum could be applied to some industries. a sprint can be replaced by a stage where a product or a service is prepared. product and sprint backlogs can be replaced by stages where workloads are planned, organized and then allocated to team members to be achieved. a user story can be replaced by a stage where a customer briefs are taken, organized and scheduled. thus, although a scrum objects have special names and comprehensive contents, they can be adapted to some industries where customer briefs are given, workload is planned, organized and allocated to team members, and a product or a service is continuously provided. a.tuğba karabulut & esra ergun 114 6. scrum ceremonies scrum ceremonies are a daily scrum, a sprint review, and a sprint retrospective. these ceremonies lead a scrum to succeed. 6.1 daily scrum the daily scrum which is a 15-minute time-boxed event held by the development team in each sprint day to plan the next 24 hour work. it optimizes team performance and collaboration, inspects the work since the last daily scrum and forecasts a next sprint work. the daily scrum is held at the same place and time every day to minimize complexity. the development team practices the daily scrum for inspecting a progress toward the sprint goal to complete the work in the sprint backlog. the development team meets after the daily scrum for discussing, adapting or replanning the remaining part of the sprint’s work. daily scrums improve communication and knowledge, promote quick decision-making, prevent other meetings, and identify impediments to development to remove them (schwaber and sutherland, 2017, p. 12). purposes of a daily scrum are building a team focus, collaborating intensely, forming a mental attitude and creating a team spirit (https://www.scribd.com/document/385806389/csmjsv20, 27.8.2018, p. 200). 6.2 sprint review a sprint review is applied at the end of the sprint for an increment inspection and a product backlog adaptation. the scrum team and stakeholders collaborate about the achievements in the sprint during the sprint review. based on it and changes to the product backlog during the sprint, attendees collaborate on the following things for optimizing the value. it is an informal meeting. the increment’s presentation highlights the feedback and encourages the collaboration. it could be up to a four-hour meeting for one-month sprint. the sprint review’s result is a revised product backlog which defines the potential product backlog items for the next sprint (schwaber and sutherland, 2017, p. 13). 6.3 sprint retrospective the sprint retrospective leads the scrum team for a self-inspection and a plan preparation to make improvements during the upcoming sprint. it is held after the sprint review and before the upcoming sprint planning. it may be up to a three-hour meeting for one month sprint. the scrum team plans for increasing a product quality to improve work processes or adapt the definition of “done” during each sprint retrospective. the scrum team should identify improvements which will be implemented in the upcoming sprint by the end of the sprint retrospective. implementing improvements in the upcoming sprint is the adaptation for the inspection of the scrum team. improvements can be implemented at any time but the sprint retrospective offers an opportunity for an inspection and an adaptation (schwaber and sutherland, 2017, p. 14). a daily scrum, a sprint review and a sprint retrospective ceremonies can be adapted to some industries. a daily scrum can be considered as a daily meeting for organizing. a sprint review can be considered as a meeting after a product or a service providing period. a sprint retrospective can be considered as a meeting before a new product or a new service is provided. they can be held in most of the organizations since they are important meetings. 7. the process of a scrum the process of a scrum has project starting, project planning, project implementing, project monitoring and project ending stages. a sprint planning, an iterative planning, and an overall planning are made during a project planning stage. design practice templates, an iterative process, and an incremental design are made during a project implementing stage. a day progress meeting, an iterative tracking, and an iterative evaluation are made during a project monitoring stage. a project evaluation is made during a project ending stage. an iterative process has an iterative planning, an iterative evaluation, and iterative tracking stages. an iterative planning focuses on the value and responses to the business needs. other iterative processes inspect and evaluate a function and a quality realization. practice templates which point out testable design problem solving methods a new way of management: a scrum management 115 involve relative independent methods about a design management such as trial and error with templates, a survey questionnaire template, user experience design templates, behavior image templates, a brainstorming template, a situation template, team templates, etc. practice templates facilitate an adaptive mode of a method combination to design managers (yang et al., 2010, p. 891).process of a scrum reflects a project process which is held in many organizations. thus, it can be adapted to organizations in some industries which require a project management and a team work. 8. challenges of an agile and a scrum although a scrum offers various advantages to companies, it has several drawbacks as well. some of them may affect the implication of a scrum in different industries as well. agile methods were designed to be used in small singleteam projects (boehm and turner, 2005). on the other hand, their proved and potential benefits have made them attractive for large projects and companies. although, agile methods satisfy both developers and customers, they may not be appropriate for large undertakings and it is more difficult to implement them in large projects (dybå and dingsøyr, 2009) which require an additional coordination. handling an inter-team coordination is a problem to apply an agile for large projects. a large-scale agile arises concerns to interface with other departments, such as marketing and sales, human resources, and product management. a large scale agile causes users and other stakeholders to be distant from the development teams (paasivaara et al., 2013, 2014; dingsøyr and moe, 2014; versionone, inc, 2016). each company may search for its own balance of an agile and plan driven methods (boehm, 2002) (dikert et al., 2016, pp. 87-88). challenges of adopting and scaling an agile are presented in diagram 2. diagram 2. challenges of adopting and scaling an agile resource: versionone, 2017, p. 12 as it is shown in diagram 2, company philosophy and culture at odds with core agile is the main challenge for adopting and scaling an agile. challenges of a scrum are as follows (dikert et al., 2016, pp. 97-98): • resistance to change (management and team perspectives) • not making enough investment (lack of coaching and training, kept old commitments, high workloads) • implementation difficulties (concept misunderstanding) • coordination problems of several teams (challenges of a global distribution, achieving a technical consistency, organization size) • organizational limitations (bureaucracy) • challenges of an engineering (estimations, elevated level requirements, gap between long term and short term planning) • assurance of a quality (lack of automated testing) • integrating non-development functions (product launch and incremental delivery challenges) a.tuğba karabulut & esra ergun 116 as it is explained, a scrum is more appropriate for small projects and teams for better coordination. a change resistance, organizational limitations, financial, quality and implementation problems are major problems which could be faced in most of the team projects. thus, if scrum principles are applied in some industries, companies should be ready to overcome these challenges. 9. conclusion this paper tried to shed a light to a new way of management which is a scrum management to make contributions to both software development industry and other industries. it explained the concept, roles, objects, ceremonies, process and challenges of a scrum and gave insights whether it could be applied into other industries. it will take time to implement a scrum in software development industry completely. it will take even more time to adapt a scrum to other industries such as high-tech, service, etc. but its concept, roles, objects, and ceremonies could be adapted to other demanding industries. its principles could be applied in some industries if there are continuous product and service providing, team work projects, changing customer requirements and environmental factors. since a scrum is an innovative management approach, it will be beneficial for other industries to get the advantages of it for meeting the customer demands, a sustainable growth and a continuous innovation. it is expected that this paper will help management scholars to be more familiar with a scrum, think about its adaptations to other industries and include it into their further researches. references alsalemi a.m. and yeoh, e. (2015) a survey on product backlog change management and requirement traceability in agile (scrum). 9th malaysian software engineering conference, 16-17 december, pp. 189-194. doi: 10.1109/mysec.2015.7475219 campanelli, a.s. and parreiras, f.s. (2015) agile methods tailoring–a systematic literature review. the journal of systems and software 110, pp. 85-100. crişan e., beleiu i., and ilieş l. (2015) the place of agile in management science–a literature review. managerial challenges of the contemporary society, 8(1), pp. 62-65. dikert k., paasivaara m., and lassenius c. (2016) challenges and success factors for large-scale agile transformations: a systematic literature review. the journal of systems and software, 119, pp. 87-108. hossain e., babar m.a., and paik h. (2009) using scrum in global software development: a systematic literature review. fourth ieee international conference on global software engineering, 13-16 july, pp. 175-184. liubchenko v. (2016) a review of agile practices for project management, csit 2016, 6-10 september, pp. 168170. pozgaj, z., vlahovic, n., and bosilj-vuksic, v. (2014) agile management: a teaching model based on scrum, mipro 2014, 26-30 may, opatija, croatia, pp. 893-898. schwaber k. and sutherland j. (2017) the definitive guide to scrum: the rules of the game. available at: https://www.scrumguides.org/docs/scrumguide/v2017/2017-scrum-guide-us.pdf [accessed 8 sep. 2018] vlaanderen k., brinkkemper s., jansen s., and jaspers, e. (2009) the agile requirements refinery: applying scrum principles to software product management. third international workshop on software product management, 1 september, pp. 1-10. doi: 10.1109/iwspm.2009.7 yang g., yu s., chen g., and chu j. (2010) agile industrial design management based on scrum. 2010 ieee 11th international conference on computer-aided industrial design and conceptual design 1, 17-19 november, pp. 889-891. doi: 10.1109/caidcd.2010.5681880 a new way of management: a scrum management 117 11th annual state of agile report by versionone inc (2017) available at: https://www.versionone.com/about/pressreleases/versionone-releases-11th-annual-state-of-agile-report/, 27.8.2018 [accessed 24 sep. 2018] csmjsv20-scrum the art of doing twice the work in half the time, e-book by scrum inc. available at: https://www.scribd.com/document/385806389/csmjsv20, 27.8.2018 [accessed 11 sep. 2018] international journal of commerce and finance, vol. 5, issue 1, 2019, 70-78 70 capital structure determinants in transitional economies ardita bylo istanbul commerce university, phd. candidate, turkey assoc. prof. dr. serkan çankaya istanbul commerce university, phd., turkey abstract most of the empirical studies about capital structure tend to focus either on overall developed markets or on emerging countries. this paper aims to analyze the determinants of the capital structure of the companies in the western balkans (wbs) using a panel of 30 nonfinancial firms listed in zagreb stock exchange, belgrade stock exchange, and macedonian stock exchange over the period of 2012– 2017. the leverage ratio is modeled as a function of firm-specific characteristics. the study shows that firms in the wbs tend to rely more on short-term debt rather than long-term debt. there is a significant negative impact of liquidity, profitability and tax on both leverage level and short-term debt ratio. the long-term debt ratio is significantly positively affected by the growth opportunities of these companies and by its past level. theory. the results obtained from this empirical research indicate that companies in the wbs follow the pecking order. these findings appear to be similar to the results of previous studies of this nature done about emerging and transitional economies. keywords: capital structure, western balkans, transitional economies, leverage jel classification: c51, c58, g15, g30, g31 1. introduction even though there is extensive literature about the usage of leverage among companies, in transitional economies the optimal capital structure decision continues to be an unsolved puzzle. the considerations upon the capital structure have gained remarkable interest since 1950s. the research focused on finding an optimum debt – equity ratio in order to minimize the capital cost and to maximize the companies’ value. modigliani and miller (1963) paper about capital structure irrelevance of the capital structure decisions on companies’ value made a significant contribution to this field of research. the theory was developed under the premise of a perfect capital market, but the review of this assumption and the recognition of market imperfections led to varies conclusions that emphasize the importance of the capital structure. several other studies can be listed as: the trade-off theory (modigliani & miller, 1963; kraus & litzenberger, 1973; bradley, jarrell, & kim, 1984), the agency cost theory (jensen & meckling, 1976; jensen, 1986), and the pecking order theory (myers, 1984; myers & majluf, 1984). this paper aims to contribute to the literature on the changing aspects of the capital structure decisions for transitional economies, by analysing the relationship between leverage, profitability, liquidity, risk, and a set of explanatory variables. following, the study of akman at al. (2015) we used capital structure indicators such as: growth opportunities, market to book value, assets tangibility, the ratio of tax to earnings before tax, and liquidity ratio. the ability of explaining the capital structure decisions through financial theories has evolved, like in the case of countries that has passed through a long transitional period, such as eastern european countries. the wbs’ economies are considered economies in transition since they opened up to the global market after 1990s. all the countries of this region decentralized and changed towards a market oriented economic model. the banking system is still considered as a factor of great importance in the financial system (imf, 2015). this study aims to determine the appropriate theoretical capital structure model for transitional economies. the paper examines the capital in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e capital structure determinants in transitional economies 71 structure of the selected large listed companies in serbia, croatia, and the republic of north macedonia, from 2012 to 2017. the research questions of this paper can be listed as follows:  what are the main determinants of firms’ leverage in general and in short and long-terms for the listed companies in the wbs stock exchanges?  is the prevailing literature able to explain the capital structure of the wbs’ companies? is there any noteworthy change in the leverage decision determinants?  are the driving forces of the corporate financing decisions based on firm or country specific parameters? the second section presents a theoretical review about capital structure. the third section presents the data used and explains the econometric methodology. the fourth section discusses the empirical results and presents a crosscountry analysis. the last section concludes the study. 2. theoretical review and findings about capital structure most of the research related to the capital structure have focused on the well-known paper of modigliani and miller (1958). over the last six decades, this enabled the emergence of various theories, regarding capital structure, such as trade-off, pecking order, agency costs, signalling and market timing theory. in the first proposition of modigliani and miller (1958), the value of a company is independent of the way it chooses to finance its operations. later, on 1963, modigliani and miller (hereafter mm) explained how debt becomes beneficial for companies, if taxation is taken into account. the authors claim that, the tax deductions encourage the leverage usage. the static trade-off theory of capital structure foresees that firms aim to approach a target debt to equity ratio (myers, 1984). according to this theory, there is an optimal capital structure that maximizes the firm's value, while balancing the taxes, agency and bankruptcy costs with the benefits of an additional debt unit. thus, a firm’s target leverage can be determined by the trade-off between the cost of financial distress and the interest tax shields of debt (chakraborty, 2010). the pecking order theory explains that new investments follow a hierarchal process of financing. this theory assumes that firms prefer internal financing more than external funds. when internal cashflows are not sufficient to finance the activity, firms will borrow, rather than issue equity. this defined pecking order sends a signal to the public about the companies’ performance. it seems difficult to define an optimal leverage level by using pecking order theory (bauer, 2004). agency costs are incurred from asymmetric information and conflict of interest between the principal and the agent. as jensen and meckling (1976) mention, there are three common types of agency costs: the monitoring costs, the bonding costs, and the residual losses. based on kumar et al. (2017), most of the capital structure literature, focuses on developed economies and it results to be a limited knowledge on emerging markets. since the capital markets of transitional economies are relatively less efficient and incomplete than those of developed countries, studies on these economies’ markets have become attractive. different studies show that companies’ specific determinants of capital structure vary largely and are mainly focused on growth, profitability, liquidity, risk, tangibility, non-debt tax shield (ndts), size, and age. the relationship between these variables turns out to vary among studies. knowledge about decisions made regarding the capital structure usually originates from the empirical data of developed economies. empirical studies about leverage and capital structure determinants present conflicting results. agency cost and static trade off theory generally shows a positive relationship between size and leverage. rajan and zingales (1995) explain this relationship by increased transparency and less exposure to the negative aspects of asymmetric information. when firms have growth opportunities, in consistency with the pecking order theory, external financing seems to be more preferred (booth et al. (2001; rajan & zingales, 1995). however, in some empiric evidences about transition economies, chakraborty (2010) reports a negative effect on the total debt ratio. theoretically the asset structure of companies with a high level of tangibility tends to have a higher leverage. ardita bylo & serkan çankaya 72 however, chang et al. (2009) claims that there is a negative relation between tangibility and leverage. based on recent studies the effect of risk on the capital structure contradicts previous theories. chang et al. (2009) report a positive relation between risk and leverage. 3. data and methodology 3.1. data the dataset used in this study includes the determinants of the capital structure of the companies in the western balkans (wbs) based on a panel of 30 non-financial firms. the panel data set contains 3 countries: croatia1, serbia and the republic of north macedonia, each of which includes 10 companies listed respectively in zagreb stock exchange (zse), belgrade stock exchange (belex), and the macedonian stock exchange (mse) and each with 6 observations measured at annual intervals, over the period of 2012-2017. consequently, the total number of observations in the panel data is 180. companies operating in the financial sector have not been included. the data has been obtained mainly from stockopedia, zse, belex, mse and seinet2 database, and also from the annual reports found on the official sites of the companies. stata 12 has been used to analyse the data. this is a two-way balanced panel model. table 1. the dependent and independent variables’ explanation dependent variables definition symbol leverage debt-to-assets ratio = total debt/total assets lev short-term debt to assets short-term debt-to-assets ratio = total debt / total assets stdta long-term debt to assets long-term debt-to-assets ratio = total debt / total assets ltdta independent variables definition symbol company size ln (total assets) size growth opportunities (a) % change of total assets, per year gra growth opportunities (s) % change of sales, per year grs taxes taxes payable / ebt tax non-debt tax shield depreciation / total assets ndts tangibility tangible assets / total assets tang profitability ebt / total assets prof business risk interest coverage ratio = ebit / interest expenses risk asset utilization costs of goods sold / total debt cgtd liquidity current assets / short-term debt liqd dummy for macedonia the effect of macedonia over the 2 other countries dm dummy for serbia the effect of serbia over the 2 other countries ds dummy for croatia the effect of croatia over the 2 other countries dc table 1 shows the dependent and independent variable definitions and explanations used in this study. in this study, following akman et al. (2015), three leverage measures are used: total debts to assets; long-term debt to assets, and 1 croatia has been included in the analysis since its experience before joining the eu is very relevant for the economic problems of the other wb countries. 2 system for electronic informations from listed companies capital structure determinants in transitional economies 73 short-term debts to assets. independent variables are: firm size, growth opportunities, taxes, tangibility, profitability, business risk, and liquidity. 3.2. methodology panel data models evaluate the time effects, the unit-specific effects, or both, to deal with heterogeneity or individual effects that can be detected or not. hausman specification test is one of the most appropriate tests used to determine which effect, fixed or random, is more consistent and significant in the panel data used. the null hypothesis states that the preferred model is random effects, whether according to the alternative one the model would be based on fixed effects (greene, 2008). it basically tests whether the unique errors (ui) are significantly correlated with the regressors in the model, thus, in other words, the null hypothesis of hausman test states that these unique errors are not correlated (park, 2011). h0: error term (ui) is uncorrelated with “xit” h1: error term (ui) is correlated with “xit” table 2. results of hausman test model dependent variable chi2 (n) prob. > chi2 1 lev 7.52 0.0233 2 stdta -16.33 n/a 3 ltdta -4.18 n/a the results of hausman test have been displayed in table 2. based on these values, since the probability in model 1 is 0.0233 < 0.05, the null hypothesis is rejected, and as result the fixed effect model will provide a better estimation. regarding the second and third models, since chi2 < 0 in both of them, they fail to meet the asymptotic assumptions of the hausman test. this suggests that there is not enough information to reject the null hypotheses, and so as result the random effects model shall be used. in order to further examine our second and third model, the hausman test for fixed effects model versus random effects model can also be cast as a test of the additional over-identifying restrictions that re model imposes. the null hypothesis of this test (performed by xtoverid through stata) stands that re model is consistent (wooldridge, 2002; wooldridge, 2010; arellano, 1993). h0: random effects model is consistent h1: fixed effects model is consistent table 3. results of the over-identifying restrictions test: fixed vs random effects model dependent variable chi2(n) p-value 2 stdta 24.253 0.0001 3 ltdta 3.085 0.5437 based on the results of table 3, the p-value of model 2 is small enough (p-value = 0.0001 < 0.05) to reject h0, and since the p-value of model 3 is 0.5437 (> 0.05), in this case the evidence against re is not rejectable. thus, the second model is considered to be a fixed effects model, whereas the third model a random effect one. ardita bylo & serkan çankaya 74 we considered the following alternative models for the specification of the capital structure for each company, as a start point: • model 1: lev = f (size, gra, grs, tax, tang, prof, risk, liqd) • model 2: stdta = f (size, gra, grs, tax, tang, prof, risk, liqd) • model 3: ltdta = f (size, gra, grs, tax, tang, prof, risk, liqd) the test hypothesis is established as bellow: h0: there are no individual and time effects h1: there is autocorrelation table 4. the results of the baltagi wu lbi tests model dependent variable durbin-watson baltagi-wu lbi 1 lev 0.8106938 1.2759304 2 stdta 1.2102871 1.5632805 3 ltdta 1.2682174 1.6243993 the baltagi-wu lbi statistic values and the bhargava et al. (1982) durbin-watson statistic for zero first order serial correlation statistic values both reject the null hypothesis raised in relation to the above models (see table 4). the rejection of the null hypothesis here indicates the need to correct the standard errors for serial correlation. further, wald test and breusch and pagan lm test for fixed and random effects models has been performed, respectively. the test hypothesis would be as following: h0: there is constant variance among cross section error terms h1: there is heteroscedasticity table 5. the results of the wald tests and breusch and pagan lm test model dependent variable chi2 probability wald tests 1 lev 42354.12 0.0000 2 stdta 33543.25 0.0000 breusch and pagan lm test 3 ltdta 277.45 0.0000 based on table 5, since the p-value is smaller than 0.05 the results reject the null hypotheses and thus suggest that there is evidence of heteroscedasticity. since the tests recognize the presence of heteroscedasticity and autocorrelation in all models, heteroscedasticity-robust standard errors are going to be used for the regression of fixed and random effects panel data, following stock & watson (2006), eliminating in this way the hac problem (fischer & sousa-poza, 2009; nichols & schaffer, 2007). 4. empirical findings the results of robust standard error adjusted fixed (for the first and second models) and random effects (for the third model) panel regression are displayed in table 6. f-statistics, chi-square statistics and other values demonstrate that the selected models are reliable. even though, r-square values indicate a relatively low significance level of these models, at 26%, 16% and 17% for lev, stdta and ltdta, respectively, suggesting the idea that short-term and long-term debts might depend more on macroeconomic factors. capital structure determinants in transitional economies 75 table 6. results of standard error adjusted panel regressions note: ***significant at 1% level, **significant at 5% level, *significant at 10% level table 6 shows that liquidity has a significant negative relationship with the debt to equity ratio for each model. profitability have a significant negative impact on short-term debts to equity and total debts to equity, and even the lagged one period of profitability has a significant negative effect on the leverage as a whole and in long-terms of the debt. growth opportunities induce to an increasing of the leverage in terms of long-term debts, however this results insignificant in short and overall terms. the three of the models indicate that the companies’ size, tangibility, asset utilization, and non-debt tax shield does not connect to leverage significantly. as fan et al. (2012) reports, profitability seem to have generally a negative impact on the leverage, with the exception of some developed countries like the usa, canada, and ireland. the lack of developed debt securities’ markets in transitional economies or the presence of operation costs in developed countries may be an explanation. in this connection, the pecking order theory apprises that companies with high profits prefer their own resources, whereas unprofitable companies depend on debts. agency costs concerns may also explain the negative relationship among profitability and debt preferences, since debts might not be preferred in such circumstances. this is consistent with the fact that there is a dominance of small businesses and banks as primary financing resources in the western balkans. based on the results there is not a significant relation between tangibility and leverage. the impact of liquidity on leverage is significant and negative, and has a higher influence in total and short-term debt ratios. thus, companies with a high level of liquidity prefer long-term debts toward short-term debts. growth opportunities expressed as a model 1 (fixed-effects model) model 2 (fixed-effects model) model 3 (random-effects model) robust standard error adjustment for 30 clusters in id (robust) number of observations 180 = (2012-2017) lev stdta ltdta variable coef. robust std. err. prob. coef. robust std. err. prob. coef. robust std. err. prob. gra 0.15399** 0. 0636 0.015 prof -0.3670*** 0.0709 0.000 -0.3486** 0.1706 0.050 tax -0.0027* 0.0016 0.102 -0.0043** 0.0020 0.039 risk 0.00002** 0.00001 0.014 0.00002*** 0.0000 0.004 liqd -0.0118** 0.0045 0.013 -0.0106*** 0.0032 0.002 -0.0006* 0.0004 0.090 ltdta(-1) 0.8318*** 0.0562 0.000 prof(-1) -0.3201*** 0.0868 0.001 -0.2115*** 0.0810 0.009 tax(-1) -0.0015* 0.0008 0.058 ds -0.0175 0.0111 0.117 c 0.4891 0.0153 0.000 0.3311 0.0115 0.000 0.0322 0.0123 0.009 r2 0.2617 0.1597 0.1665 ardita bylo & serkan çankaya 76 rate of change of the total assets, affect the leverage at long terms positively suggesting that the companies depend on the capital structure in the case of making a decision about new investments. in line with our findings, akman et al. (2015) reports that in developed countries there is a negative relationship between growth opportunities and debtto-equity ratio, while in less developed countries this relationship turns out to be positive. we could not find significant relationship between company size and leverage. one reason may be the fact that the sample includes large-scale firms, which makes it more difficult to identify the size effect in the capital structure. taxes have a slight downward impact on short-term and the overall leverage. in addition, taxes of a previous period tend to decrease the long-term debt ratio, supporting the trade-off theory, under which the firms see taxes as an essential determinant of leverage. it is observed that the business risk variable considered as interest coverage rate has surprisingly a significant incremental effect on leverage. this result is in contrast to the theoretical expectations of pecking order, agency costs and static trade-off theory stating that companies under financial distress circumstances decrease the leverage level, as they wish to avoid issuing equity. regarding business risk, its impact should be seen both from the perspective of the firm and their creditors. firms in possession of a considerable amount of collateral tend to increase their leverage level, independently of the afflictions debt financing may cause. on the other hand, as long as these firms own collateral, creditors will continue to be predisposed and give debts. further, the lagged one period long-term debt ratio appears to have a positive significant effect on the short-term debt leverage. in addition to the firm specific factors used in this study, other factors such as the macroeconomic determinants can be effective in the formation of capital structure. transitional economies have different capital market and institutional structures and the power of banking industry might limit the explaining power of the classical theories asserted for developed countries. in these countries, most of the debt is covered by short-term debts. 5. conclusions this research explores the determinants of capital structure choices of thirty western balkans companies listed on the stock exchange markets of macedonia, serbia, and croatia, for the period 2012-2017. the capital structure of the companies observed is financed by debts at an approximate rate of 42 percent. transitional economies are facing many challenges such as the lack of investor protection rights, legal stability and the availability of financing sources. the high ratio of non-performing loans is the main issue of this region and has resulted in fewer loans, especially for the non-financial companies. the main financing method is through the banking system, as the other sectors such as insurance market, capital market and bond market are not fully developed. the results found in this study reveal that the capital structure determinants of companies placed in emerging and transitional economies and their behaviours seems to be similar. namely, both total debt to equity and short-term debt to equity ratios decrease with respect to profitability and liquidity, while the leverage measured by the long-term debt ratio increases significantly in relation with the possibilities of growth. in this way we notice that wb firms demonstrate reactions that support pecking order theory. however, we note that both the total debt to equity and short-term debt to equity ratios are affected positively by risk, albeit to a small extent, and negatively by taxes. this shows that these companies partially follow the static trade-off theory. our findings do not show any supporting evidence about the agency cost theory. regarding the long-term debt rate, there is a negative impact from the lagged one period variables of profitability and taxes, meanwhile the firms with high long-term debt rates tend to increase even more this kind of leverage level. another significant finding of this model is that serbia causes the long-term debt ratio to decrease in the entire region. for the analysed period, serbia has the lowest average rate of long-term debt to total asset among the three countries with an approximately rate of 10%. in conclusion, transitional economies require a unique theoretical approach to explain their capital structures. acknowledgement: we would like to thank the assoc. prof. dr. elif güneren genç, istanbul commerce university, for her insights and valuable comments about methodology. capital structure determinants in transitional economies 77 references akman, e., gokbulut, r. i., nalin, h. t., & gokbulut, e. 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(2010). econometric analysis of cross section and panel data (2nd ed.). cambridge, ma: the mit press. international journal of commerce and finance, vol. 4, issue 1, 2018, 107-120 107 export credit insurances in developing countries: the case of turkey and imt countries 1 cihat koksal, (phd candidate) istanbul commerce university abstract export credit insurance is one of the substantial tools to promote export in a country. this paper endeavours to find out the effect of export credit insurance covered by export credit agencies on the developing countries’ export figures and gdp. the countries subject to the analysis are turkey and indonesia, malaysia, thailand also known as imt countries. the relationship between export value, economic growth and export credit insurances is going to be analysed using vector autoregression (var) model. keywords: eximbank, export credit agency, export credit insurance, johansen cointegration test, granger causality test 1. introduction in recent years, goods and services in international trade are becoming increasingly similar. this development has shifted the competition from products itself to price, marketing, payment terms and after-sales services. costs can be kept in the minimum level and offered to the customer at the most appropriate price, only through the use of proper financing techniques. for this reason, countries try to provide financing opportunities on favorable conditions to encourage exports. in line with this objective, it implements foreign trade policies to develop various institutions and models to give its entrepreneurs competitive advantage in foreign markets. with the aim of financing the companies’ foreign trade activities export credit agencies (eca) play a crucial role all over the world. ecas are supported by their home countries. their organization and structure change among the countries. they can be established as a bank, financial institution or insurance company. when ecas are founded as a bank, their model is called export-import bank (eximbank). when ecas are established as an insurance company, they are usually privately owned and have responsibilities against their related ministries within the country they operate for. (salcic, 2014) ecas have two main functions. first one is supporting the national export via direct loans given either to the domestic exporter company or foreign buyer (importer). direct loans provide a crucial source of funding when commercial banks are not able to or does not want to give credits to the foreign buyers. (salcic, 2014) export credit insurance allows the exporters to guarantee their receivables up to a certain limit even if the importer fails to pay due to commercial or political reasons. exporters have the advantage to have export credits when they issue their export credit insurance policies as a security deposit to the banks. this is especially important for companies from the developing countries as they will have the possibility to compete with the companies from all over the world. other benefits of having such a system are; to encourage the exporter to enter new and unknown markets, widening their market share, avoiding the risk of non-payment for their open account sales and to be able to use the database of the insurance company to be informed about the potential customer’s financial situation. export credit insurance up to one year is classified as short term whilst more than one year is classified as medium-long term export credit insurance. 1 this paper is derived from the ongoing phd thesis of cihat koksal, currently a student at istanbul commerce university, foreign trade institute, department of international trade. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e cihat koksal 108 in 1934, public and private credit insurers formed “berne union” whose objective is to support internationally recognized principles in export credit and investment industry. they have 85 members including state supported ecas, private credit and political risk insurers which provide insurance products, guarantees and direct loans. (berne union, 2018) figure 1 drawn below, demonstrates that the total support on short, medium and long term export credit covers from berne union members reach 11% of total world export value. world export value experienced a sharp decrease by 22% in the 2008-2009 crisis falling from around 16 trillion usd to 12.5 trillion usd. however export credit insurances fell from 1.45 trillion usd to 1.314 trillion usd which amounts to a 10% decrease. figure 1: world export and export credit insurances source: https://www.berneunion.org/datareports (berne union, 2017) the first trade credit insurance company was founded in london under the name of british commercial insurance company. (karrer, 1958) afterwards, many other european and american companies followed it structuring better than before and establishing a more secure system. in 1928, the roof organization called “the international credit insurance association” has been founded in paris. this organization enabled their members an information network between them so that they could decide whether to provide insurance limits on that company or how much premium amount to be taken from their customers. the developing countries started establishing their state backed ecas years later such as turkish eximbank on 1987, thai exim (thailand) on 1993, mexim (malaysia) on 1995 and lpei (indonesia) on 1999. the rationale behind this act is the increase in the economic growth rates in developed countries when they support their export industries with direct credits, loans or guarantees. in this study four selected ecas from developing countries are going to be analyzed, and then the similarities and differences among them are going to be revealed. out of these ecas three of them lpei (indonesia), mexim (malaysia), thai exim (thailand) are full member institutions of asian eximbank forum while turkish eximbank is the only associate member in it. the objective of this forum is to increase the cooperation between the member institutions, sharing expertise, promoting intra-regional trade and making multilateral agreements among each other. currently there are ten full member ecas representing their countries. (asian eximbanks forum, 2018) indonesia, malaysia and thailand share their borders and all are founding members of association of southeast asian nations (asean) which has economic, social, political and cultural aims. moreover these countries are export credit insurances in developing countries: the case of turkey and imt countries 109 known as imt countries and formed a sub-regional economic program called imt growth triangle (imt-gt) in 1993 to be able to develop some less developed regions within their countries. imt-gt prepared a vision report 2036 aimed to be reached until that year. the objectives are increasing; the gdp, share of intra trade in total imt trade, incoming fdi flows, the tourism potential, the number of cross-border projects and implementing green city action plan. (asian development bank, 2018) on the other hand turkey also has a vision report for her 100th year anniversary on 2023. she has some similar objective topics and some of them are; increasing the gdp, becoming one of the top ten economies in the world and exporting $500 billion worth of goods and services. figure 2 shows the gdp per capita of the selected economies. in 2016, turkey had the highest gdp per capita ($10.862) then malaysia ($9.508), thailand ($5.910) follows her respectively. indonesia ($3.570) had the lowest per capita income in that year. gdp per capita of turkey with malaysia and thailand with indonesia follows a very similar trend during the years from 2005 to 2016. based on these gdp per capita they have, all of these countries are classified as developing countries. (united nations, 2014) figure 2: gdp per capita (usd) source: world bank when we consider the gdp volume in total, the rankings among these countries change significantly as can be seen in figure 3 below. indonesia takes the first place in 2016 with a gdp of $932 billion ahead of turkey ($863 billion). thailand ($407 billion) and malaysia ($296 billion) follows them respectively. cihat koksal 110 figure 3: gdp (million usd) source: world bank figure 4: 2016 gdp (million usd) source: world bank the high population of indonesia with 261 million people in 2016 explains the imbalance between gdp and gdp per capita ranking. the increase of her population is expected to continue in the coming years at a similar ratio as can be seen from the population statistics. turkey and malaysia increase their population in a similar ratio while thailand’s population increases in a very low rate in the last 20 years. figure 5: 2016 population (million people) source: world bank export credit insurances in developing countries: the case of turkey and imt countries 111 figure 6 shows the gdp growth rates among these developing countries. in times of crisis malaysia, thailand and turkey experienced a negative growth rate while surprisingly indonesia achieve to grow 5% and seem to be having the most stable growth rate along these years. turkey is the most fluctuating country among them having the most negative growth rate of -5% during the crisis however she had the biggest growth rate with 11% in 2011. thailand’s growth rate decreased significantly in the years 2009, 2011 and 2014. malaysian economy experienced a stable growth rate after the crisis. figure 6: gdp growth rates (%) source: world bank figure 7 below shows the exports as percentage of gdp, which is used to define an economy’s degree of openness. as the export’s share in the economy increases, country is believed to have a more open economy. theoretically countries with a smaller economy tend to have a higher rate as the domestic market is not big enough to fulfill the demand so the companies have to export their products in the international markets. malaysia and thailand economies are smaller than turkey and indonesia therefore suits well to the theoretical framework as their exports over gdp ratio are bigger than the two other countries. malaysian ratio was around 110% in 2005 and gradually fell to 70% in 2016 while the ratio of thailand is steady around 70% during those years. ratios of turkey and indonesia which are bigger economies show a stable trend at around 20%. cihat koksal 112 figure 7: exports as percentage of gdp (%) source: world bank figure 8 below shows the exports of goods and services of the four countries. there is breakdown during the crisis until 2009 and then a rapid increase in all of the countries. in 2011 malaysian and indonesian exports experienced a decrease until 2016. however turkish and thai exports increased until 2014 and then turkish exports started to decrease while thai exports showed a steady trend. figure 8: exports of goods and services (million usd) source: world bank 2. literature review there have been a number of studies regarding the relationship between export promotion expenditures and exports. the research of coughlin and cartwright (1987) is one of the first studies trying to investigate this relationship. in their study, they found out the positive effect of the export promotion expenditures on export in the u.s. by using ordinary least squares (ols) method. they put emphasis on the diversity of elasticity among states. also wilkinson, et al. (2005) studied the u.s. state expenditure on export promotion between the periods of 19942000 using regression analysis. they found that there is a positive relationship between the variables as well. export credit insurances in developing countries: the case of turkey and imt countries 113 alvarez and crespi (2000) found that promotion instruments such as export credit insurances increase the market for export companies in chile and after a few years they export more with a higher diversification possibility across products and markets. egger and url (2006) analysed the relationship between austrian exports and export credit guarantees provided by austrian eca by using gravity equation model. their results show that export credit insurances have a significant short-term and also long-term effect on the exports. one per cent covered insurance creates 0.05 per cent of shortterm exports and 0.44 per cent of long-term exports. mah (2006) studied whether the export insurances have any effect on the japanese exports. he found that there is no significant effect between the two for japan however he suggested that export insurance increased the manufacturer’s profit. baltensperger and herger (2009) studied the effect of export insurances given by oecd member countries to non oecd member countries by using gravity equation model. results show that export insurances provided by oecd member ecas for exports to low-income countries did not increase exports to those countries while exports to middleand high-income countries increased significantly during 1999-2005 period. lederman et al. (2010) studied the effect of export promotion agency (epa) activities on the exports based on a survey data consisting of 103 developing and developed countries. they found that the presence of export promotion institutions increase the exports around 12%. also they suggested that the countries with a higher gdp per capita export more. martincus and carballo (2010) studied the export promotion activities of peru’s epa to analyse through which channels the firms’ exports increase. their results indicate that exports are expanded through extensive margin, both markets and products and no significant effect has been reached on the intensive margins of exports. felbermayr and yalcin (2011) conducted a research to find out the export enhancing effect of hermes insurances on the exports of germany. results indicate that one percent increase in export insurances boosted the exports by 0.012 per cent. another finding is that insurances have a bigger effect on the lower income countries. hayakawa, et al. (2014) examined the role of export credit agencies in promoting exports from south korea and japan. their findings suggest that there is a positive and significant effect on exports and eca’s effect was larger when it comes to exporting to low-income than in to high-income countries. auboin and engemann (2014) used country level data of export credit insurers obtained from berne union statistics to analyse its effect over the country’s real imports. 1% increase in export credit insurance covered on a country increases its import by 0.4%. also they suggest that this effect does not change during crisis. van der veer (2015) studied the effect of privately insured exports from 25 countries to 183 destination countries over exports covering periods from 1992 to 2006. he found a trade multiplier of 1.3 implying that eur 1 insured export generate eur 1.3 additional exports. polat and yeşilyaprak (2017) investigated the effect of export insurances on the exports of turkey using gravity equation model during the years of 2000-2015. theirs results show that one percental increase in export insurance leads to 3% to 17% increase in exports. according to the export-led growth hypothesis, exports are believed to be the engine for the economic growth. katircioglu, et al. (2007) and katircioglu (2012) studied the causality between financial development, international trade and economic growth in india and sub-saharan africa. their results indicate that there is a unidirectional relation between economic growth and international trade. they also suggest that exports enhance the financial development in india and sub-saharan africa. hye, et al. (2013) suggested that the export-led growth hypothesis holds for countries bangladesh, bhutan, nepal, india and sri lanka. cihat koksal 114 there are also studies which prove that this hypothesis is valid including the developing countries in this research. taban and aktar (2008), jiranyakul (2010), keong, et al. (2003) rahmaddi and ichihashi (2011) analysed the hypothesis respectively for turkey, thailand, malaysia and indonesia and tested the relationship empirically which they found that the hypothesis holds for these countries. also anatasia (2015) put emphasis on the role of promoting export in thailand and malaysia to be able to reach to a higher standard of living and welfare level. kalaycı and koksal (2015) pointed out to the relationship between these variables for china. 3. data and methodology this study aims to investigate the relationship between gdp, export value and export credit insurances for the countries turkey, indonesia, malaysia and thailand covering the periods 2005 q12016 q4. export credit insurance data have been obtained from berne union statistics. gdp and export value data have been obtained from imf database. gdp series have been converted to us dollar currency from their local currencies using the quarterly average exchange rates. all series have been transformed to logarithmic values to be able to stabilize the variance. variables that are used in the analysis are described below: loggdp: quarterly gdp data are used to describe the economic growth. logexp: quarterly export value data describe the exports of total goods and services in a given country. loginsst: quarterly export credit insurance data describe the total insurance coverage of export credits by the analysed country ecas. ecas for turkey, indonesia, malaysia, and thailand are turkish eximbank, lpei, mexim and thai eximbank respectively. the relationship among the variables is tested by using johansen cointegration test and granger causality test. first of all unit root test is applied to find out the stationarity among the variables. the ones that are stationary in the same level are tested to find out the long run cointegration relationship. afterwards causality analysis is done to determine the direction of the relationship. in order to test the variables for johansen cointegration, they have to be stationary at the same level. augmented dickey fuller (adf) unit root test results are shown in table 1 below. table 1: unit root test results countries turkey indonesia malaysia thailand variables level value first difference level value first difference level value first difference level value first difference gdp 0.4643 0.1848 0.6493 0.2196 0.2192 0.0215 0.2395 0.0000 export credit insurances 0.9093 0.0000 0.5424 0.0000 0.1951 0.0000 0.5093 0.0000 export value 0.4096 0.0492 0.2813 0.0006 0.2218 0.0065 0.2054 0.0000 table 1 shows that all variables have unit root before taking the first difference. after taking the first difference all variables become stable except gdp series of turkey and indonesia. so cointegration test can be done with two variables for these countries. cointegration test of countries malaysia and thailand can be done using all variables including gdp. afterwards optimum lag length is determined by using lag length criteria test. lm test is applied to find out if there is auto correlation problem. to check the stationarity of the whole model is examined by looking at inverse roots of ar characteristic polynomial. white test is applied to see if there is a heteroscedasticity problem. all these tests are done and proceeded to the cointegration tests. export credit insurances in developing countries: the case of turkey and imt countries 115 table 2: johansen cointegration test results turkey hypothesis trace statistic maximum eigenvalue statistic h0 h1 statistic critical value statistic critical value r=0 r≥0 6.425 18.397 4.321 17.147 r=1 r≥2 2.103 3.841 2.103 3.841 according to table 2, both trace (6.425<18.397) and maximum eigenvalue statistic (4.321<17.147) is less than critical value. this is why null hypothesis r=0 can not be rejected for both test values. in other words export value and export credit insurance variables are not cointegrated for turkey. table 3: johansen cointegration test results indonesia hypothesis trace statistic maximum eigenvalue statistic h0 h1 statistic critical value statistic critical value r=0 r≥0 13.59517 20.26184 8.273956 15.8921 r=1 r≥2 5.321211 9.164546 5.321211 9.164546 according to table 3, both trace (13.5951<20.2618) and maximum eigenvalue statistic (8.2739 <15.8921) is less than critical value. this is why null hypothesis r=0 can not be rejected for both test values. in other words export value and export credit insurance variables are not cointegrated for indonesia as well. table 4: johansen cointegration test results malaysia hypothesis trace statistic maximum eigenvalue statistic h0 h1 statistic critical value statistic critical value r=0 r≥0 43.77541 42.91525 26.16753 25.82321 r=1 r≥2 17.60788 25.87211 12.85867 19.38704 according to table 4, both trace (43.7754>42.9152) and maximum eigenvalue statistic (26.1675 >25.8232) is bigger than critical value. this is why null hypothesis r=0 can be rejected for both test values. in other words gdp, export value and export credit insurance variables are cointegrated for malaysia. table 5: johansen cointegration test results thailand hypothesis trace statistic maximum eigenvalue statistic h0 h1 statistic critical value statistic critical value r=0 r≥0 45.56453 35.0109 33.52462 24.25202 r=1 r≥2 12.0399 18.39771 7.254035 17.14769 cihat koksal 116 according to table 5, both trace (45.5645>35.0109) and maximum eigenvalue statistic (33.5246 >24.2520) is bigger than critical value. this is why null hypothesis r=0 can be rejected for both test values. in other words gdp, export value and export credit insurance variables are cointegrated for thailand as well. turkey and indonesia where there is no cointegration among the variables are going to be tested with granger causality to see if the variables affect each other in the short term. malaysia and thailand where there is a cointegration relationship are going to be tested with vecm granger causality. table 6: granger causality test result – turkey h0 hypothesis chi-sq df prob. dloggdp is not a granger cause of dlogexp 4.528567 1 0.0333** dloginsst is not a granger cause of dlogexp 0.000704 1 0.9788 dlogexp is not a granger cause of dloggdp 23.23611 1 0.0000* dloginsst is not a granger cause of dloggdp 0.611214 1 0.4343 dlogexp is not a granger cause of dloginsst 0.007189 1 0.9324 dloggdp is not a granger cause of dloginsst 0.677414 1 0.4105 (*) and (**) signs show that the coefficients are significant at 1% and 5% level respectively. table 6 shows the granger causality test result for turkey. there is a causality relationship between gdp and export value in both directions. table 7: granger causality test result – indonesia h0 hypothesis chi-sq df prob. dloggdp is not a granger cause of dlogexp 1.637682 2 0.4409 dloginsst is not a granger cause of dlogexp 0.230639 2 0.8911 dlogexp is not a granger cause of dloggdp 4.940501 2 0.0846 dloginsst is not a granger cause of dloggdp 0.857569 2 0.6513 dlogexp is not a granger cause of dloginsst 1.131868 2 0.5678 dloggdp is not a granger cause of dloginsst 4.560947 2 0.1022 table 7 shows the granger causality test result for indonesia. according to the test result no significant causality relationship exists among the variables. table 8: vecm granger causality test resultmalaysia h0 hypothesis chi-sq df prob. dloggdp is not a granger cause of dlogexp 5.986249 1 0.0144** dloginsst is not a granger cause of dlogexp 2.682409 1 0.1015 dlogexp is not a granger cause of dloggdp 7.026798 1 0.0080* dloginsst is not a granger cause of dloggdp 0.562818 1 0.4531 dlogexp is not a granger cause of dloginsst 0.086043 1 0.7693 dloggdp is not a granger cause of dloginsst 0.052937 1 0.818 export credit insurances in developing countries: the case of turkey and imt countries 117 table 8 shows the granger causality test result for malaysia. there is a causality relationship between gdp and export value in both directions. table 9: vecm granger causality test result thailand h0 hypothesis chi-sq df prob. dloggdp is not a granger cause of dlogexp 7.697927 3 0.0527** dloginsst is not a granger cause of dlogexp 15.38715 3 0.0015* dlogexp is not a granger cause of dloggdp 5.045282 3 0.16850 dloginsst is not a granger cause of dloggdp 0.951864 3 0.8129 dlogexp is not a granger cause of dloginsst 11.79337 3 0.0081* dloggdp is not a granger cause of dloginsst 10.97385 3 0.0119** table 9 shows the granger causality test result for thailand. there is a causality relationship from gdp to export value and export insurance. another causality relationship is between export value and export insurance in both directions. 4. conclusion according to the analysis, there is a cointegration relationship among the variables gdp, export value and export credit insurances for countries malaysia and thailand. data cover the period between the years of 2005-2016. gdp, gdp growth rate and exports as percentage of gdp of these two countries show very similar patterns which might have an effect on the results. however for countries turkey and indonesia there is no cointegration relationship. granger causality test was applied to find out the direction of the relationship for all of the countries. gdp and export value of turkey and malaysia have bidirectional causality relationship. however export insurance does not have an effect neither on gdp nor on export value. gdp of thailand has both causality on export value and export insurance. bidirectional causality relationship is obtained between export value and export insurance. as the export value increases, exporters demand more export credit insurances and as more companies can reach to export credit insurances, the country increases its export value. for indonesia, no granger causality can be found among the variables. the causality relationships can be summarised with the help of figures below. cihat koksal 118 it can be concluded that the export-led growth hypothesis is valid for turkey and malaysia according to this study covering the period 2005-2016. this paper supports the findings of taban & aktar (2008) and rahmaddi & ichihashi (2011). gdp increase leads to an increase in the export value in countries turkey, malaysia and thailand. the only country that the export credit insurance has a significant effect on the export value is thailand. it can be seen from figure 8 that the export value has a break in 2011 when thailand continues to increase her exports while the malaysia and indonesia decrease their exports. second break is in 2014 when thailand stabilizes her exports while the other three country exports start to diminish. the literature on the relationship between export credit insurances and exports usually exists for developed countries and the results confirm the export enhancing effect of export credit insurances. this study tries to analyse the four developing countries in a similar income level and export value. it can be inferred from this study that the export promotion policies in these developing countries have to be analysed and used more effectively to be able to create more export value. özyüksel (2017) in her survey study, found out that the turkish exporters, both smes and large companies, regard export credit insurance as a first level priority that the state should support for the promotion of exports. the operations and the budget of the ecas should be increased by the governments. another recommendation would be that export credit insurances and other export promotion tools should be introduced to the smes in the developing countries to enhance their exports. more studies are needed to find out how the export promotion policies in the developing countries affect exports and other macroeconomic variables. references alvarez, r. & crespi, g. 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(2008). an empirical examination of the export-led growth hypothesis in turkey. journal of yasar university, 3(11), pp. 1535-1551. cihat koksal 120 united nations, (2014). world economic situation and prospects 2014. available at: http://www.un.org/en/development/desa/policy/wesp/wesp_current/2014wesp_country_classification.pdf (accessed 16 march 2018). van der veer, k. j. (2015). the private export credit insurance effect on trade. the journal of risk and insurance, 82(3), pp. 601-624. wilkinson, t., keillor, b. & d'amico, m. (2005). the relationship between export promotion spending and state exports in the u.s.. journal of global marketing, 18(3/4), pp. 95-114. world bank (2018), world bank open data, available at: https://data.worldbank.org/ (accessed 20 february 2018). https://data.worldbank.org/ international journal of commerce and finance, vol. 5, issue 1, 2019, 92-101 92 the mediating role of organizational identification on the relationship between job satisfaction and organizational citizenship behavior: a research in the finance industry ece arıkoğlu istanbul commerce university, turkey assc. dr. necla öykü i̇yigün istanbul commerce university, turkey mehmet sağlam istanbul commerce university, turkey abstract this study aims to examine the relationship between job satisfaction, organizational identification and organizational citizenship behavior of the employees in the finance industry. also, it is aimed to reveal the mediating role of organizational identification on the relationship between job satisfaction and organizational citizenship behavior. the convenience sampling method was used in the study. the questionnaires were distributed to 355 personnel working in the finance industry and the 304 completed responses obtained from these participants were analyzed. the correlations between the variables were found statistically significant and hierarchical regression analysis was used. keywords: job satisfaction, organizational identification, organizational citizenship behavior 1. introduction organizations operating in the finance industry are evaluated by the capability of adapting rapidly to changing conditions, adapting to the conditions created by the competitive market, integration of employees with different cultures into the business structure and employment policies etc. the main factor of business life is human. because of the competition and the increasing importance given to human resources within the changing working conditions, the concepts of job satisfaction, organizational identification (oi) and organizational citizenship behavior (ocb) have literally taken their place and become frequently used. the most basic demand of the employee who spends most of the day in the workplace aims to spend a happy and peaceful time in the work environment where he/she is located and to take the spiritual value for his/her labor. the value that the organization gives to the employee and the way in which the employee perceives and evaluates the value that the employee will receive from the organization affects the connection between the employees and the organization. finance industry is a dynamic industry, which is affected by economic and political conditions. employees of this industry frequently come across with continuous risks against volatile market conditions. job satisfaction is one of the most important tools used to measure organizational effectiveness (yeşil and dereli, 2013, ss.109-199). the concepts of job satisfaction and organizational commitment are closely related. employees with high job satisfaction are more committed to the organization they work for. the more important it is to produce goods and services from the point of view of organizations; the more important is for employees to be satisfied with their work and the organization they work with. (çöl, 2004, ss.31-45). in case of lack of job satisfaction, many negative attitudes and behaviors could occur, such as turnover intention. at this point, the causing factors for dissatisfaction of the employees should be evaluated in detail. job satisfaction is one of the most important issues of organizational behavior and management. organizational identification is a factor that allows the employee to be satisfied with his/her work. according to başar and basım in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the mediating role of organizational identification on the relationship between job satisfaction and organizational citizenship behavior: a research in the finance industry 93 (2015), employees identifying themselves with the organization display positive behaviors when they face with problems (başar and basım, 2015, s.118). employees display these positive behaviors in public and private life at the same time (türk, 2007, s.96). employees with high organizational commitment are more committed to organizational goals and are more enthusiastic to achieve organizational goals. as a result, employees feel more committed to their organization and become identified with the organization. organizations also want employees with strong organizational identification, because of the expectation of more positive contribution. the importance given to the human factor for organizations has attracted attention in the literature. employee behaviors affect the efficiency, productivity and profit margin of an organization in a positive or negative way. employees who do not go beyond the formal job role behaviors, and do not make any extra effort for the success and development of the organization; do not provide any benefit and cannot be at the expected level. 2. conceptual framework 2.1 job satisfaction job satisfaction is about a person's positive emotional response to a particular job. job satisfaction is an emotional response that the employee expects from work, with the results he/she expects, and deserves. one of the most important attitudes in organizational behavior is the attitude of the employee towards his/her work and is called “job satisfaction” (özkalp and kırel, 2011, s.113). it is stated that one of the most common subjects of the researches conducted in order to measure the attitudes of the employees is the job satisfaction. a distinction must be made between the satisfaction of the employee against his/her performance and the satisfaction he/she obtains during his/her work. the first one is called external satisfaction (external rewards) and the second one is called internal satisfaction (inner rewards) (eroğlu, 2007, s.381). job satisfaction is the result of the attitude of the employee towards his/her work. factors affecting job satisfaction could be counted as organizational factors (wage, promotion/promotion opportunity, working conditions, organizational procedures and principles), individual factors (personal needs and expectations), cultural factors (beliefs, values and attitudes), economic, social and environmental factors (duman, 2000, ss.14-15). job satisfaction is a combination of positive and negative feelings about people's work as an attitude and a personal situation (konak.,2011, s.26). a satisfactory job for an employee may not provide the same level of satisfaction to another employee. in other words, employees' perceptions of job satisfaction are different. job satisfaction may change over time and may not satisfy the person after a certain period of time. job satisfaction covers not only the professional business life of a person but also a large part of personal life. job satisfaction affects employee’s life outside work and job satisfaction affects life satisfaction, life satisfaction affects job satisfaction. (smither, 1998, s. 236). the alienation of employees to their organizations and the decrease of job satisfaction cause the slowdown of work within the organization, low productivity, disciplinary problems and other organizational problems (davis, 1988, s.504). organizations need to implement various methods to minimize these problems and to make the most effective use of the employees. 2.2. organizational identification organizational identification makes organization membership become a part of the employees’ personality. employees are proud to be members of the organization. it is an indicator of the good intentions of employees about their organizations (tutar, 2016, s. 236; i̇yigün, 2015, s.183). organizational identification is measured by the degree of acceptance of the organization by the employee’s. someone who is identified with the organization is expected to reflect the identity of the organization, and to work for the organizational values by making sacrifices in favor of the organization. organizational identification consists of two dimensions which are intra-group identification and identification with the organization itself. intra-group identification has a stronger structure than organizational identification with the organization because it is concrete and easy to perceive. individual communication with people is easier than communicating with other physical structures and processes. intra-group identification shows the degree to which ece arikoğlu & doç. dr. n. öykü i̇yi̇gün & arş. gör. mehmet sağlam 94 the person is part of the group. if the person has the belief that he/she has shared the same fate as the group he/she is identified with, then the group is experiencing identification. in-group identification is stronger than organizational identification because people spend most of their time with their work groups. organizational identification shows the degree of conformity of the organization and the goals and values of the people to which they are members. organizational identification is the degree of internalization and assimilation of organizational values, aims and organizational missions of employee. in other words, personal objectives are harmonized with the organizational objectives (ashforth and mael, 1989, s.20). 2.3. organizational citizenship behavior organizational citizenship behavior (ocb) is defined as “behaviors that help the organization to function efficiently as a whole without taking into account the formal award system based on volunteerism” (taşçı and koç, 2007, s.371). main reasons of ocb could be summarized as the idea that “the senior management behaves fairly and treats equally to the employees”, the desire of employees to be accepted by their colleagues in the organization, expectation of some rewards such as promotion, salary increase and etc. (gürbüz and yüksel, 2008, s.52). organizational citizenship behavior consists of five dimensions (serinkan and erdiş, 2014, s.71) the first dimension is altruism which means that employees help other employees in their duties and problems related to the organization. “helpfulness” is the base of this behavior. conscientiousness is the second dimension which means that members of the organization fulfill their job role behavior beyond what is expected from them. the third dimension is gentlemanship (sportsmanship), which can be expressed as the willingness of employees to approach the organization, the organizational culture and their work with a positive viewpoint/approach and overcome the problems with a constructive approach. it is important that the employee is in a good will. courtesy is the fourth dimension that refers employees’ need for getting along well with each other in the organization. the concept of “courtesy” was first described by organ. courtesy behavior is explained as positive behaviors and attitudes displayed by employees due to the decisions they decide and the duties they are responsible in the organization in which they are continuously in communication (öztürk, 2010, s.56). civic virtue includes active participation in organization management within the organization, monitoring opportunities and threats in the organization, and observing the interests of the organization. employees who display civic virtue behavior should be both active and constructive (suküt, 2010, s.29). these behaviors are the ones in which the employees are actively involved and interested in organization-related issues. 3. methodology this study aims to investigate the relationships between job satisfaction, organizational identification and organizational citizenship behavior of the employees in the finance industry. within the scope of this research, participants only in the finance industry were included and the findings should not be generalized to the other industries. the limitations of the study could be summarized as time constraint and the number of research questionnaire forms. job satisfaction questionnaire is derived from minnesota job satisfaction questionnaire (msq), which consists of 2 dimensions and 20 statements, developed by weiss et al., in 1967. organizational identification questionnaire which was used in the research, was developed by mael and blake (1992), consisting of 6 statements (mael and blake, 1992). organizational citizenship behavior questionnaire, which is derived from podsakoff et al. (1990), that is based on organ (1988) 's five dimensions including conscientiousness, sportsmanship, civil virtue, courtesy and altruism. podsakoff et al. (1990) and moorman (1991) then improved the scale and it was translated and adapted to educational organizations by polat (2007). in this study, convenience sampling method was used. the number of the respondents is calculated by multiplying it by minimum 5, which is derived from bryman and cramer (2001)’s study. based on this, it was determined that 304 participants were sufficient for the sample size. face to face questionnaire was used as the data collection method for the research. spss 21 and amos 21 statistical programs were used to analyze the collected data. while the amos program was used to determine the validity and reliability of the second order confirmatory factor analysis, the spss 21 program was used for explanatory factor analysis, reliability tests, pearson correlation and hierarchical regression analyzes. the mediating role of organizational identification on the relationship between job satisfaction and organizational citizenship behavior: a research in the finance industry 95 4. research model and hypothesis in light of literature review and the research purpose, the research model was formed as in figure 1. figure 1. research model the research hypotheses based on the literature are formed as follows. h1: job satisfaction has a significant and positive effect on organizational identification. h2: organizational identification has a significant and positive effect on organizational citizenship behavior. h3: job satisfaction has a significant and positive effect on organizational citizenship behavior. h4: organizational identification has a mediating role on the relationship between job satisfaction on organizational citizenship behavior. 4.1 research findings  demographic findings when the participants were evaluated according to their age, it was found that almost half of the participants are aged between 31-39, followed by 34,1% who are aged between 25-30. the majority of the participants are aged between 25 and 39. when the participants were evaluated according to their gender, 56.3% of the sample is women and 43.7% it is men. when the participants were evaluated according to their marital status, 51% of the sample is single and the rest is (49%) married. when the participants were evaluated according to the department they work, 18,6% of the participants work in the marketing department, 13,2% of them work in the purchasing department, 12,2% of them work in the credits department, 9,3% of them work in the information systems department, 5,9% of them work in the operations department, and lastly 5,6% of them work in the treasury department. it is seen that the number of employees in the departments is much less in the sample, so that it could be put forward that most of the departments are being represented. when the participants were evaluated according to the position, 21,7% of the sample is director, 20,3% of the sample is expert, 14,1% of the sample is specialist, 9,9% of the sample is assistant job satisfaction organizational identification organizational citizenship behaviour ece arikoğlu & doç. dr. n. öykü i̇yi̇gün & arş. gör. mehmet sağlam 96 specialist, 8,7% of the sample is assistant, and finally 7,6% of the sample is manager. when the participants were evaluated according to their period, 36,1% of the participants work for 3-5 years and 24,5% of the sample works for 6-10 years.  confirmatory factor analysis while the first-order confirmatory factor analysis was used to determine the factor structures of the scales with more than one dimension, in this study, second-level confirmatory factor analysis was performed with the aim of obtaining scale structures in a single factor structure. the certain modification index values are used for the evaluation of confirmatory factor analysis results. values such as x2 / df, gfi, agfi, cfi and rmsea are generally used in the literature (jöreskog and sörbom, 1984; meydan and şeşen, 2011). confirmatory factor analysis and modification index values for each scale are shown in table 1. table 1. confirmatory factor analysis adaptation index values dimensions x2/df gfi agfi cfi rmsea job satisfaction 2,79 0,91 0,88 0,95 0,07 organizational identification 2,67 0,94 0,91 0,96 0,06 organizational citizenship behaviour 3,16 0,92 0,87 0,95 0,05 degree of compliance x2/df gfi agfi cfi rmsea good ≤3 ≥0,90 ≥ 0,90 ≥0,97 ≤0,05 acceptable ≤4-5 0,89-0,85 0,89-0,80 ≥0,95 0,06-0,08 reference: jöreskog and sörbom, (1984), meydan, c.h. and şeşen, h. (2011) table 1 shows acceptable modification index values. in the result of confirmatory factor analysis, the fit indices were within the range of these values, indicating that the confirmatory factor analysis was appropriate and the scale factor structures were confirmed.  validity and reliability analysis the cronbach alpha reliability values are used to determine the reliability values and internal consistency values (hair et.al., 2006; netemeyer et. al., 2003) of each scale structure and sub-dimensions which are obtained by confirmatory factor analysis and the composite and discriminant validity values used in determining the structure validity are used. cronbach alpha values and the composite validity values should be over 0,70 and the discriminant validity values should be over 0,50 (fornell and larcker, 1981). table 2. validity and reliability test results dimensions cr ave cronbach alpha job satisfaction 0,834 0,535 0,743 organizational identification 0,857 0,563 0,801 organizational citizenship behaviour 0,943 0,664 0,835 as mentioned above, table 2 shows the validity and reliability test results after validation of the factor structures while the cronbach alpha values for all scale sub-dimensions were 0,70 and above, it was found that the validity values were 0,70 and over, and the validity values were over 0,50. the mediating role of organizational identification on the relationship between job satisfaction and organizational citizenship behavior: a research in the finance industry 97  correlation analysis within the scope of this research, by using pearson's correlation analysis technique, as a result of the sub dimensions of the scales were complied with normal distribution, the relationships between the sub-dimensions of job satisfaction, organizational identification and organizational citizenship behaviors were analyzed. with the pearson correlation analysis, the direction and strength of linear relationship can be determined between the variables. correlation coefficients obtained could be explained as 0 to ± 0.30 low level relationship, 0.31 to ± 0.70 moderate relationship and 0.71 to ± 1.0 high level relationship (çokluk, şekercioğlu and büyüköztürk, 2012, s.35). table 3. correlation analysis results in te r n a l sa ti sf a c ti o n e x te r n a l sa ti sf a c ti o n o r g a n iz a ti o n a l id e n ti fi c a ti o n c o n sc ie n ti o u sn e ss s p o r tm a n sh ip c iv il v ir tu e c o u r te sy a lt r u is m internal satisfaction 1 ,737** ,475** ,338** ,248** ,473** ,285** ,292** external satisfaction 1 ,497** ,382** ,257** ,501** ,342** ,338** organizational identification 1 ,378** ,312** ,591** ,322** ,343** conscientiousness 1 ,283** ,623** ,763** ,745** sportmanship 1 ,365** ,322** ,335** civil virtue 1 ,526** ,548** courtesy 1 ,850** altruism 1 table 3 shows the correlation analysis results for the determination of the relationships between the factor structures used in the research. it is found that there is a high-positive relationship between internal satisfaction and external satisfaction. also it is found that there is a medium relationship with the organizational identification, low-positive level relationship with the dimension of organizational citizenship behavior which are sportsmanship, courtesy and altruism and medium-positive level relationship with conscientiousness and civil virtue. while internal satisfaction has the highest level of relationship with the civil virtue dimension of organizational citizenship behavior, it has the lowest level of relationship with sportsmanship. external satisfaction has a medium relationship with organizational identification, has a low relationship with sportsmanship and has a medium-positive relationship with other dimensions. organizational identification has a medium-positive relationship with all organizational citizenship behavior dimensions; and it also has the highest level of relationship with civil virtue. conscientiousness has a low level relationship with sportsmanship, medium level relationship with civil virtue and high-positive level of relationship with other citizenship behavior dimensions. it has also the highest positive level relationship with courtesy. sportsmanship has a medium-positive level relationship with civil virtue, courtesy and ece arikoğlu & doç. dr. n. öykü i̇yi̇gün & arş. gör. mehmet sağlam 98 altruism, and it also has the highest-level relationship with civil virtue. civil virtue has a medium-positive relationship with courtesy and altruism and it has also a higher relationship between altruism. there is a high and positive relationship between courtesy and altruism. external satisfaction, which is one of the dimensions of job satisfaction, has a slightly higher level of relationship with organizational identification than with internal satisfaction.  hierarchical regression analysis before applying regression analysis, certain assumptions should be provided. the first one is to ensure compliance with normal distribution. the linearity between the variables should be provided and there should not be multicollinearity problem (orhunbilge, 2017). normality and linearity could be specified successfully when working on normal distribution tests and distribution tables. calculating variance inflation factors (vif) and durbin-watson (d-w) coefficient examine multicollinearity problems between dependent and independent variables. if variance inflation factors are less than 10 and the values of durbin-watson (d-w) are between 1,5 and 2,5, the model indicates that there is no multicollinearity problem between variables (çokluk, şekercioğlu and büyüköztürk, 2012, s.35-36). kolmogorov smirnov and shapiro wilks tests were calculated for the scales used in this research to provide normality. all scales provided normality when p statistical significance values were calculated among all scales (when p value is greater than 0,05). baron and kenny’s (1986) three-stage regression analysis was used for to test hypotheses to determine the mediator roles in the research hypotheses. this regression is also referred as “hierarchical regression”. according to this method, there must be three conditions provided for an intermediary effect: (1) the independent variable must have an impact on the mediator variable; (2) the independent variable must have an effect on the dependent variable; (3) when the mediator variable is included in the second regression analysis, independent variable regression coefficient on the dependent variable should decrease or disappear, or the independent variable should have a significant effect on the dependent variable. the results of the hierarchical regression analysis performed on the scale factor structures obtained from factor analysis are shown in table 4. table 4. the role of organizational identification on the relationship between job satisfaction and organizational citizenship behavior *p<0,05; **p<0,001 significant model 1 dimension oi (β) r2 ∆r2 f p durbinwatson vif js 0,521** ,272 ,270 132,074 ,000 1,669 1,000 model 2 dimension ocb (β) js 0,480** ,231 ,229 105,978 ,000 1,415 1,000 model 3 dimensions ocb (β) js 0,306** ,312 ,308 34,982 ,000 1,472 1,374 oi 0,333** 1,374 the mediating role of organizational identification on the relationship between job satisfaction and organizational citizenship behavior: a research in the finance industry 99 table 4 shows the hierarchical regression analysis results. d-w coefficients are in the range of 1,5-2,5 for all the regression models, and vif values are less than 10, which shows confirmation about regression assumptions. anova (f) test shows that the models are significant when p values are less than 0,05. when adjusted r2 values are examined, it is found that 27% of the changes in organizational identification for model 1 are explained by job satisfaction, 22,9% of the changes in organizational citizenship behavior for model 2 are explained by job satisfaction, 30,8% of the changes in organizational citizenship behavior for model 3 are explained by job satisfaction and organizational identification. the model is evaluated by baron-kenny approach with independent variable as job satisfaction, mediator variable as organizational identification and dependent variable as organizational citizenship behavior. in the first stage, it is examined that job satisfaction has a significant effect on organizational identification (β = 0.521**). in model 2, job satisfaction has a significant effect on organizational citizenship behavior (β = 0,480**). and finally, when organizational identification, which is a mediator variable in model 3, that is included in model 2, the effect of organizational identification on the impact of organizational citizenship behavior is significant (β = 0.333*). the effect of job satisfaction decreases (β= 0.306*) which shows that organizational identification has partial mediator role on relationship between job satisfaction and organizational citizenship behavior. h1, h2, h3, and h4 hypotheses were accepted from these results. external satisfaction, which is one of the dimensions of job satisfaction, is found to be higher when it is compared with internal satisfaction of the participants. altruism, which is one of the sub-dimensions of ocb, is found to be at the highest level, and then altruism, courtesy and conscientiousness were found at equal level, whereas sportsmanship behavior was at lowest level. while the altruism behavior of the participants was at the highest level, the behavior of sportsmanship was found to be at the lowest level. external satisfaction has the highest relationship with civil virtue which is one of the sub dimensions of ocb, has medium relationship with organizational identification, and again has the lowest relationship with conscientiousness, sportsmanship, altruism and courtesy from the ocb. organizational identification has a high level relationship with civil virtue from ocb; it also has a low level relationship with conscientiousness, sportsmanship, courtesy and altruism. an employee with high job satisfaction will demonstrate less organizational citizenship behavior in case of disagreement with his/her organization. when an employee’s idea is not taken into consideration by the organization or rejected, he/she will feel psychologically “self-excluded”. in this research, it is examined that job satisfaction has a positive effect on the relationship between organizational identification and ocb. it is also found that organizational identification has a positive effect on ocb and job satisfaction has a partial mediating effect on ocb. according to the results, it is understood that the employees in the financial industry display altruism behavior the most among the other dimensions of ocb. it is observed that employees with high job satisfaction will display more organizational citizenship behaviors and they will become more identified with their organizations and then it is expected to display more. 5. conclusion the real success of an organization depends on the performance of its employees. when the ' performance level is high, job satisfaction will increase accordingly. the research shows that employees, who have high job satisfaction, demonstrate extra effort to accomplish their duties and achieve organizational goals. fierce competition and pace of change create stress, conflict, and miscommunication for the employees causing energy loss and alienation. at this point, organizations are expected to take some measures in order to maintain employees’ job satisfaction by revising in-house decisions, regulations and processes such as re-evaluation of promotion, wages, employee morale, organizational communication, etc. businesses have to build good relationships with their employees to provide competitive advantage. employees, who have low job satisfaction, demonstrate organizational deviance behaviors ece arikoğlu & doç. dr. n. öykü i̇yi̇gün & arş. gör. mehmet sağlam 100 such as absenteeism, aggressive behavior, abuse of property and etc., which can cause financial losses for the businesses. therefore, managers should allocate consensus and compliance with employees to increase job satisfaction at workplaces and encourage teamwork, loyalty, innovation and entrepreneurship. employees, who are identified with their organization, appear to make extra efforts to achieve their duties and achieve organizational goals. employees, who have organizational identification, are expected not to have intention to leave or have organizational deviance behaviors. giving value to employees, encouraging employees for participation in decisionmaking processes, providing an ideal work environment are expected to increase organizational commitment. if the organizational identification of employees increases, it will also increase organizational citizenship behavior. in this context, promotion and career opportunities, financial incentives and rewards by the organization offered should be increased. having employees who are motivated to work voluntarily and enthusiastic about acting beyond job description are one of the competitive advantages for the businesses. employees who have organizational identification and high job satisfaction are expected to demonstrate more ocb. and also he/she will participate in the decision-making process, perceive the decisions as his/her individual decision, will display extra role behavior without any expectation and directly will be able to increase organizational success. references başar, y. and basım, n.,(2005). “effects of organizational identification on job satisfaction: moderating role of organizational politics”, university of celal bayar, journal of management and economy, 22(2),666. baron, r. m., and kenny, d. a., (1986). “the moderator–mediator variable distinction in social psychological research: conceptual, strategic, and statistical considerations”, journal of personality and social psychology, 51(6). bryman, a., and cramer, d. 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(1967). “manual for the minnesota satisfaction questionnaire”. minnesota studies in vocational rehabilitation, 22, 120. international journal of commerce and finance, vol. 4, issue 2, 2018, 118-127 118 strategic management sensitivity scale development and validity research münir ataş, (phd candidate) istanbul commerce university, turkey murat kasımoğlu, (phd) istanbul commerce university, turkey abstract the paper aims to develop a scale to be applied to the managers by conducting sensitivity analysis on strategic management activities. this paper uses a sample of 320 managers who are working in strategy units in the public institutions, municipalities, private sector, universities and managers engaged in strategic management activities in turkey. data is collected via the draft scale called “strategic management sensitivity scale form” developed by the researcher. dimensionality analysis, normality analysis, reliability analysis and factor analysis for construct validity are performed for data processing. the results revealed that the scale has 24 items measured by a fivepoint likert-type scale. the items are grouped under three factors as (1) distribution, dissemination and action sensitivity, (2) planning sensitivity and (3) process sensitivity. they accounted for 58.49% of the total variance. the scale has a cronbach’s alpha coefficient of 0.86. this improved scale is found fairly high in terms of validity and reliability. this paper has focused on the roles of managers in strategic management and strategic planning processes. the results show the importance of the managers’ strategic management activities in the planning and decision making processes. this paper contributes to the literature on strategic management and strategic planning on managerial issues, human resource effectiveness and firms’ strategies. organizations can benefit from this scale on issues such as better recognition of people in recruitment, determination of training needs and promotion process. keywords: strategy, strategic management, the scale of strategic management sensitivity 1. introduction the main objective of the organizations is the development of plan, program, strategy and methods that ensure the most effective usage of the resources. increased competition and the changing demand structure make it inevitable to change the organization managements. developing strategies that will ensure to adopt quickly to these changing structures and applying these strategies through appropriate managerial skills are the main factors. to what extent the institutions need strategies, to what extent those strategies will enable the businesses to reach the desired success level effects the behavior of managers. businesses need to make decisions in accordance with the resources they have by taking into account the changes occurring in their environment. these decisions made by business managers enable them to move more accurately under uncertain conditions (bradutan et al., 2012). in the literature, the concept of strategic management is mostly addressed to the organization’s performance, competitiveness, the success of development-oriented plans, the role in decision-making processes and service management, contribution to the managers’ learning process, relationship with entrepreneurship, the role in talent management and contribution to human resources management (favoreu et al., 2015; andrade et al., 2016; pelc, 2015; hoogstra et al., 2008; kohl et al., 2016; luo et al., 2011; congdon et al., 2013; bourletidis, 2013; douglas et al., 2015). to the best of our knowledge, there is no scale to measure the sensitivity of managers to the strategic management process in the literature. with this scale, businesses can create total strategic management sensitivity index value for all managers. the resulting index value can be used for making comparisons among consecutive years and competing businesses. measuring the relationship and causality between theoretical structures, monitoring, evaluating and establishing connections can contribute to the accumulation of knowledge. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e strategic management sensitivity scale development and validity research 119 determining the level of strategic awareness in businesses will provide data and information about the managers' training, knowledge, skills and sensitivity deficits. on the other hand, it allows managers to differentiate in the progress and promotion practices of human resources, performance-based reward applications, strategic management and innovation applications. thus, businesses establish a system where strategic management is measured, monitored and rewarded. in the following years, it is aimed that the strategic management sensitivity scale will be a tool that will contribute to the academic and non-academic researchers. the widespread use of such a scale in scientific studies depends on high internal and external validity and reliability, and practical, useful and easy implementation. in this respect, the necessary effort has been made to meet the psychometric and statistical requirements of the strategic management sensitivity scale. 2. theoretical framework 2.1 strategic management definitions in the literature, it is seen that there are a lot of definitions regarding the concept of strategic management. olexandrivna (2016) defines the strategic management as the activities that will keep the business in the changing market conditions. cox et al. (2012) defines the strategic management as a process in which business managers create strategies to provide competitive advantage against the competitors and provide an efficient resource allocation by analyzing the internal and external environment. nag et al. (2007) defines strategic management as an effort to analyze organizational and non-business environments effectively and efficiently. strategic management is a process of formulating, implementing and evaluating strategies (athapaththu, 2016). the formulation of strategies involves the acquaintance of the business itself, the identification of mission and vision statements and the development of strategies. the implementation of the strategy is to determine the policies and procedures, to take measures to ensure the motivation of the employees and to provide the resources to ensure that the strategies are in line with the determined goals and objectives. the evaluation of the strategy is the control of the effective implementation of the strategies (david, 2011) and a collection of decisions that affects the businesses performance (hunger and wheelen, 2007). 2.2 . strategic management process the strategic management process initiated by top executives proceeds towards middle and lower level managers. although the path to be followed by the business is determined by the top management, any input required by the process is obtained by the sub-level managers and employees. many models have been developed during the implementation of the strategic management activity. according to david (2011), the strategic management process which starts with having a strategic consciousness, continues with the determination of the aims and targets in line with the vision and mission statements. these strategic objectives and strategies to reach strategic goals are evaluated and the most effective one is determined. the strategic management process is completed with the implementation of the plan prepared in this direction, defining the deficiencies and giving feedback. according to nedelea and paun (2009), the strategic management process consists of five stages. the first three stages are intended to guide the business. the fourth stage is the most complex and challenging one. at this stage, strategic plan is determined, formulated and administrative decisions are made accordingly. in the fifth stage, strategic performance is evaluated, and corrective actions are taken when necessary. münir ataş & murat kasımoğlu 120 figure 1. strategic management process 3. method 3.1. participants and procedures in this study, the target population has been identified as professionals who are working as a manager in strategy units in public institutions, municipalities, private sector, universities and managers engaged in strategic management activities. as this population represents a very large group of people, the sample size is calculated to be 320 persons in accordance with the scientific criteria. 3.2 creation of measurement tool in the literature, we observed no scale to measure the strategic management sensitivity of managers. in addition, no concrete studies are conducted to measure strategic management sensitivity. in this respect, this research is an exploratory scale development study. the questions in the scale are intended to identify managers’ demography and management mindset. 14 questions are asked in the demographic section. in the first stage of scale development, a large number of research and measurement tools are examined for strategic management and strategic planning concepts and a pool of statements related to the scale is created. the statements in this pool are grouped by considering the dimensions of the review. the first dimension of the scale, the distribution, dissemination and action is structured regarding the works carried out by harvey and scott (1999), davis et al. (2012), dundar and kılıc (1994) and ouchi et al. (1985). the second dimension of the scale, the planning sensitivity dimension refers to kaufman (2016), ferreira et al. (2015), schultz (2016), salkic (2014), carnahan (1980), bakan and buyukbese (2008), demirel (2013), esen (2012) and rajablu et al. (2015). the third and last dimension of the scale, process sensitivity is inspired by studies due to guth (1981), hitt et al. (2007), wang (2016), gunduz (2012), karakas (2014), sencan (2016), tremblay et al. (2009), borger and gaia (2010). 3.3 measures we intend to develop a scale with high validity and reliability within the scope of the study. strategic management sensitivity scale is composed of 24 statements and is analyzed with 5-point likert scale. the degrees determined in response to the labels used in the developed scale are as follows: i strongly disagree = 1, i disagree = 2, neither agree nor disagree = 3, i agree = 4, definitely describes me = 5. the research process is discussed in three parts, namely, the creation of the item pool, the structuring and evaluation of the scale. in the first phase, the strategic management literature is examined and a pool of 122 statement is created. after the creation of the pool, the opinions of the experts are consulted in order to eliminate the unsuitable substances. after that, surface and content validity studies are performed. after these studies, questionnaire form is adapted with 86 questions and pilot research is conducted on a sample of 100 persons similar to the target group. internal consistency analyses are conducted for the data obtained from pilot research. the main research phase started with 25 questions after the pilot research is carried out. after the elimination of the sieved items, the questionnaire is applied to 320 persons using the survey method. 4. results strategic management sensitivity scale development and validity research 121 the results of the study are discussed in two parts as theoretical and empirical. 4.1. theoretical results the theoretical foundations of this research have been shaped around how managers consider strategic management practices in their activities and decision-making processes. therefore, a good understanding of the basics of strategic management concepts is important in analyzing business and employee behavior. in recent years, the changes in the environment of businesses and the increasing competition have influenced the businesses and managers searched for ways of keeping up with these changes. the financial crises and uncertainty have increased the importance of strategic management activities. from this point of view, it has been deemed that it is necessary to deal with the change in the process of strategic management. besides, it is necessary to determine the theoretical and empirical researches carried out on these subjects and to examine the role of these concepts in businesses with a holistic approach. with strategic planning, businesses determine how to reach their targets more effectively. strategic planning is an activity that will be performed by businesses in the process of strategic management. for this reason, these concepts are intertwined but also have different meanings. 4.2 empirical results dimensionality analysis dimensional analysis is applied on the data obtained from the surveys. in this context, exploratory factor analysis is performed to determine whether the sample size is sufficient or not. in this phase kaiser-meyer-olkin (kmo) and barlet sphericity tests are performed. according to the field (2000), if the kmo value is below 0.50, it means that the data is not suitable for factor formation. exploratory factor analysis (efa) should be applied to develop a multidimensional scale that aims to measure complex structures. as a result of the exploratory factor analysis performed for the strategic management sensitivity scale, the kmo value is found as 0.902, while the bartlett sphericity test result is significant 3015 (df 300; p = 0.00). in order to interpret the results of the factor analysis, the total variance value is expected to be over 50%. as a result of the analyses, we observe that the total variance value is realized as 58.49%. factor load analysis is performed in order to evaluate the factor structure correctly. according to netemeyer et al. (2003), the factor load should be at least 0.40. although the value of 0.60 and above is considered satisfactory; 0.59-0.30 is considered to be acceptable. epstein, verbeeten and widener (2016) stated that if there is cross load below 0.20, it should be removed from the scale. as a result of the analysis, no cross-factor load is detected in the analyses. vif value (variance inflation value) and tolerance value are measured for the variables in order to check for multicollinearity between the independent variables. the vif value is measured by r2 values which are determined by regression of independent variables (jensen and ramirez, 2013). the tolerance value is also calculated for all the independent variables with the 1r2. o'brien (2017) stated that where the vif value is greater than 10 and the tolerance value is less than 0.10, multicollinearity problem can be mentioned. according to the analyis results, we observe the scale has no multicollinearity problem. vif values are between 1 and 3 and the tolerance values are more than 0.40. reliability analysis reliability analyses are performed to determine whether the scale represents a particular conceptual structure. in order to measure reliability, corelation coefficient, cronbach's alpha, split half, and omega reliability analysis are performed. the correlation coefficients of the items are between 0.15 and 0.80. it means that the cross-correlation coefficients of the scale items are consistent with the relevant conceptual structure. according to hinkin (1995), the correlation coefficients should be larger than 0.20 and less than 0.70. according to brckalorenz et al. (2013), these coefficients should be between 0.15 and 0.85. if the coefficients are smaller than 0.20, items do not represent the same concept. münir ataş & murat kasımoğlu 122 the second method to measure the internal consistency is “cronbach's alpha” coefficients analysis. the alpha coefficients are greater than 0.65 for all factors. it is also observed that this value is 0.86 for the scale. nunnally states that the alpha coefficient should be at least 0.70, whereas hinkin (1995) states that the alpha coefficient should not be less than 0.50. according to bandana and saini (2009), the alpha value should be at least 0.60. another internal consistecy measurement method is “split half” method. as a result of the calculations performed, the split-half reliability value is found above the threshold value of 0.80 to 0.84. the last internal consistency analysis discussed in this study is the “omega reliability coefficient” analysis. omega reliability analysis is defined as the rate of the total variance explanation value of the common variance value. this method is an internal consistency analysis based on variable factor loads (ventura-león, 2018). omega value is calculated as 0.895. scale dimensions omega values vary between 0.824 and 0.840, which are highly acceptable. normality analysis normality tests are performed to determine whether the items of scale have normal distribution or not. it can be seen that kolmogorow-smirnov and shapiro-wilk tests are used extensively in the literature. the test values must be greater than 0.050 to have normal distribution (noughabi and arghami, 2011). elliot et al. (2007) recommend the shapiro-wilk test when the sample size is less than 50. if the sample size is more than 50, kolmogorow-smirnov test is recommended. our test results indicate normal distribution conditions on the basis of both scale and dimensions. hinton, mcmurray, and brownlow (2014) have pointed out the stickiness and skewness values as a measure of normal distribution. fisher value (z coefficient) is the most important indicator of the normal distribution. if the fisher value is between -1.96 and +1.96, it can be said that the distribution is normal. the skewness and kurtosis values of the scale are examined, and the results are analyzed. as a result of the analysis, it is seen that most of the z values remained within the range of -1.96 and +1.96. construct validity analysis in this context, explanatory and confirmatory factor analyses are performed. the descriptive factor analysis, which enables the determination of a factor model for a group of variables, is a method of analysis, which enables the acquisition of a small number of factors from a large number of variables (bandalos, 1996). it is not possible to apply explanatory factor analysis to all data sets. the data should be normally distributed, the variables should be related to each other at a certain level, the relationship between the variables should be linear and the data should be measured on an equally spaced scale. (büyüköztürk, 2002). confirmatory factor analysis is determined by the factor structure of the scale analysis and the level of the factors previously determined. according to brown (2015), the factor structure of the measurement tool is confirmed with confirmatory factor analysis and the relations of the dimensions with each other. the analysis carried out in three stages are considered as the goodness of fit, affinity and decomposition validity. in this scale development study, the structure validity has been tested by the matching indices. the first goodness index is chi-square/degree of freedom. this is the most widely used measurement method that tests the general suitability of the model. it is tested whether there is a difference between the chi-square test and covariance matrices (hu and bentler, 1999). according to tabachnick and fidell (2007), if the chi square value is less than 2, it is perfectly compatible and if it is below 5, it is acceptable level. the second goodness index value is the goodness of fit index. this value refers to the power to measure the covariance matrix of the variables in the model. it takes values between 0 and 1 and moves in different directions with the degree of freedom (bollen, 1990). a value greater than 0.90 means that the model is valid, and the level of compliance is high (munro, 2005). the third goodness index is the root mean square error of approximation and root square error of approximation. these values are expected to be close to 0 in order to minimize the error between the initial model and the matrix created. for the highest fit, it is stated that the values should be less than 0.08 (lawrence et al., 2006). the fourth goodness index is the comparative fit index. it tests the harmony between the model and hidden variables according to the covariance and correlation matrices. although this method gives more meaningful results in small samples, it is one of the most widely used methods of analysis. the value should be at least 0.90 (munro, 2005). finally, the adjusted goodness of fit index can be considered. this value is between 0 and 1 as in the goodness of fit index. the value should be 0.90 and above (hooper et al., 2008). strategic management sensitivity scale development and validity research 123 table 1. goodness of fit indices fit indexes index values acceptable values chi-square/degree of freedom (x2 /df) 4,216 1<x2/df<5 cfi 0,908 0,90≤cfi agfi 0,818 0,80≤agfi gfi 0,873 0,85≤gfi rmsea rmr 0,093 0,082 0,01≤rmsea≤0,10 0,01≤rmr≤0,10 the final scale included 24 items. hidden factors for measuring strategic management sensitivity are identified and these factors are named by exploratory factor analysis. the first factor included 5 items. it is determined that all these items are related to the distribution, dissemination and action carried out within the scope of strategic management. for this reason, the factor is named as “distribution, dissemination and action sensitivity”. the second factor included 8 items. it is determined that most of these items are related to planning activities carried out within the scope of strategic management. for this reason, the factor is named as “planning sensitivity”. the third factor includes 11 items. it is determined that the majority of these items are related to the strategic management process. therefore, the factor is named as “process sensitivity”. 5. limitations and future research the study has several limitations. although the research aims the larger audience, it is applied to the target participant to be chosen randomly. the participants are provided with preliminary information in order to understand correctly and interpret the items sincerely. as a result of the study, the reliability and validity results are found satisfactory. the research is carried out on managers of the strategic units of the public institutions, municipalities, private sector and universities in turkey. therefore, the results of the study may not be valid for managers in other regions and provinces. at this stage, if necessary, different solutions may be offered for other provinces. as stated before, the target participant of the research is the managers working in the strategy units of the public institutions, municipalities, private sector and universities and the managers working in other units. some of the surveys are filled online because of the limited time of target group and lack of enthusiasm for this subject. the building process of scale development is affected by personal perceptions to a certain extent. although the entire development process is based on scientific foundations, personal factors are seen as a limitation. in the literature, it is seen that the studies are generally conducted as a literature review. this situation shows that the topics such as the ability of the managers to manage the strategic management process, roles in the planning process, the importance of strategic management practices in the decision-making process, and the role of strategic management in the selection and training of human resources are not examined sufficiently. therefore, empirical studies to measure the sensitivity of managers to these issues will lead to success in businesses and lead to a significant increase in the human resources quality. moreover, we believe that the implementation of similar scale building studies on different economic, cultural environments and introduction of additional psychological and demographics factors will make a significant contribution to the strategic management literature. münir ataş & murat kasımoğlu 124 appendix please read the following opinions carefully to evaluate the situation in your business. i strongly disagree 1 i disagree 2 neither agree nor disagree 3 i agree 4 definitely describes me 5 degree of accuracy 1 i present the determined strategic goals and objectives to the stakeholders for the criticism and evaluation. 2 i ensure that the determined critical performance indicators are accessible and reliable. 3 i try to achieve strategic goals by providing a democratic working environment. 4 i ensure that employees are committed to equal strategic goals by treating them equally. 5 at the end of the year, i review the consistency of performance reports and develop enhancements suggestions. 6 i encourage employees to participate in the processes and to make them more participatory. 7 i try to achieve the goals by communicating effectively with employees. 8 i try to understand the staff and improve strategic goals and objectives accordingly. 9 i prepare annual spending or cost plans for large projects. 10 i determine the strategic unit’s objectives by negotiating with employees. 11 i review the minutes of the stakeholder meetings and make improvements to the goals of the following years. 12 i conduct a preliminary market research and budget it in order to set strategic goal that require expenditure. 13 i come together with the other unit managers who prepare entries in the annual report. 14 i hold meetings with other managers to evaluate the role of reporting mechanisms in the strategic planning process. 15 i encourage employees to achieve strategic goals and objectives. 16 i take precautions for problems that deviate from strategic goals and objectives. 17 i give importance to negotiating topics with unit staff when determining strategic goals and objectives. 18 i visit stakeholders and get their views on strategic goals and activities. 19 i attach importance for determining the strategic objectives as a result of the negotiation of the related responsible. strategic management sensitivity scale development and validity research 125 20 the strategic objectives are known to the employees and they are easily accessible. 21 i take part in all monitoring and control activities related to the strategic planning activities. 22 i determine the road map regarding the strategic management process with the senior management. 23 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(2013). strategic management and business policy, prentice hall, new jersey. international journal of commerce and finance, vol. 5, issue 2, 2019, 76-86 76 the effect of non-financial incentive scheme on employees’ motivation (in case of commercial bank of ethiopia in jimma town) kibru kefay , jimma university, ethiopia chalchissa amentie kero jimma university, ethiopia abstract the purpose of this study was to investigate the effect of non-financial incentive scheme on employees’ motivation. therefore, the study was descriptive as well as explanatory which used primary source of data. by that 162 questionnaires were distribute and all of them were returned and used for the study and stratified and simple random sampling methods were applied to determine respondent for the study. however, the study try to examine the perception of employees’ about the incentives scheme of the bank, motivation level of employees’ in the bank and the effect of promotion, recognition, training on employees’ motivation. among the major findings, the overall perception of respondents about current non-financial incentive practices were shown as they are happy and satisfied with promotion and training but they are neutral on recognition. the result of regression analysis shows that; promotion, recognition, training were a significant predictors of employees’ motivation. also of that, a significant portion of employees was at good motivation level to perform their job. it is recommended to review the bank's recognition practice to increase the current motivation level of employees.. keywords: non-financial incentive, motivation 1. introduction organizational theorists have generally acknowledged that the key quality that a corporation will ever have are its human resources, but the productive accomplishment of the goals of the organization are going to be subject to the correct readying of its human resources. moreover, organization success rests on its staff, so the necessity to worry on components that may impact on employees’ motivation and performance from the views of (liao et al., 2007). motivated staff creates organization become additional productive as they're driven to unendingly get enhancements to try to work (rutherford, 2007). a motivated and qualified manpower is crucial for any company that wishes to extend productivity and client satisfaction. during this context, motivation means that the temperament of a personal to try to efforts and take action towards companies goals (dobre, 2013). the challenge for any manager is to seek out the means that to form and sustain worker motivation. on one hand, managers ought to concentrate on reducing job discontentedness (working conditions, salary, supervision, relationship with colleagues), while on the other hand should use motivating factors such as achievement, recognition, responsibility and the work itself (dobre, 2013). non-monetary incentive includes a vital and distinct role that infuses enthusiasm in a very employee to perform. a study by lawler (1973) that has been explained by wiscombe (2002) has the flexibility of reinforcing the conception that non-monetary incentive includes a vital outcome of achieving organization goals. the reward structure ought to encourage adept workers to remain long period in the organization similarly as increase the motivation and commitment to the organization and thus increase the productivity (brickley et al, 2002). 1.1. statement of the problem increasing motivation, commitment and engagement levels are key organizational components nowadays. the improvement of compensation policies has an important role in motivating staff to supply high ranges of performance, discretionary effort and contribution (salanova and kirmanen, 2010). banks function under intense strain and in a competitive environment. they should justify their existence with the aid of making profits and in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the effect of non-financial incentive scheme on employees’ motivation (in case of commercial bank of ethiopia in jimma town) 77 customers require them to grant better service. this has made it crucial for banks to use fantastic administration control to make sure that their personnel are working hard to reach the organization’s objectives (magnusson & nyrenius, 2011). apeyusi (2012) concurs that in order to attain company goals, personnel are supposed to be well influenced and remunerated in order to unleash their full potential. this is the reason companies are increasingly offering worker incentive schemes to inspire and encourage them to be extra productive and efficient. according to the study of safiullah, (2014) it is not just one factor can motivate employees, for example it is not just monetary rewards which motivate an employee, though monetary compensation is the physiological factor to the employees. that is the employees in any organization need to be constantly provided with opportunities for learning new skills so that they do not feel monotonous. they should be motivated to use the acquired skills on their job. shaheen and farooqi, (2014) have presumed that for individuals with acceptable financial incentives, some nonfinancial helpers are more compelling than additional trade out building long hour worker engagement in most divisions, work capacities, and business connections. numerous monetary remunerates basically create short-lived supports of vitality, which can have harming unintended outcomes. as fact, most organizations provide only money or financial incentives to remunerate employees for the work they done for the organization by perceiving that people need only money to stay, motivated and work in their organization. this perception may lead to lose of the skilled manpower and it would affect the productivity of organization. moreover, initiation for the study was that the word motivation seems simple to call and collection of only ten letters but it is a key for everyone’s (individuals or organizations) success. it is a means for success even more than ability because people or employees can improve their ability by different meanness only if they have motivation for what they need to do. therefore, the above gap and the importance of the title initiated the researcher to conduct this research. hence, this study was undertaken to investigate the effect of non-financial incentives on employees’ motivation in commercial bank of ethiopia jimma town. it has tried to response the following research questions. what are the current perception of employees about non-financial incentives and their level of motivation? what is the employees’ motivation level in the bank? what is the relation between non-financial incentives and employees’ motivation? 1.2. objective of the study the main objective of the study was to investigate the effect of non-financial incentive scheme practice on employees’ motivation in commercial bank of ethiopia in jimma town. 1.3. specific objectives 1. to understand the perception of employees’ about non-financial incentives 2. to examine the motivation level of employees’ of the bank. 3. to identify the relation between non-financial incentives (promotion, recognition and training) and employees’ motivation. 1.4. hypothesis of the study h0: promotion has insignificant effect on employee’s motivation h0: recognition has insignificant effect on employee’s motivation h0: training has insignificant effect on employee’s motivation 2. literature review 2.1. concept of motivation the study of motivation encompasses the science of perception ‘why people behave the way they do?’ (buelens et al, 2010). in easy phrases motivation can therefore be described as the will to perform (brooks, 2009). this definition kibru kefay & chalchissa amentie 78 paints motivation as a type of inner pressure or force that affect the actions and efforts of a person. motivation is concerned with the power and course of conduct and the factors that have an impact on people to behave in certain ways (armstrong, 2009). the term ‘motivation’ can refer variously to the goals persons have, the ways in which persons chose their dreams and the approaches in which others attempt to change their conduct (armstrong, 2009). motivation is set of procedures based totally on a pressure that makes the behavior energized and directs it closer to some purpose to attain (baron and greenberg, 2008). 2.2. theory of motivation 2.2.1. maslow’s hierarchy of needs theory probably one of the most known need theories, maslow’s hierarchy of needs theory, says there exists a hierarchy of 5 needs categorized into lower order and higher order needs, each of which must be satisfied before the next one becomes dominant. those needs are physiological (i.e. hunger, thirst, shelter, sex, health among other bodily needs) and safety needs are both categorized as lower order needs, which must be satisfied externally through salaries, type of contract (safety) and insurance policies among others. we can see those needs are extrinsic. on the upper half of the pyramid, social (i.e. affection, friendship, belongingness, acceptance), esteem (i.e. autonomy, self-respect, status and recognition) and self-actualization (i.e. growth, living up to one’s potential, self-fulfillment) are categorized as higher order needs, which must be satisfied intrinsically (judge and robbins 2009). 2.2.2. hertzberg’s two-factor theory the two-factor theory was once developed by herzberg, mausner, and snyderman (1959), following an investigation into the sources of job satisfaction and dissatisfaction. herzberg (1966) advised that factors involved in growing job pride had been separate and distinct from factors that led to job dissatisfaction. according to herzberg (1966), intrinsic elements such as the work itself, achievement in the work, the possibilities of personal growth and recognition, and being charged with vital responsibilities, regarded to end result from the human capability to personally advance and grow. he called these elements motivators. on the other hand, extrinsic factors had been these elements that prevented job pride and employee growth. the extrinsic factors such as working conditions, salary, job security, and relationships with others are not phase of the work, but they refer to the environment, and prevent job dissatisfaction. herzberg calls these elements hygiene, dissatisfiers or upkeep factors (herzberg, 1966). 2.2.3 theory of expectancy the expectancy theory is one of the motivational theories proposed by victor vroom in 1964. it encompasses what motivates employees in an organization. motivation is a force that energies, directs and sustains behavior (nteere, 2012). expectancy theory asserts that individuals are motivated by internal and external conditions. motivated performance requires a conscious decision, and people are motivated to do what they believe will result in the reward of highest value or probability. expectancy theory assumes that persons work to optimize their expectations of attaining a valued outcome and those predictions can be made regarding their behavior if the factors that influence behavior can be quantified (sanders, 2012). 2.3. concept and importance of incentive by definition, incentives are an external persuading issue that encourages the motive that absolutely directs the individual into operate hard working in long duration, matching the desired performance within the institution to gets the inducement. incentives also are outlined as strategies employed by institutions to encourage staff to figure with elation and also as concrete and ethical methods of satisfying the individuals' moral and material wishes (palmer, 2012). the importance of incentives originates from the necessity for the worker to be recognized and appreciated for his or her efforts. actually, appreciating individuals for his or her efforts by giving them incentives could be a terribly vital factor in satisfying the interior wishes of an individual. the individuals' own skills don't seem to be enough to allow them to work with high productivity unless there's an incentive system that encourages their internal motives so leads terribly tireless efforts (locke and braver, 2008). the effect of non-financial incentive scheme on employees’ motivation (in case of commercial bank of ethiopia in jimma town) 79 2.4. overview of non-financial incentives non financial incentives are the key to improving employees’ motivation, job satisfaction and better performance, there are a number of non-financial incentives that may represent more effective means of improving quality of work performance as well as motivational level (franco, et al, 2004). a simple definition has been given by mathauer and imhofff (2006) non-financial incentives as any means of incentives that do not involve directly with money, transfers of monetary values or equivalents. selected non financial incentives for this study were job promotion, recognition, and training and development. 2.5. job promotion if promotion done fairly it enhance worker motivation and competitiveness within the view of robbins (2005), upgrading is that the progression of a staff level or position in an institution’s hierarchical order. advancement in work could be an individual’s compensation or motivation for employment well done. an occasion to upgrade or promote a personal to a particular rank guarantees that, that individual worker is capable of handling the additional duties. 2.6. recognition “recognition explains the appreciation to the workers for the amount of performance, and success or an influence to attain goal. it is intimate or community, basic or official. it’s continuously in tally to pay” (robbins, 2005). but, the workers conjointly want recognition. persons prefer to distribute the celebration of their success with others and need to be recognized within the organization. whereas the required is satisfied it works to be an excellent motivator. further, if employers rely on reward solely to acknowledge influence and success it's most probable that the employee’s goals will become altered to safeguard the pay and nothing more while this will lead to a besmirched culture of the organization. therefore, using recognition properly it will be efficient way of increasing success and permit staff to feel intricate in the corporation culture (robbins, 2005). 2.7. training and development the training is properly organized, complex process, which the result is to improve the qualifications of employees, acquiring new skills and broadening employees’ knowledge (kochmańska 2016, p. 126-137). in new workplace also are conducted employee training in order to broaden the knowledge and skills about occupied position, training is concerned employees who haven’t contact with the pursuit of a given profession (silin et al. 2014, p. 69). most commonly associated with human professional sphere, not only during job. often training is enabling to get a new job (łaguna and fortuna 2009, p. 12). 2.8. conceptual framework the current study was guided by the following conceptual framework as summarized from the literatures. the proposed model below tried to show the relationship between independent variables and the dependent variable. kibru kefay & chalchissa amentie 80 h1+ h2+ recognition h3+ training 3. research methodology 3.1. research design this research paper adopts both descriptive & explanatory research approach since its purpose was to identify and describe the perception of employees about the nonfinancial incentive scheme practice of the bank; their motivation level and also it would identify the cause and effect relationship between no-financial incentive scheme practice and employees’ motivation. in addition to that the research was quantitative research. after collecting the questionnaire, the researcher tried to describe and relate the gathered data by quantitatively testing with different statistical techniques and cut point for mean was that 1-2.5 indicate low, 2.5-3.5 moderate and from 3.5-5 indicate high agreement with the raised measurement questions. 3.2. population of the study the target population of the study had the professional employees of cbe jimma town, which incorporates all professional employees from one main branch and ten sub branches of cbe with the total professional employees of 272. 3.3. sampling technique and sample size the study used probability sampling technique of stratified random sampling, within each stratum employees are being selected using a simple random method. stratified sampling technique was used to select samples from the existing employees in each branch of the bank in the jimma town; yamani (1967) formula was used to determine the sample size of the study. n=n/ (1+ne2) n= 272/ (1+272 (0.05)2 n= 272/ (1+ 0.68) n= 162 where; “n” is the sample size, “n” is the population size and “e” is the level of precision. at 95% confidence level, degree of variability=0.05 and level of precision/sampling error= 5%. 3.4. model specification mtv= α + β1pro + β2rec + β3tra + e where; mtv = motivation, α = the constant, or y intercept, βi= the coefficient of the independent variables, pro = promotion, rec = recognition, tra = training, e = the error term. 3.5. data sources and types the only source of the data used was primary in order to determine the effect of incentive practices on employee motivation and to meet the study objectives and the type of the data was quantitative. 3.6. data processing and analysis techniques promotion employee motivation the effect of non-financial incentive scheme on employees’ motivation (in case of commercial bank of ethiopia in jimma town) 81 the data collected was analyzed through quantitative data analysis techniques. the numerical data analysis was done using spss (statistical packages for social science) software program. both descriptive (frequencies, percent, mean, standard deviation) and inferential statistics (correlation, regression) would be used for data analysis. the pearson correlation coefficient was used to measure the linear relationship between dependent and independent variables. 4. data analysis 4.1. result of descriptive statistics table 1. frequency, mean and standard deviation for measures of promotion practice i variables frequency mean sd 1 2 3 4 5 1 there is opportunity of promotion in my organization. 14 5.1% 28 10.3% 27 9.9% 136 49% 68 24% 3.79 1.087 2 staffs has promoted in a fair and transparent manner. 14 5.1% 44 16.1% 58 21% 133 48.7% 24 8.8% 3.40 1.024 3 the criteria for promotion are acceptable 25 9.2% 78 28.6% 36 13.2% 113 41.1% 21 7.7% 3.10 1.170 4 my job allows me for rapid promotion 3 1.1% 26 9.5% 85 31.1% 131 48% 28 10.3% 3.57 .842 5 i’m satisfied with promotion system of the bank 21 7.7% 25 9.2% 58 21.2% 144 52.7% 25 9.2% 3.47 1.040 over all perception of employees towards the promotion 3.466 source: owen survey, 2019 1=strongly disagree, 2= disagree, 3= neutral, 4= agree, 5=strongly agree the result of descriptive statistics in the above (table 1) shows that (59.9% in average) of respondents have positive feelings about the promotion practice of the bank. the overall mean for all dimensions under promotion practices shows that the mean value of 3.466, which shows that majority of respondents were satisfied with promotion practice of the bank. table 2. frequency, mean and standard deviation for measures of recognition practice ii variables frequency mean sd 1 2 3 4 5 1 i feel that my efforts are being appreciated. 20 7.3% 56 20.5% 81 29.7% 89 32.6% 27 9.9% 3.17 1.093 2 the nature of my job helped me to get tangible recognition for my performance 25 9.2% 38 13.9% 36 13.2% 130 47.6% 54 16.1% 3.48 1.185 3 i get credit for what i do 13 4.8% 74 27.1% 73 26.7% 93 34.1% 20 7.3% 3.12 1.041 4 i get constructive criticism about my work 2 0.7% 71 26% 46 16.8% 121 44.3% 33 12.1% 3.41 1.026 kibru kefay & chalchissa amentie 82 5 i receive feedback on my progresses 3 1.1% 53 19.4% 56 20.5% 135 49.5% 26 9.5% 3.47 .947 over all perception of employees towards the recognition 3.3 source: owen survey, 2019 1=strongly disagree, 2= disagree, 3= neutral, 4= agree, 5=strongly agree from the value of above table 2 around half of the respondents (52.5% in average) have positive feelings about the recognition practice of the bank. the total perception of employees’ about the recognition was lie on the mean value of 3.3 ≈ 3. from this we understand that majority of respondents are neither satisfied nor dissatisfied or keep neutral about recognition practices of the bank. table 3. frequency, mean and standard deviation for measures of training practice iii variables frequency mean sd 1 2 3 4 5 1 organization provide training regularly 12 4.4 22 8.1 32 11.7 181 66.3 26 9.5 3.68 .913 2 the goals of the training were clearly communicated to trainee 42 15.2% 13 4.8% 42 15.4% 148 54.4% 28 10.3% 3.39 1.211 3 the training addressed my individual needs. 28 10.3% 55 20.1% 42 15.4% 135 49.5% 13 4.8% 3.18 1.126 4 the training was conducted in an interesting way 14 5.1% 14 5.1% 41 15% 164 60.1% 40 14.7% 3.74 .948 5 i am happy with the organization overall training system 14 5.1% 28 10.3% 27 9.9% 176 64.4% 28 10.3% 3.64 .975 over all perception of employees towards the training 3.52 source: owen survey, 2019 1=strongly disagree, 2= disagree, 3= neutral, 4= agree, 5=strongly agree in the above (table 3) majority of respondents (68.86%) have positive feeling about training practices of the bank and in other way the total mean was 3.52 which show that majority of respondents were satisfied with training practice of the bank. table 4. frequency, mean and standard deviation for measures of employee motivation iv variables frequency mean sd 1 2 3 4 5 1 i have opportunity to accomplish my objectives 28 10.3% 68 24.9% 150 54.9% 27 9.9% 3.64 .796 2 i have loyalty and belongings to my bank 27 9.9% 14 5.1% 42 15% 149 54.6% 41 15% 3.60 1.114 3 the bank provides me with challenging and meaningful jobs 29 10.6% 45 16.5% 32 11.7% 119 43.6% 48 17.6% 3.41 1.252 4 i have encouragement to improve my performance and to develop my skills 27 9.9% 30 11% 72 26.4% 130 47.6% 14 5.1% 3.27 1.057 5 i support and help each other with my coworkers or staff members 12 4.4% 27 9.9% 45 16.5% 151 55.3% 38 13.9% 3.64 .986 the effect of non-financial incentive scheme on employees’ motivation (in case of commercial bank of ethiopia in jimma town) 83 6 i am committed to my responsibility 14 5.1% 46 16.8% 59 21.6% 109 39.9% 45 16.5% 3.46 1.108 7 my accomplishments give me an important sense of self-respect 12 4.4% 53 19.4% 65 23.8% 113 41.4% 30 11% 3.35 1.051 over all perception of employees towards their motivation level 3.48 source: owen survey, 2019 1=strongly disagree, 2= disagree, 3= neutral, 4= agree, 5=strongly agree as shown in the above table 4 majority of respondent (60.9% in average) have positive feeling regarding their motivation level and they were motivated at mean value of 3.48. so, it is possible to say that majority of the respondents were motivated to do their job in the bank. 4.2. correlation and regression analysis from the result of pearson correlation the variables promotion and training have a strong positive relationship with employees’ work motivation but recognition has moderate positive relationship with employees’ work motivation. table 5. pearson correlation analysis for independent and dependent variables promotion recognition training motivation promotion pearson correlation 1 .501** .692** .608** recognition pearson correlation .501** 1 .570** .514** training pearson correlation .692** .570** 1 .627** motivation pearson correlation .608** .514** .627** 1 **. correlation is significant at the 0.01 level (2-tailed). source; spss results, 2019 the study used a multiple linear regression model and examined the effects and magnitudes of the independent variables on motivation level of employees. table 6: model summaryb model r r square adjusted r square std. error of the estimate 1 .689a .474 .468 4.19923 source; spss results, 2019 a. predictors: (constant), promotion, recognition, training b. dependent variable: motivation kibru kefay & chalchissa amentie 84 the table.3 indicates the results on the effect of promotion, recognition and training on employee work motivation. it is clear that this model has the r² .474 that shows 47.4% of the variation on the employees’ motivation was explained by the variables included in this model. table 7: anovaa model sum of squares df mean square f sig. 1 regression 4279.237 3 1426.412 80.892 .000b residual 4743.430 159 17.634 total 9022.667 162 source; spss results, 2019 a. dependent variable: motivation b. predictors: (constant), basic pay/ salary, recognition, promotion, fringe benefit, training in the above table f-ratio describes whether the regression model was good fit or not. large f value and a small significance level (sig.) (typically smaller than 0.05 or 0.01) indicate that the model was good fit 0.05 in this case. accordingly, as can be seen from the table above the f value is 80.892 and is significant at 0.000. hence, the researcher can suggest that, the regression model adopted in this study was good fit and is considered significant. table 8:coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 4.504 1.355 3.324 .001 promotion .461 .097 .296 4.760 .000 recognition .279 .082 .185 3.386 .001 training .408 .084 .317 4.830 .000 a. dependent variable: motivation h0: promotion has no positive & significant effect on employees’ motivation in the above table the p-value for the promotion was less than .05 as a result, the null hypothesis was rejected. the tvalue as shown in the table titled coefficients is 4.760 which is greater than +2 and that make it an important predictor of employees’ motivation. h0: recognition has insignificant effect on employees’ motivation. the null hypothesis was rejected and by the reverse alternative hypothesis was accepted because the p-value was less than 0.05; the t-value is 3.386 which is greater than +2 that make it an important predictor of employees’ motivation. h0: training has insignificant effect on employees’ motivation the null hypothesis was rejected since the statistical value in the above table 4.21 titled coefficients shows that the training has significant relationship with employee motivation at p (sig) of .000 which is < p = 0.05. the t-value as shown in the table 4.830 is greater than +2 thus making it an important predictor the effect of non-financial incentive scheme on employees’ motivation (in case of commercial bank of ethiopia in jimma town) 85 5. conclusion and recommendation 5.1. conclusion the study concludes that majority of employees’ are satisfied with the current promotion and training practices of the bank but they were neither satisfied nor dissatisfied with the recognition practice of the bank. however, majority of the employees’ were at good motivation level to perform their work. also, it concludes that promotion and training had a strong positive and recognition had moderate positive relationship with employees’ work motivation. standing from the result of regression analysis the study concludes that promotion, recognition and training are the significant non-financial incentives which are important predictors of the employee motivation. in generally, effective implementation of them will last in increment in employees’ motivation and the opposite is true 5.2. recommendation the bank should periodically examine its promotion and training practices to make it more interesting, fair and acceptable by its employees. even if there was a partial employee’s satisfaction on the promotion and training practices but there is a gap that would be improved by the bank to fully satisfy its employees’. so, human resource department of the bank should not sit silent by thinking as they are satisfied because these variables had positive, a strong & significant effect on employee’s motivation. so, improvement on those variables will lead to high employees’ motivation. also, the bank should improve its recognition practice since employees’ are neither satisfied nor dissatisfied with the variable. but, the variable has a positive and significant impact on employees’ motivation. therefore, the bank should make improvement on this variable to increase the employees’ motivation level at high extent. references armstrong, m. 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(1967), statistics, an introductory analysis, 2nd edition, new york: harper and row. international journal of commerce and finance, vol. 5, issue 2, 2019, 147-157 147 preparedness to teach international financial reporting standards (ifrs) in ethiopia: a study on selected universities deresse mersha lakew, jimma university, ethiopia mohammed getahun musa jimma university, ethiopia abstract modern type of business organizations were started in ethiopian before hundred years ago and the number is tremendously increasing nowadays. however, there was no one set of generally accepted accounting standard used by business organization in the country till december 2014 when ifrs was proclaimed as the law of the land. though ifrs was accepted for financial reporting in the country starting from 2014, the level of preparedness in teaching ifrs in ethiopian universities was not studied. this paper is aimed at identifying problems in teaching ifrs among teachers in ethiopia universities. to achieve this objective, data was collected from 46 academic staffs working in six universities in the country. the study found that teachers in relatively old universities are trying to incorporate ifrs in their course plan as compared to those in recently established universities. generally, the level of preparedness to incorporate ifrs is low in majority of the universities under study. lack of text books in line with ifrs, problem of integrating ifrs in to the curriculum and lack of practical experiences are the top three bottle necks that hinder teaching ifrs in our universities. in order to prepare our staffs to teach in line with ifrs, both short and long term capacity building strategies were recommended in this study. keywords: international financial reporting standard, preparedness, universities, ethiopia jec codes: m400, m410, m420 1. introduction education is the backbone for the development of any nation. it is because of this that ethiopian government is investing a huge amount of resource on expansion of schools and universities throughout the country. many universities came to existence within a few years to increase the accessibility of higher education to citizens capable of perusing their training at tertiary level. accounting and finance is one of the departments that we find in most universities in the country. the department is responsible to prepare students for the rewards and challenges facing them in the professional accounting, finance and auditing world both today and tomorrow. however, opening many universities and departments by itself may not bring the required result. it has to be equipped with the necessary skilled manpower, teaching material and other pertinent facilities. education cannot play its role unless it is of the highest quality and is relevant to the development needs of the country. in order to equip students with the necessary skills and knowledge’s, there must be adequate manpower and teaching facilities. the library should be equipped with relevant and up-to-date books. the curriculum should be designed in line with development needs of the country and the contents incorporated in the courses should be up-to-date with the current development in the globe. international financial reporting standards, commonly referred to as ifrs, is gaining acceptance as the global norm in financial reporting. issued by international accounting standards board (iasb), ifrs is currently accepted in more than 144 countries in the world (iasb, 2019). in line with this, as of december 2014, ethiopian parliament has proclaimed companies, public enterprises and small and medium enterprises in the country should prepare their financial report in line with the international accepted ifrs. accounting and auditing board of ethiopia (aabe) in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e deresse mersha lakew & mohammed getahun musa 148 was also established to facilitate the adoption of ifrs and control accounting and auditing profession in the country (proclamation no.847/2014). so, it is important that today’s accounting students have a basic understanding of these standards as they are responsible for preparing financial report in line with ifrs tomorrow, when they complete their study. the purpose of this study is to assess the level of preparedness of accounting and finance teachers in incorporating ifrs in their course and session plan. 2. statement of the problem although ethiopia was never been colonized, it’s economic and social environments were significantly shaped by its dependence on western countries for resources. when one closely looks at accounting profession in the country, it is characterized as importing accounting education from one source and accounting practice from another source. accounting education in ethiopia was introduced by us academics and was modeled based on the us accounting education system. as a result, universities were teaching accounting principles and theories which are formulated based on us accounting standards. most of the accounting academic staffs we have today throughout the country are the products of this education system. on the other hand, british experts were the first to open public accounting practices; and the first ethiopian professional accountants obtained british accounting qualification. both trends continue to the present day. the sourcing of accounting education and accounting practice from different countries has led to the misalignment of the two and has adversely affected the development of the profession and restricted its contributions to the economic development of the country (mihret & bobe ,2014). to solve this misalignment of accounting education and practice in the country, the house of peoples representatives (hpr) adopted international financial reporting standards (ifrs) with the aim of unifying the country’s finance and audit standards. a board was also established to implement a unified reporting standard across the country and comply with the standards acceptable at international level. therefore, students of today need to be prepared for what they will face outside of academia in their careers as the conversion to ifrs is certain in the country’s financial reporting. coursework needs to be adapted to ensure that students are exposed to all the knowledge, skill and attitude they need to succeed and that they are able to communicate, analyze and utilize financial information. today’s student must be made aware of ifrs, its principles, and its impact on the accounting world. the future accountants must prepare themselves and become fluent in ifrs. however, the most difficult tasks for instructors are finding and assimilating all resources available, developing a curriculum that works in their classrooms, and educating themselves in all of the potential changes as convergence continues. in most universities, many instructors are having difficulty discerning the how, when, and what of incorporating ifrs into today’s accounting courses as most of them have limited practical experience. all universities are using common harmonized curriculum which is not well integrated with ifrs. though there is an effort to train accounting and finance teachers to enable them integrate ifrs in their daily lesson, there are no studies that investigated to what extent they are trying to incorporate ifrs in their course plan. therefore, the main objective of this study is to identify the challenges while incorporating ifrs in the accounting and finance program. specifically, the study is aimed to: 1. investigates the level of preparedness of academic staffs in teaching ifrs at selected universities in ethiopia 2. identify the main challenges while incorporating ifrs in to the curriculum and course plan. 3. literature review international financial reporting standard (ifrs) is a set of accounting standard prepared by the london based standard setting body named “international accounting standard board (iasb)” and its earlier forerunner international accounting standards committee (iasc). the need for ifrs arise as a result of the desire of multinational companies for one set of financial statements, and the demand for one common global reporting language. according to iasb (2019) report, currently about 144 countries have decided to adopt ifrs and other 12 countries permits ifrs. ethiopia is one of the countries that proclaimed to adopt ifrs in december 2014. by july preparedness to teach international financial reporting standards (ifrs) in ethiopia: a study on selected universities 149 8, 2020, all private and public reporting business enterprises in the country are required to prepare their financial statement in line with ifrs (proclamation no. 847/2014). the application of global standards including ifrs requires a high level of human capacity that can be developed through education, training and experience. in order to achieve the above framework, adequate number of competent accounting and auditing professionals should be produced. for this purpose, curriculum in accounting and finance education at higher institutions should be integrated with ifrs or include modules in ifrs to narrow the gap between what is taught at the universities and what is required in the work place to provide fast track entry for professional qualification for graduates (aabe, 2015; unctad, 2013). however, previous studies showed that there are a number of human capacity related challenges that countries face when implementing ifrs and other standards developed at international level. these challenges occur to a varying extent in all countries regardless of their level of economic development. changing in to a new accounting standard is challenging and a critical integral component in such a transition period is developing the necessary competencies of human resource thus, developing human resource capacity for corporate reporting in a sustainable manner requires regulatory and institutional support as well as reliable sources of funding (unctad, 2013). poor ifrs education is one of the major bottlenecks for successful ifrs implementation identified by iasb (2019). the adoption of ifrs for accounting education are considered important due to the role played by accounting educators in providing graduates for the business world globally. some of the factors affecting ifrs adoption for educators around the world have been addressed in the literature. for example, the lack of accounting educators with experience in ifrs , the lack of textbooks and educational materials in languages other than english , and the broader range of skills that need to be addressed in accounting curriculum, academics’ resistance to changing the way they teach, environment in which the change is to occur, budget constraints associated with the change, time investment required from academics to support the change, academics’ dependency on textbooks and ready materials to avoid extra preparation for lectures, academics’ lack of updated knowledge on emerging issues and lack of interdisciplinary knowledge are some of the factors hindering incorporation of ifrs in the accounting curriculum and the main causes resulting in increasing the hesitation of accounting academics to start teaching ifrs (albader, 2014; saito et al., 2013; vysotskoya & prokfeiva, 2013). in transitioning to ifrs, there is an understanding that ifrs requires the exercise of professional judgment involving a high level of professional experience. hence, while teaching principle based ifrs, teachers should design instructional methods that require them to be active, independent learners and problem solvers rather than passive recipients of information in the class room. a student centred approach represents the most modern approach of teaching principle based standards such as ifrs. the benefits of this approach stems from its focus on the development of students’ critical thinking and professional – judgment skills. this approach assists in increasing students’ conceptual understanding of economic events, accounting concepts and principle. thus, teachers should utilize new teaching methods that are more relevant to a principle based approach such as simulations, role plays, oral presentations by students and problem based case studies with multiple solutions (albader, 2014). however, this method has its own challenges both for the teachers and students. accounting academics have the challenges of preparing questions and cases for examinations and evaluating and grading students’ responses (bonnier et al., 2013). conversely, students face the challenge of studying and preparing for examinations, ensuring that they cover all required aspects of what constitutes a correct and appropriate answer. students also need to be sure of the accuracy and fairness of the grading process (bonnier et al., 2013). similarly, tan, chatterjee and bolt, (2013) attribute difficulties in adopting a principle based approach of teaching accounting to the tendency of students and academics towards rule-based approach that favors a system of teaching and learning in which ‘right’ and ‘wrong’ are easily identified. they added that accounting academics need to compromise the ease of preparing examinations and the grading process under the old approach with the benefits of applying new pedagogical deresse mersha lakew & mohammed getahun musa 150 approaches despite the difficulties and challenges associated with these new approaches. smaller class size has positive effects on students’ grades and performance. conversely, large class sizes are considered major impediments to students developing soft and generic skills and increasing the quality of teaching and the adoption of innovative pedagogical approaches. considering the principles -based nature of ifrs, which requires meeting the learning outcomes of developing critical thinking and exercising judgment, most studies encouraged an active learning approach to teaching ifrs. active learning engages students in higher order thinking, exercising their critical thinking skills, and requires teachers to focus on what students do, rather than on transmission of information (tan, chatterjee and bolt, 2013). 4. research methodology the research design adopted in this study is descriptive in nature. this is because the objective of the study is to examine the level of preparedness of academic staffs to teach ifrs and the associated challenges. the data for the study was collected mainly from selected public and private universities in the country. there are about 43 public universities and many more private universities and college that are training students in accounting and finance discipline in either regular or continuing and distance education program at the moment. it is very difficult to incorporate the whole universities and colleges in the study since they are very much dispersed throughout the country. hence, multi stage sampling methods was employed to select representative universities. first universities in central and west ethiopia were selected for convenience of data collection. second, the universities in the central and western ethiopia were categorized in to four generation and six universities were selected for this study. therefore, two sample universities were selected from first, second and third generation universities respectively. fourth generation universities were not included in this study since they are still at establishment stage. finally, from each of the six universities, 10 academic staffs were selected for questionnaire which gives a total sample of 60 academic staffs. the following table 1 shows the selected universities, selected sample respondents and actual respondents from each university. table 1: selected universities for the study sample universities ownership of the universities sample respondents actually respondents response rate (%) addis ababa public 10 10 100 jimma university public 10 8 80 mizan tepi university public 10 8 80 rift valley university private 10 3 30 wolkite university public 10 9 90 mettu university public 10 8 80 total 60 46 76.67 the low response rate at rift valley university is because; most of the teachers are par timer working in a nearby public university. to facilitate the analyses, the study used different methods of data collection including survey questionnaire and interview with department heads. questionnaires were personally distributed to accounting and finance teachers in each university. further, semi structured interview were made with accounting and finance department heads in each universities in order to triangulate the data obtained through questionnaire. preparedness to teach international financial reporting standards (ifrs) in ethiopia: a study on selected universities 151 5. result and discussion before going to the discussion of the main objectives of the study, it is important to know the characteristics of academic staffs contacted. ten academic staffs from each university teaching accounting and finance courses at undergraduate level were selected for the study and survey questionnaire was given to them. however, only forty six completed questionnaires were returned back. the demographic characteristics of the respondents are summarized in table 2 below. table 2: description of the respondents educational level % specialization %  ph.d. 6.52%  accounting and finance 84.78%  masters 80.43%  mcom (accounting) 6.52%  ba degree 13.04%  finance and investment 6.52% age % experience %  less than 25 years 17.39%  0 5 years 39.13%  26 – 35 years 63.04%  6 10 years 32.61%  greater than 35 years 19.57%  greater than 10 years 28.26% sex % marital status %  male 82.61%  single 47.83%  female 17.39%  married 60.87% from table 2 above, it can be seen that the majority of the respondents have master’s degree and above education level in accounting and finance discipline. this indicates that the academia involved in teaching accounting and finance are relatively well trained as compared to the past situation in the country. with respect to age, the majorities are below 35 years with less than ten years of experience which implies majority of the teachers are in their young age categories who are less resistance to changes coming. further, the majorities of the academic staffs are males and married which implies the dominance of male in the accounting and finance academic staffs. ifrs become the law of the land starting from december 2014. hence, students of today should be trained in line with ifrs and accounting and finance programs at university should incorporate ifrs in the curriculum and academicians should be prepared to teach ifrs. in connection to this, academic staffs teaching accounting and finance courses at undergraduate level were asked to state their experience of incorporating ifrs in to their daily session plan. the result is summarized in table 3 below table 3: practice of teaching ifrs have you started teaching ifrs whenever you are assigned to related courses? frequency % yes all the times 11 23.91% yes sometimes 20 43.48% not at all 12 26.09% deresse mersha lakew & mohammed getahun musa 152 total 46 100% table 3 above shows that only about 24% of the respondents are incorporating ifrs in their daily session plan all the times. about 43.50% of the respondents are including ifrs only sometimes and about 26% of the academics did not incorporate in to their daily session plan at all. this implies majority of the teachers are not adopting ifrs consistently in their courses as a result of low preparedness. in relation to this, existing studies highlighted that several institutional factors can influence what is included in the accounting curriculum. further, characteristics of academic staffs, such as their background, have been shown to play a significant role in the development of course content. chi square test was used to see the association between the different demographic variables and the practice of teaching ifrs in the class. the result was summarized in the table 4 below. table 4: association between teaching ifrs and selected variables teaching ifrs total χ2 test always sometimes not at all generation of university first 10 7 3 20 χ2=15.452 second 0 3 5 8 asymp. sig=0.004 third 1 10 7 18 total 11 20 15 46 teaching ifrs total alway s sometimes not at all education level ph.d. 1 2 0 3 χ2=4.725 masters 10 15 11 36 asymp. sig=0.317 ba 0 3 4 7 total 11 20 15 46 teaching ifrs total always sometimes not at all experie nce >10 years 7 4 0 11 χ2=16.832 6 – 10 years 3 10 6 19 asymp. sig=0.002 < 5 years 1 6 9 16 total 11 20 15 46 teaching ifrs total alway s sometimes not at all age >35 years 7 3 0 10 χ2=17.064 26 – 35 years 4 12 10 26 asymp. sig=0.002 < 25 years 0 5 5 10 preparedness to teach international financial reporting standards (ifrs) in ethiopia: a study on selected universities 153 total 11 20 15 46 teaching ifrs total alway s sometimes not at all sex female 0 3 4 7 χ2=4.725 male 11 17 11 39 asymp. sig=0.174 total 11 20 15 46 from table 4 above, one can see that teaching ifrs is significantly associated with the age of the universities identified by generation, experience and age of the academia. this implies, academic staffs working in first and second generation universities tend to teach ifrs more as compared to those in third generation universities. this might be because old universities have well established facilities including libraries and internet connection where one can easily find ifrs related resources. this finding is in line with the finding of groomer and murthy (1996) who identified several institutional factors that affect the course content of accounting subjects including the size of university, type of university, number of academic staffs, and whether the institution is a doctoral granting school or not. in addition, the χ2 test further shows relatively older teachers with long years of experience tend to teach ifrs as compared to relatively young teachers with short years of experience. this is in line with watson et al. (2007) who suggested that professional experience including teaching experience, research interest, and training have direct impact on course delivery methods and ultimately affect the skills and knowledge of the students. however, education level and gender has no significant association with the practice of teaching ifrs. teachers under the study were asked to identify the main challenges while incorporating ifrs in their course plan and the result is summarized in the figure 1 below. 0,00% 10,00%20,00%30,00%40,00%50,00%60,00%70,00%80,00% lack of staff motivation/resistance to change use of common harmonized curriculum shortage of time to do so no incentives to prepare teaching material confusion in teaching two type of standards lack of training for academic staffs lack of practical experience of the teachers problem of integrating ifrs in to the curriculum lack of text books in line with ifrs percentage c h a ll e n g e s figure 2: challenges in teaching ifrs deresse mersha lakew & mohammed getahun musa 154 figure 1 above shows large majority of teachers surveyed identified lack of text books in line with ifrs, problem of integrating ifrs in to the curriculum and lack of industry experiences are the top three bottle necks that hinder teaching ifrs in the class. developing ‘new’ materials and getting textbook authors/publishers to incorporate ifrs material is seen as a problem in developing country like ours. on the date of awareness creation workshop conducted by accounting and auditing board of ethiopia (aabe) back in 2016, representative of the board recommended the design and implementation of a national curriculum that can meet the international standards in the field of study. furthermore, the board also promised to work closely with universities and colleges to help them revamp their curriculum so that they can teach their students with materials which are up to the standards and the international practices of the field. however, the curriculum revision was not finalized till to date and it is still the major bottleneck raised by department heads in each universities. the other challenges cited by teachers and department heads includes lack of adequate training in ifrs. intensive training of academic staffs plays critical role in teaching ifrs as the majority of the staffs are educated using us based accounting system. interview with the six department heads shows that four out of the six department heads have organized short term training to their staffs. one university is planning to do so in the near future and the remaining one is a private university and has no plan to train as most the teachers are par timers. in this respect, most department heads responded that arranging training on ifrs has taken long time because of administrative and budget challenges and the training provided by itself was not intensive and complete because of lack of qualified trainers in the country. confusion of teaching two types of standards; absence of incentives and time shortage to do so; lack of staff motivation and use of common harmonized curriculum are additional challenges mentioned by respondents. incorporating principle based ifrs in course plan while teaching accounting and finance subjects is becoming problematic. this is because most of the text books used in the currently working curriculum are written based on us gaaps. this implies revision of the existing curriculum is the first requirement. department heads in each university complain that curriculum revision was started before three years under the responsibility of addis ababa university but not completed yet because of administrative and financial limitations. in connection to this, academicians have different opinion on how to include ifrs in the curriculum. those teachers who are teaching ifrs either always or some times were asked their preference in incorporating ifrs in the accounting and finance curriculum and the result is summarized in table 5 below table 5: methods of incorporating ifrs in the accounting and finance curriculum what do you suggest on how to inculcate ifrs in to undergraduate accounting and finance curriculum % if you suggest integration to other courses, in to which of the following course should it be integrated? %  separate ifrs module 23.91%  financial accounting 78.26%  integrating to other courses 60.87%  principles of accounting 76.09%  both together 21.74%  advanced financial accounting 60.87%  cost and management accounting 36.96%  accounting information systems 36.96%  government and nfp accounting 36.96%  public finance and taxation 30.43% table 5 above shows that majority of the academics have the opinion that ifrs should be integrated in to other courses. this is in line with berrios (2012), who suggested the integrated approach to ifrs education rather than preparedness to teach international financial reporting standards (ifrs) in ethiopia: a study on selected universities 155 teaching ifrs as a separate module in latin america. the study by judy et al. (2016) also support that the main approach to teaching should be to integrate ifrs into existing courses instead of a separate module. according to them, most integration should be done in to intermediate or advanced accounting modules although other courses can also be used for integration. this is similar with the opinion of academic staffs in this study who suggested integration should be made to financial accounting, principles of accounting and advanced financial accounting courses. another important preparation while teaching ifrs is a change in method of teaching. past literature has discussed different teaching methods applied to teach ifrs. most studies suggested that real-life case studies are the best method to teach ifrs because ifrs are principles – based (tan, chatterjee & bolt, 2013). in connection to this, academic staffs were asked the method of teaching they are using at the moment in their class. the response was summarized in table 6 below. table 5: methods of teaching used at the moment methods of teaching frequency percentage lecture method 43 93.48% group work method 21 45.65% cooperative teaching method 15 32.61% practical teaching method 10 21.74% case based teaching 6 13.04% as we can see from the table 6 above, lecture method is the most dominant method of teaching practiced by teachers. group work, cooperative teaching, practical teaching and cased based teaching are next in respective order. this indicates that most accounting academics in ethiopia tend to prefer traditional way of teaching, an approach not ideally suited to teaching ifrs. this implies an awareness of this issue is required to ensure there is an appropriate shift in direction of academics’ teaching approaches so that accounting academics are prepared to teach principles based ifrs. most studies suggested that reallife case studies are the best method to teach ifrs because ifrs are principle – based. the reason behind suggesting case studies is that they inform students about the real world, develop their critical thinking and familiarize them with companies’ financial statements (tan, chatterjee & bolt, 2013). department heads further indicated that most of the teachers in higher institution are not prepared for teaching profession and they did not take any pedagogy course. hence, most of them are following traditional method of teaching as indicated above. 6. conclusion and recommendation there is a gap between ethiopia's accounting education system and the international standards of the profession. since many international companies are now coming to ethiopia we need to work hard to comply with the standards. one way we do that is starting with the accounting education system in order to meet the international standard in terms of accounting curriculum and daily session plan. this study found that although the roadmap of adopting ifrs in the country specifically mandate to accept ifrs starting from 2015/16, university accounting and finance education is lagging behind in teaching future accountants about ifrs. only limited numbers of academic staffs are exerting their personal effort to update themselves with recent development in accounting and finance and incorporate ifrs in their lesson. the major bottle necks identified includes absence of books written in line with ifrs, problem of integrating ifrs in to curriculum, lack of industry experience, lack of training, confusion of teaching two types of standards, lack of incentives, time and deresse mersha lakew & mohammed getahun musa 156 motivation. the problems are critical in recently opened new universities in the remote area in the country (third and fourth generation universities). mandatory adoption of ifrs in 2015/16 and the absence of a well-developed program for retraining of accountants to date indicate that much closer attention is needed to restructure the entire system of accounting and accounting education in the short and long time frame. since the curriculum we are using at the moment was designed based on the us gaap, the text books available in our library are us books. in addition, as ifrs is a resent development, it is very difficult to find text books written in line with it. therefore, the researchers recommend that curriculum revision should be made urgently and books and other resources that are written in line with ifrs should be purchased by each universities. universities should enable academic staffs to complete higher diploma program (hdp) that will help them change their method of teaching ifrs. creating awareness by conducting term training and motivating academic staff to use resources written in line with ifrs are other suggested short term strategies to solve the problem. in the long run, it is recommended that faculty members should have certificate of qualification in ifrs. further, it is recommended employing academic staff who are certified accountants. the problem with this strategy is that it is difficult to obtain qualified staffs at the current university salary rate. therefore, another possible strategy may be encouraging the existing academic staffs to pursue their training by covering the tuition fee at least partially. academic staffs should be encouraged to attend higher diploma program (hdp) in pedagogy in order make them ready to teach ifrs. in addition, professional accounting bodies can play a vital role in helping universities revisit their pedagogical approaches, revise their accounting curricula and cope with the requirements of adoption of ifrs. for example, for a long time, the professional accounting organization in south africa has greatly influenced the way accounting curricula are designed in south african universities. therefore, strengthening accounting and auditing professional associations plays vital role in ethiopia. accounting and auditing board of ethiopia should work hard in supporting professional associations in this respect. references albader m. (2014).transition to ifrs and its implications for accounting education in saudi arabia. (ph.d. thesis). victoria university accounting and auditing board of ethiopian (aabe) (2015). five years strategic plan 2015/16 – 2020/21, ethiopia, addis ababa berríos, m. r. (2012) ifrs readiness in latin american business curricula, business education & accreditation, 4, pp. 49 – 60 bonnier, c, demerens, f, hossfeld, c & manh, a 2013, a french experience of an ifrs transition’ issues in accounting education , 28 (2) pp. 2212 34 groomer, s. m., and murthy u.s. (1996). an empirical analysis of the accounting information systems course. journal of information systems, 10 (2), pp103-127. iasb (2019) international financial reporting standard (ifrs) accessed from https://www.ifrs.org/groups/international-accounting-standards-board/ judy k. b., michel m., munter p. and venuti e. (2016). results of the aaa/kpmg survey on implementation of ifrs and data analytics into u.s. accounting curricula. working paper, university of rhode island, college of business administration, mihret, d. g. and bobe, b. j. (2014), multiple informal imperial connections and the transfer of accountancy to ethiopia (1905 to 2011), accounting history, 19(2) pp. 309-331. preparedness to teach international financial reporting standards (ifrs) in ethiopia: a study on selected universities 157 proclamation 847/2014. a proclamation to provide for financial reporting. house of people’s representative of federal government of ethiopia, addis ababa saito h., hiramatsu k., and mayangosri s. (2013). accounting education for the implementation of ifrs in indonesia. tan a.,chatterjee b., and bolt s. (2013). the rigor of ifrs education in the usa: analysis, reflection and innovation unctad (2013). international accounting and reporting issues, un, newyork and geneva vysotskoya a. & prokfeiva m. (2013). the difficulty of teaching ifrs in russia. issues in accounting education. 23(1) pp. 309-319 watson, s. f., apostolou b, hassell j.m., and webber s.a. (2007). accounting education literature review (20032005), journal of accounting education 25 (2): pp. 1-58. international journal of commerce and finance, vol. 5, issue 2, 2019, 128-139 128 effect of liquidity and dividend pay-out on financial performance of deposit taking sacco’s in kenya robert lukhanda shibutse, united states international university africa (usiu-a), kenya dr. elizabeth kalunda, united states international university africa (usiu-a), kenya dr. george achoki united states international university africa (usiu-a), kenya abstract capital structure is one of the fundamental aspects to the success of deposit taking savings and credit cooperative societies.the study aimed to investigate the effect of two capital structure determinants; liquidity and dividend payout, on financial performance as meas ured by return on assets of deposit taking savings and credit cooperative societies, in kenya. the study was grounded on the pecking order and free cash flow capital structure theories. the study utilized a mixed research design using primary and secondary data for the period 2013 to 2017. the population of the study was 174 deposit taking savings and credit cooperative societies. stratified and purposive sampling technique was employed. a regression model was used to analyze the data. results revealed that liquidity and dividend pay-out had a significant and positive effect on the financial performance of deposit taking savings and credit cooperative societies in kenya. the study recommends having in place an assets and liabilities committee in each deposit taking savings and credit cooperative society that would help manage the assets and liabilities of the institution, ensuring adequate liquidity and cashflow management. having in place a robust dividend policy is also critical. keywords: liquidity, dividend pay-out, capital structure, financial performance 1. introduction a savings and credit cooperative society (sacco) is a financial association official in nature, owned, controlled, used, and democratically directed by members themselves to address their prevalent economic, social, and cultural needs (international cooperative alliance (ica), 2016). one of the most important sources of financing in developing countries are saccos/credit unions, and in the last few years, they have undergone remarkable growth all over the world (labie & périlleux, 2008). as at 2008, there were more than 53,000 saccos/credit union/cooperative financial institution (cfi)/mutual, serving about 97 countries with membership of over 185million, penetration of 7.7%, savings of us$ 995 billion, loans of us$ 847 billion, reserves of us$ 115 billion and total assets of 1.1 trillion (world council of credit unions (woccu),2008). as at 2017, there were more than 89,000 sacco’s/credit union/ cfis/ mutual, serving 117 countries with membership of over 260million, penetration of 9.09%, savings of us$ 1.7trillion, loans of us$ 1.5 trillion, reserves of us$ 195billion and total assets of 2.1 trillion (woccu, 2017).kenya's blueprint for national development and the vision 2030, identified sacco societies key role in deepening financial access, mobilize savings for investments in enterprises, and personal development (mohammed, 2013). as at december 2017, the total assets in the kenyan sacco subsector stood at kshs 442 billion up from kshs 293 billion in december 2012, a growth of kshs 149 billion in 5 years (ademba, 2013; sacco societies regulatory authority, 2017). according to poulsen (2008), capital structure is the composition or construction of a firm’s liabilities. taiwo (2012) noted that capital structure is a firm’s proportion of short-term and long-term debt and is principally a mix of debt and equity retained by an organization. capital underpins cooperatives; members come together to pool money and do more together than they could alone, therefore cooperatives may get bogged down or fail to get off the ground if in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e effect of liquidity and dividend pay-out on financial performance of deposit taking sacco’s in kenya 129 they cannot get enough capital either due to regulation or long-standing practice (andrews, 2015). financial performance is a measure of how well a firm utilizes its primary mode of business to generate revenue. it involves determining the results of a firm’s policy and operations in monetary terms based on the allocated resources. different methods can be used to measure financial performance, but all measures should be viewed in aggregation for example financial ratio analysis which has been a useful way of gaining a snapshot picture of saccos (milcah & muturi, 2016). the rise of free-market capitalism, the deregulation of primary industries, and increasing global competition have affected the viability of the traditional cooperative business model (downing & schmidt, 2005). the challenge in sourcing internal financing partially lies in a gradual change in member behavior (mikami, 2010). nilsson (2001) noted that the dual role of cooperative members as investors and patrons, when coupled with increased heterogeneity that is members with diverse risk profiles, creates challenges in raising member capital within the conventional cooperative model. in response to these challenges, some governments have allowed deviations to the traditional cooperative model, some of which claim to overcome the inherent weaknesses of the traditional cooperative model, accommodating the dual needs of members as both patrons and investors (chaddad & cook, 2004). in kenya, cooperative insurance company (cic) and cooperative bank of kenya are unique cases where a deviation from the strict cooperative model was achieved. for the year ended 2017, 161 deposit taking savings and credit cooperatives (dt-saccos) were compliant with the absolute core capital, 163 dt-saccos were compliant with core capital to deposits (ccd) ratio, and only 146 dt-saccos were compliant with the core capital to assets (cca) ratio as compared with the 173 dt-saccos which were compliant with the absolute core capital (sacco societies regulatory authority (sasra), 2017). this variance in the comparative level of compliance with the capital adequacy measurements shows that most dtsaccos found it easy to meet both the absolute core capital and the ccd ratio, but found it very hard to achieve and maintain the cca ratio, which then results in an exposure of a substantial portion of their asset base. this demonstrates that dt-saccos are relatively low in the retention of their surpluses to build their capital bases but are very quick to lend to their members and build other assets, without proportionate mobilization of deposits (savings) or capital funding plan. further, the number of dt-saccos meeting the absolute core capital ratio has dropped from 173 in 2015 to 161 in 2017. this situation could also be because, as the business grows, expansion opportunities can arise that outstrip the financial ability of the dt-sacco reliant on members’ shares and internally generated capital. 1.1. statement of the problem capital structure is arguably fundamental to the success of every dt-saccos as it influences the realization of their objectives and goals. the sacco sector has faced tough challenges globally, as noted by (woccu, 2012), including mission drifts, income generation, and insufficient capital among many others. the principles of democratic member control and members’ economic participation, influence the choice of capital (andrews, 2015). the difficulty cooperatives have in raising capital, mainly when competing with other businesses, is seen as one of the principal drawback for cooperatives in the current environment (novkovic, 2008; gentzoglanis, 2007; henry, 2005). wasike (2012) study found that capital inadequacy, and reduced liquidity were among the key factors affecting the performance of saccos. amedeo, espenlaub, khurshed, and simkovic (2010) observed that some cooperatives in kenya were finding it challenging to operate mainly because of their poor financial state. mvula (2013) pointed out that the problems affecting the performance of saccos included inadequate capital, reduced profitability, and inadequate liquidity. in last several years, we have seen growing concern from the regulator on dt-sacco financial management, mainly reflecting on capital management, which could potentially impact on institutional performance (anyanzwa, 2018; marete, 2016; wanzala, 2019; munaita, 2018). several dt-saccos have been facing challenges in meeting necessary capital threshold as stipulated by sasra the body that regulates dt-saccos in kenya. several studies have been carried out on the capital structure, and other relevant variables and their effects on the financial performance of organizations. these have been limited by; period, geographic scope, industry, or firm biases, and so far, none has holistically covered all dt-saccos in kenya except mwatu & abdul (2018) study which utilized debt, equity, and liquidity as study variables. therefore, this study was necessitated to assess the robert shibutse & dr. elizabeth kalunda & dr. george achoki 130 impact of selected capital structure determinants specifically liquidity, and dividend pay-out on the financial performance of dt-saccos in kenya. 1.2. objectives the general objective of the study was to establish the effect of determinants of capital structures on the financial performance of dt-saccos in kenya. the specific objectives of the study were three, namely: i. to determine how liquidity affects the financial performance of dt-saccos in kenya. ii. to assess the effect of dividend pay-out on the financial performance of dt-saccos in kenya. iii. to assess the combined effect of liquidity and dividend pay-out on the financial performance of dtsaccos in kenya. 1.3.hypotheses the hypotheses tested in the study were: h01 there is no significant effect of liquidity on the financial performance of dt-saccos in kenya. h02 dividend pay-out does not significantly affect the financial performance of dt-saccos in kenya. h03 the combined capital structure determinants liquidity and dividend pay-out have no significant effect on the financial performance of dt-saccos in kenya. 2. literature review 2.1. theoretical review 2.1.1. the pecking order theory based on the belief that financing choices are made in such a way as to cause the least difficulty to management, the pecking order theory (pot) is said to be a behavioral approach to capital structure (myers & majluf, 1984). an organization has a specific order of preferences which it follows in making financing decisions (myers, 1984). the pot is all about financing the companies by an order from safer too riskier; it means it gives an advantage to internal financing compared to external funding; prefer debt to convertible bonds; prefer hybrid securities compared to equity. the hierarchy of financing firms, according to pot suggests, a portfolio of financing, does not eliminate any kind of funding, but merely provides an order to be followed. according to ica (2016), cooperatives should always consider the relative priority for raising capital from the following sources; first from its members, second from other cooperatives and cooperative financial institutions, third from social bonds and social investors, fourth and last from commercial lenders, the financial markets. 2.1.2 free cash flow theory the central agency theory as advanced by jensen and meckling (1976) and the existence of information asymmetry between managers and shareholders, (jensen, 1986) expanded the work to highlight a significant problem, the free cash flow. he defined free cash flow as, cash flow more than that necessary to finance all ventures which when discounted at the relevant cost of capital return a positive net present values. when organizations generate a high level of free cash flow, pay-out policies become a severe source of conflict between shareholders and managers. how to inspire managers to disgorge the cash rather than investing it at lower than the cost of capital or misappropriating it on business inefficiencies is usually the task. the theory covers; first, the advantages of debt in reducing agency costs of free cash flows, and secondly how debt can substitute for dividends. 2.2. conceptual framework the conceptual framework of the study is developed from the research objectives (kothari, 2004). the relationship between the independent and dependent variables is outlined in figure 1. effect of liquidity and dividend pay-out on financial performance of deposit taking sacco’s in kenya 131 independent variables dependent variable h01 h03 h02 figure 1. conceptual framework of effect of liquidity & dividend pay-out on financial performance 2.3 empirical review according to sharma and paul (2015), the importance of liquidity as a determinant for the capital structure was indirectly suggested by at least two strands of literature, one exploring the effects of transaction cost on the cost of equity and the other explaining capital structure choices based on trade-off theories. however, the first study to directly test this implied relationship was lipson and mortal (2009). their results suggest a significant negative relationship between the equity market liquidity and capital structure in a sample of us firms. according to nwankwo (2004), adequate liquidity allows a bank to address three risks; funding risk which is the ability to substitute net outflows through withdrawals of retail deposits or nonrenewal of term deposits, adequate liquidity which is necessary to enable the bank to recompense for the non-receipt of inflow of funds such as when borrowers fail to meet their commitments, lastly risk arising from calls to honor maturity commitments or from a request for funds from important customers. kabure (2014) is his study noted that the coming into force of prudential regulations by sasra in kenya changed the way deposit-taking saccos carried out their business. his study found that liquidity had a positive effect on the return on investments in the saccos. mwatu and abdul (2018) found a differing result to kabure (2014) there study found liquidity to have a negative but insignificant effect on financial performance. malombe (2011) in her research asserts that there is a positive but insignificant relationship between dividend policy and profitability of dt-saccos in kenya. dabrowska (2009) noted decisions concerning the most optimal choice of financing and dividend policy are some of the most difficult financial decisions. in her article does dividend policy follow the capital structure theory, she presents the results of research concerning the relationship between two capital structure theories (hierarchical theory and substitution theory), and dividend payments policies ,which found that company management limits dividend payment according to the hierarchy theory and prefers internal sources of financing economic activities. liquidity -ratio of current assets to current liabilities dividend pay-out -rate of dividend payment financial performance -return on assets robert shibutse & dr. elizabeth kalunda & dr. george achoki 132 3. research methodology a positivist research philosophy was adopted for this study. the research adopted a mixed research design that is the use of both quantitative and qualitative methods (cresswell, 2013). the target population for the study constituted of the 174 dt saccos licensed by sasra in kenya. to ensure the quality of data collected in terms of ensuring its representative of the dt-saccos, the study categorized the dtsaccos into three subgroups/strata by assets size, hence use of stratified sampling. the sample of respondents was then be drawn from each stratum using purposive sampling. the study used the yamane (1967) formula for determining the sample size given by: n = n/ (1 + n e2) where n, is the sample size n is the population size, and e is the margin of error fixed at 5% from our target population n = 174/ (1+174 (0.052)) n = 121.25 hence our sample size was 122 dt-saccos. the study used secondary data, collected from the audited financial statements of the sampled dtsaccos for the years 2013 to 2017, sourced from sasra using data sheets. this provided the data on financial information necessary to ascertain the values for financial performance and determinants of capital structure. the financial information collected was surplus/profit after tax, total assets, total fixed assets, current assets, current liabilities, total debt, total equity, and dividend pay-out rate. regression diagnostic tests for multicollinearity, heteroscedasticity, normality, and linearity were carried out to evaluate the model assumptions. inferential data analyses was carried out and to investigate the effect of liquidity and dividend pay-out on the financial performance a regression model as presented in equation 1 and 2 was used. path coefficients were used to determine the direction and strength while t=statistics provided information on the significance to the relationships. yi = β0 + β1(x)i +ℇ (equation.1) where: yi = financial performance measured by roa in this case β0= the y-intercept (constant) for the independent variable β1 = regression model coefficient that is the slope which represents the degree with which the financial performance changes as the independent variable changes by one unit. ℇ = error term yi= β0 + β1 (liq) + β2 (div) +ℇ (equation. 2) where: roa= financial performance of the dt-sacco β0 = the y-intercept (constant) for the independent variables β1…. β2 = regression model coefficient that is the slope which represents the degree with which financial performance changes as the independent variables changes by one unit. liq = liquidity div = dividend pay-out ℇ = error term. 4. results 4.1. effect of liquidity on financial performance of dt-saccos in kenya the effect of liquidity on the financial performance of dt-saccos in kenya was assessed using the pearson correlation coefficient, as shown in table 1. the output indicates that liquidity had a strong positive and significant relationship with the financial performance of dt-saccos in kenya (r=.512, n=98, p<0.05). effect of liquidity and dividend pay-out on financial performance of deposit taking sacco’s in kenya 133 table 1 correlations between liquidity and financial performance roa liquidity roa pearson correlation 1 .512** sig. (2-tailed) .000 n 98 98 liquidity pearson correlation .512** 1 sig. (2-tailed) .000 n 98 98 **. correlation is significant at the 0.01 level (2-tailed). source: authors compilation the first objective was to determine how liquidity affects the financial performance of dt-saccos in kenya. the research hypothesis formulated from the specific research objective was: h01 there is no significant effect of liquidity on the financial performance of dt-saccos in kenya. the regression results are presented in table 2. the r2 for the regression model between liquidity and financial performance of dt-saccos in kenya was 0.262 meaning that financial leverage explains 26.2 % variation in the financial performance of dt-saccos in kenya while the remaining variation is explained by other factors not included in the model. the regression model was a good fit, as indicated by a significant f statistic (f=34.161, p<0.05). the regression model obtained from the output was; yi =.025 +0.001 (liquidity) + ℇ (equation. 3) the unstandardized regression coefficient for liquidity was 0.001. this indicates that a unit increase in the liquidity would result in 0.001 increase in the financial performance of dt-saccos in kenya. the t-statistic for the regression coefficient for liquidity was significant at 5% level of significance (t=5.845, p<0.05) implying failing to confirm the null hypothesis. by these statistics, the study concludes that there is a significant positive relationship between liquidity and financial performance of dt-saccos in kenya. table 2 effect of liquidity on financial performance model summary model r r square adjusted r square std. error of the estimate 1 .512a .262 .255 .01609 a. predictors: (constant), liquidity anovaa model sum of squares df mean square f sig. 1 regression .009 1 .009 34.161 .000b residual .025 96 .000 total .034 97 a. dependent variable: roa robert shibutse & dr. elizabeth kalunda & dr. george achoki 134 b. predictors: (constant), liquidity coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) .025 .002 13.629 .000 liquidity .001 .000 .512 5.845 .000 a. dependent variable: roa source: authors compilation 4.2 effect of dividend payout on financial performance of dt-saccos in kenya the effect of dividend payout on the financial performance of dt-saccos in kenya was assessed using the pearson correlation coefficient, as shown in table 3. the output indicates that dividend payout had a strong positive and significant relationship with the financial performance of dt-saccos in kenya (r=.510, n=98, p<0.05). table 3 correlations between dividend pay-out and financial performance roa dividend pay out roa pearson correlation 1 .510** sig. (2-tailed) .000 n 98 98 dividend pay out pearson correlation .510** 1 sig. (2-tailed) .000 n 98 98 **. correlation is significant at the 0.01 level (2-tailed). the second objective was to assess the impact of dividend pay-out on the financial performance of dt-saccos in kenya. the research hypothesis formulated from the specific research objective was: h02 dividend pay-out does not significantly affect the financial performance of dt-saccos in kenya. the regression results are presented in table 4.the r2 for the regression model between dividend pay-out policy and financial performance of dt-saccos in kenya was 0.260 meaning that financial leverage explains 26.0 % variation in the financial performance of dt-saccos in kenya while the remaining variation is explained by other factors. the regression model was a good fit, as indicated by a significant f statistic (f=33.723, p<0.05). the regression model obtained from the output was; yi =.008 +0.002 (dividend pay-out) + ℇ (equation. 4) the unstandardized regression coefficient for dividend pay-out policy was .002. this indicates that a unit increase in the dividend pay-out policy would result in 0.002 increase in the financial performance of dt-saccos in kenya. the t-statistic for the regression coefficient for dividend pay-out policy was significant at 5% level of significance (t=5.807, p<0.05) implying failing to confirm the null hypothesis. by these statistics, the study concludes that there is a significant positive relationship between dividend pay-out and the financial performance of dt-saccos in kenya. effect of liquidity and dividend pay-out on financial performance of deposit taking sacco’s in kenya 135 table 4 effect of dividend pay-out on financial performance model summary model r r square adjusted r square std. error of the estimate 1 .510a .260 .252 .01612 a. predictors: (constant), dividend payout anovaa model sum of squares df mean square f sig. 1 regression .009 1 .009 33.723 .000b residual .025 96 .000 total .034 97 a. dependent variable: roa b. predictors: (constant), dividend payout coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) .008 .003 2.905 .005 dividend payout .002 .000 .510 5.807 .000 a. dependent variable: roa source: authors compilation 4.3 effect of combined liquidity and dividend pay-out on financial performance the third objective was to assess the combined effect of liquidity and dividend pay-out on the financial performance of dt-saccos in kenya. the research hypothesis formulated from the specific research objective was: h03 the combined capital structure determinants liquidity and dividend pay-out have no significant effect on the financial performance of dt-saccos in kenya. the regression results are presented in table 5.the r2 for the regression model for the combined effect of liquidity and dividend pay-out on the financial performance of dt-saccos in kenya was 0.450 meaning that liquidity and dividend pay-out explain 45.0 % variation in the financial performance of dt-saccos in kenya while the remaining variation is explained by other factors not incorporated in the model. the regression model was a good fit as indicated by a significant f statistic (f=42.074, p<0.05), implying failing to reject the null hypothesis. based on these statistics, the study concludes that there is a significant combined effect of liquidity and dividend pay-out on the financial performance of dt-saccos in kenya. the regression model obtained from the output was; yi=.015 +0.001(liquidity) +0.001(dividend pay-out) + ℇ (equation. 5) the standardized regression coefficient for liquidity was 0.487. this indicates that a unit increase in the financial liquidity would result in 48.7% decrease in the financial performance of dt-saccos in kenya. the t-statistic for the regression coefficient for financial liquidity was significant at 5% level of significance (t=6.514, p<0.05). the standardized regression coefficient for the dividend was 0.371. this indicates that a unit increase in the dividend would result in a 37.1% increase in the financial performance of dt-saccos in kenya. the t-statistic for the regression coefficient for dividend was significant at 5% level of significance (t=4.961, p<0.05). robert shibutse & dr. elizabeth kalunda & dr. george achoki 136 table 5 effect of combined liquidity and dividend pay-out on financial performance model summary model r r square adjusted r square std. error of the estimate 2 .671a .450 .439 .01422 a. predictors: (constant), dividend pay-out, liquidity anovaa model sum of squares df mean square f sig. 2 regression .017 2 .009 42.074 .000b residual .021 103 .000 total .038 105 a. dependent variable: roa b. predictors: (constant), dividend pay-out, liquidity coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 2 (constant) .015 .003 6.100 .000 liquidity .001 .000 .487 6.514 .000 dividend pay-out .001 .000 .371 4.961 .000 a. dependent variable: roa source: authors compilation 5. conclusions and suggestions 5.1. effect of liquidity on financial performance of dt-saccos in kenya inferential regression results show a significant positive relationship between liquidity and financial performance. the study indicated that liquidity as an only determinant of capital structure influenced 26.7% of financial performance and a unit increase in liquidity would result in a 0.1% increase in the financial performance of the institution. hence the rejection of the null hypothesis. the significance of liquidity on performance indicates the more liquid the dt-sacco, the better its financial performance. this is so as it allows the dt-sacco to meet its obligations promptly and key, in this case, being loan disbursements which in turn earns revenue by way of interest income improving the financial performance of the organization. this study is consistent with findings of wang, (2002) who observed that the cash conversion cycle (ccc) has a negative relationship with the financial performance measured by returns on assets (roa) or returns on equity (roe) that is, liquidity has a positive relationship with financial performance. however, the findings of this study are inconsistent with that of mwatu and abdul (2018), who found a negative but insignificant relationship between liquidity and financial performance. the study objective was to determine how liquidity influences the financial performance of dt-saccos in kenya, with results showing it has a significant positive relationship with financial performance.liquidity is the lifeline of most financial institutions hence why a regulated institution such as microfinance banks, commercial banks, and dt effect of liquidity and dividend pay-out on financial performance of deposit taking sacco’s in kenya 137 saccos in kenya have a prescribed minimum. for dt-saccos to improve liquidity, they need to enhance their branch location presence, through physical presence or use of technology and further have adequate savings and deposits products. however a concern is on the measure of liquidity for dt-saccos which is only on withdrawable demand deposits, given that there is no separation of withdrawable and nonwithdrawable deposits from a utilization perspective, it would be prudent for the regulator sasra to amend this computation to factor in both catergory of deposits so as to get a realistic liquidity position picture of dt-saccos. further, it would be important to set up a central liquidity fund to act as a lender of last resort when a dt-sacco has liquidity challenges. 5.2. effect of dividend pay-out on financial performance of dt-saccos in kenya inferential regression results show a significant positive relationship between dividend pay-out and financial performance. the study indicated that dividend pay-out as an only determinant of capital structure influenced 26% of financial performance and a unit increase in financial leverage would result in 0.2% increase in the financial performance of the institution. hence the rejection of the null hypothesis. in kenya, most people join dt-saccos which have been profitable due to their going concern basis; these institutions are also seen to pay-out a higher dividend. the increase in member number drives up key parameters required from growth, fuelling improved financial performance holding all other factors constant. malombe (2011), in her research, asserts that there is a positive but insignificant relationship between dividend policy and profitability of dt-saccos in kenya. thus,one can conclude out of the fact or perception, that in some cases higher dividend-paying dt-saccos are better performing hence attract more members, with membership growth being a key driver to the growth of dtsaccos. this fuels increased resources for dt-sacco utilization through increased share and savings contribution leading to improved financial performance. whereas increased dividend pay-out is key for membership attraction and retention dt-saccos management and leadership have also to consider the sustainability of the same and weigh the cost of borrowing to finance ventures as opposed to retention, which avails cheaper funds. hence the need for the development of robust dividend policies in dt-saccos. this is critical, especially when it is said some dt-saccos borrow to pay dividends creating an illusion that all is well. references ademba c.(2013). speech for the chief executive officer, sasra during the sacco leaders forum, held at kicc on 26th august 2013. amedeo de cesari, susanne espenlaub, arif khurshed & michael simkovic. 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(1967). statistics: an introductory analysis, 2nd ed., new york: harper and row. international journal of commerce and finance, vol. 7, issue 2, 2021, 101-121 101 global or local strategies? mcdonald’s turkey example sertaç hamza istanbul commerce university a. tuğba karabulut istanbul commerce university submitted: 01.08.2021 accepted: 20.08.2021 published: 02.12.2021 abstract this study aims to explore how a global franchisor implements global and local strategies together in its turkish franchisees. mcdonald’s is a global franchisor which has a distribution license agreement with anadolu group in turkey. the effect of the agreement is discussed in terms of global and local strategies in the fields of supply chain management, operations management, marketing management, finance management, and human resources management. in-depth interviews were conducted with five functional managers of mcdonald’s turkey to find out the approach of the company. according to the findings of the in-depth interviews, it is found out that the company implements both global and local strategies in turkey to decrease its costs, increase its efficiency, and align its strategies with its headquarter. however, it focuses on local strategies more than global strategies due to the effect of its local distribution licensee anadolu group. this study has a this study has a unique approach and findings. its questions were developed by authors based on their knowledge and experiences and the feedback gathered from five functional managers and top managers of the company. these comprehensive questions were not asked before to another global company to gather information in turkey. keywords: global strategies, local strategies, mcdonald’s, transnational company sertaç hamza & a.tuğba karabulut 102 1. introduction global companies prefer to implement global strategies and standardize their business functions to decrease costs and increase efficiencies. however, external environmental factors and their strategic alliances with other companies lead global companies to implement local strategies and differentiate their business functions to be accepted by the market, to increase their sales, profits, and market shares. government regulations, laws, customer expectations, actions of competitors, cultural differences, availability of suppliers and supplies, and logistic opportunities are some of the reasons to implement local strategies and differentiate their business functions. when companies implement local strategies, their costs increase, and operations become more complicated. but they are accepted by the market, increase their sales, profitability and market share. therefore, companies should balance implementing global and local strategies to control their costs and operational efficiency. bartlett and ghoshal (1989) coined a transnational company for the companies which balance global and local strategies. these companies think global but act locally when it is necessary. mcdonald’s can be considered a transnational company or a company which tries to balance global and local strategies. franchising involves two parties; franchisor and franchisee. franchisor gives the franchising and the franchisee takes the franchising. franchisors let the franchisees use their brand name and management know-how to operate restaurants to serve the food. the franchisor decides pretty much everything such as where to open the restaurant, where to get equipment, machinery, and supplies, how to decorate the restaurant, which food to serve, at which price to sell, and what kind of advertising and promotion will be made. companies which implement global strategies standardize their products and prefer to buy supplies from suppliers where they can find the highest quality and the sustainable lowest global or local strategies? mcdonald’s turkey example 103 price. they explore suppliers in the world and make agreements for huge amounts for their annual consumption to decrease their costs. when companies implement local strategies they differentiate their products and supplies. they purchase several supplies from local suppliers in smaller quantities for consumption in that country to higher prices. companies which implement global strategies standardize their marketing activities, advertising, and promotions. therefore, they can work with global advertising agencies to conduct global advertising campaigns and offer global promotions to decrease their costs. however, when companies implement local marketing strategies, they can be accepted by the customers more, defeat their local competitors, increase their sales but increase their costs as well. companies which implement global strategies standardize their hr activities. when they have a local partner in the country where they have operations, they prefer to implement local hr strategies. they hire employees from that country according to legislation and labor law. they provide career advancement opportunities and compensation packages according to the requirements and expectations in that country. 2. mcdonald’s turkey mcdonald's was founded in 1940 california, us. mcdonald’s is one of the world's largest global foodservice company with over 39,000 locations in more than 110 countries. approximately more than ninety percent of mcdonald's restaurants worldwide are owned and operated by independent local owners and franchisees. the total revenues of the company reached almost 5.200 billion usd in the first quarter of 2021 (mcdonald’s, 2021). mcdonald’s’s turkey opened its first restaurant in taksim/i̇stanbul in 1986, mcdonald's turkey has been operating under the umbrella of anadolu group since 2005. mcdonald's corporation opened its first office in 1991 in turkey. the company served more than 100 million customers sertaç hamza & a.tuğba karabulut 104 annually with its more than 6,000 employees in 2020. mcdonald's turkey has 247 restaurants in 41 cities in turkey (anadolugrubu, 2020). the value of mcdonald's turkey was determined as approximately 280 million tl according to public disclosure platform (kap) statement in 2019 (kap, 2020). anadolu group has the country distribution licensee (dl) for mcdonald’s turkey. it focuses on the turkish market with its main marketing strategy; value for money means "the customer finds the products and services they buy, worth the price they pay " (vardar, 2011). as its business model, country dl makes investment and operates restaurants where as it gives sub-franchisees as well. the granted license gives the operator the right to engage in commercial activities under the mcdonald's brand. the conditions for granting the license are as follows (orel and nakıboglu, 2016):  mcdonald's management license is given only to the individual person, not to partnerships or companies.  since mcdonald's operator must devote all his time and power to the restaurant business, he/she cannot focus on other main businesses.  operators should always focus on restaurants, they cannot manage their business remotely.  mcdonald's license is only for one restaurant, it is not a regional license. according to its market expansion strategy, mcdonald's lists where to open a restaurant in turkey and when it finds a suitable place, it either rents or buys it. this also makes mcdonald's a property management company. after mcdonald's prepares the restaurant, the system continues by renting it to the sub-licensee (orel and nakıboglu, 2016). global or local strategies? mcdonald’s turkey example 105 3. global and local strategies companies which expand to the world, can implement global strategies for exploring business opportunities and getting advantage of them with a geographic deployment of their non‐location‐ bound (friedman, 2006; levitt, 1983; van agtmael, 2007; yip, 2001). they can use local resources including knowledge and blend them with their current resources. they can search strategic assets (doz et al, 2001). they can get rid of locational boundaries by forming strategic alliances with other companies by making licensing or production agreements. when they can integrate their activities, they can reach economies of scale (by concentrating some activities in one location), economies of scope (by sharing resources across borders) and economies of exploiting national differences (by distributing the value chain across the headquarter and subsidiaries and coordinating them later on) (bartlett and ghoshal, 1989). rugman and verbeke (2005) believe that inter‐regional investments are made in more upstream activities because economic actors (employees, suppliers, logistics companies, research labs, etc.) can establish r&d, production, or logistics operations in subsidiaries. global companies face pressures for national responsiveness and country differences in culture, customer preferences, government regulations, etc. when they tailor their activities for each country, they can have more demand and ask for higher prices for their products. bartlett and ghohal (chang, van witteloostuijn, and eden, 2010) suggested that companies which expand in different countries can implement the following three strategies: global, multinational and transnational (verbeke and asmussen, 2016). global companies compete with the dilemma of implementing global integration and local responsiveness (taylor et al., 1996, 962). companies can decrease their costs through economies of scope and scale by implementing global strategies whereas they can customize their products and services to adapt to local customer tastes, customs and laws by implementing local strategies (hill, 2005, 26) (ross and büchner, 2010, p. 47). sertaç hamza & a.tuğba karabulut 106 distance between the headquarter and the subsidiaries can increase the cost of doing business and business opportunities (estrin et al, 2009; slangen and hennart, 2008; zaheer and hernandez, 2011) (meyer and estrin, 2014). using local resources, local competition, and the distance between the headquarter and the subsidiary affect the responsiveness and exporting strategies more than integration strategies. subsidiaries of glocal companies can combine global and local resources to provide products and services for local markets within the global supply chain. subsidiaries contribute to global strategy by creating and exploiting local opportunities (birkinshaw and morrison, 1995; cantwell and mudambi, 2005; ambos, andersson, and birkinshaw, 2010). strategies conceptualized with the integration‐responsiveness framework (prahalad and doz, 1987; bartlett and ghoshal, 1989; devinney, midgley, and venaik, 2000) which proposes that global strategies are adopted consistently and uniformly across subsidiaries (meyer and estrin, 2014). subsidiaries can play different roles for implementing strategies and accessing local resources (anand and delios, 2002; hennart, 2009); by interacting firm-specific and country-specific advantages (rugman and verbeke, 2001). global companies can integrate their strategies across all their subsidiaries whereas they can be locally responsive to the local conditions such as competition, local resources, etc. and exploit locational advantages (birkinshaw and morrison, 1995; cantwell and mudambi, 2005; ambos, andersson, and birkinshaw, 2010; zaheer and nachum, 2011). resources of the headquarter and subsidiaries such as knowledge can be exploited by different strategies (kostova and roth, 2002). subsidiaries can join in integrated but geographically dispersed global networks and value chains (de la torre, 1971; doh, et al., 2009; kogut, 1985). they can make different contributions to the value chain of the organization (meyer and estrin, 2014). global or local strategies? mcdonald’s turkey example 107 when global companies adopt their strategies to local conditions they facilitate local responsiveness. however, when they implement global strategies in their subsidiaries, they facilitate global integration among their headquarters and subsidiaries. if companies implement local strategies, make local investments and production, they can decrease costs of some inputs, production, transportation, and imports. they can also access local networks and resources. however, they increase costs of investments and take more financial risks. on the other hand, when they implement global strategies, they can reach scale economies, achieve synergy, efficiency and coordination, decrease their costs, and determine global standards around the world (hansen, 2020). companies can have a global approach with standardized products and processes, geographically concentrated value chain activities, and centralized decision‐making to reach economies of scale (banalieva, and eddleston, 2011). on the other hand they can have a multinational approach with locally adapted products and processes, geographically dispersed activities, and local autonomy of subsidiaries. they can also have a transnational approach when they face with pressures of both responsiveness and high integration at the same time. when companies produce standardized products for the world, they can reach economies of scale to decrease their costs (verbeke and asmussen, 2016). on the other hand, industry forces can lead to make local strategic decisions to be nationally responsive (roth and morrison, 1990). companies can balance coordinating global brands and being sensitive to cultural differences in terms of marketing (takeuchi and porter, 1986). they can manage a global supplier network or let each subsidiary choose its local suppliers (verbeke and asmussen, 2016). when they work with global suppliers they can decrease their costs due to having a bargaining power but when they work with local suppliers they can decrease transportation and coordination costs. sertaç hamza & a.tuğba karabulut 108 global companies can have local practices in their subsidiaries in the following areas: determining local procurement objectives and standards, determining local standards for suppliers, conducting supplier screening programs, developing short lists for capable suppliers and local infrastructures, organizing supplier development and training programs, developing local suppliers by enhancing skills and absorptive capacity, monitoring and auditing suppliers, reporting and communicating local activities and achievements, lobbying governments to affect local standards and regulations (hansen, 2020). if companies want to be responsive to the local conditions, they need to adapt their products and services and their subsidiaries need to make sales decisions. this approach increases their costs and requires changes into processes and products (solberg, 2000; dow, 2006; grewal, chandrashekaran, and dwyer, 2008) and decreases the standardization and increases complexity of the interface between the headquarter and the subsidiaries (meyer and estrin, 2014). companies can offer different products with different prices and qualities (ricardo, 1817). responsiveness strategies are sensitive to local conditions and require interaction between the headquarter and the subsidiaries to exploit core competencies while adapting products and processes to local conditions (meyer and estrin, 2014). locally responsive strategies require the integration of the technologies of global companies with local knowledge (solblocerg, 2000; dawar and chattopadhyay, 2002; dow, 2006). if global companies adopt their products and processes to local conditions, they need skilled and qualified employees. they need to focus on developing human resources and innovation (liu, 2007). if local competitors are strong and have competitive advantages with local knowledge and resources, subsidiaries of global companies should adopt their products to local demands and react to the actions of their local competitors (meyer and estrin, 2014). global or local strategies? mcdonald’s turkey example 109 companies can localize their strategies and activities based on local culture. when customers have more information about product attributes, they focus on priceless in evaluating the product (mitra, 1995; rao and monroe, 1988) (westjohn, roschk, & magnusson, 2017). companies can differentiate global and local advertising strategies when they expand in global markets (villena and contreras, 2019). global companies can achieve standardization and coordination for human resources management (hrm) by implementing global strategies but adapting to local laws, regulations and customs in different subsidiaries by implementing local strategies can limit coordination of hrm practices across all organization (harzing, 2004). when there is more “institutional distance” between the head quarter and the subsidiary, it is more difficult to transfer and coordinate hr practices (ferner et al., 2005, p. 306). hrm practices reveal coordination of hrm policies, transfer of management practices, cross-cultural issues, expatriate management, and national diversity (wolfram cox, di cieri, and fenwick, 1998) (ross and büchner, 2010, pp. 47-48). 4. the methodology this study aims to explore how a global franchisor implements global and local strategies in its turkish franchisees. mcdonald’s is a global franchisor which has a distribution licence agreement with anadolu group in turkey. the main motivation of this research is observing the importance of balancing global and local strategies for global companies to succeed in global markets. since mcdonald’s is known as a company which balances global and local strategies, mcdonald’s turkey was chosen as a company to gather information. qualitative research is prefered for this study to gather more specific and comprehensive information about the subject. the questions are developed by reviewing the literature, gaining knowledge and experience in the field and discussing with the managers of the company by authors. one of the author wrote a phd thesis about structural changes of global companies when they sertaç hamza & a.tuğba karabulut 110 expanded in the world. she has books and articles about global companies. she has taught courses in the field of global business for many years. the other author has been working for global companies for many years. thus, questions are developed by accumulating knowledge and experience in the field as well. also, when questions are prepared, before they are asked, they are discussed with the related functional managers and the top management of the company to understand whether they are appropriate questions to accumulate the information. the questions are also based on the feedback taken from the managers of the company as well. then, they are asked back to functional managers to be answered. the questions are presented in each section before the answers. in-depth interviews were conducted with five functional managers (supply chain manager, operations manager, marketing manager, finance manager and human resources manager) of mcdonald’s turkey to find out whether the company implements both global or local strategies. the limitation of this study is the data was gathered from only one licensee of one global company. the data was gathered from five functional managers about five functions which are considered as important functions for implementing global and local strategies. this study is assumed to be original with its sample and questions. according to the findings of the literature review, this type of study has not been conducted in the same field in turkey. 4.1. supply chain which of the global supply chain policies do you implement locally? as mcdonald’s turkey, we implement almost all of mcdonald's sustainability programs implemented by countries worldwide. we provide a certified supply of agricultural products such as palm oil, coffee, and paper, especially from sustainable sources. in addition, we constantly reduce the nutritional values of products, especially children's menus, and offer healthier menus. global or local strategies? mcdonald’s turkey example 111 do you cooperate with your global suppliers locally? yes, we have suppliers who have come to turkey and invested (such as bimbo, havi, mccormick, fersan) and we can establish local relations with our global partners such as coca cola and run various campaigns together. how many of your suppliers have made direct investments up to now? what is the estimated number? until today, we have three global suppliers as direct investments (bimbo, havi, mccormick). they have established facilities which directly invested in the country. we assume that the investment made for us -with all our other suppliershas been more than 100 million tl so far. how many percentages of your products do you supply locally? we supply approximately 98% of the total products from local sources. we only supply products such as toys produced in a special program and/or products such as coffee which cannot be grown in our country from our global sources. how do you manage your quality processes globally and locally? one of our crucial values is the concept of sustainability, which is one of the main criteria in our supplier management system which describes a socially responsible and sustainable supply chain with ethical, environmental, and economic elements. ethics; includes occupational health and safety, employee and animal welfare issues. environment; it includes reducing the negative environmental impacts in the entire value chain, including the design, production, and distribution processes. on the other hand, the economy includes positive effects on fair trade, reduction of agricultural diseases, and increasing social welfare. supplier code of conduct valid all over the world is applied. in addition, the social workplace accountability sertaç hamza & a.tuğba karabulut 112 program (swa) is implemented in turkey. we cooperate with our food and non-food product supplier based on the same standards, regardless of whether they provide direct or indirect services. in addition to supplier quality audits for each product category, we check our suppliers' fair working environment and employee welfare practices. have you ensured that your suppliers expand to global markets? how? under our global supplier management system, all of our suppliers supply their products to the turkish market. they are also approved of our global system for other countries. our suppliers have unique code numbers and all other mcdonald's countries can also supply products from these suppliers. nowadays, as well as european countries, our suppliers sell their product especially in the middle east market. as country supply chain management, do you have any innovative and different practices than your global supply chain management system? in terms of supply chain management, turkey is actually one of the countries which manage one of the most suppliers internally. for example; while mcdonald's outsources the purchasing of packaging materials to a 3rd party company in the world, we supply products from suppliers which we have developed locally. these suppliers even sell their products to other mcdonald's countries. if we talk about your packaging materials, what are the global and local supply rates? are you getting promotional materials made in turkey? or do you work with the suppliers which were determined by the global? we supply all of our packaging materials 100% from our country. we have been working together with almost all of our packaging suppliers are in our system for a long time. as i global or local strategies? mcdonald’s turkey example 113 mention earliest, some of our packaging suppliers sell their products to other mcdonald's countries. 4.2. operations management which global operations management policies do you implement locally? some of the global projects are implemented as recommendations and some as compulsory projects. the recommended projects are implemented if they meet our local needs. the projects which we have to implement are generally projects to support the global brand strategy. they are implemented within a time plan which we have determined with the global under our franchise agreement. all projects of mcdonald's are based on two target points. one of them is to improve the guest experience. the second is to improve the employee experience. do you have global standards in operations management? it would not be wrong to say that all of our operational processes are shaped according to our global standards. there may be minor differences only if there are differences determined by local legal processes. especially during the pandemic process, while determining the expectations of local laws as our minimums, it would not be wrong to say that we are a brand which is the first and differentiated in the sector in this understanding by trying to implement the measures implemented abroad. on the other hand, approval is expected in all processes from the design of our mcdonald's restaurants to where they will open and location analysis. on the other hand, approval is expected in all processes from the design of our mcdonald's restaurants to where they will open and location analysis. how do you collaborate and adapt with global operations management? we are in constant communication with our operation partners. apart from periodic meetings, we are visited at least three times a year by our global operation partners. apart from these, sertaç hamza & a.tuğba karabulut 114 we can follow all the operational procedures of the global, best practices, and results in different countries from our global intranet system. do you have local implementations which are successful in operations management? one of the best practices which we are successful and pioneers in is our package service (mcdelivery). this practice, which has been actively used in foreign markets for the last 4-5 years, has been actively implemented in turkey since 2003. at the point we have reached, 30% of our sales (before the pandemic) come from the mcdelivery service. this ratio has a much higher rate in the sales of restaurants which offer mcdelivery services (140 restaurants). we have supported many countries implementing this service in the past. 4.3. marketing management (4p) which of the global marketing management policies do you implement locally? according to the brandz report, mcdonald's is the 9th largest brand in the world. it has also been in the top 10 for years. it is included in this list along with technology and social media companies. the main reason for keeping it on the list is its customer-centered approach which attaches importance to digital transformation and customer experience. since mcdonald's brand is one of the biggest brands in the world, there are some brand usage rules such as logo, color, etc. determined by the global marketing management. we create our own assets locally within the framework of these rules. in addition, mcdonald's also frees countries in product development. as long as it offers the same quality and taste all over the world, we cannot make any changes or localize the main products. however, we can develop any product we want by obtaining permission within our global or local strategies? mcdonald’s turkey example 115 own country. as mcdonald's turkey, we produced very popular local products. these are the mangal burger, düpdürüm, daba daba and superkıyak burgers. for example, mcturco is a product which customers can not forget, even if it was on sale with temporary importance in the past. finally, both digital technology is transferred from global to countries and freedom of development is provided to countries. in this way, it provides unity in some issues, and freedom is provided to the countries of the world. how many of the products in your menu consist of the products in the global menu? (such as bigmac)? what is the percentage of your total sales? our best selling products consist of global products due to their high awareness. however, when we release local products, these products become our best selling products by providing communication. how do you measure your local customer expectations? first of all, we are constantly social listening. we listen to our customers on a daily basis. in addition, we also have face-to-face market research where we can listen to the opinions of our customers. we follow all trends in both the world and the country. in addition, with our rate your visit application, our customers can both evaluate us and convey their opinions to us. are you able to make changes to the products on the global menus for your local customers? unfortunately, we cannot make changes to global products. mcdonald's does not allow this in order to maintain the same standard all over the world. are there any products created entirely for turkish taste in your menus? yes, there are. these are mangal burger, düpdürüm, daba daba, and superkıyak burgers. for example, mcturco is a product which customers still want and cannot forget, even if it was on sale with temporary importance in the past. sertaç hamza & a.tuğba karabulut 116 what are the global and local rates in ads? do you adapt the ads to turkey? are you working with the advertising agency of the global center? we create everything ourselves by paying attention to our brand guidelines in advertisements. we have the right to work with one of three global agencies. we create our own advertising campaigns ourselves by working with one of these three agencies. our 360-degree communication campaign, in which we announced our national teams sponsorship last year, was shown as an example to all countries globally. what are the global and local rates on promotions? are you getting promotions done in turkey? do you work with the suppliers determined by the global center? each country determines its strategies according to its own priority and market structure. we create all promotions. we even have projects which set an example for the globe. our "friday free" concept, which we created through our discount application, was once again shown as an example. how do you determine your pricing policy? what is the impact level of the spherical center? as turkey, we determine ourselves according to market dynamics. we determine the situation in turkey by conducting market researches according to many criteria such as economic factors, our competitors, the expectations of our customers etc. how do you do the positioning of the products? how do you determine your target customers? is it determined locally or globally? we set them locally. as i mentioned earliest, we determine them according to some market researches. we have done and published digitally and according to our customers who prefer global or local strategies? mcdonald’s turkey example 117 us. here, we determine the target audience and always put them at the center and communicate according to their needs. 4.4 finance management which of the global finance and accounting standards do you use? we use ufrs and the turkish accounting system together. as mcdonald's, we operate under the umbrella of the anadolu group in turkey (this system is called dl distribution licensee), so we follow the anadolu group financial reporting system as the reporting standard. these systems are audited and reported every year by independent audit companies. mcdonald's corporation only expects our sales data to be consolidated and reported. apart from that, we do not have any obligations as a financial reporting standard. our priorities for the anadolu group are more important in terms of reporting. do you get any support in terms of finance management by mcdonald's global? no, we do not receive global support in this regard. in this regard, when we need it, we mostly get support from the anadolu group finance unit since we are a holding company. do you pay for brand usage fee to mcdonald's global? is this price calculated based on your sales? yes, we do pay royalty fee to mcdonald's corporation which is calculated with a certain percentage of our annual sales. do you use mcdonald's global's resources or connections when you need financing? (lowinterest loan etc.) since we are a holding company, we act in coordination with the corporate finance unit of the holding and meet our financial needs sertaç hamza & a.tuğba karabulut 118 4.5 human resources which of the global hr policies do you implement locally? our global hr policies determine the main framework in the countries. our mission and strategic annual plans proceed in line with the elements determined by the brand. we realize what our priorities are in the global sense, and at the same time, we can make our own action plan or adapt it to the determined strategy in line with our local needs. focus areas such as mission, company values, annual strategy plan, employee approaches benefit from global hr policies. how do you take advantage of global human resources management practices? we mainly take advantage of restaurant staff applications. we move forward with our own local practices and decisions in office-side processes. how do you benefit from global implementations such as personnel selection, orientation, training, and development processes in your implementations? in our restaurant employees, we benefit 100% from global practices in training-development processes and promotion steps (career management process). the training of our restaurant employees in all positions is very critical to ensure the correct operation of the restaurant operation and to ensure its continuity following brand standards. training processes are carried out with full global implementations and process tracking. apart from that, we also have promotions depending on the training development steps. this is, as i mentioned earliest, the process was created on a global basis. career steps are also supported by the global implementations, except for the follow-up of the process steps. global or local strategies? mcdonald’s turkey example 119 processes such as recruitment and performance management are followed by our own internal local practices. what is the ratio of foreign nationals to total staff in turkey, if any? we do not have foreign employees. do your employees in turkey go to the mcdonald's headquarters or other mcdonald's countries for work? are there any employees from mcdonald’s headquarters or from other countries who come to work in turkey? we work with dl (distribution licensee) structure in turkey. therefore, they have a high chance of being evaluated in roles not in the headquarters but in the regional offices to which we are affiliated. apart from that, as dl, we have the opportunity to rotate to different companies of anadolu group. because, we are under the umbrella of anadolu group. therefore, in this sense, we can provide our employees with different opportunities if there are suitable roles and we support their rotation. especially many of our employees went to work in roles abroad. currently, there are still employees working abroad. currently, we do not have any employees who come to work from abroad. 5. conclusion mcdonald’s turkey is an example of a company which balances global and local strategies. this paper presents how mcdonald’s turkey implements global and local strategies and handles its business functions. according to the findings of the in-depth interviews, it is found out that the company implements both global and local strategies in turkey for decreasing its costs, increasing its efficiency and alligning its strategies with its headquater. but it has a more decentralized approach and has a tendency to implement more local strategies. it is because of the effect of its turkish distribution licensee anadolu group. the company can decrease its sertaç hamza & a.tuğba karabulut 120 costs when it implements global strategies whereas it can increase its market share when it implements local strategies. mcdonald’s can be considered as a company which thinks globally but acts locally. it balances to implement both global and local strategies whichever is more appropriate to have competitive advantages. on the other hand, global companies, while operating in local markets, have to compete with local competitors as well as other global competitors. based on this research, it can be said that it is important and necessary to combine the global strategies which a global company is stronger with the local strategies to compete with local competitors in local markets. this study is expected to make contributions to the field with its findings. according to the literature review, these comprehensive questions were not asked to another global company especially in the fast-food sector before to gather information in turkey. thus, this study has a unique approach and findings. the findings of the study highlight the approach of a global company to lead its distribution licensee to make decentralized decisions and implement local strategies when it is required to gain more competitive advantages and market share. thus, it can be an example to other global companies and their subsidiaries to decide to balance both global and local strategies to succeed in global markets. references anadolugrubu (2020), sürdürülebilirlik raporu, https://www.anadolugrubu.com.tr available at: https://www.anadolugrubu.com.tr/upload/docs/anadolu_grubu_surdurulebilirlik_raporu_ 2020.pdf (accessed 27 jun 2021). bartlett, c. a. and ghoshal, s. (1989), managing across borders: the transnational solution. boston, ma: harvard business school press. global or local strategies? mcdonald’s turkey example 121 hansen, m.w. (2020), “toward a strategic management perspective on local content in african extractives: mnc procurement strategies between local responsiveness and global integration,” africa journal of management, 6(1), 24-42, https://doi.org/10.1080/23322373.2020.1717283 kap, (2020), non-current financial asset sale. available at: https://www.kap.org.tr/en/bildirim/815670 (accessed 27 jun 2021). mcdonald's, (2021), www.corporate.mcdonalds.com. available at: https://corporate.mcdonalds.com/corpmcd/en-us/our-stories/article/financialnews.q1-2021results.html (accessed 27 jun 2021). meyer, k.e. and estrin, s. (2014), “local context and global strategy: extending the integration responsiveness framework to subsidiary strategy,” global strategy journal, 4(1), 1-19. orel, f. & nakıboğlu, g., (2016), uluslararası perakendecilik ve tedarik zinciri yönetimi. 1.basım. ankara: detay anatolia akademik yayıncılık. ross, p.k. & büchner, l.m. (2010), “global consistency versus local responsiveness: deutsche telekom's human resource management strategies in central and eastern europe", journal of east-west business, 16(1), 4566. https://doi.org/10.1080/10669860903558268 vardar, n., (2011), "mcdonald's'ın marka değerleri ve türkiye'de fark yaratma üzerine." fark yaratmak. i̇stanbul: el i̇zi i̇letişim, pp. 17-18. verbeke,a. and asmussen, c.g. (2016), “global, local, or regional? the locus of mne strategies,” journal of management studies, 53(6), 1051-1075. villena, m.j. and contreras, m. (2019), “global and local advertising strategies: a dynamic multi-market optimal control model,” journal of industrial and management optimization, 15(3), 1017-1048. doi: 10.3934/jimo.2018084 westjohn, s., roschk, h., & magnusson, p. (2017), “eastern versus western culture pricing strategy: superstition, lucky numbers, and localization,” journal of international marketing, 25(1), 72-90. https://doi.org/10.1080/23322373.2020.1717283 https://www.kap.org.tr/en/bildirim/815670 https://onlinelibrary.wiley.com/action/dosearch?contribauthorstored=meyer%2c+klaus+e https://onlinelibrary.wiley.com/action/dosearch?contribauthorstored=estrin%2c+saul https://www.tandfonline.com/author/ross%2c+peter+k https://www.tandfonline.com/author/b%c3%bcchner%2c+lutz+michael https://doi.org/10.1080/10669860903558268 https://onlinelibrary.wiley.com/action/dosearch?contribauthorstored=verbeke%2c+alain https://onlinelibrary.wiley.com/action/dosearch?contribauthorstored=asmussen%2c+christian+geisler https://onlinelibrary.wiley.com/journal/14676486 http://dx.doi.org/10.3934/jimo.2018084 international journal of commerce and finance, vol. 3, issue 1, 2017, 1-11 work attitudes influencing job involvement among ‘y’ generation murat bolelli, (asst.prof.) okan university, turkey beril durmuş, (prof.) marmara university, turkey abstract: the purpose of this study is to examine the effect of different work attitudes of generation y on job involvement in turkey. data is collected from generation y employees who work in various companies operating in different markets in turkey through a questionnaire survey, which contains work attitude statements developed by kamau et al. (2014) and the job involvement scale developed by kanungo (1982). 258 respondents completed the survey. after sorting and removing duplicate submissions a net sample of 228 usable questionnaires remained. exploratory factor analysis is conducted to job involvement scale which returned five items. also multiple regression analyses are conducted using all 39 work attitude items, lead to finding out 7 which are explaining job involvement. the findings indicate that, work takes a central place in the lives of generation y. they like to work and ambitious in their career pursuit. such factors as, high commitment level to job related goals, strong motivational investment level to their careers, tendency to identify themselves with work are blurring the boundaries of work-personal life balance of generation y. respecting educational differences highly, generation y discriminates work relationships according to the qualifications and the level of education with their colleagues. generation y also has respect to their bosses and cares less about salaries as compared to work itself. the implications of the results are discussed and future research areas are suggested. keywords: work attitude, job involvement, generation y 1. introduction there are several generations actively working in the business life today. since every generation has their own nurture in relation with the era and surrounding conditions of their maturing period, majority of the generations in circulation on the work life namely baby boomers, generation x and generation y has developed different attitudes towards work. on the other hand, the developments which took place in last decade, have made concepts come to the forefront such as global competition, boundaryless organizations, virtual teams, distance working, e-learning, ecommerce, being continuously in connection etc. these concepts significantly effected work life and highlighted the importance of human resources, which is considered to be one of the most important competitive advantages in today’s business world. taking into account of the structure of workforce in the global market, baby boomers whom are in their late 60’s seems to be approaching –if not already thereto their retirement ages, making way for next generation, generation x to climb hierarchical ladders and reach executive positions after them. quantitative research conducted by manpowergroup containing sample of 11.000 working generation y members (also known as millennials. barr, 2007) and 8.000 manpowergroup millennial associates from 25 countries in 2016 about generations on global work force suggests that, by 2020 generation y will cover 35% of the overall workforce in the market, while baby boomers will be representing 6%, generation z 24% and generation x 35% respectively (millennial careers: 2020 vision, manpower report, 2016). since generation x is expected to fill vacant positions in executive levels, it can be predicted that in the next decades, generation y will be occupying a considerable portion of employee seats in the labor market. generation y is different in terms of beliefs, values and attitudes as compared to generations before them (kamau et al., 2014). since these differences are creating communication problems and difficulties in reaching consensus, to understand generational discrepancies is important to identify sources of conflicts between managers, likely to be members of generation x and workers representing y generation whom are increasing in the work life day by day. it is in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 2 murat bolelli & beril durmuş http://ijcf.ticaret.edu.tr becoming very important to address issues of not only leading but working with people whom differs significantly in their values, expectations, attitudes from generations before and after them. kupperschmidt (2000) has defined generations as “identifiable group that shares birth years, age, location and significant life events at critical development stages”. although definition is clear and concise, defining generational clusters and setting borders to separate them is difficult. there are different distinctions in the literature regarding to generations which resulted critics (jaeger, 1985; joshi et al., 2010; mannheim, 1952). in the present study years 1946, 1964 for baby boomers (egri and ralston, 2004), years 1965, 1982 for generation x (eisner, 2005) and years 1982, 1996 for generation y distinction has been adopted. kanungo (1982) defined job involvement as an individual’s psychological identification or commitment to her work. since job involvement has important effects on motivation, effort and overall performance of the organization, it is desirable for leaders to understand and to foster it. although concept is discussed through two distinct perspectives in literature, both individual characteristics and work characteristics are accepted to be important on having and maintaining job involvement. there are strong relations between concepts job involvement, engagement, performance, individual preferences and attitudes. companies may use either work or individual characteristics approaches to induce improving engagement which will result to reach desired performance level through job involvement. generational proportions are changing in work life rapidly. therefore understanding the relationship between generation y work attitudes and job involvement may help especially generation x leaders to better communicate, motivate and engage them efficiently. the paper is organized as follows. next section reviews the literature of the generation concept and ways of defining them, also discusses work related values of each generations as well as job involvement concept, different perspectives and approaches regarding to it. third chapter describes research methodology and findings. fourth chapter concludes and discusses the relationship between generation y work values and job involvement. problem statement according to the millennial careers: 2020 vision, manpower report (2016), generation x and y members will be representing 35% each of overall workforce by 2020. taking into consideration of age and tenure differences between two generations, it is reasonable to predict that generation x members will have to lead generation y members in business life within next years. having and maintaining job involvement is one of the most important goals of managers. it is very important for them to understand employee’s positive and negative feelings towards work to enable continuous involvement. since there is little known about work attitudes of generation y, it will be beneficial to investigate work attitudes of generation y as well as the relations between job attitudes and job involvement. therefore, the following research questions have been formulated: what are generation y’s attitudes towards work? how does generation y work attitudes effect job involvement? purpose the purpose of this study is to examine the relationship between work attitudes of generation y on job involvement in turkey. data for this research is collected through a questionnaire survey. the work attitude statements developed by kamau et al., (2014) and the job involvement scale developed by kanungo (1982) are used in this research. data for the study is collected from the generation y employees who work in different departments and companies which are in different markets in turkey, 258 respondents completed the survey. research questions h1: generation y work attitudes has an impact on job involvement significance of the study understanding the relationship between generation y work attitudes and job involvement may help managers to be more effective especially when leading generation y employees. findings also can be used for having efficient communication, managing conflicts, most importantly understanding millennials motives towards work. since there work attitudes influencing job involvement among ‘y’ generation 3 http://ijcf.ticaret.edu.tr are few studies in turkey exist about the relationship between generation y work attitudes and job involvement, this paper may help future researchers and professionals as well. definitions generation “identifiable group that shares birth years, age, location and significant life events at critical development stages” (kupperschmidt, 2000). job involvement individual’s psychological identification or commitment to her work (kanungo, 1982). 2. literature review generations at work baby boomers are defined as the people born between 1946 and 1964 (egri and ralston, 2004). they are born into the golden era of economic and social growth which takes place after world war ii and their attitudes towards work and life are influenced and shaped by both their parents’ negative memories of war conditions and their own preferences towards work. baby boomers have conservative values like loyalty, hardworking, competitiveness (crampton and hodge, 2007), they are willing to make sacrifices for their families and satisfied with tangible awards (kupperschmidt, 2000). baby boomers value success, team work, challenge, maintaining a good relationship with their superiors and other employees as they value loyalty and commitment to the workplace (shragay and tziner, 2011). on the other hand, generation x is born after baby boomers prosperous era, whom has to cope with unfavorable circumstances like unstable economy, epidemic deceases like aids, ethical scandals involving high level executives of companies and governments. strongly effected by incidents and new conditions like bankrupting firms, parents losing their jobs, lack of lifelong jobs offered by profitable companies, absence of predictability and security at work, generation x relied on their individual initiatives and developed lack of trust towards companies they are working for (johnson and lopes, 2008). generation x is self-confident, independent, dislikes supervision, wants to have fun and achieve goals at work (shragay and tziner, 2011). instead of being loyal to the organization, they are loyal to their jobs, colleagues and managers (neil, 2010). members of generation x has more commitment to their own careers than to their organizations (lyons, 2004; miller and yu, 2003) and prefer organizations which value skills development, productivity and work-life balance rather than status and tenure (smola and sutton, 2002). generation y is the last generation born in the 20th century. raised in the era of technological breakthroughs, communication and information technologies, globalization, internet where they can easily reach to the sources they require to obtain knowledge and share their personal views freely, generation y is influenced by intensive exposure of the messages, information flow, advertisement wielded by mass media and different other organizations which led them to be skillful on collecting and processing information, multitasking, working well in groups and seeking for individual consideration. “generation y has never known life without internet, cell phones, fax machines, voice mail and chat rooms. weaned on technology, this generation has no personal reference for a time before atm’s, vcr’s, pc’s, cd’s, mtv and mp3’s” (kamau et al., 2014). generation y members are on the center of attention during their childhood and expectations from them are very high. having strong self-confidence, generation y believes that if they lost their main income tomorrow, they could find equally good or better work within three months (millennial careers: 2020 vision, manpower report, 2016). according to the same report, 60% of the generation y is expecting to work past age 65 and rather than one long job for life, since they understand the requirement for continuous skills development to remain employable, they prefer working for different organizations to that end. research shows that although salaries and benefits are still important to generation y, these are significantly less important than these values are to generation x members (schullery, 2013). generation y especially differs in valuing leisure rewards at work, self-paced work, having time for other things in life, increased vacations compared to generation x. even though roots of motivation are different, generation y is sharing same attitude with generation x when it comes to loyalty to their current employers. deloitte millennial survey (2016) is indicating that only 16% of the generation y workers see themselves with the current employer a decade from now, while 44% of them say that they will quit their jobs in two years if given choice to join a new organization or to do something different. 4 murat bolelli & beril durmuş http://ijcf.ticaret.edu.tr believing that financial results are not the only indication to measure business success, generation y value behaving ethically, responsibility to society, employee satisfaction, trust and openness in the workplace, honest treatment to customers. deloitte millennial survey (2016) indicates that generation y chooses employers whose values reflect their own and almost half have been reported to choose not to undertake a task at work because it went against their personal values or ethics. it is not an easy task to motivate generation y with tangible rewards since they prefer flexible working hours, time to travel and enjoy life, a good work-life balance more than salaries (broadbridge et al., 2007). cennamo and gardner (2008) suggested that there are significant generational differences exists for individual work values involving status and freedom but not for extrinsic, intrinsic, social and altruism related values between generations and no differences in perceived organizational values. since their research suggests differences between generations on individual and perceived organizational values, but only for two of the six values, it can be commented that baby boomer, generation x and generation y has some differences in work values but fewer than expected with respect to criteria mentioned. “meeting generation y demands for work where they enjoy and require unlimited fun, shows a lack of leadership in tulgan’s view (2009). he instead advises strong leadership and commitment to “high maintenance management” to provider, not what generation y want, but what they need.” (schullery, 2013) in order not only to manage conflicts efficiently, but to provide guidance, mentorship, and support to generation y, it is useful to understand their attitudes towards work and others in work place. job involvement regardless of the generation, working individuals are either spending an important portion of their time in the workplace or with the work related activities. since her deliberate actions define who that person is, work and personal values effect each other inevitably, resulting positive or negative feelings towards work. in the strictest sense, these positive or negative feelings that are considered to be the attitudes, has a significant effect on both job involvement and organizational performance. job involvement has been defined as the identification of the individual with the job and as a psychological selfinvestment of the individual in the work as a means of seeking some expression of the self at work (lodahl and kejner, 1965). job involvement also involves the internalization of values about goodness of work or the importance of work in the worth of the individual (lodahl and kejner, 1965). ekmekçi (2011) states that from an organizational perspective, job involvement has been considered the key to employee motivation and competitive advantage and from an individual perspective it is key to personal growth, satisfaction and related to leader consideration, participative decision making, communication. job involvement concept has been approached from two different perspectives (sekaran, 1989; sekaran and mowday, 1981). first approach viewed as an individual difference variable and job involvement is believed to occur when the possession of certain needs, values or personal characteristics predispose individuals to become more or less involved in their jobs. the second perspective views job involvement as a response to specific work situation characteristic. in other words, certain types of jobs or characteristics of the work situation influence the degree to which an individual becomes involved in her job (chungtai, 2008). for organizations, having and sustaining job involvement is an important target since it has strong relations with organizational effectiveness (pfeffer, 1994). katz and kahn (1978) states that effective organizational functioning requires employees to not only perform their prescribed role but also to engage in behaviors that go beyond these formal obligations. since involved individuals likely to perceive work as a very important aspect of their lives, it can be suggested that they will spend extra effort to reach organizational goals. supporting this argument, brown (1996) found that job involvement is positively effecting employee’s motivation and effort, leading to higher levels of in role job performance. yet further research is needed to clarify how job involvement is related to other job attitudes. job involvement has been found to be related to the job characteristics of skill variety, task identity, task significance, autonomy and feedback from work itself (hackman and oldam, 1975; rabinowitz and hall, 1977). on the other hand there is a disagreement between researchers about job involvement being a personal characteristic which suggests that it is less likely to be influenced by organizational factors and more likely to be influenced by personal characteristics (dubin, 1956; rabinowitz and hall, 1977). carmeli (2005) is indicating that job involvement is unlikely work attitudes influencing job involvement among ‘y’ generation 5 http://ijcf.ticaret.edu.tr to be changed because of organizational factors since it is a relatively fixed attribute. therefore the ultimate determinant of job involvement should be the value of ones work in life (kanungo, 1979). supporting this opinion sekaran (1989) also suggests that employees usually join the organization bringing their own work values. based on their experiences and interactions with organizational factors, employees make deliberate choices whether to involve in their jobs and invest them in work or not. in this study, the relationship between generation y work attitudes and job involvement has been examined by adopting the point of view that job involvement is a personal characteristic which differs from person to person. work attitudes job involvement generation y figure 1: conceptual model h1: generation y work attitudes has an impact on job involvement in the light of literature presented above, the conceptual model is prepared. 3. research method and findings research instrument: the primary objective of this study is to examine the effect of the different factors of work attitudes of generation y in turkey on job involvement. data for this research is collected through a questionnaire survey. a review of the literature yielded a number of measurement instruments that are employed to test the hypothesized model. each scale has a history of reliable measurement. the work attitude statements are developed by kamau et al., (2014) and the job involvement scale is developed by kanungo (1982). the work attitude scale is measured with 39 items. job involvement is measured with 10 items (see in table 1 and table 2). all scales employed in this study are measured on five-point likert scales ranging from “1=strongly disagree” to “5=strongly agree”. 6 murat bolelli & beril durmuş http://ijcf.ticaret.edu.tr table 1: measurement items of work attitudes construct item measurement work attitudes wa1 i access information instantaneously wa2 i am completely different from my parents as far as work attitude is concerned wa3 i use modern media for communications in the work place wa4 i do not live to work but work to live wa5 i do not like work wa6 i do care less about salaries wa7 i prefer more flexible working hours wa8 i prefer balancing work and social life wa9 i am demanding and have high expectations in the work place wa10 i am ambitious and hungry for success in career targets wa11 i prefer to change jobs frequently wa12 i like my freedom wa13 i seek instant fulfillment in the work place wa14 i have no respect for authority from my bosses wa15 i generally cannot complete tasks in time wa16 i require guidance from my manager in the work place wa17 i create conflict with the other people in the work place wa18 i access information quickly at work place wa19 i take responsibility but lack total commitment to duty wa20 i am highly receptive to new technologies wa21 i do not want to be considered as young among colleagues at work wa22 i do not want to be viewed as inexperienced in the work place wa23 i believe that i deserve the position they i want at work wa24 i can seek for a new job at any given time wa25 i am flexible to work related changes wa26 i want to start as a manager, or at least be one shortly wa27 i expect to relate with my employers as with my parents wa28 i discriminate relationship with colleagues on basis of education qualifications wa29 i pick my colleagues on the strength of their wallets wa30 my loyalty to work is based on meaning attached to it wa31 conventional eight hours work-day is a challenge to me wa32 i prefer to extend leave days wa33 i do not like working on weekends wa34 i always visit social networks during working hours wa35 i am the most technologically friendly employee in my current company wa36 i freely communicate with my age mates at work place especially in coded language wa37 going work is not mandatory to me, if i do not feel like it i won’t wa38 i can fake sickness as an excuse from work wa39 i question work methods work attitudes influencing job involvement among ‘y’ generation 7 http://ijcf.ticaret.edu.tr table 1: measurement items of job involvement construct item measurement job involvement ji1 the most important things that happen to me involve my present job. ji2 to me, my job is only a small part of who i am. ji3 i am very much involved personally in my job. ji4 i live, eat and breathe my job. ji5 most of my interests are centered around my job. ji6 i have very strong ties with my present job which would be very difficult to break. ji7 usually i feel detached from my job. ji8 most of my personal life goals are job-oriented. ji9 i consider my job to be very central to my life. ji10 i like to be really involved in my job most of the time. in the process of translation, the techniques of back translation and parallel translation have been adopted with the help of an academician fluent in english and turkish. the authors of this paper further verified the final turkish version of the questionnaire. sampling and data collection: data for the study is collected from the generation y employees who work in different departments and companies which are in different markets in turkey. during a two-week period, 258 respondents completed the survey. after sorting and removing duplicate submissions, a net sample of 228 usable questionnaires remained. a total of 124 (54.4%) of the participants are female and 104 (45.6%) are male. questionnaires are distributed and filled in by those employees whose level of education is graduate and above. the mean age of respondents is 32.19 years with standard deviation of 7.34. data obtained from questionnaires are analyzed through the ibm spss 23.0 statistical program. analysis: factor analysis: to identify and test the underlying structure of job involvement scales, exploratory factor analyses (efa) are conducted. job involvement: to determine the dimensions of job involvement an exploratory factor analysis (efa) with principle component factoring and varimax rotations is conducted. kaiser-meyer-olkin measure of sampling adequacy and bartlett test of sphericity tests are performed to test the appropriateness of data for conducting factor analysis (sharma, 1996). result of the tests (kmo=0.807, x2 bartlett test (10)=310.669, p=0.000) are satisfactory. the diagonals of the antiimage correlation matrix are all over 0.50, supporting the inclusion of each item in the factor analysis. factors with eigenvalues over one are retained and items with factor loadings below 0.50 and items with high cross loadings are excluded (hair et. al., 1998). job involvement is unidimensional as expected. 8 murat bolelli & beril durmuş http://ijcf.ticaret.edu.tr table 3: factor analysis result of job involvement factor name factor items factor loading %variance reliability job involvement i consider my job to be very central to my existence 0.803 54.67 0.790 most of my personal life goals are joboriented 0.774 most of my interests are centered around my job 0.758 i like to be absorbed in my job most of the time 0.730 the most important things that happen to me involve my present job 0.617 by conducting exploratory factor analysis, we found that job involvement has five items. (see table 3). multiple regression analyses: when we conducted multiple regression analyses to understand the relationship between job involvement and work attitudes, we prefer to use all 39 items in the regression that gives more deeply insight about relationship of the constructs. when we conducted multiple regression analyses to understand the relationship between work attitudes and job involvement for generation y, we found out that wa10, wa6, wa28, wa5, wa33, wa27, wa14 explain job involvement (f=14.984, p=0.000 respectively, r=0.576; r2= 0.332). table 4: multiple regression analysis result dependent variable: job involvement independent variables: beta t-value p value wa10its ambitious and hungry for success in career pursuit 0.262 4.493 0.000 wa6cares less about salaries but 0.241 4.174 0.000 wa28they discriminate relationship with colleagues on basis of education qualifications 0.265 4.621 0.000 wa5generation y does not like work -0.149 -2.454 0.015 wa33generation y does not like working on weekends -0.163 -2.768 0.006 wa27expect to relate with their employers as with their parents 0.169 2.871 0.005 wa14has no respect for authority from their bosses -0.126 -2.213 0.035 work attitudes influencing job involvement among ‘y’ generation 9 http://ijcf.ticaret.edu.tr as reflected in table 4 wa10, wa6 and wa28 have nearly same contributions (βwa10 =0.262, βwa6= 0.241 and βwa28= 0.265) respectively. wa27 also has positive relationship with job involvement βwa27= 0.169. items wa5, wa33 and wa14 have negative contribution on job involvement (see table 4). h1 cannot be rejected. 4. conclusions and recommendations, conclusions the main objective of this study is to determine the relationship between generation y work attitudes on job involvement. according to the results of analysis, generation y considers their jobs in the center of their lives and also builds their personal lives around it. these finding is in line with the literature indicating that generation y are as hard workers as other generations and seventy three percent reports working more than 40 hours a week, nearly a quarter working over 50 hours (millennial careers: 2020 vision, manpower report, 2016). also, findings regarding to the relationship between generation y work attitudes and job involvement are suggesting that millennials like to work even on weekends, has respect for authority from their bosses, care less about salaries and have ambition for success in their career pursuit. considering as a whole, it can be interpreted as generation y has strong psychological identification and commitment to their work. generation y has been reported to have less loyalty to their current employer, need to like what they do at work, prefer to work for a cause that they can embrace. supporting our findings, literature also suggests that if those needs are satisfied, they work hard and are less sensitive to financial income. 87 percent of generation y believes that success of a business should be measured in terms of more than just its financial performance; also business success shouldn’t be measured in purely financial terms. millennials promote loyalty when company pursues purpose beyond financial success (the 2016 deloitte millennial survey). generation y has strong values and sensitive to ethical behaviors, believing that companies should put employees first; they should build and sustain a solid foundation of trust and integrity. also business that they are in should have a positive impact on wider society. one other finding is that millennials tend to discriminate their relationship with colleagues on basis of education qualification. this makes sense when taken into account with the literature indicating that generation y highly values continuous skills development and to that end they are not only willing to spend their own time and resources but to change jobs to enlarge their skill set. from this perspective, it can be said that millennials are not loyal to their employers or colleagues but to their abilities to produce and create in relation with their values. recommendations &future studies the leaders and human resource managers can get insight from the findings of this study regarding to generation y attitudes towards work and effecting factors of their job involvement levels. findings also can be used for having efficient communication, managing conflicts, most importantly understanding millennials motives towards work. future research should look at the different mediators and moderators involved in the relationship between leadership and job involvement of generations. references barr s. 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(2009), not everyone gets a trophy: how to manage generation y. san francisco, ca: jossey-bass. international journal of commerce and finance, vol. 5, issue 1, 2019, 51-59 51 a conceptual framework for the evolution of c2c social commerce business models in tunisia amir ben mekki ph.d. candidate istanbul commerce university, turkey abstract facebook is the preferred social networking service (sns) among tunisian users for social commerce (sc) and consumer-to-consumer (c2c) commercial activities. this article aims to increase the understanding of the influencing factors of c2c sc activities and provide a new interpretation of the evolution of c2c sc models in tunisia's fastest growing trend. in order to fulfill this goal, we performed a literature review to update existing multi-facet framework that combines four important dimensions with new fundamental components: incentive systems, information and communication technologies (ict), participative web, and e-business rules and regulations. this study has shown that these influencing factors are the key ingredients driving the evolution of c2c sc business models in tunisia and the consideration of the four dimensions founded in our study will aid ecom professionals to enable the widespread occurrence of c2c sc activities and can drive the success of these business models in tunisia. keywords: social networking service (sns), consumer-to-consumer (c2c), social commerce (sc). 1. introduction the development of social networking services (snss) has influenced the evolution of e-commerce (ecom) (turban et al., 2010). a new division of ecom has emerged as a result of combining social activities with commercial features. many of sns’s aspects are undergoing rapid changes and thus stimulating private individuals across the globe to engage in social commerce (sc) activities and multiply their income streams. messaging applications and platforms such as facebook messenger, whatsapp or viber are used to communicate with family and friends as well instantly can be used to set up communications between buyers and sellers (turban et al., 2015), intensifying the spread endorsement of consumer-to-consumer (c2c) sc activities. for instance, in tunisia, facebook (fb) and other tunisian snss users take part in both selling and buying activities of products and services. users (sellers) are regularly sharing publications (content) attached with pictures, and descriptions of their offer targeting potential buyers (turban et al., 2015). commercial activities over the snss often occur between unfamiliar buyers and sellers (sukrat et al., 2018). while ecom growth has intensely influenced the evolution of the retail industry in developed and developing countries (dahiya, 2017), the evolution of tunisia c2c sc models has shaped modern domestic e-business. the present research studies in depth the influencing factors involved in the rise of c2c sc business models in tunisia. based on the literature review (wang and zhang, 2012), we suggest a new conceptual framework, which covers four aspects that could better increase our understanding of the supportive factors of c2c sc development and provide a new interpretation of the evolution of c2c sc models in one of tunisia's fastest growing trend. 2. the rise of c2c social commerce in today’s marketplace, consumers are increasingly having control over their marketplace experiences. innovations in mobile technologies are removing barriers and facilitating access to modern social network and mobile applications anywhere and anytime, thus, making users connect to each more than ever before. a wide range of social network has led users to evolve from being content receivers to content creators (adams, 2015). numerous well-known online retailers added several sns functionalities into their ecom websites. consumers today can share knowledge and experience about products and services by using different social networking applications, such as social commerce constructs (scc) (recommendations, ratings, reviews) (shen and eder, 2009). sharing of information and experiences online consequently impact the consumer’s decision to purchase certain products and services from ecom websites (snyder et al., 1997). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e amir ben mekki 52 online shoppers and online retailers in developing countries stimulated by socio-economic factors usually reinvent the use of sns platforms, which may circumvent the intervention of intermediary retailers. reinvention occurs when consumers are using sns unique characteristics with no intermediaries, managing and performing business transactions with each other as a c2c sc activity (yue and xie, 2011). snss provide opportunities for consumers to interact with businesses and other consumers. the adoption of these online platforms that involve the recognition of the consumer’s role as an integral part of c2c sc models persuades progressive sns suppliers to improve their commercial functionalities and consequently facilitates the growth of these new business models. wang and zhang (2012) introduced a comprehensive framework of sc named the information model or i model. the authors explained the evolution of sc from 2005 to 2011 and proposed that sc evolution can be summarized into four interlinked dimensions including people, management, technology, and information. further, these four dimensions have a mutual effect. as stated by the authors (wang and zhang, 2012), the people’s dimension in sc represents private individuals, small or large groups, or virtual communities and societies benefit from the technology. the management dimension embraces policies, strategies, management, operation, processes, structures, cultures, and opportunities practiced to benefit or to make profits from social commerce transactions. the technology dimension represents the technical capabilities and advancement responsible for social commerce's technological feasibility and maturity. the information perspective refers to the uniqueness of this content-driven environment where an extensive and massive amount of content related to products or services is continuously generating, processing and spreading among customers. 3. a conceptual framework of c2c social commerce in tunisia in recent years, several reports have highlighted the contribution of ecom in the economic growth of tunisia (export.gov, 2019). ecom services are covering a wide range of tunisian products including crafts, textiles, tourism, travel-related services, food, and beverage. because of specific government regulations related to online payment transactions, the development of this sector is limited. however, c2c sc market is growing exponentially (“le ecommerce en tunisie,” 2016). according to the literature review undertaken, we re-purpose the four dimensions of sc introduced by wang and zhang (2012) (i.e., people, management, technology, and information) and replace them with incentive systems, information and communication technologies (ict), participative web, and e-business rules and regulations. figure 1 dimensions of c2c social commerce models, updated from the i-model (wang & zhang, 2012) a conceptual framework for the evolution of c2c social commerce business models in tunisia 53 incentive systems refer to devices including monetary or non-monetary rewards that could engage and stimulate the consumer’s motivation. information and communication technologies (ict) refers to technologies that provide access to information through communications (chalopatham et al., 2015). it includes any communication device, television, mobile technology, and computer; that helps individuals, businesses, and organizations get access to information. using ict, particularly mobile technology and digital technology has increased dramatically, and new technologies such as video chat, live chat, and mobile banking played a vital role to support c2c sc activities. participative web concerns the implementation of new innovative web services that empower the users to express themselves through different channels and media such as user-created content (ucc) it includes content such as text, image, and multimedia shared across snss. e-business rules and regulations, including strategies, procedures, and policies that can assert business structure, ethical conduct, and control or guide consumer’s behavior. figure 1 illustrates a typical example of the dynamic interrelation of these four dimensions. when a fb member shares a publication about a product or service (participative web) on his profile or fb group (ict), prospective consumers who see the publication and are willing to make a purchase (incentive system) may contact the seller (user) directly via facebook messenger (ict). before deciding to buy, the prospective consumer can visit dedicated ratings and review sites or retailers’ ratings and reviews (ict) generated by other consumers (participative web) and check their historical sale information such as after-sales service, delivery history, comments, and star rating. to pursue the transaction, customers have to obey the rules and regulations enacted by group administrators and authorities (e-business rules and regulations). 4. the influencing factors of c2c social commerce in tunisia based on a thorough review of multiple articles, books and the results of a new survey conducted by the national institute of consumption in tunisia related to customer experience and ecom (institut national de la consommation, 2018) we present a detailed description of the influencing factors behind each aspect of our new conceptual framework (figure 1). 4.1. incentive systems multiple factors stimulate sellers and buyers to engage in ecom (celsi and gilly, 2019) such as economic incentive, social incentive, or moral incentive. similarly, in c2c sc activities these factors can profoundly influence the consumer’s purchase intention and decisions. having a well-established incentive plan could promote ecom in tunisia and consequently enable the widespread occurrence of c2c sc business. 4.1.1 economic incentives economic incentives include, low transaction cost, convenience, and particularly price discounts can motivate buyers and sellers to be involved in c2c sc activities. commonly the consumer wants to pay as less as possible. schlagbauer et al. (2014) showed that the more discount the seller offers, the higher the potential to trigger the intention to buy. the research revealed that consumers are much more sensitive to the price discount on the online than the conventional environment and that they often choose a product with more significant price discounts (degeratu et al., 2000). one of the reasons tunisian buyers shop at sns platforms such as fb buy and sell groups is that they can benefit from the higher profitability that results from selling directly to one another without an intermediary. for a local business owner with a limited budget, engaging in c2c sc business can be profitable because of the low transaction cost. they can share their products and services at a cheaper rate and trim unnecessary spendings such as rent and office supplies. 4.1.2 social incentives recent research has highlighted the social embeddedness of ecom, in which value is shaped by the tunisian culture and the post-revolution (after january 2011) environment influences. as a collectivist society, which privileges the group over individual interest, mainly always subordinate to the family or group (sandıkcı and rice, 2011). tunisian consumers understand the importance of social support and are involved continuously and mobilized for their network (madoui, 2012). amir ben mekki 54 cooperation and online interaction through sns can fulfill an individual’s social needs, bring cordiality among users and positively affect the sense of community (oh et al., 2014). informational and emotional supports are two forms that ensure ecom business success (yusuf et al., 2018). similarly, for c2c sc business, these two support messages can improve the attentiveness of social relations among users and encourage them to proactively share knowledge and contribute to evaluating and promoting products and services. 4.1.3 moral incentives in modern societies, moral incentives have high predictive power on purchase behaviors, and they can motivate the consumer to achieve a socially beneficial end (tolba, 2001). before making online purchase users do not merely act rationally, they also choose their actions according to moral motivations like fairness, justice, inalienable rights (schultz, 1986). islam is the official state religion in tunisia. the majority of the population of the country is muslim. based on an islamic point of view, a muslim should be very loyal, trustworthy and god-fearing in any financial practices (ali, 2015). in sns platforms such as fb buy and sell groups, tunisian consumers often promote ethical behavior as a way of gaining trust and increasing confidence. having a personal relationship is also an essential factor in the success of business transactions. usually, consumers avoid dealing with those whom they do not get along with or trust. another aspect of tunisian culture that has a significant influence on business is the conflict avoidance attitude. tunisians are non-confrontational (commisceo global consulting, n.d.). during traditional business negotiations, they usually reluctantly agree and wait until a better opportunity to express their disagreement, contrary to online transactions they behave as if ecom and especially sns platforms can shield them from the discomfort of saying “no” overtly (zarrad and debabi, 2012). we assume that an effective incentive plan is suitable for many aspects of a business and it is especially beneficial for the development of models in tunisia. 4.2. information and communication technologies (ict) advanced and emerging technologies have been the primary drivers for the societal changes in tunisia. the collaboration between government, higher education institutions and multinationals has resulted in a well established international reputation and a favorable technological environment for business (weber and hamlaoui, 2018). tunisia is the first african country to implement information and communication technologies (ict) as a based national strategy. it has 11 operational technoparks and over 15 industrial centers devoted to training, scientific, and technological research (youssef et al., 2012). moreover, telecommunication solutions are the most promising industry sectors in tunisia (export.gov, 2019). fb is the preferred platform among tunisian consumers and secondly on instagram (ig), another sns that is gaining ground in the tunisian market. 7.40 million from the total population, which is 11,75 million (worldometers, 2019), are monthly active fb users as compared to the second largest platform ig with 1.90 million monthly active users (datareportal, 2019). nearly all consumers perform c2c sc transactions in the above-mentioned social networks. according to develite, more than 80% of all ecom transactions are highly localized, in four major cities: tunis, sousse, sfax, and gabes, known for their well-developed ict infrastructures (“le e-commerce en tunisie,” 2016). people aged between 30 and 39 are the most active online shoppers, and high-income consumers are likely to shop more often (institut national de la consommation, 2018). fb groups are commonly used to operate c2c commercial activities (gnagey, 2017). sellers can leverage advertising in buy and sell groups for either new and second-hand product or service promotions while buyers can browse, search for relevant product information, connect and exchange information among other consumers. through crossplatform messaging and voice ip services such as fb messenger or whatsapp customers can contact sellers for more details about the offer and complete the deal. the lack of trust among sellers and buyers on snss has the potential to slow the transaction; tunisian consumers are not willing to share their banking information during sc operations. they consider “pay on the door” which represent 70% of all online transaction payments the safest payment method for ecom (nordea trade, 2019). another factor that limits and slows the transaction is the underdevelopment of online payment systems (regaieg essafi and bouslama, 2013). a conceptual framework for the evolution of c2c social commerce business models in tunisia 55 with the largest mobile phone subscriber rates, the third highest internet penetration rate in africa, and the development of sns applications, consumers can directly engage in c2c sc activities and conduct transactions (nordea trade, 2019). we assume that the development of e-commerce infrastructure can accelerate the advancement of tunisia’s c2c sc business. 4.3. participative web in an increasingly connected world, today’s internet users are allowed to take part in producing, rating, and distributing internet content and customizing internet applications. the implementation of new intelligent web services empowered the users to express themselves through different channels and media such as user-created content (ucc) (ocde, 2007). user-created content and social networking websites played an essential role in the tunisian revolution (january 2011) known as “jasmine revolution” (noah tesch, 2011). social networks such as facebook, twitter, and youtube were the primary online tools used to disseminate contents during the protests and report on events live by protesters, activists, and supporters of the protests (comninos, 2011). user-created content comprises text, audio, images, videos, blogs, forums, tweets, besides its consumer’s profile on snss, including biography, ratings, and scores critical to the online identity/image (s.l. lai, 2015). based on the literature review (sukrat et al., 2018) we can categorize user-created content into two types: 1. seller-created content: a complex process implemented by companies and retailers and known as content marketing. in this category, sellers produce, distribute and analyze contents that include product information, product reviews, presentation, news, and live feeds to distinguish themselves from the competition. 2. buyer-created content: including reviews, gchat, comments, bulletin board, blogs, and forum. in this category, buyer produces and share voluntarily content with their peers such as friends, families, and followers (pius, 2018) especially when they live a personal experience with a product, a service, or a person. the researchers anticipated that quality information helps establish trust (chen and shen, 2015) and higher trust influence behavioral intentions and stimulate consumers’ purchase intention (hajli et al., 2017). therefore, we can infer from this that the quality of ucc can enhance c2c sc activities in tunisia. 4.4. e-business rules and regulations 4.4.1 online customer community rules an online community is a group of individuals who share mutual interests, personal opinions, and ideas through the mediation of digital networks (li et al., 2018). an online customer community that supports c2c sc models needs continuing cooperation between its members. tunisian consumers commonly use fb for sc and online communities. buy and sell fb groups are often created and managed by voluntarily fb users (jing et al., 2016). they often manage the community following written or unwritten rules. effective fb group community management positively affects group confidence, trust, and rapport (staff, 2017). in a c2c sc models context, sellers who follow a defined sales and delivery strategy along with a well-maintained online customer community can enhance their relationships with prospective buyers and influence their purchase intention (baethge et al., 2016). 4.4.2 government regulations of ecom in tunisia, customers use e-dinar, a non-convertible currency as an electronic payment system created by the tunisian postal service for domestic internet transactions (touzani, 2004). moreover, this system can be used to pay public services such as public utilities, telecommunication, and university registration. for more secure payments, the tunisian government collaborated with the universal postal union (upu) to offer more secure shipment deliveries (universal postal union, 2017). furthermore, companies that operate a global online payments system and support online money transfers such as paypal has offered its payment service to the central bank of tunisia, and the integration is in effect. amir ben mekki 56 cross-border ecom purchases trade used to be negligible owing to the tunisian dinar's status as a non-convertible currency and the general lack of online payment systems (export.gov, 2019). nonetheless, tunisia-based websites offer transhipment services from international ecom platforms, such as from amazon and aliexpress. in april 2018, the tunisian parliament adopted the start-up act law. a progressive initiative expected to increase the number of tech start-ups, support successful entrepreneurship, and generate economic growth (katrin, 2018). tunisian start-ups can now have access to a particular worldwide online payment system to pay for cross domestic product and services without prior authorization from the tunisian central bank. the government has also implemented 'digital tunisia 2020' project that aims to develop digital governance and quality digital service for tunisia’s industrial and commercial sectors, which should drive ecom growth further and c2c sc activities (ezzeddine, 2018). according to the tunisian minister of communication and digital economy anwar maaroufi ‘digital tunisia 2020 will enable the country to become the first african country to invest in the digital economy’ (tunisian monitor online, 2018). thus, we suggest that efficient fb group community management along with government support and incentives can accelerate the development of tunisia’s c2c sc business. 5. limitations and future research many potential limitations may necessitate future research. first, we proposed the different factors involved in the rise of sc c2c business models in tunisia only from the consumers’ perspective. we thus suggest that future research may also consider exploring these influencing factors from the companies’ (auction-based sites) perspectives. second, we based our framework of the influencing factors on a thorough review of multiple articles, books and the results of a national survey that only consider users’ opinion as a reference. we suggest that future research may approach and target a more “balanced” sample that incorporates ecom professionals in the investigation. last, the dimensions proposed are only relevant for tunisia and other developing countries where a conventional ecom business infrastructure is still underdeveloped. further studies may replicate our proposed dimensions to other industrialized countries with highly developed ecom business infrastructure. for the incentive systems dimension, researchers can examine the effects of sustainable incentives on consumers purchase intention and their capability to stimulate people to engage in c2c sc business. as to participative web, future research may inspect the impact of language proficiency and users’ subjectivity on the quality of the information on sns. as regards to information and communication technologies (ict), researchers may propose the implementation of artificial intelligence to combat fraud and improve the user experience as well as the application of new systems to keep up with cybercriminals. finally, for e-business rules and regulations, while cybercrime is rising exponentially, researchers may propose different approaches towards consumer protection in c2c commercial activities. 6. conclusion in the present era, many of sns’s aspects are undergoing a rapid transformation and thus stimulating private individuals across the globe to engage in social commerce (sc) activities and multiply their income streams. similarly, social networking platforms enabled features and functionalities will allow ecom to evolve. consumers today can share knowledge and experience about products and services by using different social networking applications, such as social commerce constructs (scc) (recommendations, ratings, reviews). moreover, sharing can be observed as a pathway to conduct commercial activities and transaction processes. in reviewing the literature, we identified the influencing factors of c2c sc business models in tunisia and generated a new conceptual framework, which covers four aspects: incentive systems, information and communication technologies (ict), participative web, and ebusiness rules and regulations. the results of this study indicate that these influencing factors are the main pillars for c2c sc business models adoption in tunisia and that this evolving phenomenon will continue to expand in depth and scope. based on these assumptions, we propose that the implications of these factors should be explored in future research using empirical evidence. a conceptual framework for the evolution of c2c social commerce business models in tunisia 57 references adams, d.c. 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(2011), “research on the consumer behavior in c2c market”, 2011 2nd international conference on artificial intelligence, management science and electronic commerce (aimsec), presented at the 2011 2nd international conference on artificial intelligence, management science and electronic commerce (aimsec), pp. 1428–1431. yusuf, a.s., che hussin, a.r. and busalim, a.h. (2018), “influence of e-wom engagement on consumer purchase intention in social commerce”, journal of services marketing, vol. 32 no. 4, pp. 493–504. zarrad, h. and debabi, m. (2012), “attitudes éthiques et perceptions des tactiques non éthiques de la négociation commerciale”, available at: https://www.afm-marketing.org/fr/content/12277-attitudes-%c3%a9thiqueset-perceptions-des-tactiques-non-%c3%a9thiques-de-la-n%c3%a9gociation (accessed 4 april 2019). international journal of commerce and finance, vol. 3, issue 1,2017, 59-70 a research into the relationship between type a personality and emotional intelligence in leadership development gökhan i̇ncebacak istanbul commerce university, istanbul mehmet sağlam (ph. d. candidate) istanbul commerce university, istanbul abstract: the aim of this study, which is conducted on male and femaleparticipants and managers from different departments and sectors, is to investigate the relationship between type a personality traits and emotional intelligence dimensions.in addition, for male and female managers, the emotional intelligence dimensions that are effective on type a personality traits are tried to be determined according to each department. in the results of the analysis conducted on 205 participant managers and the survey used as the data collection tool, different findings were obtained for different departments in male and female managers, and the hypotheses proposed for inter-variable effects and relationships were partially accepted. keywords: type a personality, intelligence, emotional intelligence. jel codes: 1. introduction in the study conducted with the participation of male and female managers in different sectors in istanbul, it is aimed to investigate the relationship between type a personality traits and emotional intelligence dimensions according to the departments where male and female managers are working. these types of personality traits were assessed separately for male and female participants according to the importance given to work, the importance given to the timing, the importance given to speed, divergence from social activities, optimism in dimensions of emotional intelligence, emotional evaluation and use of emotions. regression models were also developed to measure the impacts of emotional intelligence dimensions on type a personality traits for departments in separate analyses for male and female managers in a total of 205 participant managers, consisting of 105 manufacturing sectors and 100 service sectors. when the studies in the literature are evaluated, the lack of studies that are analyzed by distinguishing between male and female managers and departments shows the importance of the study. 2. literature review the concept of type a behavior emerged as a result of long-lasting research that began in the 1960s and was conducted in order to determine the risk factors for heart failure. generally, type a behavioral individuals are defined as those who are impatient, aggressive, hostile, competitive, job-oriented, committed to success, deadline focused and showing these characteristics to extreme levels (jones and bright, 2001). type a behavior is a mixture of actions and emotions that are demonstrated by individuals who can not or do not want to evaluate their own competencies. such individuals judge themselves according to the evaluations of those whom they see superior. they rarely try to increase the quantity of the achievements to advance in the eyes of others. their self-assessments depend on the level of success they believe they have reached (friedman, 1980). type a behavior style is also referred to as type-a personality in the literature. this concept will be used as type a personality in this study. however, it should not be overlooked that this is used to express a certain set of behaviors rather than one of the classic personality traits in the literature. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 60 gökhan i̇ncebacak & mehmet sağlam http://ijcf.ticaret.edu.tr individuals with type a personality are in a constant state of struggle and within this struggle, they try to obtain the maximum profit in minimum time. they maintain this struggle despite and against the people around them. the general characteristics of this type of individuals are; the effort to achieve success in competition, an exaggerated time-lapse, aggression and hostility. it is suggested that type a behaviors are associated with lack of self-esteem, together with not exactly knowing what causes it (friedman, 1980). it is not possible to categorize people precisely as type a or type b. it should not be anticipated a person to exhibit all features of type a personality. some type a behaviors can also be observed in an individual who can be defined as type b in the same way. the method used to distinguish between individuals who show type a and b personality is the number and severity of these behaviors. when classification is required, a rating can be made, starting from the extreme end of the a 1 type behavior, ending at b 5 ehich is the other end. b5s can be described as people who need time to think and act and who can listen calmly to other people, as opposed to type a personality traits (lelord and andre, 1996). it has been argued that type a personality traits have been shown since childhood. as a result of a survey conducted on a scale developed to measure type a behaviors in children, it was determined that children classified as type a exhibited behavior similar to type a behaviors observed in adults (stamps and clark, 2001). the reason for the differences in achievement of individuals in academic and business life can be explained by cognitive ability tests of about 25%. it is obvious that there are significant effects of features and behaviors besides the cognitive abilities measured by intelligence tests, even though they have significant practical value in education and work life. these features probably include personal motivation, perseverance, interest, knowledge accumulation, learning styles, parental attitudes, peer effects and educational practices (burns et al., 2007). emotion can be described as "a feeling and certain thoughts specific to this feeling, psychological and biological states, and a set of movement tendencies" (goleman, 1995). emotions emerge as reactions to an internal or external event that is important to the individual (salovey and mayer, 1990). what is emotional intelligence is explained by two different concepts. thus, according to the so-called "talent model", emotional intelligence is defined as a set of cognitive abilities in emotional functions; according to the "feature-ability composite model", emotional intelligence is a combination of personality traits in a wide range and other traits (goldenberg et al., 2006). monitoring the feelings and emotions of yourself and others; the ability to distinguish them and to direct their thoughts and movements using this knowledge has been conceptualized as emotional intelligence by the theorists of the talent model salovey and mayer (1990 p. 189). the basis of this concept is based on the social intelligence of the 1920s, one of the elements of thorndike's intelligence model. thorndike distinguished social intelligence from other intelligences and described it as "to understand men and women, boys and girls to act wisely in human relationships" (salovey and mayer, 1990); general intelligence has different abilities; it is a different kind of intelligence that the individual sees and understands the feelings of himself and others (rozel et al., 2006). it was after goleman's work "emotional intelligence (why it can matter more than iq?)" that the concept of emotional intelligence was learned by large masses and became a popular subject (rozell et al., 2006). emotional intelligence is defined as "to be able to continue on the path despite the inconveniences; to postpone satisfaction by controlling your impulses; regulating the mood; not allowing obstacles to prevent thinking; putting yourself in the place of others and hoping..."(goleman, 1995). goleman, like bar-on, focuses on how emotional intelligence is a mixed intelligence but, unlike him, how cognitive and personal factors determine workplace success (stys and brown, 2004). 3. research methodology the scope of the research is limited to male and female managers participating from different enterprises, including manufacturing and service sectors in istanbul. the results should be interpreted on this sample group. a research into the relatıonshıp between type a personalıty and emotıonal intellıgence in leadershıp development 61 http://ijcf.ticaret.edu.tr in the study where the questionnaire was used as a data collection tool, a questionnaire consisting of three parts was prepared. volunteering was taken as a basis in the process of conducting the questionnaire. the process of implementation of the survey was conducted in person with men and female managers in different enterprises in the manufacturing and service sector. the questionnaire return rate was 82% during the one month period, and the analysis was performed on the precise data from 205 participants. there are demographic terms in the first part of the questionnaire, type a personality characteristics in the second and emotional intelligence scale terms inthelast. the type a personality traits scale developed by batıgün and şahin (2006) which has 25 expressions, as in likert scale, 1 = never-5 = always was used to measure the rating in the questionnaire to determine participants' type a personality traits. inversely coded form is based on the scale score and the high score is considered to be indicative of intensive type a personality traits. there are four dimensions in the scale: importance given to work, importance given to timing, importance given to speed and divergence from social activities. these dimensions and their expressions are; -the importance given to work 12 expressions (expressions 2, 5, 6, 7, 8, 10, 16, 20, 21, 23, 24 and 25) -divergence from social activities 4 expressions (expressions 9, 11, 12, 13), the importance given to timing 6 expressions (1, 3, 14, 17, 18 and 19 expressions) and -the importance given to speed 3 expressions (4, 15, 22). in order to determine the levels of emotional intelligence dimensions, the emotional intelligence scale developed by schutte and adapted to turkish by arkun and his colleagues is also composed of likert-type scale, 41 expressions and three dimensions in total. these dimensions and expressions are; the optimism dimension which has a total of 21 expressions (21, 25, 37, 18, 38, 30, 27, 29, 19, 33, 31, 7, 36, 9, 2, 11, 16, 5, 15, 1, 32) -the dimension of emotional evaluation which has 13 expressions (22,40,6,17,39,35,8,24,26,3,41,28,12) the use of feelings dimension which consists of 7 expressions (34,13,14,10,4,20,23). 3.1. population and sample the research is made up of men and women working in different companies in istanbul in the manufacturing and service sectors. because it is not possible to reach every manager at the site, 105 manufacturing and 100 service sector managers have been reached through easy sampling. easy sampling is used as it is more convenient to include all participants who are likely to have access by means of it. 3.2. analysis of the obtained data in the analysis of the data, spss 21 statistical program was used. in accordance with the purposes of the study, frequency analysis to determine the descriptive statistics of the participants, factor analysis to determine whether the used scales can be obtained in the working sample with original dimensions, corrolation analysis to determine the relationship between type a personality traits and emotional intelligence dimensions for both male and female managers, regression analysis to measure the effect of emotional intelligence dimensions on each type a personality, determination of whether pearson or spearman correlation is preferred for correlation analysis, and normality test to determine normal distribution appropriateness as a prerequisite for applying regression. the kolmogorov-smirnov test was preferred for the normality test. the kolmogorov-smirnov test result indicates that the normal distribution is appropriate for scales of p greater than 0.05. when the appropriateness of the normal distribution of the scale data used in the research is examined, it is concluded that the normal distribution of the resultant data is appropriate when the significance value of p is larger than 0.05. pearson correlation was preferred in the correlation analysis because the data were fit to the normal distribution and since the assumption of regression was given, the male and female managers were individually regressed according to the departments they were working with. 62 gökhan i̇ncebacak & mehmet sağlam http://ijcf.ticaret.edu.tr 3.3. research hypotheses the hypotheses for studying the relationship between type a personality traits and emotional intelligence dimensions are as follows. h1a: for the male participants, the importance given to work is influenced by emotional intelligence dimensions on type a personality traits. h1b: for the female participants, the importance given to work is positively influenced by emotional intelligence dimensions on type a personality traits. h2a: for the male participants, the importance given to timing is influenced by emotional intelligence dimensions on type a personality traits. h2b: for the female participants, the importance given to timing is positively influenced by emotional intelligence dimensions on type a personality traits. h3a: for the male participants, the importance given to speed is influenced by emotional intelligence dimensions on type a personality traits. h3b: for the female participants, the importance given to speed is positively influenced by emotional intelligence dimensions on type a personality traits. h4a: for the male participants, social divergence is influenced by emotional intelligence dimensions on type a personality traits. h4b: for the female participants, social divergence is positively influenced by emotional intelligence dimensions on type a personality traits. 3.4. demographic findings the descriptive statistics of participant managers are separately divided as men and women in the sampling and the findings are shown in the following table. table 1. the demographic findings of male and female participants age number percentage department number percentage female 18-24 6 5,9 female marketing(sales) 8 7,8 25-34 53 52,0 accounting(finance) 30 29,4 35-44 36 35,3 human resources 17 16,7 45-54 7 6,9 it 10 9,8 total 102 100,0 quality control 15 14,7 male 18-24 2 1,9 r&d 7 6,9 25-34 38 36,9 technical 4 3,9 35-44 40 38,8 procurement 11 10,8 45-54 19 18,4 total 102 100,0 55+ 4 3,9 male marketing(sales) 20 19,4 total 103 100,0 accounting(finance) 11 10,7 education number percentage human resources 14 13,6 female high-school 33 32,4 it 11 10,7 associate’s 22 21,6 quality control 7 6,8 bachelor’s 42 41,2 r&d 9 8,7 master’s 5 4,9 technical 17 16,5 total 102 100,0 procurement 14 13,6 male high-school 26 25,2 total 103 100,0 associate’s 21 20,4 time in position number percentage bachelor’s 47 45,6 female 1-5 years 58 56,9 master’s 7 6,8 6-10 years 30 29,4 doctorate’s 2 1,9 11-15 years 14 13,7 total 103 100,0 total 102 100,0 male 1-5 years 39 37,9 6-10 years 40 38,8 11-15 years 20 19,4 21+ 4 3,9 total 103 100,0 a research into the relatıonshıp between type a personalıty and emotıonal intellıgence in leadershıp development 63 http://ijcf.ticaret.edu.tr when participant male and female managers were evaluated according to their demographic findings, 25-34 and 3544 age groups participated in the sample in male and female participant managers, whereas participants in the 25-34 age group constituted more than half of the sample in female participants. when the participants were evaluated according to the educational status, it was determined that both the male and female managers had the majority of the undergraduate students, followed by the high school and associate degree graduates respectively. when evaluated according to the departments, it is seen that the accounting (finance) manager in the female managers, the marketing (sales) department in the male managers and the manager of the technical services department in the close position are in majority in the sample compared to the other departments. when the male and female managers were evaluated according to the duration of their job, it was observed that the majority of the managers who worked for 1-5 years in the female managers were more, and more than half of the sample, while in the male participants, with the most of the sample consisting of male participants working for 1-5 and 6-10 years, the participants between 1-5 and 6-10 years were distributed in close proportions. 3.5. validity and reliability analysis cronbach alpha values were examined for the reliability of the scales used in the research. for each dimension of the scales, this value of 0.70 and above indicates that the scales are also reliable in the relevant sample. the reliability test results of the scales are shown below. table 2. cronbach alpha values of the reliability analysis scale numbers cronbach alpha type a personality 19 importance of work 8 0,83 social divergence 4 0,87 importance of speed 4 0,75 importance of timing 3 0,77 emotional intelligence 37 optimism 19 0,89 emotional evaluation 12 0,79 use of emotions 6 0,73 the results of the table show that for each factor, cronbach alpha value of 0.70 and above provides reliability. in order to determine the validity of the scale, the construct validity is given. factor analysis of scale expressions in construct validity shows that the construct validity is achieved when the factor loadings and the load values between the two factor dimensions are less than 0,10. as a result of subtracting the values below 0,10 in the factor analysis, the validity of the scales obtained in their original state is also valid in the research sample. 3.6. correlation analysis in the correlation analysis conducted to examine the relationship between scale dimensions, the value expressed as the relationship coefficient indicates the direction and strength of the relationship between the dimensions. if the statistical significance level is less than 0.05, it means the correlation coefficient is in; a very weak relation if it is below 0,20, a weak relation between 0.20 and 0.40, an intermediate relation between 0.40-0.60, a strong relation between 0.60 and 0.80 64 gökhan i̇ncebacak & mehmet sağlam http://ijcf.ticaret.edu.tr a very strong relation between dimensions if above 0.80 as the sample data is appropriate for normal distribution, pearson correlation analysis is included, and the results for male and female managers are shown separately on the tables above. table 3. female participant managers' type a personality and emotional intelligence dimensions according to departments department optimism emotionalevaluation use of emotions marketing(sales) importance of timing ,881** accounting(finance) importance of timing -,491** it importance of speed -,759* quality control social divergence -,564* quality control importance of timing ,517* r&d social divergence -,893** r&d importance of timing ,828* -,771* technical importance of speed -,993** *. significant in 0.05 level, **. significant in 0,01 level when the relationship between type a personality characteristics and emotional intelligence dimensions of female participant managers working in different departments is examined, the interrelationships between the dimensions in which statistically meaningful relationships are obtained are shown in the table. relevant coefficients for the same variables, which have no meaningful results, are not shown on the table.for female participant managers in the human resources and procurement departments, the p-value was greater than 0.05. this showed that there was no relationship, thus it is not included in the table. when the correlation coefficients between the dimensions obtained from the relationship are examined, it id seen that; in the marketing department female participants, there is a very strong and positive relationship between the importance of timing and the use of emotions. for the accounting department, the results show that there is a moderate and negative relationship between the importance of timing and the use of emotions. it is clear that there is a strong and negative relationship between the importance given to speed in the it department managers and the emotional evaluation. the quality control department has a moderate and positive relationship between social divergence and the emotional evaluation in women managers, and a moderate and positive relationship between the importance of timing and the use of emotions. r&d department has a very high and negative relationship between the social divergence and optimism in female managers, as the personality trait from social activities increases, the optimism decreases, the relationship between the importance given to the timing and optimism is still very high and positive, while between emotion evaluation there is a strong and negative relationship. in the technical services female managers, the relationship between the importance of speed and emotional evaluation is very strong and negative. a research into the relatıonshıp between type a personalıty and emotıonal intellıgence in leadershıp development 65 http://ijcf.ticaret.edu.tr table 4. male participant managers' type a personality and emotional intelligence dimensions according to departments department optimism emotional evaluation use of emotions marketing(sales) importance of speed ,684** ,587** accounting(finance) importance of work -,648* human resources importance of work ,618* human resources social divergence ,787** human resources importance of speed ,662** human resources importance of speed ,643* -,734* quality control social divergence ,857* technical social divergence ,501* technical importance of speed ,574* procurement social divergence ,596* procurement importance of timing ,737** procurement importance of speed ,623* *. significant in 0.05 level, **. significant in 0,01 level when the results of the correlation analysis for males participating managers were analyzed, it was not shown on the tables because there was no statistically significant relation between the type a personality traits and emotional intelligence dimensions for r&g department participants. when the meaningful results are evaluated; in the marketing department male participants, there is a strong and positive relationship between the importance of speed and optimism and a positive relationship between the importance of speed and the use of feelings at an average level. in the accounting department male participants, there is a very strong and negative relationship between the importance of work and the use of emotions. for the human resources department, the results show that there is a strong and positive relationship between the importance of work, the importance of speed and optimism. the data processing department showed that there is a strong and positive relationship between optimism and the importance of speed but a stronger and negative relationship between emotional evaluation and the importance of speed. there is a very strong and positive relationship between social divergence and the use of emotions in the quality control department participants, in the department of technical services, participants have a moderate and positive relationship between social divergence, the importance of speed and optimism. the level of relationship between the importance of speed and optimism higher. in the procurement department, there is a moderate and positive relationship between the social divergence and the use of emotions. there is a strong and positive relationship between the importance of timing and speed and optimism, and the relationship between the importance of timing and optimism is stronger. 3.7. regression analysis the results of regression analysis applied to measure the effects of emotional intelligence dimensions on personality traits of type a personality were evaluated separately according to the departments of participating male and female managers and the results are shown in the tables below. 66 gökhan i̇ncebacak & mehmet sağlam http://ijcf.ticaret.edu.tr to apply regression analysis, normality assumption has to be accepted. regarding the normal distribution of the research scales, regression analysis was applied to the sample as previously mentioned. type a personality traits were taken as independent variables for each participant manager in each department, and the emotional intelligence dimensions investigated on these properties were taken as independent variables. in the regression models formed, the anova test was not performed because the regression analysis was not considered model compatible in the department managers with a p value greater than 0.05, and was not included in the tables. in the regression analyses made according to the departments, the results of the research obtained from the anova test p <0.05 were shown on the tables. table 5.impact of dimensions of emotional intelligence on characteristics of type a personality of female participant managers by departments department r2 anova f p social divergence β t p. quality control ,475 5,222 ,017 (constant) 7,005 2,202 ,050 r&d ,912 21,605 ,016 optimism -,393 -1,495 ,163 emotional evaluation -,815 -3,335 ,007 use of emotions ,378 1,796 ,100 (constant) 8,109 5,591 ,011 optimism -,220 -5,381 ,013 emotional evaluation -,832 -2,982 ,059 use of emotions ,257 1,548 ,219 department r2 anova f p importance of timing β t p. accounting(finance) ,209 3,552 ,028 (constant) 4,067 4,809 ,000 optimism ,108 ,578 ,568 emotional evaluation ,184 1,305 ,203 use of emotions -,467 -3,155 ,004 when the effects of emotional intelligence dimensions on the personality traits of type a were examined for the participating female managers, it was determined that emotional intelligence dimensions affected the social divergence and the importance given to the timing. when the effects of emotional intelligence dimensions on social activities are taken into consideration, it is seen that the emotional evaluation, which is smaller than the p-value of 0.05 in the quality control department managers, have an 81.5% negative effective on social divergence and in r&d department managers, optimism, the p-value of which is below 0.5 was found to have a negative effect of 22% on social divergence. the increase in emotional evaluation in the quality control department managers was determined to cause a decrease in social divergence. the increase in optimism in r&d department managers has been determined to cause a decrease in social divergence. when the influence of emotional intelligence dimensions on the personality traits of type a was examined for participating female managers of the accounting department, it was determined that emotional intelligence dimensions affected the dimension of importance given to the timing for accounting department managers. given the influence of the emotional intelligence dimensions on the importance of timing to the accounting department, it was determined that the use of emotions smaller than the p-value 0.05 had a 46.7% negative effect over the importance of timing. it has been determined that the increased use of emotions in accounting department managers will cause a decrease in the importance given to timing. a research into the relatıonshıp between type a personalıty and emotıonal intellıgence in leadershıp development 67 http://ijcf.ticaret.edu.tr table 6.impact of dimensions of emotional intelligence on characteristics of type a personality of male participant managers by departments department r2 anova f p importance of work β t p. accounting(finance) ,628 6,628 ,019 (constant) ,565 2,630 ,034 optimism -,533 -2,299 ,055 emotional evaluation ,326 1,411 ,201 use of emotions -,515 -2,621 ,034 department r2 anova f p social divergence β t p. public relations ,521 5,706 ,015 (constant) ,962 ,912 ,383 optimism ,073 ,393 ,703 emotional evaluation ,680 3,264 ,009 use of emotions -,103 -,473 ,647 department r2 anova f p importance of timig β t p. procurement ,467 4,804 ,025 (constant) 2,062 1,902 ,086 optimism ,794 3,384 ,007 emotional evaluation -,068 -,259 ,801 use of emotions -,244 -,744 ,474 department r2 anova f p importance of speed β t p. marketing(sales) ,537 8,341 ,001 (constant) ,205 ,216 ,832 technical ,597 8,896 ,002 optimism ,665 3,034 ,008 emotional evaluation -,013 -,085 ,934 use of emotions ,381 2,370 ,031 (constant) -2,398 -1,871 ,084 optimism ,715 4,352 ,001 emotional evaluation ,219 ,726 ,481 use of emotions ,640 2,875 ,013 when the effects of emotional intelligence dimensions on the type a personality characteristics were examined for the participating male managers, it was seen that type a personality characteristics were affected by the dimensions of emotional intelligence for all the different departments. when the effects of emotional intelligence dimensions on the importance given to work are examined, it is observed that the use of emotions smaller than the p value of 0.05 in the accounting department managers had a 51.5% negative effect over the importance given to work, in the human resources department managers, the use of emotions smaller than the p value of 0.05 was found to have a positive effect on social divergence by 68%, for the procurement department managers, optimism, which is less than the p value of 0.05, was found to have a negative effect of 79.4% over the importance given to timing, in the marketing department managers, the optimism which is less than the p-value of 0.05 was positively effective by 66.5% over the importance given to the speed, the use of the emotions was also positively effective by 38.1% it is determined that in the technical services department as well as the marketing department, optimism, which is less than the p-value of 0.05, is positively effective by 71.5% over the importance given to the speed, and that the use of emotions also has a positive effect by 64%. 68 gökhan i̇ncebacak & mehmet sağlam http://ijcf.ticaret.edu.tr the increase in the use of emotions in accounting department managers has been determined to cause a decrease in the importance given to work. the increase in emotional evaluation in the human resources department managers has been determined to lead to an increase in social divergence. the optimism in procurement department managers is determined to increase the importance given to timing. in the marketing department managers, it has been determined that optimism and increase in the use of emotions will increase the importance given to speed. it has been determined that optimism and increase in the use of emotions in the technical services department managers will increase the importance given to the speed. 4. results the basic characteristics of type a personality are expressed as mobility, impulsiveness, ambition, competition, aggression, hostility and time pressure (baltas and baltas, 2004, pp. 147-148). individuals with type a personality characteristics are in constant competition, especially in business life. it is argued that lack of self-confidence is behind the excessive competition. the individual's self-comparison with others puts him in the effort of preserving and bettering his place. the tendency of competitiveness in type a individuals is manifested as work addiction. as they spend most of their time working, they can not have enough presence in the other areas of their lives. emotional intelligence, on the whole, shows life satisfaction, a healthy psychological adaptation, positive relationships with family and colleagues, and parental intimacy. the low level of emotional intelligence, on the other hand, is associated with aggressive behavior, drug and alcohol use, and involvement in crime (stys and brown, 2004: ii, brackett et al., 2004, p. 1398). in this study, the relationship and effect between type a personality traits and emotional intelligence dimensions of male and female participant managers from different departments were examined and the results of the analysis are given below; -all relationships between variables are meaningless for female participats in human resources and procurement departments. the importance given to the timing in marketing department, which has high personality traits, will have a high emotional intelligence in the use of emotions in female managers, the importance given to the timing in the accounting department female managers with high personality traits, the use of emotions will be low, the importance given to speed in the information processing department female managers is that the emotional evaluation will be low as soon as the personality trait is high as the quality control department female managers increase their personality trait of social divergence, the emotional evaluation will be low, the importance given to the timing will be high if the personality features are high, -for r&d department female managers, as social personality increases, optimism decreases, as the level of importance given to the timing increases, the level of emotional intelligence increases, emotional evaluation decreases, as the importance of the speed increases, the results of the emotional evaluation are reduced for the manager of the technical services department. for the marketing department male participants, the participants with high importance given to the speed will have high level of optimism and the use of emotions will be high as well, the accounting department male managers with high importance given to the work will be less optimistic, in the human resources department male managers, with the importance given to work and to speed, the social divergence, the optimism and emotional evaluation will be high, as the importance given to speed in the department of information processing male managers increases, optimism will be high, emotional evaluation will be low, as social divergence is high in the quality control department participants, the use of emotions will be high, when the importance of speed and social divergence is high in the technical services department male managers, optimism will be high as well, for the purchasing department male managers, high levels of social divergence has resulted in a high level of emotional use, for the male participants with a high degree of importance given in timing and speed, has resulted in a high level of optimism. a research into the relatıonshıp between type a personalıty and emotıonal intellıgence in leadershıp development 69 http://ijcf.ticaret.edu.tr when the impacts of emotional intelligence dimensions on the type a personality characteristics of female participants were examined, it was found that when the statistically significant regression models were evaluated, in the quality control department emotional evaluations had a negative impact by 81.5% over divergence from social activities, for the r&d department managers, optimism had a negative impact by 22% over divergence from social activities and accounting department managers were found to have a negative impact of 46.7% over the significance of timing, with the use of emotions that are smaller than the p-value of 0.05. when the impacts of emotional intelligence dimensions on the personality traits of male participants were examined, it was found that when the statistically significant regression models were evaluated, the use of emotions in the accounting department managers had a negative impact by 51.5% on the work, and in the human resources department managers, emotional evaluation had a positive impact by 68% in social withdrawal, in the purchasing department optimism had a negative impact by 79.4% over the importance given to the timing and in the marketing department managers, optimism had a positive impact by 66.5% over the importance given to speed, the use of emotions had a positive impact by 38.1% again, over the importance given to speed, in technical department as well as in the marketing department, it was determined that optimism had a positive impact by 71.5% over the importance given to speed and also the use of emotions had a positive impact by 64%. 5. recommendations & future studies it is thought that different results will occur when the work is done with more sampling. it is also believed that new and more comprehensive results can be obtained by carrying out the researches on both men and women and with participants from different departments and by including organizational culture and/or the type b personality traits on managers and participants from different departments. a sample group can be created from different department managers. different results can be obtained if the research is done in different cities (in rural places and where the flow of life is intense) that are in the pace of the business life. among the emotional intelligence scales, the schutte scale was used to avoid time constraints and the disruption of participants' concentrations. however, bar-on emotional intelligence scale can be used if more comprehensive results are intended. 70 gökhan i̇ncebacak & mehmet sağlam http://ijcf.ticaret.edu.tr references burns, n.r., bastian v., nettelbeck, t. (2007). “emotionalintelligence: more than personality and cognitiveability? ”emotionalintelligence: knowns and unknowns, oxford, oxford university press. friedman, m. (1980). “type a behavior: a progress report”, thesciences, 20, 10-28 goldenberg, i., matheson k., mantler, j. (2006). ”the assessment of emotionalintelligence: a comparison of performance-basedand self-report methodologies”, journal of personalityassessment, 86, (1), 33-45. goleman, d. (1995).duygusal zekâ (neden iq’ dan daha önemlidir), çev. banu seçkin yüksel, i̇stanbul, varlık yayınları. jones, f., bright j. (2001). stress myth, theory and research, london, pearson education limited. lelord, f., andre, c. (1996). “zor kişilikler”le yaşamak çev. rıfat madenci, i̇stanbul, i̇letişim yayınları. rozell, e. j., pettijohn, c.e., parker, r.s. (2006). “emotionalintelligence and dispositional affectivity as predictors of performance i̇n salespeople”, journal of marketing theoryandpractice, 14,(2), 113-124 salovey, p., mayer, j.d. (1990). “emotionalintelligence”, imagination, cognition&personality, 9, (3), 185-211 stamps, l. e., clark, c.l.c. (2001). “relationshipbetween the type a behavior pattern and intelligence i̇n children”, journal of geneticpsychology, 148, (4), 529-531 stys, y., brown, s.l. (2004). “a review of the emotionalintelligence literature and implications for corrections”, research branch correctional service of canada. international journal of commerce and finance, vol. 4, issue 1, 2018, 96-106 96 the energy policies of eu, russia, turkey and syria mehmet enes aşcı, (ma) istanbul medipol university, turkey abstract today, global energy politics, mainly determined by oil and natural gas. these policies shape the basis of the regions have the largest share the reserves in middle east, central asia and caspian regions.there is a significant global competition in the search for oil and natural gas exploration, production, and delivery to international markets. the fact that turkey is going to become a country with increasing requests in energy market / sector is important for turkey to become a strategic country for petrol and natural gas producers. therefore, supply and demand variety in natural gas and petroleum import, supply security, and the sustainability/continuity of this situaton, energy transportation projects are essential for turkey. keywords: oil, natural gas, energy, energy policies, eu, russia, turkey, syria 1. what is the effect of eu's energy policies on turkey? energy a life source in the world, and today, we can understand that most of the countries try to have energy resources. in addition to that, today, energy factor causes wars, regional or international conflicts, and political changes. therefore, we can see that energy policy is used as one of the dominant tools to get moreand more power, especially in the international area of the world. as you know, energy sources are limited; factors such as the rise of the population, development of countries direct states to search for new energy sources in economical, and political perspectives. energy consumption of developing countries gradually icrease; these countries try to get security of energy supply in legal ways. one of the best examples is eu. in this scientific study, firstly, we will focus on energy policies from a general perspective. secondly, we will go inside to the specific energy policies of the eu countries, russia, and turkey. in the third part we will look at the potential effects of energy policies of eu and russia on especially turkey and we will discuss alternative energy methods for turkey in the long-term plans. when we inspect global energy policies, we can deduce that there are fundamental goals in the energy sector. one of these goals is to provide energy security. the second important goal is to diversify energy sources. another goal is to create a competition area between partners in the energy sector. the last goal is to offer to the consumer highestquality energy with the lowest price. therefore, the energy suppliers should have a multi-dimensional approach to foreign relations with other countries. another important factor is the protection of the environment by the states. in other words, some energy sources like oil, natural gas, or coal may damage nature; the states should find a solution in order to solve this problem. today, some countries have begun to alter their positions and policies. in other words, they are making much more investments in renewable energy sources or other alternative sources such as wind power, solar energy, or nuclear power. as stated before, energy policies depend on foreign policies of countries as well as consumption amounts of countries. societies continuously need energy, and this situation challenges the states to find alternative energy sources. on the other hand, if we look at the primary energy resources in the world, we are going to see fossil fuels have ahuge part on the energy scale. in other words, it makes up 87 % of the daily energy consumption, renewable energy sources are just 7 % on the scale, and nuclear energy only 6 % on the scale. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the energy policies of eu, russia, turkey and syria 97 moreover, if we look at some estimations about energy usage, there are some serious parameters which can largely affect it; such as technological developments, rising population, fluctuations of the energy prices, acts and behaviours of countries and customers. according to iea estimation, world energy consumption will go up approximatelly 40%. also, iea forecasts that demand for energy will focus on fossil fuels, and especially the demand for natural gas always will rise, the demand for oil also will increase a bit in the future. however, the demand rate will decrease, especially the coal demand after 2030 (kaya, 2012). 2. energy policies of turkey when we look at turkey’s position on energy, we can see that turkey is not in an independent position in energy arena. in other words, turkey buys oil and natural gas from abroad. energy prices constitute a significant input cost for turkish economy. on the other hand, turkey is trying to reduce the dependency rate to russia about natural gas, and is making bilateral treaties with other countries such as azerbaycan, iran, and syria. indeed, turkey is eager to find alternative partners and different energy resources at the same time. we can see similar policies on the oil issue. energy consumption of turkey increases gradually, and the government buys two third’s of necessary energy from abroad. besides, while making plans on energy policies, turkey is aware that its energy sources are problematic. the reality is that turkey is in a dependent position on energy suppliers in this region. therefore, turkey should make much stronger policies and strategies in the energy sector. in other words, turkey should establish good relations with itsneighbors who have higher energy reserves. potential oil and natural gas reserves exist in this region. this region houses 82,1 % of global natural gas, and 74 % of global oil reserves. this situation makes turkey a dynamic energy market and a transit country for foreign energy suppliers at the same time. turkey is part of two different energy projects in the region. one of them is tanap. with the project of tanap, turkey will become a much more important country when the project is finished in 2017. with şahdeniz-2 region, natural gas will come to turkish territory and then it will go to europe. it means that this natural gas will pass on the turkish territory as well. tanap will bring gas from another project called nabucco to bulgaria. in other words, turkey and azerbaijanwill together sell natural gas to the european market via tanap. so, this situation will make turkey much more significant, and turkey will get not only some economic gains but also some political power as well (kaya, 2012). mehmet enes aşcı 98 figure 1 tanaptap-turkish stream map figure 2 turkish stream and other pipe lines map the energy policies of eu, russia, turkey and syria 99 3. eu energy policies the oil crisis of 1973-74 and 1979 shows that eu countries have no security plans on energy supply, and this situation made the eu countries much more serious on this issue. they came together and tried to have common energy policies. also, eu countries tried to make environmental projects after the oil crisis. actually, eu countries were eager to increase energy efficiency, decrease import dependency, and benefit more from local energy sources as well. in the energy policies of eu, we can see that the methods are; benefiting from renewable energy sources, developing tools for energy supply and being more efficient in order to benefit from them. extreme increase in the oil prices showed that eu has no security system on energy supply. they need an active energy plan in order to rescue themselves from dependency in this sector. the only way for eu to exit from the bottleneck is investing more in renewable energy sources and having a productive position in the energy sector. another significant and serious factor is high foreign dependency of the eu countries on the oil and natural gas use. as eu is constantly grows, it especially affects oil and gas consumption rates. in other words, with the effect of the large population, energy is becoming an essential matter for eu. eu countries altered their program and started to give more importance to productivity on their political agenda as a future plan. for this reason, they adopted a new agenda known as "green book" and declared what they need and what they want to do at the global energy market (kaya,2012:129-155). 4. energy politics of russia with leadership of putin the general foreign policy approach of putin is based on a civilized competition in the polarized world order, and in this world order russia will become a super power again. also, when we look at the foreign policy of putin, we can see a pragmatic approach when russia makes cooperation with western powers. on the other hand, russia uses asian card politically at the same time (i̇şyar, 2004: 57-58). the usa is also practicing superpower strategy in the world, and they are eager to control euro-asia in a geopolitical manner (brzezinski,2005:62-63). putin unexpectedly has established close relations with china, eu countries, and even with the usa (caşın,2002:8). indeed, he wants to control energy resources in this region with the effect of high prices of oil and natural gas(ogan,2006:110-111). there are privatization and business combinations in the world. however, putin turned to some big energy actors, energy companies like lukoil and gazprom, for his foreign policy aims(stulberg,2005:2). according to putin, universal energy is the most important driving force for social and economic developments. 5. the energy policies of russia on caucasus, khazar, and black sea region in the khazar basin, there are 75-233 billion barrels of oil and 293 trillion cubic natural gas reserve. so, this region is one of the most significant alternative regions to basra region (stulberg, 2005: 4-5). turkmenistan and uzbekistan are in a good position in natural gas reserves, and azerbaijan and kazakstan are also in a good position in oil reserves. these states are good at handling, sales, and mobilization sectors; and this situation directs international policies. the most crucial aim of the putin administration on central asia is the putting into effect of previous projects and treaties, which interest the federation of russia, and making major energy corridors on the north-south destination as well. vladimir putin thinks that this policy will prevent the alliance against russia. moreover, russia is supporting russian companies, and their investments in the khazar basin, and this situation leads to them having a part in the region. this situation is giving russia an opportunity to get suitable policies (aras, 2011: 224-225). putin tries to reach this region via gazprom, and wants to add it to the russian energy block in order to blockade the plans of eu countries in this region. in 2005, putin obstructed the interventions of kazakstan and uzbekistan with the policy of passing natural gas of central asia from the territories of these two lands(kamalov,2006:23-24). in addition, russia is practicing different policies, especially for the two major rivals. these rivals are iran and turkmenistan. russia made an agreement with turkmenistan and became a cartel in the energy sector on the field (akgül, 2007:136). mehmet enes aşcı 100 6. the energy policies of russia on middle east the energy policies of russia are to protect its national interests in the region of middle east. in other words, the policies of russia are not ideological policies. vladimir putin is eager to create new markets for russian energy companies in the middle east, and from this perspective, russia continues to collaborate with israel, especially in technology and energy. furthermore, russia is also in collaboration with iran in nuclear energy arena (akgül, 2007: 139). under the putin leadership, russia started to give special importance to israel. for instance, the amount of crude oil israel gets from the commonwealth of independent states is about 88%. another energy project russia is planning in the middle east is blue stream project. for example, they want to enlarge the area of blue stream energy project to israel and send russian natural gas, and azeri oil to israel, passing the red sea, and the next destination is china by the red sea, and the other way the destination is suez canal to reach southern europe. the best partner of russia in middle east is iran. putin deals with the government of iran in order to commercialize natural gas of iran via russian energy companies (dugin, 2006:74) 7. the relations between turkey and russia on energy dimension if we summarize the energy situation of turkey: turkey is 73,5% dependent on especially primary energy sources to abroad. in the year of 2002, this rate was 67% and payment of energy import was 9.2 billion usd in the same year. in 2014, this number became 55 billion usd. in the energy sector, the biggest partner in dependency for turkey is russia. turkey imports 98 % of its natural gas from foreign countries and also 55 % of this 98 % comes from russia. in addition, the dependency rate of turkey to russia on petroleum and petroleum products is 16 % (pamir,2015). in other words, the daily natural gas import capacity of turkey is; from russia: 42 million meter cubic via west line, 48 million meter cubic via blue stream, from iran: 29 million meter cubic, from azerbaijan: 19 million meter cubic, from nigeria and algeria combined (lng): 22 million meter cubic. these rates show that there is no other alternative oil and gas supplier instead of russia in the short term for turkey. on the other hand, 35% of coal import of turkey comes from russia too. in turkey, the plan of akkuyu nuclear energy power plant will be completely built by the russians. this situation shows that turkey is extremely dependent on russia. in fact, because of the extreme dependence on just one country, this situation creates a risky policy in economic, security and foreign relations aspects. when turkey is so deeply dependent to russia in the energy sector, russia is also dependent on turkey especially on billions of dollars of payment as well. in other words, the payments of turkey to get oil, natural gas, and coal are significant for the russian economy. besides, turkey gets energy from russia, and also russia has a bilateral relation with turkey as a result of energy sources. 8. economical and political relations with syria syria is one of the crucial partners of turkey in the middle east region. syria was a sanjak of the ottoman empire up to world war-1. when ottoman empire was defeated by the french, british, and russian troops, syria got its freedom, but only for a short term. france took syria from ottoman empire, and turned it into a colony like lebanon (moubayed, 2008). on the other hand, there are four different phases in bilateral relations between turkey and syria. these are deterioration relations (the mid-80s to 1998), gradual normalization relations (19982003), accelerating into a movement toward amity and alliance (20032010) and regression toward enmity over the uprising in syria starting in march 2011. if we compare the relations with this country, there is a similarity between 1990s and from 2011 to 2015. in other words, we can see there are conflicts and disagreements with syria, especially on the political and economic perspectives. the uprising began in syria in march of 2011, and this event started to change almost everything, especially in economy and the energy sector for this country. syria is selling oil and natural gas to abroad like the other countries in the middle east. however, the civil war has a huge impact on oil and natural gas supplied from the territory of the energy policies of eu, russia, turkey and syria 101 syria, and this situation is creating much more economic difficulties, poverty, and political instability in the relations with neighbors, including turkey (moubayed, 2008). the civil war damages the energy sector in this country; especially the infrastructure, oil, and natural gas pipelines, and electricity transmission networks of syria. in addition, western countries put economical sanctions against the regime of assad, and this situation is bringing more difficulties, and effects on oil and gas supply to the european countries, and the political instability is creating a serious uncertainty for energy sector for the future plans of the syrian government, and until now there has been no consensus between the regime and protestors in syria. the effect of the civil war on the relations between turkey and syria is very bad. in other words, erdoğan immediately cut the relations with assad regime in 2011 and stopped import and export of goods with this country when the conflicts started in syria. we need oil and natural gas in order to close energy deficit in turkey, but we can not buy oil and gas from syria because of the political problems and disagreements among assad and erdogan. the regime of assad decided to stop selling fossil fuels to turkey, and we lost syrian market to sell our products in the region of middle east. 9. natural energy resources in middle east existing and planning projects the energy projects in the middle east have strategic importance for us and russia. in other words, there are different energy projects in this region which look suitable and good for the national interests of russia and usa as well. currently, iran, iraq, syria, lebanon, israel, saudi arabia, and turkey are the main actors in the middle east. indeed, syria is demanding to become a transit country for energy lines, like turkey. but, syria did not get this chance because of the civil war in its territory since 2011. 10. the project of iran iraq and syria on energy market in the middle east, the most crucial and most contradictive energy project is friendship project, which belongs to the tehran regime. this pipeline project covers three countries in the middle east. these countries are iran, iraq, and syria; and the cost of this project is 10 billion dollars. the expectations from friendship project 40 billion cbm, and the length is 6000 km. on the other hand, these three states signed an agreement with each other two years ago. however, nobody knows which way the iranian natural gas is passing (başlamış, 2013). according to tehran times newspaper, the iranian natural gas will pass from the territory of iran, iraq, syria and then with the construction of new pipelines in mediterranian sea to lebanon and then it will go to greece as the last destination. but the european countries impose sanctions on iran, and because of this situation, selling natural gas to europe from iran is not possible now. the leader of syria, assad is reluctant to add saudi arabia and qatar to this arabic pipeline project. so, he prefers another project, islamic pipeline project with iran. it means that turkey will be out of this project and the natural gas route will not pass from turkish territory. 11. israel energy project another energy project in the middle east belongs to israel. in leviathan region in israel, which is close to mediterranian sea, there is a large reserve of natural gas. in leviathan, experts estimate that potential rate is 16 trillion cubic meters. in other words, almost 100 billion dollars worth of natural gas reserves exist in leviathan. the question is, how the government of israel will carry out this natural gas in order to sell it. there are two options in front of israel. one route is that israel can benefit from mediterranian sea with the new pipelines under the sea; with these pipelines natural gas can go to turkey and then enter the market of eu countries. the second option is the territorial option. in other words, natural gas may pass lebanon, syria and then turkey again. when we look at the position of israel, they want to benefit from the mediterranean sea in order sell natural gas to the other countries because assad does not want to collaborate with israel. so, israel is also reluctant working together with assad regime. in 2011, syrian government found a new natural gas area in the homs region and this was a very significant development as well. the total natural gas reserve of syria is 284 billion cubic meters, and this new reserve adds at least 400 000 cubic meters reserve as well. mehmet enes aşcı 102 12. why is russia in syria? the official authority of russia announced that russian military planes and soldiers in syria and they are constructing new military bases in this country. after that, some questions emerged in people's minds. the questions like; "why are the russians in syria?" "whom will russian troops strike in syria?" we cannot explain the existence of the russian soldiers in syria for the protection of assad regime or the battle among russian people who are fighting with extremist groups in syria, and enlarge its effect on syria. the real reason is the location of syria. syria is the point of exit for the energy destinations, and also russia wants to make an alliance with iran and iraq, who are under the occupation of isis. in december in 2013, the russian company soyuzneftegaz signed an agreement with the syrian government. according to this agreement, this russian company can perform searches, explorations, developments and productions. this treaty is valid for 25 years as well. soyuzneftegaz got this opportunity, and this situation shows that russia is eager to stay in syria for a long time. the final aim of russia is establishing its domination in syria in order to block saudi arabia and qatar's oil. because saudi arabia and qatar try to sell their oil to europe like russia, and they are in competition in this area. another final aim of russia is cooperating with iran instead of competing with it for the european market (varol,2015). figure 3 syrian petroleum company the energy policies of eu, russia, turkey and syria 103 13. why does russia try to capture energy geopolitics of syria? the russian economy depends on energy exportation, and the national economy of russia is damaged and badly affected by the low oil prices. first of all, the oil prices should rise in order to benefit the russian economy. on 30 september, the military operations of russia became definite in syria, and after that, the oil prices started to rise and reached 50 dollars. but then again it decreased and became almost 46 dollars because of saudi arabia and usa intervention. according to the reports of imf, oil prices should be at least 60 dollars in 2016 in order not to shrink the russian economy. therefore, russia creates a test area for itself with the goal of increasing petrol prices. however, the military operations of russia in syria do not affect oil prices so much, and the other partners of russia such as iran and iraq suffer from this situation. everyday, another crisis can happen in syria. firstly, russia needs the increase in oil prices, and as you know, currently the global oil prices are under 50 dollars because of saudi arabia. saudi arabia is intentionally decreasing oil prices. figure 4source: nasdaq,19 november 2015 http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=1m as a result, the most important reason for russia is the energy issue, and that's why russia does not want to lose syria.they want to control all oil and gas energy lines in syria. russia is trying all possibilities to increase energy prices and on the other hand, ruin all plans of saudi arabia. for instance, the russians are going to have the chinese oil market. for the first time in may 2015, russians sold oil to china, and the amount of this oil was much more than saudi arabia sold, and the russians became the biggest rival for saudis. moreover, the energy treaties between russia and china are still ongoing. on the other hand, if the sanctions on iran are abolished by the western states, the energy resources of iran will start to look away in order to go to the european market. in here, there are two different options for energy http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=1m mehmet enes aşcı 104 resources of iran. the first route is benefiting from turkish territory, and the other route is passing towards iraq and syria. nowadays, russia is planning to control the syrian geopolitics with the cooperation of the countries with the biggest energy resources. the russians are holding two energy cards with a very successful increase. first of all, if the oil of kurdish, iraq, iran line comes to the mediterranean sea, the value of this oil should belong to russia. secondly, russians abolish the possibility of qatar's natural gas and transportation of it from syria (özdemir, 2015). 14. economic effects of the petrol dependency of turkey the existence of the energy sector is crucial for countries. the increase in petrol and natural gas prices in countries, whose manufacturing industry depends on petrol, has adverse effects on the foreign trade and production capacity of the country. the energy dependence rate of turkey is over 50%, and energy import is a significant factor in the current account deficit. a significant portion of the energy need is related to oil products. petrol and petroleum products are used in many sectors from production to consumption. since petroleum reserves of turkey are limited, as reserve amount decreases, foreign dependency on petroleum gradually increases. when petroleum import rate reaches 10% within the total import, these years may be a preview of crisis years. within the import of turkey, crude oil has been around 6% in the last few years. the change of this situation can happen in two ways. the first is the decrease in the petroleum dependency of the country; the second is shifting the importation of products with high added value. petrol dependency increases even more with the energy demand created by the economic growth. political developments in petrol-producing countries also cause changes in petrol prices. this situation can cause adverse changes as far as global economic effects. turkey also gets considerably affected by these changes. as a result of the petrol dependency of turkey, changes in petrol prices have various effects on turkey’s economy. these effects can be explained as: * price increases of petrol cause increase in costs as basic production input or decrease in petrol use and a decline in production as a result. * the increase in petrol prices affect foreign trade limits and therefore cause budget deficits. this situation causes decreases in the purchasing power and welfare level of the country. * increases in petrol prices also increase money demand. on the other hand, the inability of monetary authorities to offer sufficient liquidity causes an increase in interest rates and as a result, it negatively affects economic growth. * increase in petrol prices also causes an increase in inflation. increases in petrol prices as a crucial cost element causes an increase in general price levels on the one hand, and constriction in non-petrol demands and investments creates a public deficit as tax income decreases and increases interest rates on the other hand. * increases in petrol prices creates changes in production structure. if petrol prices stay on high levels for long durations, this situation also negatively affects other sectors, which use petrol-based production methods, and causes an increase in general level of prices and creates inflation increase. as is seen, petrol dependency causes many negativities on economic balance. turkey needs to work on reducing its petrol dependency, and it needs to turn towards alternative pursuits. 15. conclusion energy is a decisive life source in our age. we can understand that energy resources have a vital and significant role in the world. states are in a transition period to acquire and control energy resources; they may even take the risk of fighting, conflict, and dissent to get energy resources. energy resources are limited in the world, and the world population is always getting higher and higher. therefore, countries need more energy, and they gradually need to use more and more limited energy sources. these are the basic factors in the energy arena. for this reason, countries started to enable their rules of law in order to benefit from and play for the right energy card at the same time. in other words, these states try to take precautions in order to guarantee their future in the energy sector as well. the energy policies of eu, russia, turkey and syria 105 in the universal energy market, the producers, transit countries and big consumers have an important strategic situation as well. nowadays, the regions of middle east, central asia, and khazar region countries have opportunities especially in the supply of oil and natural gas. the countries in the middle east and the central asia are still going to keep their positions in the long term. for this reason, the regions of middle east, central asia, and khazar are at the center of attention especially for the supply of oil and natural gas. on the other hand, petroleum search, production, transport is performed in the international market, and there are deep and powerful conflicts between rivals in the international market, especially regional and global arena. eu countries try to create new political strategies in order to get more energy for their people and their daily lives because eu countries are in a speedy enlargement process. so, the states of eu are working on new political and economic strategies to get oil and natural gas from middle east, central asia, north africa via pipelines as well. russia is using its energy advantage as a political weapon as an actor in the universal energy market. thus, russia is increasing its effect on the countries that depend on him and it is making bilateral treaties with the states of turkmenistan, uzbekistan, and khazakistan in order to abolish them as alternative actors in the market at the same time. on the other hand, iran has 16% of universal gas reserves. however, they need a market to sell their natural gas, and turkey is in a crucial position to do that. turkey has a role of transporting energy resources from the middle east, central asia and khazar regions as a transit country. this opportunity is creating a chance for turkey in order to become a member of the eu, but at the same time, this situation puts turkey in a risk because of potential wars and conflicts for controlling of energy lines. in addition, turkey should create alternative projects in order to reduce dependency rate to abroad with respect to its energy deficit as well. references ağış, ö."rus uçağının düşürülmesi enerji arz güvenliğimizi nasıl etkiler?",18.12.2015, http://tekva.org/13enerjiyazılari/52-rus-ucaginin-dusurulmesi-enerji-arz-guvenligimizi-nasil-etkiler.html akgül, f." effects of eurasian policies of putin's russia on turkish russian relations", journal of security strategies, issue: 05/2007, p. 129 155. aras, n., o. azerbaycan'ın hazar ekonomisi ve stratejisi, der yayınları, i̇stanbul, 2001. başlamış, c."savaşın nedeni enerji mi?", 16.09.2013, http://www.dw.com.tr brzezinski, z. büyük santranç tahtası, çev. yelda türedi, i̇nkılap kitapevi, i̇stanbul, 2005. caşın, h., m. rus i̇mparatorluk stratejisi, asam yayınları, ankara, 2002. dugin, a."türkiye'nin avrasyacılık stratejisi(2)", 26 kasım 2006, http://www.eurazia.org/modules.php?name=news&file=article&sid=2126 i̇şyar, g., ö. bölgesel ve global güvenlik çıkarları bağlamında sovyet rus dış politikaları, alfa yayınları, i̇stanbul, 2004. kamalov, i̇."rus gazı ve enerjide bağımlılığın bedeli", stratejik analiz, s.70,şubat 2006. kaya, i̇., s. "uluslararası enerji politikalarına bir bakış : türkiye örneği",uluslararası enerji hukuku sempozyumuna sunulan bildiri, 11 12 mayıs 2012, çağ üniversitesi. moubayed, s."turkish syrian relations:the erdogan legacy", seta policy brief, october 2008, no: 25. ogan, s."theblack sea: new arena for global competition" , turkish policy querterly, vol. 5, no: 2, yaz 2006. özdemir, v."rusya suriye'de ne yapmak i̇stiyor?enerjeopolitik bir analiz", eppenenerji piyasaları ve politikaları enstitüsü, 19.10.2015, http://eppen.org mehmet enes aşcı 106 pamir, n."türkiye rusya gerginliğinde enerji boyutu", 14.10.2015, http://www.dw.com/tr/turkiye-rusyagerginliginde-enerji-boyutu-a-18780979 stulberg, n., a."moving beyond the great game : the geoeconomics of russia's influence in the caspian energy bonanza", geopolitics,yaz 2005, vol: 10, issue,1. varol, t."putin enerji hatları kontrolü i̇çin suriye'de" , 21. yüzyıl türkiye enstitüsü, 20 ekim 2015, http://21yyte.org/tr/arastirma/enerji-ve-enerji-guvenligi-arastirmalari. international journal of commerce and finance, vol. 5, issue 1, 2019, 60-69 60 factoring as an effective working capital option: a critical review eletta onaepemipo federal university of technology minna, nigeria umaru zubairu federal university of technology minna, nigeria bilkisu abubakar baze university, nigeria simeon araga federal university of technology minna, nigeria hadiza umar federal university of technology minna, nigeria abdulhafeez ochepa federal university of technology minna, nigeria abstract purpose – the purpose of this paper was to critically review the concept of factoring, with the view to ascertain its effectiveness in ensuring that organizations have access to enough liquid funds that facilitate the smooth running of their operations. methodology – the systematic quantitative assessment technique (sqat) was used to identify and review relevant peer-reviewed journal articles that had investigated factoring as a source of working capital. findings – based on a critical review of extant factoring scholarship, it was deduced that factoring has been effective enough to elicit a growing rate of adoption across the continents, despite the costs of adoption, as well as the 2009-2014 global financial crisis, excluding only north america where there seems to be a constant decline in adoption rate. research limitations – the use of limited but high quality academic databases means that some articles were not considered for this review. originality/value –the study is one of few studies to discuss the effectiveness of factoring as a source of working capital. keywords: factoring, account receivables, working capital, fci, effectiveness jel classification: g320 1. introduction finance is seen as the elixir that enables businesses to exploit opportunities to grow (duff, 2018). however, there has been a consensus among scholars that finance-related problems, such as access to and management of finance, are constantly rated among the major hurdles hampering organizational growth (kumar and rao, 2015; chowdhury and alam, 2018). furthermore, while seasoned business owners are well aware that turnover and profits matter a great deal in the long run, they acknowledge that it is how cash flows in and out that makes or breaks a company in the short run (shiao, 2018). therefore, organizations have employed several means to optimize working capital, that is, to ensure that cash outflows are significantly less than cash inflows so that there is enough to run day to day operations (kowsari and shorvarzi, 2017; abbasi et al., 2018). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e factoring as an effective working capital option: a critical review 61 as such, it is often said that cash flow is the lifeblood of any company (edwards et al., 2017). particularly, this applies to corporations that engage in the convention of credit sales to customers (li and gu, 2018), as well as construction and manufacturing companies which are more often than not, required to complete a certain proportion of, or the total project before receiving payment ( hansen et al., 2017; nasir et al., 2017). this supply of goods and services before payment results in accumulation of accounts receivables, that is, the money owed a company by its clients (li and gu, 2018). it is therefore a plus that debts (receivables) have become commodities that can easily be exploited, using tools like factoring and securitization (juutilainen, 2016). for the purpose of this study however, the focus is placed on factoring as it appears to be a trending working capital intervention option, which surprisingly dates back to the early days of civilization (rts financial, 2019). factoring refers to the phenomenon where a company (the adherent) sells its accounts receivables (the invoices showing the debts owed by its clients) to a financial service company (otherwise called factoring companies or factors) at a discounted rate (a little cheaper than the exact amount stated on the invoice), which will be paid immediately the status and creditworthiness of the debtors are ascertained by the factor. this allows for the uninterrupted running of day to day operations in the company, while passing off the burden of debt collector to the factor (chirkunova et al., 2016; dorfleitner et al., 2017; protopappa-sieke and seifert, 2017). as highlighted in the 2017 organization for economic co-operation and development (oecd) annual report “financing smes and entrepreneurs 2017: an oecd scoreboard”, it is interesting to note that despite the financial crises between 2009-2014, factoring volumes continued to expand, and served as an attractive substitute for more traditional bank lending, which greatly contracted within that period (oecd, 2017). regardless of the decline of factoring volumes in 2015 across the continents, excluding europe, the global factoring volume increased to eur 2,367,790 trillion in 2016, from eur 2,347,513 trillion in 2015, and has steadily increased ever since, confirming factoring’s role as an important financial resource for sustaining companies’ growth (fci, 2018). furthermore, unlike traditional bank loans, it does not create a liability for the company since it is a sale, not a loan (except in the case of default), therefore, there is no threat of property take-over (auboin et al, 2016). also, the asset sale process is simple, working capital to fund the production of orders is provided, and the payment of wages and purchase of production inputs is made possible with little or no delay (auboin et al, 2016). nevertheless, despite its merits, there are also demerits to adopting factoring. these include the interest rates and service fees levied on the companies, which are sometimes costly, especially depending on the tax treatment in such a country (bernard et al., 2018). also, how the factor handles companies’ clients may positively or negatively affect the clients’ view of the company. hence, it is advantageous for research to be carried out to determine, first, whether or not factoring is an effective financing option and then subsequently how it can be optimized for efficiency within organizations. as such, this study reviews extant journal and news articles that have discussed this field of interest, and also evaluates the highest ranking factoring body, factors chain international (fci) 2018 annual review, in order to answer the central research question “is factoring an effective financing option?”. recommendations and areas for further research are also provided. the subsequent sections of this study are as follows: the methodology section, review section where related literature are appraised, the current trends in the factoring world are discussed, and the answer to the central research question is provided; followed by the recommendations section, and then the conclusion section where limitations of the study are presented as gaps for future research. 2. methodology the “systematic quantitative assessment technique” (sqat) developed by pickering and byrne (2013) was utilized for this study. sqat is systematic in the way papers are assessed to determine their inclusion or exclusion in the eletta onaepemipo & umaru mustapha zubairu & bilkisu abubabakar & simeon araga & hadiza umar & abdulhafeez ochepa 62 review process, and the focus is on peer-reviewed original journal publications so as to maintain a high quality of papers (pickering & byrne, 2013). sqat enabled the researcher to identify “important geographic, scalar, theoretical and methodological gaps in the literature” (pickering & byrne, 2013, p. 11). the researcher found sqat to be logical, simple to use, and easily replicated, which are all important components of a systematic review. sqat recommends five important steps in conducting an effective systematic review. each step and how it was applied in this study is described in table 1. table 1: description and application of sqat step application in current study 1. define topic factoring as a financing option 2. formulate research questions one central research question: “is factoring an effective working capital option?” 3. identify key words “factoring” + “finance” 4. identify and search databases 1. 10 databases utilized: elsevier; springer; wiley; taylor and francis; jstor; emerald; sage; inderscience; cambridge journal; heinonline; 2. “all in title” search: factoring + finance 5. read and assess publications 1. abstracts of papers found were read to ensure that they were dealing with factoring as a financing option. 2. literature reviews book chapters and conference proceedings were not included; only peer-reviewed conceptual and empirical papers. nevertheless, given the paucity of research on factoring within the years under review in the study, the journal articles are augmented with the analyzed content of factors chain international (fci) 2018 annual review so as to gain a critical overview of the concept of factoring, in order to ascertain whether or not it has been effective as a working capital solution. 3. discussion and findings this section provides an overview of the opinions of scholars and professionals on factoring as a working capital option, its benefits and costs, as well as trends in the industry, in order to gain a comprehensive outlook of the effectiveness of factoring so far. the section also outlines the challenges militating against successful factoring transactions, both in emerging and emerged economies, with a view to recommending possible solutions. 3.1. factoring as a working capital solution the recent global economic crises has caused a serious problem of insufficient liquidity and working capital for small and medium ventures, including a significant increase in the cost of corporate borrowing from banks (song et al., 2018). these, combined with the absence of accurate or substantial financial records and bankable collateral (rao et al., 2017), as well as the slow processing and disbursement of funds, have made traditional bank lending less attractive (amoah et al., 2017). a possible solution would have been equity financing, however, many companies are factoring as an effective working capital option: a critical review 63 not connected to the capital market and, and as such are not allowed to sell titles through the capital market (bogdan et al., 2018). therefore, seeing as debt is a tradable asset in the dynamic, global market arena of today (juutilainen, 2016), factoring has been highlighted as a quick solution to ease the working capital crunch faced by many corporations (bogdan et al., 2018). this is supported by the fact that factoring releases finance that might be stuck in account receivables for a long time, immediately, in form of advances. this ensures that the firms can manage the required level of liquidity, while transferring the difficulties associated with debt collection to a financial institution (tanrisever et al., 2012). 3.2. benefits and costs of factoring entrepreneurial firms are often characterized as having insufficient acceptable tangible assets, such as buildings, landed property, and others, to offer as collateral. they are also seen as lacking in the track record necessary to establish their reputation. therefore, factoring is considered more doable for them, as the collateral itself (accounts receivable) is readily available to entrepreneurs, and serves as the primary source of repaying the factor. as such, factoring can be used to complement bank loans, or, as the case may be, substitute them entirely (mol‐gómez‐vázquez et al., 2018). like other traditional forms of commercial lending, factoring also provides corporations, especially service companies which grow faster than their credit line, and tend to be payroll intensive, with the funds needed to run their day to day operations (milenkovic-kerkovic and dencic-mihajlov, 2012). however, unlike most other forms of commercial lending, factoring supplies the needed funds speedily, in such a way that enables the sale of goods and services to continue with minimal interruption, thus encouraging productivity and profitability (mugarura, 2016). furthermore, financing large scales projects become challenging when there is need to secure and raise capital, as such, contractors use several alternative sources of funding, of which factoring is usually used to get the materials needed, in order to sustain financial flow and avoid any dissatisfaction between collaborated partners (romeli et al., 2016). this is corroborated by the fact that there is no cause for asset risk, credit risk, debt, or sale of ownership (chirkunova et al., 2016). also considering that, on average, 20 to 40 percent of manufacturers have assets locked as accounts receivables (lin et al., 2018), factoring allows the high-risk suppliers among them to mitigate their credit risk level with that of their high-quality buyers, as the decision of a factor to finance the adherent has more to do with the position of the buyers owing, than the supplier owed (klapper, 2006). in addition to this, the owing buyer’s informational asymmetries and risk become the primary concern of the factor, not the adherent, and even those become secondary concerns if the accounts receivable belong to transparent and large companies (mol‐gómez‐vázquez et al., 2018). as such, manufacturers’ abilities to expand operations or change product offerings in response to changing market conditions are unhindered. following these, despite the fact that corporate finance sees the protection of the rights of financiers as essential to mitigating agency problems in sme financing and assuring the flow of capital (jensen and meckling, 1976), extant financial literature have stated that not all financial contracts are equally affected by the low quality of laws. factoring is one of such financial contracts that are less affected by agency problems and inefficiencies in the legal system, regarding the protection of investors, as long as the debtor firms are transparent dealers: this is good news for developing countries which are usually characterized with such inefficiencies. as such, protection of creditor rights and enforcement mechanisms become less important for factors (mol‐gómez‐vázquez et al., 2018). on default risk, that is, the risk that the debtor refuses to pay up as at when due, factoring offers an option, “factoring without recourse”, wherein the factor assumes the payment risk of the debtor (rajput et al., 2015). on another hand, in the case of cross-country factoring, the exposure of a firm to foreign-exchange risk can also be mitigated, since the exporter can simply sell receivables to a factor and receive home currency in return (sirpal, 2009). eletta onaepemipo & umaru mustapha zubairu & bilkisu abubabakar & simeon araga & hadiza umar & abdulhafeez ochepa 64 the use of factoring has been seen to improve credit and default risks, cash-flow and liquidity, profitability, as well as time management. however, it has also been seen to impose a whole range of costs, mainly coming from both the business and legal environments. from the business environment, the standard costs consist of two main charges discount charges (based on the interest rate determined by the factor) and service fees. there might also be additional costs for additional requested services, such as credit protection charges for non-recourse factoring agreements, performing credit investigations, guaranteeing commercial and political risks, among others (milenkovickerkovic and dencic-mihajlov, 2012; rajput et al., 2015). from the legal environment, the tax treatment of factoring can cause factoring transactions to become excessively expensive (milenkovic-kerkovic and dencic-mihajlov, 2012; bernard et al., 2018. for instance, some countries do not allow the interest on factoring arrangements to be tax deductible. also, when the law sees factoring as a sale and purchase agreement where there is a complete transfer of the receivables’ ownership, in the case of bankruptcy, factored receivables would not be part of the property of the bankrupt firm, but the property of the factor. since the factors know these, it can affect the costing of factoring services, thus making their fees more expensive. there are also a number of additional taxes, as well as legal and regulatory challenges to factoring in many countries (milenkovic-kerkovic and dencic-mihajlov, 2012). 3.3. trends in the factoring industry as observed from the fci annual review 2018, this subsection explains the global factoring trends in the last 7 years (2011-2018), highlighting the growths and declines that have taken place in a continental context. figure 1. factoring volume per continent in eur millions for 2011,2015 and 2017 as observed in figure 1, there has been a steady growth in europe’s factoring volume right from 2011 to 2017, and this is corroborated by the data collected by the eu federation for 2017, wherein factoring volumes for eu factoring as an effective working capital option: a critical review 65 countries have increased by 7.5% for the 9th year in a row, exceeding eur 1.6 trillion: today factoring is recognized as a safe short-term source of funding, committed to the real economy and employment in europe (fci, 2018). owing to the sharp rise in china’s factoring volume by 34%, as well as the increase in other major markets such as hong kong (+10%), singapore (+9%). and taiwan (+5%), after declining from 2015-2016, asia pacific’s factoring volume made a spectacular return with a growth of 18% from eur 555.55 billion in 2016 to eur 657.18 billion in 2017 (fci, 2018). as of 2017, factoring volumes of latin america (south america) and caribbean countries had grown to over eur 117 billion, from eur 96.18 billion in 2011. this is a great achievement for the region where it has been a great challenge to proffer a one-off solution to support, provide needed, funds and at the same time mitigate lending risks of young and innovative smes. both international factoring and reverse factoring have proven to be good fits in the region, such that their financial institutions attest to being contented with the results attained so far (fci, 2018). in 2017, africa’s factoring volumes increased by 9% (eur 21.6 billion), surpassing the global average growth of 4%, even after the sharp plunge in 2015 (eur 18.7 billion) owing to the increased factoring volumes particularly in morocco (+25%) and south africa (+9%). however, africa’s share represented only 1% of global figures. the annual review also highlights that in the less developed countries of africa, factoring has gained grounds. in nigeria for instance, the nigerian factoring working group (nfwg) worked actively on the enactment of a factoring law. as such, a new factoring company (factoring and supply chain finance limited) obtained regulatory approvals, commenced business, and joined fci in 2017, while two others were under establishment (fci, 2018). it is observed that the middle east, despite experiencing increase from about eur 3.8 million in 2011, to slightly above eur 8 million in 2017, has obtained the least share in factoring volume so far, while north america has not done much better as there has been a decline by at least 3% since 2011(fci, 2018). 3.4. effectiveness of factoring financial effectiveness (fe) is the ability of organizations to use the proper choice of activities, efforts, initiatives, strategies and/or policies to generate and maximize long-term sustainable financial performance (omondi-ochieng, 2018). as such, it might be safe to say that any financing option that can potentially help an organization to achieve its financial goals is an effective one, and any one that actually succeeds in facilitating the achievement of such targets is efficient: this is as distinguished by drucker (1977), who associated efficiency to “doing things the right way” and effectiveness to “doing the right things”. however, as noted, the financial option must first be effective, which is what this paper is thus concerned with. therefore, considering the turns factoring has taken in the past 7 years, seeing as all the other continents asides north america, have seen reasons to increase their factoring volume, no matter how small the fraction, as in the case of the middle east and africa, it is safe to say factoring has been effective in meeting the financial needs of organizations in the continents, as if it was not, there would be no need for its increased volume, and no way that countries would have continued to adopt it. also, in a study carried out by bogdan et al. (2018) in romania, it was highlighted that the financial structuring of enterprises is based on the criteria that such structure can be easily accessed, it can achieve the lowest cost of the capital, and with the most reasonable level of debt to the company. therefore, the constant preoccupation of managers is finding the financing sources that meet these criteria, for their operations. in the same study, using the genetic algorithms method, the solution generated showed the fact that factoring is a viable financial solution, to the extent to which the particular factoring transaction can be easily accessed and can achieve the minimum level of cost and indebtedness (bogdan et al., 2018). furthermore, despite the obvious and weighty costs that could be incurred upon adopting factoring, many still do not mind as it effectively helps bridge the gap between cash outflows and inflows, without the costs running the business down. owing to this also, it is quite safe to decide that factoring is an effective financing option. eletta onaepemipo & umaru mustapha zubairu & bilkisu abubabakar & simeon araga & hadiza umar & abdulhafeez ochepa 66 3.5. challenges selecting factoring, or even any other type of financing option, as effective financing sources for investments is complex because, besides the main criteria concerning the costs of achieving the capital, there are a series of restrictions concerning the access, difficult legislations, the decision of the authorized institutions in approving the usage of these types of financing sources, as well as the financial situation of the company (bogdan et al., 2018). capital from factoring does not necessarily translate to the flow of goods between suppliers and recipients as lack of proper marketing techniques, constant defaulting, inconsistencies in deliveries, and so many other factors may militate against successful flow (hofmann, 2009). furthermore, successful factoring can be limited because of ineffective information infrastructures characterized by the absence of data on payment performance (as is usually the case in emerging countries), and /or high cost and long time required for the information collection (milenkovickerkovic and dencic-mihajlov, 2012). also, despite the fact that factoring is less affected by inefficiencies in legal systems, than many other means of financing smes, in a survey conducted by mol‐gómez‐vázquez et al. (2018), it was discovered that other institutional factors, besides the legal environment, might influence the demand and the supply of factoring. as such, firms operating in underdeveloped economies might still have a reduced use of factoring, despite having a weak legal environment in which factoring does not have a problem thriving. on another hand, due to the contradictory stands concerning the shari’ah-compliance and efficiency of factoring, international factoring is possibly one of the most controversial issues in islamic trade finance. this is owing to the element of bill discounting and interests, on which islamic finance puts restrictions as directed by the koran (gundogdu, 2016). 4. recommendations seeing as selecting factoring as an effective financing option goes beyond the direct costs it imposes, it is advised that corporate organizations do proper studies on the financing options available to them, using capital budgeting tools like net present value, and others to determine if factoring is the best fit for their particular organization, as it may be a viable venture for some, and not for others, owing to the internal, and sometimes external environment they find themselves. factoring provides capital almost as soon as it is needed, however, this does not automatically translate to higher sales and profitability, the internal conditions of the organization, such as how the money is managed, the value and quality of products and services, customer relations, proper communication of corporate goals to employees, and so many others, have to be properly handled. in the same vein, countries, especially developing ones, have to be holistic in their approach towards solving financial problems, which they are usually characterized by, such that the legal system, as well as the political and socioeconomic systems will be supportive of businesses, thus helping the economy to grow steadily and eventually develop (restructure for enhanced clarity). according to fci, a working group has been established to create an interface agreement which would enable the existing members of fci to cooperate with islamic financial institutions. as such, the global rules of international factoring (grif) has been revised, and it is believed that signing the supplemental agreement for islamic international factoring will eliminate the controversies (include reference). it is however advised that fci be careful in its attempt to draw in more of the islamic financial institutions, as they also risk losing former members who will not like to comply with the new rules. it is also recommended that corporations also carefully choose the particular customers whose debts they sell to the factors. this is pertinent as some customers will not like to be approached by third parties concerning their debts, and may feel insulted and completely stop patronizing the company. the careful selection will ensure that toppriority customers and clients are not driven away. lastly, a cost-benefit analysis should be carried out to ascertain if it will be more beneficial to undertake a factoring transaction, than to undertake the other options available to the company. 5. conclusion and suggestions for future research factoring as an effective working capital option: a critical review 67 despite the fact that the problem of finance is a persistent one in organizations because there are always more needs than available means of meeting them, factoring has been found efficacious as an innovative short-term financing tool that continues to gain grounds as a working capital financing solution, as it enables businesses to keep afloat and maintain competitive advantage in the ever evolving, not-waiting-for-anyone world we find ourselves, by freeing up cash stuck with the organizations’ debtors. nevertheless, it is worthy of note that when it comes to financing businesses, there is no one-size-fits-all. this means that, since strengths, weaknesses, opportunities and threats vary from firm to firm, managers are to be saddled with the responsibility of critically assessing the various means of funding available to their organizations, so as not to adopt just any one, but the one that best suits theirs: what works for company a might not work for company b. however, this paper is limited in that, as opposed to the original intent of the researchers, the paper could not rely on just peer reviewed journal articles as points of reference as the number of scholarly articles specifically discussing factoring are meager, and even some of the available ones are neither comprehensive nor holistic enough. it is therefore proposed that potential researchers seize the opportunity to explore the field of factoring, especially at a time like this when it is still a trending topic in the world of corporate finance. references abbasi, w.a., wang, z., & alsakarneh, a. 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(2016), “economic challenges in joint venture infrastructure projects: towards contractor's quality of life”, procedia-social and behavioral sciences, 234, 19-27. rts financial (2019), “a brief history of factoring (accounts receivable financing)”, available at https://www.rtsfinancial.com/articles/brief-history-factoring-accounts-receivable-financing (accessed 16 april 2019). shaio, v. (2018), “the evolution of sme financing”, available at: https://www.businesstimes.com.sg/magazines/the-sme-magazine-septemberoctober-2018/the-evolution-of-smefinancing (accessed 24 october 2018). factoring as an effective working capital option: a critical review 69 sirpal, r. (2009), “methods of payment and foreign-exchange risk management among firms in brunei darussalam”, the journal of risk finance, 10(4), 377-392. song, h., yu, k., & lu, q. (2018), “financial service providers and banks’ role in helping smes to access finance”, international journal of physical distribution & logistics management, 48(1), 69-92. stošic panić, d. (2017), “performance and financing strategies of female and male entrepreneurs in the republic of serbia”, international journal of gender and entrepreneurship, 9(2), 136-156. international journal of commerce and finance, vol. 9, issue 1, 2023, 1-20 * * universitas pancasila, indonesia, harnovinsah@univpancasila.ac.id **universitas mercu buana, indonesia, nindyelfania@gmail.com ***universitas mercu buana, indonesia, lucky.nugroho@mercubuana.ac.id ****universitas mercu buana, indonesia, yananto.mihadi@mercubuana.ac.id 57 analysis of the impact of tax knowledge and penalties on the compliance level of taxpayers with religion as a moderator harnovinsah harnovinsah* nindy elfania kansil** lucky nugroho*** yananto mihadi putra**** submitted: 26.09.2022 accepted: 30.03.2023 published: 06.07.2023 abstract: this study aims to analyze the effect of tax knowledge and tax sanctions on taxpayer compliance with religiosity as a moderating variable. the study population includes all individual taxpayers who do independent work and own businesses in dki jakarta, with 113 samples. the research method uses multiple regression analysis with primary data sources. moreover, the research design used causal and quantitative. this research showed that the tax knowledge variable had a positive effect on tax compliance, the tax sanction variable had a positive effect on tax compliance, and religiosity as a moderating variable proved to strengthen or weaken the influence between variables so that religiosity was a moderating variable. this research aims to provide information to the government and policymakers about taxes so that what should consider religious aspects to increase public awareness of paying taxes. the originality of this research is to include religious variables in the study of awareness of paying taxes. jel classification: h2, z12 mailto:lucky.nugroho@mercubuana.ac.id international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 58 key words: tax knowledge, tax penalties, taxpayer compliance, religiosity. 1. introduction: according to the minister of finance of the republic of indonesia sri mulyani, taxes are the foundation and have a vital role in financing development and driving a country's economy so that it can improve the welfare of the community (anggela & nugraha, 2022; anshary et al., 2021; silalahi et al., 2018). therefore, according to sri mulyani, education is needed for the public, especially the younger generation, to be obedient in paying taxes so that the development of the indonesian state can be sustainable (alaydrus & sabki, 2022; soeharjoto et al., 2022). furthermore, the tax contribution to state revenue is substantial; in 2020, it was 65.1% (makki, 2021). thus, the government should be concerned about increasing state revenue through these tax instruments. however, the phenomenon in indonesia is that according to the world bank, the ratio of tax revenue to national income (gross domestic product / gdp) or tax-to-gdp ratio is still low at 10.2% in 2018 (fitriani & prasetya, 2020). this causes tax revenues in indonesia to be still not optimal compared to other developing countries or countries with a large population, such as brazil, india, thailand, malaysia, and the philippines (citradi, 2019; fitriani & prasetya, 2020). this condition reflects that, until now, the level of taxpayer compliance in indonesia is still deficient (heru tjaraka, 2020). as a result, many taxpayers in indonesia complain about the taxes imposed by the government. moreover, the fewer taxpayers who do not comply in paying taxes, the more they become free-riders (enjoying state facilities without contributing) (arifin, 2021; bogoviz et al., 2019). therefore, based on the low tax revenue, there are efforts to increase state opinion through taxes by increasing compliance and expanding the tax base (kurniawati, 2017; purba et al., 2020). furthermore, to improve tax compliance, the government expands the tax base in various ways, increasing taxpayers' knowledge. the taxpayer's knowledge in question can be in the form of knowledge about taxation or related to the instrument or type of tax and the mechanism for paying taxes, including understanding the importance of taxes for development in a country (kowel et al., 2019; nasfi, ganika, et al., 2022). therefore, to increase public awareness regarding taxes, the government has tried to socialize it through advertising media and also involved academics in the tax goes to a campus program, which is a program to disseminate the importance of taxes for development to students (arfiyanto et al., 2021; fitriyani et al., 2022). in addition to the program to increase tax knowledge, the government also has a program to improve compliance with paying taxes to the public so that people can consciously fulfill tax international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 59 payments following their obligations (hartanto et al., 2020; hidayah et al., 2020; rendy & irawati, 2019). public knowledge and taxation compliance must be optimized through socialization and character education. indirectly with knowledge about taxes owned by taxpayers, taxpayers are aware of their obligations in paying taxes because taxpayers understand that taxes are beneficial for the development needs of a country(sarker & ahmed, 2022; sushkova, 2022). in addition, religious values adopted by the community are expected to prevent negative attitudes and encourage positive attitudes in daily life. (karyanto et al., 2019; nasfi, sutiapermana, et al., 2022; nugroho, 2022). therefore, compliance in paying taxes can be supported by one's religiosity, where the higher one's religiosity, the more compliant with government provisions or regulations, which in this case relates to the payment of taxes (saragih et al., 2020). furthermore, the existence of sanctions or penalties is one of the essential elements so that the community can comply with the provisions. thus, according to alm (2019) and nugroho (2015), a penalty or sanction is one of the tools to enforce regulations. based on the phenomena mentioned above, the formulation of the problem in this study includes:  does tax knowledge positively affect the level of compliance of individual taxpayers?  do tax sanctions positively affect the level of compliance of individual taxpayers?  does the variable religiosity moderate the effect of taxation knowledge on the compliance of individual taxpayers?  whether the religiosity variable moderates the effect of tax sanctions on individual taxpayer compliance? according to the formulation of the abovementioned problem, this study aims to analyze religiosity in moderating the influence of tax knowledge and tax sanctions on individual taxpayer compliance. therefore, the implication of this study is to provide information related to variables related to tax payment compliance. furthermore, the originality of this study is to include the variable of religiosity as a moderation variable on the influence of tax knowledge and tax sanctions on compliance with individual tax payments. 2. literature review the grand theory used in this article is the theory of planned behavior, where there are three aspects of the theory developed by icek ajzen in 1985 (yadav & pathak, 2017). the theory of planned behavior, in general, can be illustrated as follows: international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 60 source: yadav & pathak (2017) figure 1. the concept of theory planned behavior according to figure 1 above, the three essential aspects of theory planned behavior are as follows:  behavioral beliefs, that is, attitudes, result from behavior beliefs, where beliefs become one of the considerations in acting. therefore, the behavior of a person is caused by the existence of something that is liked and disliked, where when someone behaves, the person will think about the consequences (ajzen, 1991; sniehotta et al., 2014);  norm beliefs and attitudes are also the results of norm beliefs where norms or rules adopted by a person are used as guidelines for attitude. therefore, the behavior of a person is caused by the norms that are used as a guide for a person in acting (ajzen, 1991; oreg & katzgerro, 2006);  control beliefs and attitudes result from aspects of controlling an action caused by applicable provisions and regulations so that a person can act or not (borges et al., 2016). referring to the three aspects in the theory of planned behavior, if it is related to compliance with paying taxes, three variables are considered in a person's actions in paying taxes, namely the existence of public knowledge related to taxes, the application of sanctions and penalties, and community religiosity. furthermore, tax is the people's dues to the state treasury under the law (which can be imposed) without receiving reciprocal services (counter-performance), which can be directly demonstrated and used to develop a country. therefore, a person's knowledge of the benefits of taxes to improve their population's welfare becomes vital; if that person who is a personal taxpayer has sufficient knowledge, then they will voluntarily pay taxes. this is in line with the research conducted by zulma (2020), that the higher the level of knowledge of taxpayers, the easier they understand tax regulations and the more compliant the taxpayer is to fulfill his tax obligations. international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 61 in addition, according to nugroho (2014) and innes (2004), in enforcing regulations, sanctions or penalties are needed so that the public complies with the provisions that have been made. likewise, with compliance with paying taxes, if there is a penalty for tax payments in the form of a penalty whose amount is significant, then the personal taxpayer will comply with carrying out his obligations in paying taxes. on the other hand, indonesia, as a religious country with the world's largest population, should have good religiosity. furthermore, religiosity can also be a moderating variable of the influence of tax knowledge and the personal taxpayer's sanction on compliance with paying taxes. this is because the more religious the person will not only carry out the orders of his religion but will also be subject to and obey the provisions applicable to the country in which the person lives (mohdali & pope, 2014). therefore, although there is no direct influence of a personal taxpayer's religiousness on taxpayer compliance, religiosity can moderate the influence of taxation knowledge and sanction on taxpayer compliance. therefore, based on the literature review, the conceptual research framework in this article is as follows: figure 2. research conceptual framework based on the conceptual research mentioned above, the hypotheses in this study are as follows:  h1: tax knowledge has a positive influence on taxpayer compliance;  h2: tax sanction has a positive influence on taxpayer compliance;  h3: religiosity moderates the influence of tax knowledge on taxpayer compliance;  h4: religiosity moderates the influence of tax sanctions on taxpayer compliance. 3. methodology in this study, the research design used was a causal research method to determine the effect of the dependent and independent variables (oktris et al., 2022). the data analysis method used is multiple linear regression. moreover, to analyze with a regression model, data quality testing must be carried out using descriptive statistics and classical assumptions (napitupulu et al., international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 62 2020). this research was conducted to analyze the influence of the independent variable, tax knowledge, and tax sanctions, on the dependent variable, taxpayer compliance, by placing religiosity as a moderating variable. the population used in this study was all individual taxpayers in dki jakarta. the sample used in this study is an individual taxpayer who owns a business and does independent work. the technique of data collection used for this research is distributing questionnaires, and the sampling method used was accidental sampling. furthermore, the sample data used in this article are 113 data. the dependent variable in this study is taxpayer compliance. the independent variables in this study include tax knowledge (x1) and tax sanctions (x2), while the moderating variable is religiosity (z). the operationalization of research variables, along with indicators and measurement scales of each dependent and independent variable, can be seen in table 1 below: table 1. variable operationalization no. research variable dimension indicator scale 1 taxpayer compliance 1. formal 1. some parties are required to comply. 2. some parties have the authority to demand compliance. ordinal 2. material 3. there is an object or content of demands from parties that have the authority to be implemented by other parties. 4. there are consequences of the behavior. ordinal 2 tax knowledge 1. taxpayer responsibilities 1. has a tax id number. 2. know the general provisions and procedures for taxation. 3. know the deadline for payment and reporting of spt ordinal 2. taxpayer rights 4. right to overpayment tax 5. right to data confidentiality ordinal international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 63 3 tax sanction 1. administrative sanction 1. interest sanction 2. tax penalties ordinal 2. criminal sanction 3. imprisonment and criminal sanctions 4. imprisonment penalties ordinal 4 religiosity 1. intrapersonal 1. daily religious experience. 2. obedience 3. meaning of religion ordinal 2. interpersonal 4. involvement in religious organizations 5. religious support 6. religious influence ordinal source: processed research data, 2021 the data collection technique of this study uses survey techniques through disseminating questionnaires. this technique is a technique or approach to obtaining primary data by directly observing the object of study. in carrying out this method, researchers will go directly to get the necessary data because this method requires contact between researchers and respondents. the scale used in the questionnaire is as follows: table 2. interval scale for questionnaires no. respondent's answers value 1. very agreeable (ss) 5 2. agree (s) 4 3. neutral (n) 3 4. disagree (ts) 2 5. very disagree (sts) 1 furthermore, the equation model multiple linear regression and moderating regression analysis used to test the hypothesis in this study are as follows: taxcomp = a + β1taxknow + β2taxsanct + ε (1) taxcomp = a + β1taxknow*religios + β2taxsanct*religios + ε international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 64 (2) information: taxcomp = tax compliance a = constant β1, β2 = regression coefficient taxknow = taxation knowledge taxsanct = tax sanctions religios = religiosity ε = error 4. results and discussions results classical assumption test results the classic assumption test has been conducted in this study. therefore, the results of the classical assumptions in this study are expected and comply with all the standards determined by each classical assumption test. multiple regression analysis simultaneous test (f-test) the model feasibility test (f) determines whether all independent variables included in the regression model have a joint (simultaneous) influence. the f test results in this study are as follows: table 3. f-test results anovaa model sum of squares df mean square f sig. 1 regression 753.853 3 251.284 25.22 8 .000b residual 1085.687 109 9.960 total 1839.540 112 a. dependent variable: taxcomp b. predictors: (constant), taxknow, taxsanct, religious international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 65 the results of the f test in table 3 above obtained a significance value of 0.000 < 0.05. it can be concluded that together the free variables consisting of tax knowledge (x1), tax sanctions (x2), and religiosity (z) simultaneously affect the bound variables of tax compliance (y). determination test the results of the coefficient of determination (r²) test aim to see how much the influence of independent variables contributes to dependent variables. the following table is the results of the determination test: table 4. coefficient of determination test results model summaryb model r r square adjuste d r square std. error of the estimate change statistics durbinwatson r square change f change df1 df2 sig. f change 1 .640a .410 .394 3.156 .410 25.228 3 109 .000 1.798 a. predictors: (constant), taxknow, taxsanct, religious b. dependent variable: taxcomp the value of the adjusted r square (coefficient of determination) shows a value of 0.394 or 39.4%. the results showed that the ability to explain independent variables (tax knowledge (x1), tax sanctions (x2), and religiosity (z)) to the tax compliance variable (y) was 39.4%. in comparison, the remaining 60.6% was explained by other variables beyond the variables contained in the model. partial test (uji-t) the t-test was performed to show how far the influence of one independent variable individually is in explaining the variation of the dependent variable. here is a partial test table as follows: table 5. partial test results coefficientsa model unstandardiz ed coefficients standardi zed coefficie nts t sig. correlations collinearity statistics international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 66 the results of the t-test in table 5 show that the significance value of the tax knowledge variable (x1) to the tax compliance variable (y) is 0.000 < 0.05. this explains that the variable of tax knowledge has a significant influence on tax compliance. therefore, it can be concluded that the h1 hypothesis of tax knowledge positively affects tax compliance. in table 5, the tax sanctions (x2) show a significant value of 0.041 against the tax compliance variable (y). the significance value of 0.041 < 0.05 explains that the variable tax sanctions significantly influence tax compliance. therefore, it can be concluded that the h2 tax sanction hypothesis's positive effect on tax compliance is acceptable. therefore, the results of the first equation in this model are as follows: taxcomp = 9.824 + 0.276taxknow + 0.225taxsanct + ε (3) moderating analysis test interaction tests test the relationship between independent, dependent, control, and moderating variables that are listed factors that strengthen or weaken those relationships. the criteria are based on a significant ρ-value. if the significant level < 0.05, then the variable can moderate, and if the significant level > 0.05, then the variable is rejected or cannot moderate the influence of the independent variable on the dependent variable. here is the moderation test of this study: table 6. moderation test results coefficientsa b std. erro r beta zer oorde r partia l part tolera nce vif 1 (constant ) 9.824 2.73 4 3.59 3 .000 taxknow .276 .069 .342 3.99 0 .000 .528 .357 .294 .735 1.36 0 taxsanct .225 .109 .190 2.06 6 .041 .494 .194 .152 .642 1.55 7 a. dependent variable: taxcomp international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 67 model unstandardized coefficients standardize d coefficient s t sig. b std. error beta 1 (constant) 43.631 14.838 2.940 .004 taxknow*reli gios .024 .011 1.812 2.232 .028 taxsanct*relig ios .043 .020 2.266 2.137 .035 a. dependent variable: taxcomp table 6 above shows that the significance value for the variable interaction of tax knowledge with religiosity is 0.028. thus, the significance is less than the significance level of 0.05. this suggests that hypothesis 3 is accepted. so, religiosity is proven to strengthen the influence of tax knowledge on tax compliance. further referring to table 6 above, it can be seen that the significance value for the variable interaction of tax sanctions with religiosity is 0.035, and the regression coefficient is 0.043. the significance value is smaller than the significance level of 0.05. this suggests that hypothesis 4 is accepted. so, religiosity is proven to strengthen or weaken the influence of tax sanctions on tax compliance. therefore, the equation of the second model following the results of statistical processing is as follows: taxcomp = 43.631 + 0.024taxknow*religios + 0.043taxsanct*religios + ε (4) discussion the effect of taxation knowledge on the level of compliance of individual taxpayers the hypothesis test results show that tax knowledge positively affects tax compliance, which means that the higher the level of tax knowledge, the more likely the taxpayer is to comply with taxes. based on the theory of planned behavior, knowledge is the reason taxpayers comply with tax rules; good knowledge and understanding will cause an attitude in behavior because they know the impact of the actions taken. the greater and higher the level of tax knowledge, the higher the taxpayer's compliance level (zulma, 2020). this is international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 68 because knowledge increases the understanding that paying taxes will impact the community's welfare, including those taxpayers and their families because tax revenues are used to carry out development. the results of this study are consistent with previous studies, such as the research conducted by rahayu (2017), which states that tax knowledge has a positive effect on taxpayer compliance. knowledge of tax regulations is essential to give rise to the compliant behavior of taxpayers. some taxpayers provide further input to expand the scope of disseminating information about taxes. however, the dissemination of tax information is still limited among universities that study taxation majors, universities with economic faculties with an exchange corner, tax seminars, tax training, or tax officers who are met when taxpayers come to the tax service office. lack of media that better reaches all taxpayers can lead to low levels of taxpayer compliance. therefore, based on the findings of previous studies, it can be concluded that knowledge has a positive effect on tax compliance because if the taxpayer has a high level of tax knowledge, it will increase his compliance with carrying out his tax obligations. the tax knowledge in question is not only regulation but also what is the allocation of taxes paid by taxpayers. if the taxpayer knows the allocation of the tax paid, the taxpayer will tend to be more compliant with his tax obligations. the effect of tax sanctions on the level of compliance of individual taxpayers the hypothesis test results show that tax sanctions positively affect tax compliance. tax sanctions indicate that the strictness of sanctions imposed by the tax office if the taxpayer does not comply with paying or reporting taxes can increase taxpayer compliance. theory planned behavior is a supportive theory about tax sanctions. this theory describes a model that considers a selected action's potential costs and benefits. legal sanctions are potential losses arising from illegal actions that have been committed. therefore, when determining whether he is obedient or non-compliant in fulfilling his tax obligations, a person will consider the potential costs and benefits of an action he chooses. this study's results align with the research conducted by savitri & musfialdy (2016), which states that tax penalties positively affect tax compliance. tax penalties significantly affect the compliance of taxpayers to pay their taxes on time and report their taxes before the predetermined due time. a person will try to avoid all forms of sanctions that will cause losses if they violate the law by not complying with paying and reporting taxes. therefore, tax sanctions that expressly apply to taxpayers indiscriminately will increase taxpayer compliance. conversely, less strict tax sanctions cannot guarantee that the taxpayer's international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 69 behavior will comply with the tax rules. so referring to the research findings, it can be concluded that tax sanctions positively affect tax compliance. the existence of sanctions considered detrimental to taxpayers will make taxpayers choose to comply with applicable tax rules. the application of strict sanctions can be used as a guarantee that tax obligations will be fulfilled. the more severe the sanctions applied to violators of tax rules, the more it will shape the behavior of taxpayers who comply with their tax obligations. the influence of taxation knowledge on the level of compliance of individual taxpayers with religiosity as a moderation variable the moderating hypothesis test showed that religiosity could strengthen or weaken the effect of tax knowledge on tax compliance. this is in line with the theory of behavior, namely the theory of planned behavior which explains how a person can behave when the person has intentions and motivations. for taxpayers with high religiosity, taxpayers can distinguish which behavior is good and which is terrible. in terms of taxation, a reasonable taxpayer is supposed to comply with everything related to tax regulations. taxpayers assume that complying with all tax regulations is the same as complying with religious teachings. this result is consistent with research by shafer & wang (2018), which found that religiosity positively affects tax compliance. taxpayers who have high religiosity are likely to carry out their tax obligations. this is because taxpayers who understand religion very well will do good. with the taxpayer paying the tax means, the taxpayer is behaving well. religiosity can strengthen or weaken the influence of tax knowledge on taxpayer compliance because if taxpayers who know tax rules, the importance of taxes, and the role of taxes for the state are supported by a high level of taxpayer religiosity, then taxpayers will tend to be more compliant with their tax obligations. taxpayers who have knowledge of taxes and have high religiosity consciously and without coercion comply with all their tax obligations. this research is in line with research conducted by ermawati (2018) and (ermawati & afifi, 2018), which concluded that taxpayers who have high religiosity would not commit crimes by embezzling taxes or avoiding taxes because taxpayers are aware that embezzling or avoiding taxes means committing a crime prohibited by religion. so based on the results of the study, it can be concluded that religiosity can strengthen the positive influence of tax knowledge on taxpayer compliance because taxpayers with sufficient tax knowledge and a high level of religiosity will tend to comply with applicable tax obligations. in addition, international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 70 taxpayers tend to avoid things considered religious prohibitions in doing things, so the religiosity variable in this study is a moderation variable. the effect of tax sanctions on the degree of compliance of individual taxpayers with religiosity as a moderation variable the hypothesis test results show that religiosity can strengthen or weaken the effect of tax sanctions on taxpayer compliance. such results show that religiosity can strengthen the influence of tax sanctions on taxpayer compliance, following the theory of planned behavior, which explains that religiosity is considered behavioral belief. the taxpayer believes that complying with the applicable tax rules means having contributed to the development of the state. contributing to the development of the state is considered to be a positive act. it is one of the reflections of religious values. the theory of planned behaviour also explains that tax sanctions can be categorized as control beliefs. the better the application of tax sanctions, the higher the level of tax compliance. if the tax sanctions have been strictly implemented, it is expected that the violations committed by the taxpayer will be reduced and eventually increase the taxpayer's compliance. these results align with the studyadhimatra & noviari (2018), which says tax sanctions positively influence taxpayer compliance. religiosity has a dimension of consequence that, in this case, relates to the extent to which a person is willing to commit to the teachings of his religion in everyday life (marliani, 2013). therefore, this consequence is seen as a dimension related to taxpayer compliance. the more the taxpayer has a high level of religiosity in religion and knows what sanctions will be imposed if he commits a tax violation, the taxpayer will tend to be more compliant. so based on the results of the study, it can be concluded that religiosity can strengthen or weaken the effect of tax sanctions on taxpayer compliance because taxpayers who know sanctions for violations of tax rules and have high religiosity tend to have a high level of tax compliance. the application of strict tax sanctions against violators of tax rules and the attitude of taxpayers, which is a reflection of the high level of religiosity in daily life, will further increase taxpayer compliance with applicable tax rules. this explains that religiosity in this study proved to be a moderation variable. 5. conclusion this study aimed to determine the influence of tax knowledge and tax sanctions on tax compliance with religiosity as a moderation variable. based on the formulation of the international journal of commerce and finance harnovinsah harnovinsah &nindy elfania kansil & lucky nugroho & yananto mihadi putra 71 problem, hypothesis testing, and discussion submitted in the previous chapter, the following conclusions can be drawn:  tax knowledge has a positive effect on tax compliance. taxpayers who know tax rules will tend to have a high level of tax compliance. in addition to the rules, taxpayers who know the importance and role of taxes on the state will choose to comply with the applicable rules.  tax sanctions positively affect tax compliance since the imposition of strict sanctions on rule-breakers will tend to increase taxpayer compliance. the imposition of sanctions will be regarded as something that harms the taxpayer, so tax sanctions will be avoided and increase tax compliance.  religiosity can strengthen the influence of tax knowledge on tax compliance because by knowing tax rules and carrying out religious values in daily life, taxpayers will do things considered good by complying with applicable tax rules.  religiosity can strengthen the effect of tax sanctions on tax compliance. the imposition of strict sanctions on tax violators, supported by the high level of religiosity of taxpayers, tends to increase tax compliance. in carrying out daily life, taxpayers who have a high level of religiosity will avoid things that are considered to violate religious values. the imposition of sanctions considered detrimental to taxpayers will also be avoided so taxpayer compliance increases. the next suggestion for researchers is that in this study, the immense of religiosity is limited to two dimensions: interpersonal and intrapersonal. so subsequent researchers should develop the dimensions used on religiosity variables, such as beliefs, religious practices, passions, religious knowledge, and experiences. 6. references adhimatra, a. a. g. w., & noviari, n. 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(2020). pengaruh pengetahuan wajib pajak, administrasi pajak, tarif pajak dan sanksi perpajakan terhadap kepatuhan pajak pada pelaku usaha umkm di indonesia. ekonomis: journal of economics and business, 4(2), 288-294. international journal of commerce and finance, vol. 5, issue 1, 2019, 1-12 1 capital expenditures structure, cost of capital and shareholders' wealth hooshang asheghi-oskooee university of qom, iran abstract financing with reasonable cost, correct usage of capital and preventing the creation of unused resources are the financial management’s most important tasks. appropriate financing and correct investment in assets leads to sustainable growth in shareholders’ wealth. this study was carried out to investigate the relationship between the capital expenditures structure (ces) and the cost of capital with shareholders’ wealth. using systematic sampling in a five years period, 186 companies, including the listed companies in tehran stock exchange were selected. to analyze data, partial least squares method of structural equation modeling was used. the findings indicated that there is a significant positive relationship between the ces and shareholders’ wealth in total, but some components of the ces are not related to shareholders’ wealth and it is necessary to be studied carefully. because, understanding the relationship between the ces and shareholders’ wealth is very important to maximize shareholders’ wealth and will be most effective in capital expenditures’ budgeting. also, there is a significant inverse relationship between the cost of capital and shareholders’ wealth. keywords: assets structure, capital expenditures structure (ces), cost of capital, shareholders’ wealth, unused resources jel classification code no: g31, d24 1. introduction providing long-term resources to invest in various economic sectors is one of the major goals of the capital market. the capital markets play a significant role in advancing the countries' economic goals. typically, the main market capitalization of most countries is the stock exchange. the stock exchange, attracts and directs the savings and liquidity of the community towards productive investments. the main goal of the managers of the companies listed in the stock exchange is to maximize the wealth of their shareholders. the companies' capital structure (resources and expenditures of capital) is one of the factors that can affect this goal. the structure of capital resources (lefthand side of the balance sheet) is one of the important issues for managers (hassani and pakmaram, 2017). one of the important responsibilities of managers is to decide on how to obtain resources and allocate these resources to each of the asset considering the goal of maximizing shareholders' wealth. kind of financing model that can make a financial performance better for the company is the question of many corporate finance managers (rezagharehbagh and mohammadi, 2015). on the other hand, the proper use of capital and the prevention of the creation of unused resources while financing at the right cost is one of the most important tasks of financial management. proper financing and proper investment in assets can lead to sustainable growth of shareholders' wealth. due to certainty that all assets are related to the company's performance and, consequently, to the shareholders' wealth, many managers and even researchers in the field of financial management and investment have not paid much attention to studying and researching about. while, the preparatory studies undertaken to initiate this study yield a different result. it specifies that all components of assets do not necessarily have the same relation to the performance and wealth of the shareholders. an examination of existing databases shows that, there have been few researches on the structure of capital expenditures (asset structure) in a comprehensive manner. however, there are several studies on working capital (part of the ces). comprehensive analysis of all items on the right side of the balance sheet is one of the features of the present study. the results of this study can provide a comprehensive view for corporate executives and investors regarding capital structure and affect financing and investment practices. so, because decisions about capital expenditures in assets regardless of how they relate to corporate performance and shareholders' wealth can reduce in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e hooshang asheghi-oskooee 2 the company's return, and consequently reduce wealth and also reduce investors' willingness to invest in companies, this study examines the relationship between ces and cost of capital with shareholders' wealth. the study of the relationship between each component of the company's assets with the cost of capital and shareholders' wealth is a new topic that this paper addresses. in the research process, first, theoretical foundations and research background were reviewed, and then the hypotheses related to research questions were designed and analyzed using structural equation modeling. 2. literature review and research background 2.1 literature review literature in the last few decades, there have been many changes in the economic situation of countries. this changes, to a widespread, have led the new generation to investing on securities. business managers are facing a number of challenges. due to the expansion of online trading and transactions, investors are able to easily transfer their capitals to a company that generates higher returns. there is no trace of the effective rules restricting the displacement of capital. corporate executives must accept that the capital will go to where it will increase and not remain available to company forever. this situation creates challenges for corporates managers. in short, all these challenges are, management to create value. that is, key systems and processes in business units should be oriented toward value creation and their orientation towards creating value (izadinia, 2005). the importance and necessity of using financial management also begins at this point. financial management refers to the managing of capital resources and capital expenditures in such a way that maximize shareholders' wealth (neveu, 1989). capital sources are the same as the loans or debts that the company owns or the funds that shareholders have provided to the company in the form of capital and written on the left side of the balance sheet. capital expenditures are also the acquisition of assets (current assets, fixed assets, investments and other assets) derived from sources of capital and written on the right side of the balance sheet. given the fact that wealth is derived from the use of assets, the structure of capital expenditures is one of the important factors that financial managers have to pay attention to for maximizing shareholders' wealth. but the proper structure of corporates' capital expenditures is what seems to be neglected in capital market and competition. minimize the cost of capital is another effective factor in maximizing shareholders' wealth. because there are different financing methods, the costs of these methods are also varies. considering the cost of each financing method and its effect on the company's returns and risks, management should choose resources that will minimize financing costs and maximize shareholders' wealth (molanazari et al., 2009). given what has been noted, the ability of company to participate in creating wealth for shareholders is one of the key factors in deciding whether to invest or not. this goal (wealth creation) is possible through the proper utilization of resources and lowering the cost of capital. so, this study examines the relationship between capital expenditure structure and cost of capital with shareholders' wealth. 2.1.1 capital expenditures structure one problem with corporate assets is the problem of determining the optimal structure of assets. ces is an important and explicit indicator of investment in assets and financial performance of the company. due to use of each asset in different parts of the operation, the structure of capital expenditures is influenced by the management's intention to operate more effectively and increase returns. in fact, determining the structure is the decision about the ratio of assets. for example, when more capital is invested in current assets, the company's returns are lower. but, liquidity risk increases if less invested in current assets. deciding in these cases depends on manager's views about risk and return. in fact, deciding on the ces of a firm is at the discretion of its management, and what actually happens can be different from theory (chen and haque, 2015). the ces is the different types of assets shown in the balance sheet (neveu, 1989). it should be managed more efficiently (markovic et al., 2009). so, type of industry, organizational strategies, economic requirements, competition, macroeconomic variables such as interest rate and inflation, and financial indicators such as financing methods, business risk, financial risk, credit risk, political risk, etc. are the most important factors that managers have to put under consideration to allocate resources among different types of assets. the decision about the ratio of assets should be in such a way that it leads to the ultimate goal of financial management that is to maximize the capital expenditures structure, cost of capital and shareholders' wealth 3 wealth of shareholders. the ces that can maximize wealth, will be realized under the following conditions (reilly and brown, 2000; litterman, 2003): • the ces that yields the highest returns based on a certain amount of risk. • the ces that minimizes the risk of a company for an expected rate of return. 2.1.2 cost of capital issues related to the cost of capital are related to maximizing shareholders' wealth. each company has its own special risk and return. each of the investor groups, such as bondholders, preferred stock holders and ordinary share holders, requires a rate of return that is relevant to that risk. cost of capital can be defined as “the rate that makes the present value of the cash flow equal to the value of the capital of the asset in question” (goncalves et al., 2018). that is, the cost of capital is the minimum return that the company must acquire to preserve the shareholders' wealth. on the other word, the minimum return that a company must earn to have no change in the company's value. so, if the company earn a higher rate of return than the cost of capital, the market value of the company will be increased and in the opposite, the market value of the company will be reduced (neveu, 1989). given that the main purpose of financial management is to maximize shareholders' wealth, it seems that the best way to achieve this goal is to increase the return on investment and minimize the cost of capital. 2.1.3 maximizing shareholders' wealth many researchers like bohme et al. (2005), shen (2006), anglano et al. (2014), gonzalez-alcorta et al. (1994) and marston et al. (2011), who seems are not financial management specialists have investigated maximization of profit. however, it is possible to consider maximizing profit as one of the objectives of financial management. but it is not the main objective. the goal of financial management is to maximize the current value of the existing stock (ross et al., 2016), or to maximize shareholders' wealth (neveu, 1989). profit maximization is essentially a short-term goal. a company can increase the profit of each share by implementing high risk plans (neveu, 1989). but increase in the profit does not lead to an increase in share price and shareholders' wealth necessarily; because shareholders give less valence to the risky profits and stocks its profits are more fluctuating. moreover, the profit can be manipulated (likierman, 1983; lambert and sponem, 2005) and it seems the profit cannot be the only measure to evaluate the value of investment. regarding the above discussions, it can be concluded that, the company's performance depends on the use of its assets. on the other hand, the provision of assets requires cost. so, it is necessary, while paying attention to the cost of investing in assets, first, buy appropriate assets to the appropriate extent (the ces issues are shapes at this stage) and then, have to be used appropriately to maximize shareholders' wealth. the main question of the research arises at this point. how is the relationship between the ces and the cost of capital with shareholders' wealth? 2.2 research background based on a review of the research background, there is no comprehensive study on the ces. many previous studies have studied part of the ces that is, working capital management. given that the present study has a new and different view compared to previous studies, some researches that are related to the subject are briefly reviewed and then questions and research hypotheses are proposed. auerbach (1979) stated that investors who seek to maximize their utility, they tend to maximize current value of their investment. achieving this goal involves investing in projects that its current value considering the expected return rate of investors is positive. in this way, cost of capital is one of the factors affecting the maximization of shareholders' wealth and should be minimized. the capital structure (from an accounting standpoint), that been called the structure of capital resources from a financial management perspective that is, combination of liabilities and shareholders' equityaffect the cost of hooshang asheghi-oskooee 4 capital. so, to determine the cost of capital, it should be measured the debt and equity costs (gitman et al., 1982; francis et al., 2008; berry-stölzle and xu, 2018). yaghobnezhad et al. (2010) examined various variables of working capital and net operating profit and found an inversely relationship between the variables of working capital management and profitability. they mentioned, an increase in the receivables collection period, the payment period, the inventory turnover and the cash flow cycle, will reduce profitability. al-ani (2013) studied structure of fixed and current assets (it is introduced as the ces by neveu, 1989). the assets structure doesn’t have a strong impact on roe, he found. in other words, the change in the structure of assets does not correlate with the change in their returns. in another part of the results, it has been stated that, only the fixed assets affect roe, while they do not affect roa. on the other hand, current assets have no effect on roe and roa, while assets structure in the petrochemical industry affects roe. regarding the results of al-ani's research, it seems, the impact of assets structure on the shareholders' wealth can be different in different industries. so, it is important issue to be studied. tashakori jahromi et al. (2014) have studied the relationship between working capital variables, such as sales cycle and receivables collection period, with stockholders' wealth (adjusted return). they found, there is a significant positive relationship between working capital components and the optimal level of working capital with stock's adjusted returns. aktas et al. (2015) found that the existence of an optimal level of working capital policy and converge of that optimal level by increasing or decreasing investment in working capital, improve firms' stock and operating performance. also, efficient management of working capital can provide a new sources of internally-generated funds, which can be used at the benefit of firms' shareholders. mun and jang (2015) suggest that, working capital influences operating profitability. it has a significant inverse relationship with profitability and an increase in working capital has a negative effect on profitability. also, the cash level is an important factor in efficient management of working capital. harc (2015) found that tangible assets have a positive impact on the long-term debt. so, it can be concluded that the ces is related to the cost of capital and can ultimately affect the shareholders' wealth. in another study, ahmad et al. (2017) found a significant and positive impact of asset structure on capital structure. as it was identified before, the asset structure is the ces and the capital structure is liabilities and shareholders' equity, from the financial management perspective. according to the results of this research, it can be argued that the ces can be related to the shareholders' wealth and cost of capital too. 3. research questions and hypotheses there are several researches similar to those reviewed in the previous section. but, as previously mentioned, there is no comprehensive study on the ces and cost of capital which be directly related to the shareholders' wealth. so, given the literature review and study of research background, the following questions were raised. • is there a significant relationship between the ces and shareholders' wealth? • is there a significant relationship between cost of capital and shareholders' wealth? • how is the model of relationship between the ces and cost of capital with shareholders' wealth? to answer the first two questions, two main hypotheses and several sub-hypotheses has been raised based on research literature and background. h1: the ces has a significant relationship with shareholders' wealth. h1.1: the cash to total assets ratio (cta) has a significant relationship with shareholders' wealth. h1.2: the short-term investments to total assets ratio (stita) has a significant relationship with shareholders' wealth. h1.3: the current assets to total assets ratio (cata) has a significant relationship with shareholders' wealth. h1.4: the fixed assets to total assets ratio (fata) has a significant relationship with shareholders' wealth. h1.5: the long-term investments to total assets ratio (ltita) has a significant relationship with shareholders' wealth. capital expenditures structure, cost of capital and shareholders' wealth 5 h1.6: the other assets to total assets ratio (oata) has a significant relationship with shareholders' wealth. h2: the cost of capital has a significant relationship with shareholders' wealth. h2.1: the cost of debt capital (cdc) has a significant relationship with shareholders' wealth. h2.2: the cost of equity capital (cec) has a significant relationship with shareholders' wealth. 4. methodology the method (strategy) of this study is analysis of secondary data. it is applied research and has used quantitative data to explore and describe the subject. this study examined the business level; that is, companies that have one business, not holding companies having several businesses. for this study, the statistical population encompassed companies listed in the tehran stock exchange. the statistical population was screened, because 1) holdings, the group companies and companies reporting consolidated financial statements, have more than a business were excluded due to lack of access to detailed data about each business and because this study focused on the business level, 2) their fiscal year ended in march, 3) need to review past performance of business that require the presence of companies in the stock exchange not less than five years. finally, some 186 companies were selected as sample based on systematically eliminated sampling. 4.1 research variables the independent variables of the research are the ces and the cost of capital and the dependent variable is shareholders' wealth. 4.2 variables' measurement methods to measure variables, standard methods used by most researchers have been hired. 4.2.1 capital expenditures structure the cash to total assets (deakin, 1972), short-term investments to total assets (doukas and lang, 2003), current assets to total assets (öcal et al., 2007), fixed assets to total assets (deloof, 2003), long-term investments to total assets (doukas and lang, 2003) and other assets to total assets ratios are used to calculate the ces. 4.2.2 cost of capital companies combine equity and debt or loan financing. the firms' cost of capital is usually calculated as the weighted average cost of debt and equity (ross et al., 2016). it can be calculated by equation 1. equation 1: wacc = rdebt(1-tc) d/v + requity e/v there is wacc = weighted average cost of capital, rdebt = cost of debt capital, tc = tax rate, d/v = debt/total financial resources ratio, requity = cost of equity capital and e/v = equity/total financial resources. equation 2 (ross et al., 2016) has been used to calculate the cost of equity capital. equation 2: re = d1/p0 + g there is re = cost of equity capital, d1 = next period’s projected dividend, p0 = current stock price and g = the dividend growth rate. also, the equation 3 has been used to calculate the cost of debt capital. equation 3: rd = i(1-t) there is rd = cost of debt capital, i = interest rate debt, t = tax rate. hooshang asheghi-oskooee 6 4.2.3 shareholders' wealth for calculating the wealth created for shareholders, the formula provided by fernández (2002) is used. equation 4: created shareholder value=equity market value×(shareholder return×ke) ke is the cost of equity capital that is equal with re (mentioned in equation 2) and calculated by the same method. 5. data analysis and findings this section consists of categorizing and summarizing and describing and analyzing the data collected. it was done using descriptive and inferential statistics techniques. at first, the research variables were described using descriptive statistics techniques. then, the structural equation model has been used to construct a model and test the hypotheses. 5.1 descriptive statistics three main variables have been studied. research data has an interval scale. to describe the variables of the research, the measures of central tendency and index of dispersion are used, which are shown in table 1. table 1. descriptive statistics research variables sample size mean median standard deviation skewness kurtosis cta 186 0.043 0.029 0.049 3.425 18.403 stita 186 0.020 0.000 0.051 4.473 24.741 cata 186 0.646 0.681 0.196 -0.601 -0.388 fata 186 0.246 0.203 0.179 1.127 1.001 ltita 186 0.078 0.023 0.125 2.333 5.570 oata 186 0.014 0.004 0.033 5.815 43.695 cec 186 0.295 0.290 0.202 0.909 3.915 cdc 186 0.150 0.118 0.384 17.270 394.217 shareholders' wealth 186 891221.200 15452.376 8099648.740 4.443 93.511 5.2 inferential analysis of findings in the inferential statistics section, the following tests have been used to investigate the hypotheses: • confirmatory factor analysis • structural equation modeling 5.2.1 confirmatory factor analysis research variables have been extracted from literature review and previous researches. confirmatory factor analysis was used to determine the relationship between unobservable and observed variables. factor loads should be higher than 0.5 and ideally 0.7 or higher (fornell and larcker, 1981). figure 1 shows the path analysis model in the estimating mode of standard coefficients. the summary of the confirmatory factor analysis results is shown in table 2. it indicates the suitability of the observed variables' factor loads. capital expenditures structure, cost of capital and shareholders' wealth 7 figure 1. path analysis model in the estimating mode of standard coefficients table 2. factor loads of unobservable variables unobservable variables items factor loads c e s cta 0.881 stita 0.872 cata 0.850 fata 0.874 ltita 0.871 oata 0.503 cost of capital cec 0.928 cdc 0.913 shareholders' wealth 1.000 5.2.2 structural equation modeling the structural equation model of the relationship between variables, which was designed using smartpls software, was investigated after confirmatory factor analysis and identifying the factor loads. figure 2 shows the model in the absolute value of t-statistic. this model tests all measurement equations and structural equations using t-statistic. according to this model, if the value of t-statistic is more than 1.96, then the path coefficient in the 95% confidence level is significant. given that the absolute value of t-statistic for all paths is more than 1.96, the coefficient of paths is significant at 95% confidence level. shareholders' wealth cec cdc ltita fata cata cta stita oata shareholders' wealth cost of capital ces 1.000 -0.164 0.224 0.000 0.000 0.388 0.913 0.928 0.871 0.874 0.850 0.881 0.872 0.503 hooshang asheghi-oskooee 8 figure 2. model in the state of absolute significance of t-statistic validity, reliability and goodness-of-fit indexes of the model are shown in table 3 and the correlation coefficients and divergent validity index are shown in table 4. table 3. validity, reliability and goodness-of-fit indexes unobservable variables ave cr r 2 ave 2r gof (1) ces 0.673 0.923 0.000 0.860 0.515 0.442 (2) cost of capital 0.570 0.814 0.000 (3) shareholders' wealth 1.000 1.000 0.265 table 4. correlation coefficients and divergent validity index unobservable variables (1) (2) (3) ave ces 1.000 1.000 cost of capital 0.473 1.000 0.820 shareholders' wealth -0.434 -0.563 1.000 0.773 average variance extracted (ave) indicates the convergent validity of the measurement model. if the value is less than 0.5, the validity of the indexes, whether individually or structurally, is doubtful (fornell and larcker, 1981). given that all ave values are more than 0.5, the measurement model has credibility. composite reliability (cr) or convergent validity is present when cr is larger than 0.7 and cr should be larger than ave too (hair jr et al., 2014). as shown in table 3, both conditions are met. therefore, the model has the necessary reliability. the results of the main research hypotheses test in table 5 and the results of sub-hypotheses test are also shown in table 6. table 5. structural equation results for research hypotheses test independent variable dependent variable β t-value sig r 2 result relation direction ces shareholders' wealth 0.388 8.420 0.001 0.224 confirmed + cost of capital -0.164 3.719 0.001 confirmed |t|>1.96 significant at p<0.05, |t|>2.58 significant at p<0.01 shareholders' wealth cec cdc ltita fata cata cta stita oata shareholders' wealth cost of capital ces 1.000 3.719 8.420 77.401 87.463 59.440 71.558 53.921 77.327 68.109 10.717 capital expenditures structure, cost of capital and shareholders' wealth 9 table 6. structural equation results for research sub-hypotheses test independent variable dependent variable β t-value sig r 2 result relation direction cta s h a re h o ld e rs ' w e a lt h 0.120 1.579 0.115 0.244 unconfirmed stita 0.143 2.237 0.031 confirmed + cata -0.085 -1.147 0.252 unconfirmed fata 0.288 3.719 0.000 confirmed + ltita 0.138 2.852 0.005 confirmed + oata -0.008 -0.109 0.913 unconfirmed cdc -0.174 -1.639 0.009 0.141 confirmed cec -0.233 -3.530 0.000 confirmed 6. discussion and conclusion according to the research findings, it can be concluded that there is a direct and significant relationship between the ces and shareholders' wealth with 95% confidence. also, there is a reciprocal and significant relationship between the cost of capital and the shareholders' wealth with 95 percent confidence. although, in general, the existence of such a relationship is obvious and there is no doubt, but the most important part of the results is related to the details of the relationship. these details were investigated through sub-hypotheses. the results showed that despite the general relationship between independent variables and dependent variable of research, all components of the independent variables do not have the same relation to the dependent variable. this increases the importance of the issue and indicates the need to focus on the ces. the results of the testing of the sub-hypotheses shown in table 6 show that there is no relation between the cta, cata and the oata with the shareholders' wealth. cash is one of the components of current assets that mun and jang (2015) also have paid attention to the its importance in managing working capital. the absence of a relationship between cta and cata with shareholders' wealth, is the same as the results of al-ani (2013), yaghobnezhad et al. (2010) and tashakori jahromi et al. (2014). but, differs with the results of aktas et al. (2015) and mun and jang (2015), which focused on working capital and in particular on the cash flow cycle. the differences observed in the results of these studies can be attributed to the time, economic, and political conditions of the countries in which the research is carried out. also, the type of industry in which the company operates may have a significant impact on the research results. this could be the subject of future researches. in general, it seems, the absence of a significant relationship between the cata as well as the oata with shareholders' wealth, appears due to the concept of unused resources. current assets are items that, if invested in, excessively necessary, reduce stockholders' returns (stockholders' wealth) due to low returns or lack of returns. for example, cash surplus on need, does not produce any returns. other assets are not used in the company's operations. these assets are acquired and maintained in order to gain more future returns. obviously, in conditions of market downturn, holding such assets cannot increase the company's returns, and may even reduce the company's return due to the lack of increase in value or even their devaluation. this could reduce shareholders' wealth, especially if it is financed from debt. the results of harc (2015) and ahmad et al. (2017) also confirmed, the ces is related to the cost of capital and the capital structure (liabilities and shareholders' equity). perhaps one of the main reasons for the lack of comprehensive attention to the ces by the researchers is the perception of an obvious relationship between it and the shareholders' wealth, or the firm's performance and returns. but, as stated above, the lack of attention to the proper combination of assets (ces) can create unused resources and thus reduce the returns. hooshang asheghi-oskooee 10 the results of this study showed that the assumption of the existence of the relationship between all the components of the asset with the shareholders' wealth is not correct and it is necessary to decide more carefully on the composition of the assets. also, researchers need to deviate from focusing only on the left side of the balance sheet and working capital, and to consider the right side of the balance sheet comprehensively. what is remarkable as the final result of this study, is the absence of a relationship (in other words, the existence of a very weak relationship) between current assets (working capital) and other assets with shareholder wealth and the relationship between other components of the ces as well as the cost of capital with the shareholders' wealth. the relation between all elements of the ces (assets structure) with the shareholders' wealth is not the same. therefore, more attention should be paid to research in this field. references ahmad, g. n., lestari, r., & dalimunthe, s. 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(in persian) international journal of commerce and finance, vol. 3, issue 2, 2017, 11-24 11 persistent performance of fund managers: an analysis of selection and timing skills bilal ahmad pandow senior lecturer, middle east college, sultanate of oman (ibilalhussai@gmail.com) abstract the persistence in manager’s ability to select stocks and to time risk factors is a vital issue for accessing the performance of any asset management company. the fund manager who comes out successful today, whether the same will be able to sustain the performance in the future is a matter of concern to the investors and other stake holders. more than the stock picking ability of fund managers, one would be interested in knowing whether there is consistency in selectivity and timing performance or not. if a fund manager is able to deliver better performance consistently i.e. quarter-after-quarter or year-after-year, then the mangers’ performance in selecting the right type of stocks for the portfolio would be considered satisfactory. this paper has attempted to analyze the persistence in both stock selection and timing performance of mutual fund managers in india through henriksson & morton; jenson, and fama’s model over a period of five years. it is found that the fund managers present persistence in selection skills however, the sample funds haven’t shown progressive timing skills in indian context. keywords: persistence, selectivity, timing, performance, mutual funds 1. introduction the performance of mutual funds have been researched extensively in financial studies. most of the studies like (sharpe, 1966 & jensen, 1968) observed that the net performance of mutual funds is lesser compared to their respective proxy markets. while, hendricks et.al. (1993), goetzmann & ibbotson (1994) and brown & goetzmann (1995) examined and found persistence in fund mangers’ performance over short-term horizons. some studies like carhart (1997), explains this effect to modest momentum strategies, and not to outstanding expertise of fund managers. the main contribution of this paper is to elaborate performance persistence measurement in indian context. while the stock selection skills of the mangers are of utmost importance at the same time the performance of fund managers are also accessed on their market timing skills as well. the hypothesis of persistence for both skills are tested separately using t test and hypothetical deductive approach is used in the study. the stock selection is the center of the investment management and involves identification and selection of belittled scrips. it also includes other like successful forecasting of the company specific to envisage the general behavior of scrip values in the prospect. this skill of the fund manager to be capable of identifying and selecting the undervalued scrips for the portfolio would increase the returns of the mutual fund schemes and vice versa. (pandow, 2016). apart from the scrip selection skills, the performance of fund managers also depends on the market timing skills. timing the markets correctively produces higher performance and forecasting the market movements to revise the portfolio either to drive the maximum from the thriving market and to limit losses in falling market (pandow, 2016). the study use henriksson and merton (1981) hereafter referred to as hm; jenson, and fama’s model for a period of five years to assess the skills of select fund managers in india. this paper depicts the importance of these model in order to achieve the persistent yields. also, the investors may wish to check the skills base of the fund managers. in this paper first we look for how private foundation platforms satisfy more important concerns and needs of high net worth individuals. next will be discussion on views in respect of social importance of the project and the in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e bilal ahmad pandow 12 methodology that should be applied. afterwards analysis of social benefits, cost and net present value are going to be presented. 2. literature review based on the benchmarks, characteristic timing and characteristic selectivity, researchers used measures to check whether portfolio managers successfully time their portfolio weightings on these characteristics and whether managers can select stocks that outperform the average stock having the same characteristics. the researchers apply these measures to a new database of mutual fund holdings covering over 2500 equity funds from 1975 to 1994. the results show that mutual funds, particularly aggressive-growth funds, exhibit some selectivity ability, but that funds exhibit no characteristic timing ability (daniel, et.al. 1997). in a latest research by rao, et.al. (2017) it is observed that the chinese equity funds are successful in providing higher than market returns and fund managers possess positive market timing ability. they also found that chinese equity funds do not show persistence in performance as witnessed in developed markets. well performing funds (worst funds) of last year do not continue to provide higher (lower) return in the following year. moreover, they also observed a positive relationship of fund size, age and expense ratio with the fund’s performance. overall results suggest that emerging market equity funds show better performance than that of developed markets. also, the researcher found that stock-implied volatility innovations forecast mutual fund performance. specifically, mutual funds investing in fewer option-able stocks with favorable information outperform other funds. in addition, mutual fund managers overall do not trade on past options information. however, well-performing fund managers use that information to decrease their holdings in poorly performing stocks. moreover, well-performing mutual funds containing strong options information tend to increase their holdings in option able stocks in subsequent periods (chung, wang, & zykaj 2017). also one of the studies examine the short-term persistence in performance of equity mutual funds globally between 1990 and 2013. using a sample of 35 countries, the study observed strong evidence of persistence in daily mutual fund returns over quarterly measurement periods. they also analyzed that the post-ranking abnormal return disappears when performance is examined over longer time periods. the study results confirm that superior performance is a short-lived phenomenon (vidal, et.al. 2016). these findings are also substantiated in a study were evidence of underperformance of hong kong mutual funds relative to the market were found. there was no significant selectivity and timing ability in the results of the actively managed mutual funds. also, persistence was identified for the performance of both winners and losers in the short run (abdel & qing 2007). also, a similar kind of the study reveals that using a large sample of pension funds over the period 1983-97 in which there is less survivorship bias, the researchers found strong evidence of persistence in abnormal returns generated by fund managers over one year time horizons (tonks, 2005). the mutual funds have a lot of potential to grow but to capitalize the potential fully, however, the need is to create and market innovative products and frame distinct marketing strategies. moreover, the equity culture has not yet developed fully in india as such, investor education would be equally important for greater penetration of mutual funds. as such mutual funds are expected to perform better than the market, therefore calls for a continuous evaluation of the performance of funds (pandow & butt, 2017). similar results by bollen & busse, (2005) suggest that superior performance is a short-lived phenomenon that is observable only when funds are evaluated several times a year. however, as against these observations in a study conducted by christensen, (2005) analyzed that performance persistence using parametric as well as non-parametric methodologies. the study conclude by mentioning that in general danish mutual funds perform neutrally, returns are non-persistent and danish mutual funds have no timing ability. persistent performance of fund managers: an analysis of selection and timing skills 13 3. methodology the overall performance of the sample funds were analyzed through the excess return, (rp-rf), abnormal excess return, (rp-rm), and riskiness of funds vis-à-vis. market range. the poor or superior performance is further assessed on whether the fund performance is due to the scrip selectivity skills or market timing skills of fund managers. the daily returns for each of the sample schemes and the market portfolio have been calculated and due care has been taken for proper adjustments for the dividend, if any, paid by the schemes, as follows: return (rpt) = (nav_t nav_(t-1))/nav_(t-1) where: rpt = return of a scheme at the end of day t navt = net assets value of the scheme at the end of day ‘t’ navt-1 = net assets value of the scheme at the beginning of day ‘t’ similarly the daily returns for the market index i.e. for s&p cnx nifty have been calculated using the following formula: market return (rmt)= (mi_t mi_(t-1))/〖s&p cnx niftyt〗_(t-1) where: rmt = return of the market index for the day ‘t’ mit = market value of the market index at the end of day ‘t’ mit-1= market value of the market index at the beginning of day ‘t’ the daily returns are then annualized to obtain mean annual daily returns of each sample scheme and the market index as follows: mean annual daily portfolio return (rpt-a) = (rp1+rp2+rp3+……….rpn)/n mean annual daily market return (rmt-a) = (rm1+rm2+ rm3…….rmn)/n 3.1. excess return on the basis of mean annual daily return, excess return and abnormal excess return the overall performance of the sample schemes was assessed, defined as under: excess fund return (erp) = (r pt-a – r ft-a) where: erp = excess mean annual daily fund return r pt-a = mean annual daily return of the scheme for five years r ft-a = mean annual daily return of the 91, days treasury bills for five year study period 3.2. selectivity performance measurement model stock selectivity skills of sample fund managers were tested by using jensen’s alpha and fama’s net selectivity measure. jensen (1968) developed an absolute measure based on capital asset pricing model (capm) to regress the excess returns of a portfolio on the market factor. assuming that market beta or slope co-efficient is constant then the unconditional alpha is a measure of average performance as in jensen (1968). the absolute regression equation is based on the assumption that the funds systematic risk is stationary over time. owing to this assumption, jensen’s measurement model attributes funds overall performance to manager’s selectivity performance exclusively. this model is shown by the following regression specifications: rpt rft= α + β (rmt– rft) +et where: rpt= the average return of the fund at time ‘t’ rft= the risk-free return at time ‘t’ α = the jensen performance co-efficient β = the estimate co-efficient for the systematic risk level of the fund rmt = average return on the market portfolio bilal ahmad pandow 14 et = an error term here, the intercept α in the above equation is the jensen’s performance co-efficient indicating risk-adjusted selectivity performance of the fund. a positive and significant alpha (α) indicates average extra return yielded by a scheme over the benchmark market portfolio return after considering the level of systematic risk of the scheme, thus reflecting the superior performance of the scheme due to the fund manager’s selectivity abilities. 3.3. market timing performance measurement model henriskson and merton (1981) developed a model that allows evaluation market timing and selectivity skill simultaneously. it removes the biases in jensen’s performance co-efficient which ignores market timing activities of fund managers. hence, it is important to consider timing and selectivity performance simultaneously in fund performance evaluation which is the important feature of hm model. according to hm model, the fund beta would take only two values, large value when the market is expected to do well (rm› rf) and a small value otherwise. this in other words means that the fund manager is expected to increase its exposure to equities when the market performs well, otherwise reduce its exposure to equities when the market is expected to do poorly. the relationship is estimated by using a dummy variable in the regression equation which is given as under: rpt rft= α+ β (rmt– rft) + γ [dt(rmt– rft) ] + ept where: rpt= mean annual daily return of the scheme rft= mean annual weekly risk-free rate of return rmt = mean annual daily return of the market portfolio dt = dummy variable that is taken equal to zero when (rm› rf) and (-1) otherwise ept = the random error term here, α, β, and γ are the parameters of the above stated regression equation. the ‘α’ which is called the intercept measures the stock selection skills of fund managers. a positive and statistically significant ‘α’ indicates a superior stock selection performance of fund managers and vice versa. the above regression gives two betas (β), one for the up-market and the other for the down market, therefore, ‘γ’ co-efficient, refers to the beta differentials in the above equation, hence the intercept of the quadratic regression ‘γ’ co-efficient which is also referred to as gamma, captures market timing performance of fund managers. a statistically significant positive ‘γ’ co-efficient implies superior marketing performance. while a statistically insignificant negative value of ‘γ’ co-efficient indicates failure on the part of fund managers to time market correctively. conversely, a statistically significant negative ‘γ’ co-efficient implies that the fund manager has timed the market but in a wrong direction. the hypothesis test is performed on the data set collected from the database of association of mutual funds in india for net asset value (nav), national stock exchange (nse) for s&p cnx nifty and reserve bank of india (rbi) for risk free rate. the fund returns were calculated on the basis of daily navs for the reason that the pa st research has revealed that the high frequency data such as daily navs have more revealing power than less frequency data. also, the daily yields obtained were annualized using geometric averaging to obtain average annual fund return. the yields on 91-day treasury bills issued by rbi have been used as a proxy for risk-free return. besides, s&p cnx nifty is used as surrogate for the market return as well as for bench-mark variability. the fact that there were huge number of schemes in existence through the period of the study, it was not possible to study all the schemes. in view of this fact, an adequate and representative sample was drawn from the universe using convenience sampling technique. besides, the availability of consistent data during the study period from 1st april 2007 to 31st march 2011 was available for forty schemes out of five hundred eighty seven schemes that accounts for around seventy percent of the total schemes. the schemes belong to nineteen fund houses consisting of all the three sectors i.e. public, private and foreign sector funds. persistent performance of fund managers: an analysis of selection and timing skills 15 further, the total sample size of forty schemes, thirty three schemes belonged to the private sector and seven to the public sector including unit trust of india (uti). further, thirty seven schemes are open and three schemes are close-ended in nature. while aim wise, the select sample consisted of twenty eight growth schemes, three income schemes, three balanced funds and six tax-saving schemes. the mutual fund industry in india consists of public sector, private sector and foreign funds. all the three sectors were studied to check the persistence in selection and time performance. the period of study is five years. the rationale for selecting the study period of 5-years is because of two reasons. during this period, the stock market experienced higher volatility, as such chosen to find-out whether the funds have succeeded in surpassing the market performance even under depressed market conditions. also, the five years are long enough to capture different market phases and to draw meaningful conclusions. 3.4. objectives of the study the study is aimed to achieve the following specific objectives: to study the consistency in the selection performance of fund managers to study the consistency in the timing performance of fund managers. 3.5. hypothesis in line with the above stated objectives, the following hypotheses are set to provide a direction to the study: h1: there exists persistence in the timing performance of fund managers h2: there exists persistence in the selection performance of fund managers . 4. discussion and findings in the present study, the phenomenon of performance persistence in mutual funds using a sample that contains the schemes that belong to 19 fund houses involving all the three sectors i.e. public, private, and foreign sector. the analysis is conducted through two dimensional approach i.e. assessing the persistence in selectivity performance and measuring persistence in terms of timing skills of the fund managers. for the selectivity two models are used one by fama and another by jensen. 4.1. persistence in selectivity performance to comment about the selectivity performance of fund managers using mean jensen alpha or mean fama’s net selectivity for the study period as a whole is meaningful. but more important issue is the persistence in manager’s ability to select stocks and to time risk factors. a fund manager who comes out successful today, whether he/she will be able to repeat the same performance in future consistently, is a matter of concern to the fund investors and other stake holders. rather to conclude about the stock picking ability of fund managers, one would be interested in knowing whether there is consistency in selectivity performance or not. if a fund manager is able to deliver better performance consistently i.e. quarter-after-quarter or year-after-year, then his or her performance in selecting the right type of stocks for the portfolio would be considered satisfactory. conversely if the fund manager’s performance varies significantly from period to period, then it would be an indication that there is something wrong with his/her stock selection skills or market timing ability. as per the standard practice, a fund manager is expected to perform better than the market and more importantly perform consistently. hence it is imperative to analyze the persistence in the stock selection performance of fund managers. bilal ahmad pandow 16 table 1: persistence in selectivity performance of sample fund managers jensen model scheme 2007 2008 2009 2010 2011 average variance icici prudential discovery fund – g 0.0653 0.5510 1.8581 -0.5527 -0.1452 0.3553 0.863943 hdfc equity fund 0.2832 0.6752 1.2158 -0.4587 -0.2041 0.30228 0.452366 icici pru tax plan 0.1790 0.6133 1.4186 -0.5690 -0.1600 0.29638 0.58269 reliance growth fund 0.3920 0.5733 1.3139 -0.6307 -0.1846 0.29278 0.552982 franklin india bluechip fund 0.2566 0.8182 1.0142 -0.5342 -0.1483 0.2813 0.418903 baroda pioneer growth 0.4731 0.8285 0.9159 -0.5911 -0.2545 0.27438 0.446714 reliance regular savings fund 0.2963 0.7375 1.0888 -0.5985 -0.1567 0.27348 0.456496 birla sun life frontline equity 0.2520 0.7401 1.0576 -0.5324 -0.1855 0.26636 0.423223 hdfc tax saver fund 0.2202 0.6212 1.1964 -0.5451 -0.1816 0.26222 0.463017 tata pure equity fund 0.3556 0.6783 0.9619 -0.6182 -0.1522 0.24508 0.404202 tata tax advantage fund 0.3562 0.5946 0.9392 -0.5268 -0.1428 0.24408 0.34064 principal index fund 0.3243 0.8755 0.7372 -0.5528 -0.1794 0.24096 0.36565 quantum long-term equity fund 0.1459 0.4503 1.0377 -0.4478 0.0095 0.23912 0.3039 sundaram growth fund 0.3984 0.6005 0.9542 -0.5768 -0.1970 0.23586 0.380794 uti opportunities fund 0.4719 0.1874 1.0678 -0.5344 -0.0160 0.23534 0.35173 fidelity equity fund 0.1644 0.7111 0.9713 -0.4881 -0.1955 0.23264 0.370492 l&t growth fund 0.2107 0.7761 0.8958 -0.5355 -0.1850 0.23242 0.375018 ing core equity fund –growth 0.2148 0.7515 0.8770 -0.5294 -0.1947 0.22384 0.361918 birla sun life top 100 fund – growth 0.1131 0.6959 0.9134 -0.5134 -0.1540 0.211 0.349015 sundaram select focus 0.4836 0.6001 0.7937 -0.6077 -0.2206 0.20982 0.355448 morgan stanley growth fund 0.1657 0.7097 1.0100 -0.6142 -0.2399 0.20626 0.443327 ing tax savings fund 0.0028 0.5740 1.1793 -0.5002 -0.2322 0.20474 0.453689 baroda pioneer elss 0.3099 0.6164 0.9686 -0.6539 -0.2245 0.2033 0.421376 uti growth retail 0.2348 0.5806 0.8917 -0.5186 -0.1805 0.2016 0.321417 hsbc equity fund 0.4195 0.6708 0.6449 -0.5682 -0.2050 0.1924 0.305409 lic nomura mf equity fund 0.1117 0.8036 0.7742 -0.5572 -0.2220 0.18206 0.362916 sahara growth fund 0.2827 0.6151 0.7923 -0.6433 -0.2101 0.16734 0.350993 ing balanced fund (d) 0.2667 0.6385 0.6575 -0.5827 -0.1773 0.16054 0.288307 lic nomura mf india vision fund (d) 0.4904 0.5047 0.5528 -0.5890 -0.2078 0.15022 0.269518 sbi magnum nri-flexi asset (d) b 0.2205 0.5622 0.7168 -0.5802 -0.2162 0.14062 0.290749 sbi one india fund -0.0542 0.5556 0.8404 -0.6320 -0.1764 0.10668 0.347885 kotak 50 growth 0.3298 0.6074 0.7128 -0.9292 -0.2164 0.10088 0.461286 jm balanced fund (d) 0.0896 0.4635 0.4940 -0.6130 -0.1695 0.05292 0.214348 principal personal tax saver fund -0.1842 0.4525 1.0608 -0.9938 -0.2761 0.01184 0.606788 persistent performance of fund managers: an analysis of selection and timing skills 17 source: amc reports, nse historical data and rbi reports table 1.1: anova single factor test (jensen model) source of variation ss df ms f p-value f critical between groups 2.0853694 39 0.053471 0.142557 1 1.475066 within groups 60.013624 160 0.375085 total 62.098994 199 the above mentioned table 1.1 of anova single factor test shows the f critical value 1.475 and f value is 0.1425 which means that f value is less than f critical value which depicts that the means of the five populations are almost equal. it also reveals that there is consistency in the fund manager’s skills of selectivity according to the jensen’s model so we accept the hypothesis: h2: there exist persistence in the selection performance of fund managers. table 2: persistence in selectivity performance of sample fund managers quantum liquid fund – growth 0.1687 0.4055 0.1604 -0.5981 -0.1425 -0.0012 0.14916 kotak equity arbitrage growth 0.1867 0.3730 0.1698 -0.5934 -0.1454 -0.00186 0.144016 templeton india tma 0.1712 0.4012 0.1586 -0.6040 -0.1440 -0.0034 0.15023 sbi arbitrage opportunities fund 0.1845 0.3694 0.1692 -0.6007 -0.1403 -0.00358 0.144896 hsbc cash fund 0.1705 0.3893 0.1392 -0.6104 -0.1540 -0.01308 0.148863 sahara growth fund – div -0.3704 0.6038 0.7926 -0.9336 -0.1917 -0.01986 0.509093 fama model scheme 2007 2008 2009 2010 2011 average variance uti opportunities fund 0.5519 -0.507 1.5996 -0.1627 -0.2395 0.24846 0.723883113 icici prudential discovery fund – growth 0.184 -0.6616 2.2403 -0.2033 -0.3746 0.23696 1.347855123 reliance growth fund 0.52 -0.6086 1.7914 -0.2323 -0.438 0.2065 0.97062599 hdfc equity fund 0.4054 -0.6668 1.7858 -0.1051 -0.4684 0.19018 0.961913862 reliance regular savings fund 0.3939 -0.3728 1.452 -0.2858 -0.3453 0.1684 0.615390495 tata tax advantage fund 0.4765 -0.5346 1.4165 -0.1965 -0.3529 0.1618 0.63789403 icici pru tax plan 0.2923 -0.6847 1.8179 -0.2298 -0.3999 0.15916 0.986270578 sundaram select focus 0.6439 -0.6298 1.4416 -0.2 -0.4665 0.15784 0.755630183 tata pure equity fund 0.4922 -0.6007 1.4748 -0.2313 -0.3654 0.15392 0.711674097 hdfc tax saver fund 0.3382 -0.6693 1.7004 -0.2233 -0.3942 0.15036 0.886479443 birla sun life frontline equity 0.3868 -0.6835 1.5855 -0.1603 -0.4347 0.13876 0.812246308 sundaram growth fund 0.557 -0.7981 1.5515 -0.1627 -0.456 0.13834 0.873270593 franklin india bluechip fund 0.383 -0.6495 1.4801 -0.193 -0.3852 0.12708 0.716029167 baroda pioneer growth 0.6088 -0.7254 1.4646 -0.1836 -0.5313 0.12662 0.819430322 uti growth retail 0.3507 -0.5018 1.3163 -0.1547 -0.3961 0.12288 0.553192312 bilal ahmad pandow 18 source: amc reports, nse historical data and rbi reports the issue of persistence in fund manager’s ability to select undervalued stocks has two dimensions. first, one can ask if some managers who did particularly well or poorly in the past quarter/year continues to do so in the next, that is, one can examine if there is persistence in general. the second question is if managers exhibit persistence in general, that is, no matter what the performance over the previous quarter/year was, it remains unchanged or is better in the next. in this study we check persistence by addressing both of these questions. to test for persistence in the stock selectivity performance of sample fund managers, across the two measurement criterion namely jensen (1968) and fama (1972), we have calculated yearly alpha’s and also assigned ranks to each fund on the basis of the excess return (alpha)the said data is presented in table 1, the perusal of which reveals sahara growth fund 0.4919 -0.5262 1.3115 -0.2403 -0.4355 0.12028 0.603488062 fidelity equity fund 0.2846 -0.6111 1.4443 -0.1405 -0.4219 0.11108 0.669122222 birla sun life top 100 fund – growth 0.2491 -0.5996 1.4276 -0.1267 -0.4018 0.10972 0.644229117 quantum long-term equity fund 0.2547 -0.9189 1.5115 -0.1203 -0.2351 0.09838 0.803808132 hsbc equity fund 0.5447 -0.5864 1.0873 -0.1812 -0.4518 0.08252 0.506423317 kotak 50 growth 0.4239 -0.6696 1.2299 -0.1888 -0.3934 0.0804 0.574699395 baroda pioneer elss 0.4289 -0.8203 1.5164 -0.2193 -0.5126 0.07862 0.859065497 morgan stanley growth fund 0.2967 -0.7946 1.5467 -0.2028 -0.4685 0.0755 0.835954945 l&t growth fund 0.3625 -0.8747 1.4664 -0.1492 -0.4325 0.0745 0.807100235 principal index fund 0.4675 -0.8154 1.3121 -0.1351 -0.4645 0.07292 0.703116362 ing tax savings fund 0.1339 -0.9205 1.6704 -0.1207 -0.4468 0.06326 0.962418803 ing core equity fund -growth 0.3523 -0.8214 1.3472 -0.1413 -0.4433 0.0587 0.703253305 sbi magnum nri investment fund-flexi asset (d) b 0.3281 -0.7255 1.2858 -0.2642 -0.3416 0.05652 0.614450287 sahara growth fund – div 0.1003 -0.5236 1.3108 -0.2118 -0.4211 0.05092 0.552908477 ing balanced fund (d) 0.3678 -0.4882 1.0184 -0.325 -0.351 0.0444 0.40743096 lic nomura mf equity fund 0.2766 -0.8012 1.3256 -0.1457 -0.4881 0.03344 0.682380823 lic nomura mf india vision fund (d) 0.6523 -0.8912 1.0179 -0.1696 -0.4951 0.02286 0.631782103 sbi one india fund 0.0598 -0.797 1.4278 -0.2464 -0.396 0.00964 0.723615548 equity arbitrage growth 0.1899 0.3506 0.184 -0.5557 -0.1608 0.0016 0.131871175 sbi arbitrage opportunities fund 0.1872 0.3505 0.1786 -0.5602 -0.1534 0.00054 0.131786548 quantum liquid fund – growth 0.1694 0.3992 0.1625 -0.5928 -0.1449 0.00132 0.146715597 templeton india tma 0.1719 0.3952 0.1607 -0.5988 -0.1465 -0.0035 0.147879895 principal personal tax saver fund -0.0377 -0.794 1.4852 -0.2181 -0.4756 0.00804 0.777779023 hsbc cash fund 0.1719 0.3778 0.1431 -0.5994 -0.158 0.01292 0.144042447 jm balanced fund (d) 0.1928 -0.7073 0.985 -0.2569 -0.3668 0.03064 0.425878983 persistent performance of fund managers: an analysis of selection and timing skills 19 short term persistence (i.e. in the first three years) in terms of first question defined above i.e. whether the managers repeat the past performance with positive selectivity performance, in case of all the sample forty funds except three funds namely, sbi one india, principal personal tax saver fund and sahara growth fund-div. however, with respect to the long term persistence i.e. for all the five years, none of the sample funds have shown persistence in their performance as during the first three years most of the sample funds have reported positive alpha’s and in the last two years of the period under study i.e. for 2010 and 2011, all the sample funds have reported negative alpha’s. as such it can be inferred that fund managers have failed to perform well consistently in the long run. as already stated that the other way to look into the persistence in performance is that if managers exhibit persistence in performance in general i.e. no matter what the performance over the previous year was, it improves or remains unchanged in the next, in terms of this question, during the short run i.e. first 3years of the period under study 30 sample funds i.e. 75 percent of the sample fund have exhibited persistence in general. but in the long run i.e. during the entire study period, none of the sample funds have exhibited persistence in general as in case of all the sample funds the alpha’s were positive in the first three years then negative in the last two years. what emerges from the above is that 75 percent of the sample funds have exhibited persistence in general in first three years of the time series but no such persistence for the entire time series. the table 2 presents year-wise fama’s net selectivity along with the ranks occupied by each fund. it can be observed from the data contained in the above referred table that all the sample 40 funds except four funds namely sbi arbitrage opportunity fund, hsbc cash fund, templeton india tma and quantum liquid fundgrowth have reported neither short term (2007-09) nor long run i.e. for the entire study period persistence in stock selectivity performance based on fama’s net selectivity. the above mentioned four sample funds have reported persistence only for the first three years of the study period. however, when one looks into the entire period of study, these four funds have also exhibited either little or no persistence. with respect to the persistence in general terms; none of the funds have exhibited persistence in general terms (i.e. no matter what the performance over the previous year was, it remains unchanged in the next). it can also be seen from the above referred table that on the basis of fama’s net selectivity, none of the sample funds have shown persistence in selectivity performance but during the last two years of time series, all the sample funds have consistently reported negative net selectivity performance. what emerges from the above discussion on persistence of selectivity performance is that on the basis of jensen alpha majority of the funds reported persistence in selectivity performance in the short run. but in the longer run i.e. for the entire time series no such persistence in selectivity performance has been observed for the sample funds. however, on the basis of fama’s net selectivity, no persistence neither in the short run nor in the long run in the selectivity of performance of fund managers of sample funds has been observed. lack of persistence is indicative of the fact that the fund managers have failed in picking up under -valued stocks consistently which in turn implies poor selectivity performance on the part of sample fund managers during the period under study. short run persistence was observed on the basis of jensen alpha but no such persistence has been found with respect to fama’s net selectivity, as such the hypothesis set in this regard for the study is rejected. besides, no relative persistence over the longer run has been observed across both the measurement criterion, therefore the hypothesis that there is no persistence in the selectivity performance of fund managers across both the criterion is accepted. the finding about the existence of short term persistence in selectivity performance based on jensen alpha corresponds with the findings of benjamini and hochberg (1995); benjamini and yekutieli (2001); and storey (2002). a common conclusion in the literature, however, is that expect for the very best fund managers, persistence primarily exists among poor performers carhart (1997). the similar finding emerges from the present study i.e. poor performers namely hsbc cash, quantum liquid fund-growth, sbi arbitrage opportunity fund and templeton india. tna which have performed poorly compared to other sample funds, have been found to report persistence in selectivity performance, however, in the short run only. with regard to the long run persistence, the finding of the absence of relative long term persistence in selectivity performance of the sample funds across both the measurement criterion is line with the findings of other studies like: berk and green (2004), elton et.al (1992), henrikson (1984). this lack of persistence in the long run could potentially be attributed to several factors. one is the diminishing investment opportunities of well performing bilal ahmad pandow 20 funds. another possibility is that management fee rise overtime so as to capitalize on a good performance record. finally, the performing managers may simply wish to exploit their reputation and find a more lucrative job, perhaps in a hedge fund. table 2.1: anova single factor test (fama model) source of variation ss df ms f p-value f critical between groups 0.990902 39 0.025408 0.03826 1 1.475066 within groups 106.2519 160 0.664075 total 107.2428 199 the above mentioned table 2.1 of anova single factor test shows the f critical value 1.475 and f value is 0.0382 which means that f value is less than f critical value which depicts that the means of the five populations are almost equal. it also reveals that there is consistency in the fund manager’s skills of selectivity as per the fama’s model so we accept the hypothesis: h2: there exist persistence in the selection performance of fund managers. 4.2. persistence in timing performance showing timing performance persistently is the real test for a fund manager. a fund manager is expected to time the market successfully every time. only such managers would be able to deliver superior abnormal returns to unit holders, who perform consistently. a fund manager who comes out successful once, whether to maintain same standard is of prime concern to different stake holders. therefore, if one has to comment on the timing ability of fund managers, one should see that whether the manager has been able to time the market successful, if not every time but at least most of the times. it is in view of this fact that an effort has been made to also study the persistence in the timing performance of sample fund managers by assessing the consistency in their timing abilities. the table 3 presents the ‘y’ co-efficient of each sample fund on yearly basis. it becomes clear from the above referred table that 33 funds or 82.5 percent of the sample funds have shown positive ‘γ co-efficient’ for all the five years. three funds namely lic nomura mf india vision fund (d), hdfc equity fund and sbi magnum nri investment fund flexi asset (d) balanced have reported positive ‘ γ’ co-efficient in all the years except in 2010. during 2010, ‘γ’ coefficient were very low for all the sample funds as compared to other years. this is perhaps that like other world equity markets, indian equity market was in deep recession in the year 2010 due to global e conomic crisis. it can be seen that the performance of the sample funds was at its best in the year 2007 and 2008, which declined in 2009 and reached at its lowest level in 2010, however, shown marked improvement in 2011 across the board. table 3: persistence in market timing performance of sample fund managers hm model scheme 2007 2008 2009 2010 2011 average variance principal index fund 0.8087 0.9269 0.5915 0.0013 0.4395 0.5536 0.1310 lic nomura mf equity fund 0.8950 0.8611 0.5468 0.0055 0.4025 0.5422 0.1334 l&t growth fund 0.8445 0.8872 0.5804 0.0003 0.3857 0.5396 0.1325 sundaram growth fund 0.8556 0.7530 0.6149 0.0248 0.4059 0.5308 0.1084 sundaram select focus 0.8749 0.6656 0.6498 0.0134 0.3795 0.5166 0.1101 kotak 50 growth 0.7859 0.7652 0.7104 0.0037 0.3179 0.5166 0.1186 baroda pioneer growth 0.7346 0.8486 0.5505 0.0076 0.4337 0.5150 0.1062 persistent performance of fund managers: an analysis of selection and timing skills 21 ing core equity fund –growth 0.7961 0.8539 0.4778 0.0006 0.3816 0.5020 0.1192 lic nomura mf india vision fund (d) 0.8554 0.7399 0.4615 -0.0041 0.4365 0.4978 0.1109 principal personal tax saver fund 0.8592 0.7269 0.4862 0.0137 0.3832 0.4938 0.1077 sbi one india fund 0.6491 0.7319 0.7118 0.0379 0.3336 0.4929 0.0905 baroda pioneer elss 0.6407 0.7780 0.5581 0.0295 0.4567 0.4926 0.0809 hdfc equity fund 0.6703 0.6913 0.6807 -0.0032 0.4141 0.4906 0.0896 birla sun life frontline equity 0.7483 0.7686 0.5220 0.0053 0.3905 0.4869 0.0975 morgan stanley growth fund 0.7267 0.8138 0.5322 0.0306 0.3239 0.4854 0.1003 sahara growth fund 0.8942 0.5748 0.5124 0.0670 0.3297 0.4756 0.0937 birla sun life top 100 fund – growth 0.7574 0.6908 0.5208 0.0119 0.3872 0.4736 0.0876 franklin india bluechip fund 0.7062 0.7987 0.4698 0.0146 0.3735 0.4726 0.0951 tata pure equity fund 0.7535 0.6937 0.5111 0.0290 0.3294 0.4633 0.0865 hdfc tax saver fund 0.6417 0.6886 0.6059 0.0151 0.3352 0.4573 0.0800 quantum long-term equity fund 0.6068 0.7040 0.5600 0.0258 0.3779 0.4549 0.0716 ing tax savings fund 0.6968 0.7797 0.4746 0.0011 0.3187 0.4542 0.0972 fidelity equity fund 0.6923 0.7212 0.4790 0.0076 0.3523 0.4505 0.0846 hsbc equity fund 0.6931 0.6808 0.4573 0.0195 0.3835 0.4468 0.0755 reliance growth fund 0.6885 0.6274 0.4688 0.0246 0.3911 0.4401 0.0682 sbi magnum nri investment fund-flexi asset (d) balanced 0.5986 0.6891 0.6940 -0.0014 0.1675 0.4296 0.1051 sahara growth fund – div 0.6623 0.5591 0.5100 0.0569 0.3467 0.4270 0.0558 icici pru tax plan 0.6073 0.6840 0.3901 0.0237 0.3802 0.4171 0.0661 tata tax advantage fund 0.6538 0.6047 0.4703 0.0007 0.3265 0.4112 0.0689 uti growth retail 0.6624 0.5851 0.4344 0.0178 0.2942 0.3988 0.0654 icici prudential discovery fund – growth 0.6367 0.6172 0.3351 0.0292 0.3573 0.3951 0.0617 jm balanced fund (d) 0.5588 0.6133 0.4675 0.0407 0.2929 0.3946 0.0539 ing balanced fund (d) 0.5595 0.6022 0.3572 0.0106 0.2744 0.3608 0.0570 reliance regular savings fund 0.5415 0.5791 0.3603 0.0165 0.2879 0.3571 0.0510 uti opportunities fund 0.0778 0.0638 0.5284 0.0230 0.3295 0.2045 0.0473 templeton india tma -0.0005 0.0000 0.0001 -0.0005 -0.0009 -0.0004 0.0000 quantum liquid fund – growth -0.0001 -0.0003 0.0002 -0.0006 -0.0011 -0.0004 0.0000 hsbc cash fund -0.0005 0.0001 -0.0007 -0.0007 -0.0023 -0.0008 0.0000 kotak equity arbitrage growth -0.0297 -0.0202 -0.0115 0.0118 -0.0066 -0.0112 0.0002 bilal ahmad pandow 22 source: amc reports, nse historical data and rbi reports during the study all the sample funds recorded neither increasing nor decreasing trend in ‘γ’ co-efficient but a fluctuating trend. the other thing that can be observed from the above table is that five funds namely templeton india tma, quantum liquid fundgrowth, hsbc cash fund, kotak equity arbitrage growth and sbi arbitrage opportunities fund have reported negative ‘γ’ co-efficient for all the five years of study period. this in other words means that these funds have performed badly throughout the study period. what emerges from the above is that majority of the sample funds have shown persistence in their superior performance during the entire period of study, compared to the consistent timing performance, the sample fund managers have failed to report consistency in their selectivity performance. the γ co-efficient were positive and statistically significant even at 1 percent level for all the five years which reinforces the above finding of persistence in market timing performance of sample fund managers. thus the hypothesis that the indian fund managers lack persistence in market timing performance is accepted. the finding of not persistence of market timing performance is in not in conformity with the findings of a study viz. chance and hemler, (2001) but similar to the study like bollen and busse (2001). table 3.1: anova single factor test (hm model) source of variation ss df ms f p-value f critical between groups 5.449537 39 0.139732 1.797571 0.006226 1.475066 within groups 12.43738 160 0.077734 total 17.88692 199 the above mentioned table 3.1 of anova single factor test shows the f critical value 1.475 and f value is 1.797 which means that f value is more than f critical value which depicts that the means of the five populations are not equal. it also reveals that there is no consistency in the fund manager’s skills of timing as per the hm model so we don’t accept the hypothesis: h1: there exist persistence in the selection performance of fund managers. 5. conclusion the primary focus of the study is the performance persistence of the fund managers taken into account both selection and timing skills of mutual fund. using the models by jensen (1968), fama (1972) and henriksson & merton (1981) for calculations of five years yield of alpha and gamma for the select sample. the year wise returns were tested to check the hypothesis using anova single factor test for all the three models were used. and it was found that the sample fund do possess the persistence in selectivity skills while checking for both jensen and fama model. while as the same funds failed to keep the consistency in terms of the timing skills for the duration of the study into consideration. so it is comprehended that the fund managers possessing selectivity skills consiste ntly, need necessarily not possess the timing skills and vice versa. the study implies that the fund mangers in india should stress more on timing skills and exhibit consistency in the performance. though the paper has limitations in terms of the scope of the study restricted to forty schemes and time period of the research is five years which the future researchers can take into consideration. references abdel-kader, m., & qing, k. y. 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(2016). the short-term persistence of international mutual fund performance. economic modelling, 52, 926-938. international journal of commerce and finance, vol. 5, issue 2, 2019, 219-229 219 factors affecting the disclosure of sustainability reporting nurul hidayah, universitas mercu buana, jakarta indonesia ahmad badawi, universitas mercu buana, jakarta indonesia lucky nugroho, universitas mercu buana, jakarta indonesia abstract this study examines the factors that influence the sustainability of the company's disclosure has registered at indonesia sustanaibility award (isra). data were taken from 2012 to 2017 and became a sample of 9 companies featured in the isra. regression analysis was used to examine the effect of factors (current ratio, size, type industry, social responsibility committee and meetings of the audit committee) on the disclosure of sustainability reporting. result of regression explains that the variable currente ratio (cr), size and audit committee meetings significant effect, while the governance committee and the type of industry effect are not significant. therefore, companies are growing fast in asset and have a large debt must disclose the information in a sustainability report. keywords: cr, size, type industry, corporate governance committee, audit committee, sustainability report 1. introduction social and environmental responsibility into the company's commitment to the role of supporting sustainable economic development and improve the quality of life and environment that is beneficial to the company, the company's internal, and society in general. some problems, such as pollution, climate change, global warming, resource depletion, poverty, product safety, and labor rights are also increased public interest (gray, owen, & maunders, 1987). therefore, the financial statements are no longer adequate for the stakeholders, because the financial statements alone do not contain information about the social and environmental aspects of the company's operations (martínez-ferrero et al., 2013). as a result, companies need to report corporate social responsibility (csr), and any additional information that may affect the company's performance (bernardi & stark, 2016; utami & nugroho, 2017). demands from some of the stakeholders, investors, creditors, employees, suppliers, customers, communities, ngos, and governments to companies more transparent and be accountable for its activities related to sustainable enterprises. companies are required to not only focus on achieving profit, but also focus on people and the planet is often called the triple bottom line. the resulting profit company aims to make the company remains a going concern. but in reality, the profit is not enough for companies to say going concern, but should also pay attention to the terms people and the planet. this is due to people and the planet is also associated with the process and the impact of corporate activity that is sometimes forgotten by the company. the sustained performance of the company has changed the traditional management process by focusing not only on the financial aspects of business performance but also on the social and environmental dimensions (laskar & maji, 2016). therefore, financial reporting alone no longer satisfies the needs of shareholders, customers, and other stakeholders to provide information related to the performance of the organization (siregar & bachtiar, 2010). in indonesia, the sustainability report is still voluntary and in the introduction stage so it is still a little bit interested companies to disclose a sustainability report. of the top 100 companies listed on the jakarta stock exchange (idx), only 30% of companies that make the sustainability report (sr) (ernst & young, 2016). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e nurul hidayah & ahmad badawi & lucky nugroho 220 even though ongoing reports are still voluntary, as of the end of 2016 there were 120 companies that have published continuous reports in indonesia. although every year the number of companies that disclose sustainability reports is increasing, but not comparable to the number of companies in indonesia. this happens because there is still a lack of awareness of the company regarding the benefits of disclosure of sustainability report. to attract companies' interest in disclosing sustainability reports, indonesia held appreciation concerning economic, social, environmental and called indonesia sustainability reporting award (isra). isra held to give an award to the company that has revealed a sustainability report, with isra, is expected that he is a conscious company that aspect of the environment must be protected and preserved and made into a separate reporting to the annual report. the company's concern for the environment can be seen from the absence of ongoing reporting or sustainability reporting. characteristics of a company that helped determine the level of investor confidence, the credibility of the good require that the company needs to contribute to the social growth and the environment are the firm size (nasir et al., 2014). the size of the company can be based on the total value of assets, total sales, the market capitalization, the amount of labor and so on. in general, large companies would reveal much more information than the smaller companies because they have a social responsibility to the greater community. in addition to the size of the company's improving the structure of corporate governance provides a higher level of voluntary disclosure (ho & taylor, 2013). on the other hand, a weak corporate governance structure reduces corporate disclosure because management of companies with such government structures is unlikely to provide information to stakeholders (kent & monem, 2015). wang (2017) examined the relationship of company characteristics with sustainability reports for samples of companies registered in taiwan. the results show that corporate governance and business characteristics, including board size, the percentage of independent directors, the existence of an audit committee, the percentage of export sales, foreign share ownership, company growth, and average asset age are positively related to the issuance of sustainability reports, while managerial share and stock prices are negatively related. kuzey and uyar (2017) analyze the factors that influence sustainability reporting in turkey, with a sample of 100 large companies showing industry type results and company size influencing the sustainability report, while current leverage and ratio have a negative effect. the role of the committee in the company's social responsibility also determines the company's success in publishing a sustainability report, because the committee has the role of social responsibility, planning activities of social and environmental responsibility, and supervise their implementation. amran et al., (2014) found that the presence of the social responsibility committee impact on the quality of sustainability reporting, while hussain et al. (2016) reported the need for social responsibility committee in achieving social and environmental company performance. while research dienes et al., (2016) concluded that the size of the company, availability of media and ownership is essential for sustainability disclosed in the report, while gcg (audit committee, profitability, capital structure, the age of the company, the composition of the board does not affect the disclosure of sustainability reporting. 2. literature review and hypotheses the company will increase voluntary disclosure to avoid potential pressure from the regulator (akhtaruddin, hossain, hossain, and yao, 2009). so, from the perspective of agency theory, companies voluntarily publish a sustainability report to reduce the asymmetry of information, reduce agency costs, and avoid pressure from external agents. according to the agency theory, managers as the party more to know more information related to the performance of current and future rather than shareholders and other stakeholders (ho & taylor, 2013). to reduce asymmetric information, the company required to disseminate valuable and relevant information to stakeholders (brammer & pavelin, 2008). dowling and pfeffer (1975: 122) provide a logical reason about the legitimacy of the organization, including public service institutions that the organization will try to create harmony between social values inherent in its activities with the norms of conduct that exist in the social system in which the organization is part of the system. legitimacy theory of continuous explains that the organization will operate in accordance with the limits and the value received by the community around the company (ulum, 2015: 34) states that the organization's legitimacy. legitimacy theory states that organizations are continually looking for ways to ensure their operations are within the limits and norms that apply in society. factors affecting the disclosure of sustainability reporting 221 2.1 sustainability report act no. 40 of 2007 on limited liability companies. disclosure sustainability report within the established rules in the form of a stand-alone report, although there are many implementations of the sustainability report is disclosed in conjunction with the annual report of a company (gunawan, 2010). disclosure of the sustainability report according to gri (global reporting initiative) must meet several principles. these principles are contained in the gri-g3 guidelines, namely balance, comparable, accurate, time sequence, compliance, and accountability. the disclosure standards in sustainability report according to gri-g3 guidelines consist of:  the economy is regarding the resulting impact on the economic conditions of the company's stakeholders and on economic systems at local, national, and global;  the environment is regarding the impact produced by the company against the creatures of the earth, and the surrounding environment, including ecosystems, land, air, and water;  human rights, namely the lack of transparency in considering the selection of investors and suppliers/contractors. in its work, the company must always take into consideration the interests of shareholders and other stakeholders based on the principles of fairness and equality;  society, the organization focuses on the impact on the community in which they operate, and reveals how the risks that may arise from interactions with other social institutions.  responsibility for products, which contain enterprise reporting produced products and services that directly affect customers, namely health and safety, information, labeling, marketing, and privacy;  social, which provides social activities undertaken by companies, whatever has been done and how they are carried out. 2.2. liquidity according to kashmir (2012: 130) the liquidity ratio, or often referred to as the working capital ratio is a ratio used to measure how the liquidity of the firms. the trick is to compare the components in balance, ie total current assets to total current liabilities (short-term debt). the assessment can be done for some period so that visible liquidity development companies from time to time. the purpose and benefits of liquidity ratios for companies, according to kashmir (2012: 132) is as follows:  to measure a company's ability to pay its liabilities or debts that are due at the time billed. that is, the ability to pay obligations 20 that it was time to be paid according to the schedule stipulated deadline (date and a specific month);  to measure a company's ability to pay short-term liabilities with current assets overall. this means that the amount of the obligation under the age of one year or equal to one year, compared with total current assets;  to measure a company's ability to pay short-term liabilities with current assets regardless of dosage or receivable. in this case, the current assets in fewer stocks and debt considered lower liquidity;  to measure or compare the number of stocks that exist with working capital;  to measure how much cash is available to repay debt;  as a means planning ahead, especially with regard to the planning of cash and debt;  to see the conditions and the liquidity position of the company from time to time by comparing it for some period;  to see the weaknesses of the company, of each component in current assets and current debts;  become a trigger tool for the management to improve its performance, by looking at the existing liquidity ratio at this time. nurul hidayah & ahmad badawi & lucky nugroho 222 2.3. company size according to brigham & houston (2010: 4) the size of the company is the size of a company is shown or judged by total assets, total sales, profit, tax expenses, and others. according to hartono (2008: 14), the size of the company (firm size) is the size of the company can be measured by total assets or major property companies using the logarithm of total asset value calculation. uu no. 20 of 2008 is divided into four (4) categories: micro, small business, medium, and large businesses. yogiyanto (2007: 282) the size of the company or firm size is calculated based on the logarithm of total assets. 2.4. company type gao et al., (2005), different industry will have different characteristics and depending on the growth potential, the number of employees, competition and government intervention. uu no. 3 tahun 2014, industry definition is all forms of economic activities that manage raw materials and/or utilize industrial resources, so that they can produce goods that have higher added value or benefits, including industrial services. one example of a company that has a high risk is a mining company with the characteristics of the mining industry using high-tech equipment almost 24 hours a day and involves many facilities and infrastructure. this has caused many accidents that have caused a small loss or even lost their lives. in this study, the type of industry is differentiated into 2, namely high-risk industries (pharmaceuticals, cement, glass, energy, machinery, metals, mining, oil, paper and pumps and transportation). in addition to these criteria, it is categorized as a low-risk industry. 2.5. governance committee corporate governance committee is a committee established by and responsible to the board of commissioners in an effort to support the implementation of the tasks and responsibilities of the board of commissioners in reviewing policy corporate governance well organized directors and assess the consistency of the application of corporate governance good, including those relating to business ethics and corporate social responsibility (corporate social responsibility). the governance committee is a committee consisting of several members of the board of directors (wiley, 2009). formation of good corporate governance, strong and sustainable not just run regular practices as well as the appointment of independent directors, the implementation of a regular board meeting, the proportion of the board of directors, or the appointment of an independent audit committee members, rather, it requires the establishment of additional committees formed company. one additional committee established is the governance committee. in terms of sustainability governance committee report called the remuneration and nomination committee whose task helps directors and commissioners are responsible to assist in the implementation of good corporate governance. the application of the principles of good corporate governance performance of the company is to produce an effective and efficient through harmonization of corporate management that can be achieved either by the establishment of governance committees (suryono and prastiwi, 2011). in looking at a company's corporate governance practices, to get a good practice, strong, and sustainable, which should be considered not only whether the company has been running a normal practice as well as the appointment of independent directors, the implementation of the board meeting that routine, the proportion of the board of directors, or the appointment of the independent audit committee, but it can also be seen through the formation of committees additional formed company as an embodiment of the establishment of good corporate governance is strong. the committees constituted in question include governance committee, nomination committee, and remuneration, csr committee, risk management committee, budget committee, the investment committee, or other appropriate functions and roles of each but it can also be seen through the establishment of additional committees formed as a form of business enterprise embodiment of good corporate governance is strong. 2.6. the audit committee bapepam circular letter no.se-03 / pm / 2000, that public companies should establish an audit committee. the audit committee is tasked to assist the commissioners to give an independent professional opinion to improve the quality of work and reduce irregularities in the management of the company. in general, the board of commissioners established committees under it according to the needs of the company and the prevailing regulations to assist the commissioners in carrying out the responsibilities and authority effectively. the committee established by the board of directors is of the audit committee, the risk policy committee, the remuneration committee, and the nomination factors affecting the disclosure of sustainability reporting 223 and corporate governance policy committee (national committee on governance, 2006). however, according to regulations issued by the jse no. kep-339 / bej / 07-2001, the nature of which must be owned by companies listed on the stock exchange is only the audit committee. 2.7. liquidity and disclosure of sustainability report liquidity level of corporate liquidity increases, the disclosure of sustainability report will also increase. companies with a high level of liquidity means signify a great ability to pay its short-term obligations on time. a strong financial condition will encourage companies to disclose more information as an instrument to assure its stakeholders. jannah and kurnia (2016) stated that a liquidity significant positive effect on the sustainability disclosure report. 2.8. the size of the company and disclosure of sustainability report large companies have a higher agency cost due to higher information asymmetry between managers and shareholders to avoid the agency costs, the company is more likely to provide information by publishing a sustainability report stand-alone (ho & taylor, 2007). in connection with the theory of legitimacy, large corporations will certainly pay more attention to the stakeholders' interests and activities will follow boundaries and the value received by the public. the great company better known and more highlighted by the people than the small firms, large companies have the resources and social responsibility to the community greater. larger companies also have an organizational structure that is a better and more developed information system (uyar et al., 2013). this can help them to prepare and publish a stand-alone sustainability report. 2.9. industry type and disclosure of sustainability report different industries have different characteristics for each industry has growth potential, employment, competition, the nature of its activities, business risk and government intervention are different (gao. et al., 2005, brammer and pavelin (2008) so the quality of the information disclosed in accordance with different types of industries. companies that have a higher risk level will reveal more information on their sustainability report. alsaeed (2006) suggests that manufacturing companies disclose more information than non-manufacturing companies. meanwhile, reverte (2009) that the companies included in environmentally sensitive industries have a higher csr rating. can be interpreted companies (high) that intersect with the area of the fault that occurs will be highlighted broad party. therefore it is expected the company will communicate information on the implementation of economic responsibility, social environment through sustainability reports to generate stakeholder confidence. 2.10. committee on governance and disclosure of sustainability report the company developed the existence of a committee that supports sustainability or csr as an element of the corporate governance structure to address risks and opportunities for sustainability (rossi & tarquinio, 2017). the presence of the committee increased sustainability reporting because these committees will emphasize sustainability issues (dienes et al., 2016). suryono and prastiwi (2011) additional committees placed in the company as a form of business to embody strong good corporate governance. formation committees in question include governance committees, nomination and remuneration committees, csr committees, risk management committees, budget committees, investment committees, or others according to their respective functions and roles. thus, the presence of the committee can be a better integration of sustainability issues, which in turn is attached to a higher interest related to a sustainability report (ruhnke & gabriel, 2013). 2.11. board audit committee and disclosure of sustainability report the audit committee can hold executive meetings with parties outside the audit committee members who are invited according to their needs or periodically. these external parties include commissioners, senior management, heads of internal auditors and heads of external auditors. the results of the audit committee meeting are contained in minutes of the meeting signed by all members of the audit committee. the chairman of the audit committee is responsible for the meeting agenda and is obliged to report the audit committee meeting activities to the board of nurul hidayah & ahmad badawi & lucky nugroho 224 commissioners. the audit committee has a good understanding of its business environment, has an understanding of risk and control, and has a good understanding of financial and non-financial reporting. the number of audit committee meetings will produce decisions that will be disclosed in the company report. 3. methodology the research design is causal research to test hypotheses about the effect of a single variable or multiple variables (independent variable) to another variable (dependent variable). in this study to examine the factors that affect the disclosure of sustainability reporting. (sustainability reporting). the object of research is the event, phenomenon or problem that has been abstracted research into a concept or variable (arikunto, 2006: 118). the object of this study is the concept of cr, company size, industry type, corporate governance committee, the audit committee, and disclosure sustainability report. variable sustainability report reveals about the most important impact of an organization whether it is positive or negative for the environment, society, and economy (global reporting initiative g4, 2013: 3). governance committee was measured using a dummy variable, the value of 1 if the company has a governance committee and a value of 0 if it does not have a governance committee. company size or commonly referred to company size is a variable that is measured by the logarithm of total assets of the company, the type of industry can be divided into industry high risk and low risk, companies included in the high risk rated 1 and low-risk enterprise value is 0. current ratio variable measured by total current assets divided by current liabilities. an audit committee meeting is proxied by the number of audit committee meetings in a year. sampel in this study is a company incorporated in isra and published a sustainability report (sr) year from 2012 to 2017 consisting of 9 companies. data analysis in this study used multiple linear regression. 4. results and discussion table i shows the descriptive statistics of the variables of the study, while table ii displays percentage of disclosure of sr based on gri and table iii show the results of multiple linear regression. table 1 test descriptive statistics descriptive statistics n minimum maximum mean std. deviation cr 54 1.095 7.937 2.89172 1.753416 size 54 30.0308 34.1953 31.903502 1.2485365 highrisk 54 0 1.0 .889 .3172 ktk 54 0 1 .89 .317 radit 54 4 117 22.59 22.469 sr 54 .0779 .7738 .372893 .2085519 valid n (listwise) 54 source: data is processed with spss 20 the above table presents the data disclosure sustainability by meeting the economic aspects, environmental aspects and social aspects of the guidelines of the global reporting initiative (gri) standards on average in the company based on gri4 by 37%. however, there are still companies that only revealed in the report sr of 7.79%. ratios current ratio (cr) to measure the ability of the company in the short term with its current assets have an average of 289.1% means the company incorporated in the isra has a good ability to repay their debts. isra company size in this company has an average of 31.9% of the natural log of its assets. the type of company in this study is more dominated by companies classified as high risk. the average company has a governance committee and the number of audit committee meetings held in one year is on average 22 times. factors affecting the disclosure of sustainability reporting 225 table 2 percentage of disclosures of csr based on gri standards no disclosure category frequency of disclosure precentage of disclosure 1 economic standards 13 item gri 52,85% 2 environmental standards 30 item gri 39,51% 3 social standards 34 item gri 40,25% source: data is processed with spss 20 source: data is processed with spss 20 table 2 presents the percentage of companies in conducting corporate information disclosures based on gri. the disclosure of the company's sr on economic performance is very broad in explaining everything related to the company's financial performance, the average reveals 13 items of economic indicators (52.85%). the company's disclosure regarding environmental performance is quite extensive in explaining something related to efficient processing of products and services, renewable energy of 39.51% of gri items can be said that companies pay enough attention to improvements to the surrounding environment. in the category of standards expressed by the company as many as 34 indicator items or equal to 40.25%, this proves that the company cares about social and community problems where the company runs social programs ranging from health, education and welfare to the people both around and outside the company. table 3 test result t model unstandardi zed coefficients standardize d coefficients t sig. b std. error beta 1 (constant) 2.621 .989 2.652 .011 cr .040 .018 .335 2.160 .036 size -.078 .031 -.464 -2.532 .015 highrisk -.065 .103 -.099 -.626 .534 ktk .094 .099 .143 .944 .350 radit .004 .001 .404 2.709 .009 a. dependent variable: sr 4.1. effect of liquidity (cr) on disclosure of sustainability reports table 3 explains that the current ratio (cr) significant positive effect on the disclosure of a sustainability report for 0036, it shows if the company's liquidity increases, the company will increase the disclosure of cr information in its sustainability report. companies with high liquidity levels indicate a strong capacity to repay its short-term obligations. strong financial condition will encourage companies to disclose more information as an instrument to assure stakeholders, namely by publishing related activities through disclosure of social and environmental sustainability report. the results are consistent with research jannah and kurnia (2016) which stated that a liquidity significant positive effect on the sustainability disclosure report. the result of this research was supported by a previous study conducted by research jannah and kurnia (2016) and sari and marsono (2013) which states a liquidity effect on the sustainability disclosure report. but unlike adhipradana and daljono research (2014) shows that the result does not affect the disclosure of liquidity sustainability report. doktoralina, caturida et al (2018) current liquidity ratio proxy with a negative effect on the disclosure of sr.. nurul hidayah & ahmad badawi & lucky nugroho 226 4.2. influence of company size (size) against disclosure sustainability report company size a significant negative effect on the sustainability disclosure report. this shows that the bigger companies are not necessarily the responsibility disclosure level of economic, environmental and social sustainability reports of the company will also increase. this condition indicates that to get legitimacy from stakeholders, large companies do not always do the disclosure of economic responsibility, environmental and social sustainability report. this is because corporate responsibility is no longer just the activities, but it is the duty of companies to maintain the viability of the company otherwise even small companies must disclose corporate responsibility activities with a good and indeed necessary. companies with total assets increase show that the company's assets increased so that it can more contribute to social activities to gain public legitimacy. with more and more social activities undertaken by the company so the more information that can be disclosed in the sustainability report. so that large companies that already have legitimacy in society can maintain or improve it. the results of this study support the research adhipradana and daljono (2014), which states that the size of the company's significant negative effect on the disclosure of sustainability report and does not support previous research carried out aliniar and wahyu (2017) which states that the size of the company not significant effect on the disclosure of sustainability report. 4.3. influence of company size (size) against disclosure sustainability report companies with the type of high risk and low risk do not significantly influence the sustainability disclosure report. this is due to a lack of a specific classification of industry sectors and different regulations led to unequal companies to disclose the information even within one type of sector. this research is in line with the research ward (2013) but does not support the sembiring study (2005) that the type of industry that is grouped in industries of high risk and low-risk significant effect on sr disclosure. 4.4. effect of disclosure of industry type sustainability report companies with the type of high risk and low risk do not significantly influence the sustainability disclosure report. this is due to a lack of a specific classification of industry sectors and different regulations led to unequal companies to disclose the information even within one type of sector. this research is in line with the research ward (2013) but does not support the sembiring study (2005) that the type of industry that is grouped in industries of high risk and low-risk significant effect on sr disclosure. 4.5. influence of corporate governance committee against disclosure sustainability report governance committee whose job it is to help directors and commissioners are responsible to assist in the implementation of good corporate governance, but it is not only affecting the governance committee to disclose the company's sustainability report. corporate governance committee not significant effect on the disclosure of sustainability report, the responsibility of the governance committee is not the only committee that is responsible for the disclosure of sr but there are many other committees that support the improvement of corporate governance such as the audit committee, board of directors and commissioners (suhardjanto et al., 2018). 4.6. effect of audit committee meeting (radit) against disclosure sustainability report the results of the data processing analysis show that the audit committee meeting has a significant positive effect on the disclosure of sustainability reports. this shows that the existence of an audit committee helps ensure disclosure and control systems to work properly. the more often the audit committee meets and communicates with each other, then some audit findings will be evaluated and reported to managers, so as to encourage managers to make better disclosures. to lead to better information disclosure, in addition to publishing financial reports with integrity, the audit committee will submit to the management to disclose information in additional reports, namely disclosure of sustainability report. the results of this study are supported by previous research conducted by sari and marsono (2013) and dwita aliniar and sri wahyuni (2017), but different from nasir's research, dkk (2014) which shows that the audit committee has no significant effect on the sustainability report. factors affecting the disclosure of sustainability reporting 227 5. conclusion the conclusion of this study is the first liquidity (current ratio) significant positive effect on the disclosure of the company's sustainability report which followed the indonesia sustainability reporting award, the higher the liquidity the higher the level of the disclosure sustainability report. second, the size of the company's significant negative effect on the disclosure of the company's sustainability report which followed the indonesia sustainability reporting award. this shows that the bigger companies are not necessarily the responsibility disclosure level of economic, environmental and social sustainability reports of the company will also be always wider. the third type of industry does not affect sustainability report significantly to the disclosure of the companies participating in indonesia sustainability reporting award. type of company both high risk and low risk should remain published reports sustainability report. but the company's regulations and the specific category does not cause the company must disclose sr. fourth corporate governance committee no significant effect on the disclosure of the company's sustainability report which followed the indonesia sustainability reporting award. corporate governance committee duties only support a policy of commissioners and directors so that the decision to disclose sr not be the task of the governance committee. fifth meeting of the audit committee (radit) significant 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"corporate governance committee-investment and finance definition," https://onlinelibrary.wiley.com/doi/full/10.1111/corg.12143 international journal of commerce and finance, vol. 4, issue 2, 2018, 25-39 25 examining prevailing internal value chain risks in horticulture values chains and its management in ethiopia: the case of east showa tomato producers zerihun ayenew birbirsa jimma university, college of business and economics, department of management emnet negash debele jimma university, college of business and economics, department of management abstract many studies found that value chain risk management plays great role to get competitive advantage in the chain. however, despite its role, managing prevailing risks in the chain was not studied in comprehensive way by including both internal factors. the sample size of the study was a total of 275 farmers, input dealers and market traders found in east shawa zone. the source of the data of the p aper was both secondary and primary data in which the primary data was collected through questionnaires and interviews which was developed in english language and translated in local language. to achieve this objective, this study was divided in two stages: an exploratory and casual relationship testing. the findings of the study show that there is no efficient risk management program, there is no c ooperation and coordination among value chain actors. in addition there is no design strategy to mitigate value chain risks and internal factor risks elements have medium importance in business activities to manage value chain risks. the multiple regression result show internal factors were significantly and positively influence effective risk management. keywords: risk, value chain risk management, internal factors 1. background of the study and aspects of problem now days, new model of organization is popular in business organizations particularly in agribusiness sector that seeks to merge social mission and objectives with core business operating principles, known as agri-business value chains. according to dunn (2014) an agriculture value chain is a vertical linking or a network between various independent business organizations and can involve processing, packaging, storage, transport and distribution. these business arrangements are distinguished by their commitment to transparency, collaborative business planning and exchange of market intelligence and business knowhow among chain partners and their interest in developing business strategies and solutions that yield tangible benefits to each participant in the system. thus efficiency gains resulting from close coordination among supply chain partners, higher prices earned through marketing differentiated products, and shared values articulated by chain participants helps markets to responds to consumer demands and interests (diamond eta’l 2014), but to get these benefits from agri-businesses, identifying prevailing risks and finding the way to cope up risks is very important. currently due to the influence of growing incomes, urbanization and globalization of trade, agriculture in developing countries is shifting increasingly towards agribusiness which focuses on value addition to agricultural outputs before delivering to the market. these bring opportunities and threat to actors in the sector. opportunities arise from greater demand for agriculture products resulting from growing populations requiring greater diversity in consumption. indeed, with changing consumer preferences in both domestic and export markets, new opportunities have emerged for producers, particularly in the development of niche markets and differentiated products with potentially higher price premiums than standard commodities. on the other side producer access to these new opportunities remains limited by numerous deficiencies throughout the value chain that increases risks faced by producers. this magnified the growing need to coordinate all stages of production, marketing, logistics, and sales in a way that satisfies consumer demands for quality, traceability, and food safety. the coordination requires developing viable and sustainable value chains to manage the flow of products between intermediaries and ensure that quality specifications in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e zerihun ayenew birbirsa & emnet negash debele 26 are met. in addition synergizing the relationships between the public and private sectors, creating dynamic and sustainable partnerships to ensure inputs are available and used appropriately helps relatively to lower participants’ risks in value chains. therefore public-private partnerships are an integral part of agricultural value chains particularly for horticulture producers and they should work together in functional partnership manner to minimize risks in the sector and to ensure benefits of all stakeholders. this can help agri-business forms to get competitive advantage in the market. however managing prevailing risks in the sector to develop closely-aligned value chain to achieve sustainable competitive advantage is still in its infant stage. there are commonly cited reasons for the slow development of risk management in agri-business value chains. first, participants operate in an environment where policies and structures result in a continuation of the adversarial relationships and attitudes that have historically characterized the industry. second, there is a lack of understanding regarding how to successfully manage risks associated with forming and managing value chains. third, by its nature agriculture and food systems are at the highest risk from so called “sustainability mega forces” such as poverty, hunger, population growth, climate change, competition for scarce natural resources, and environmental degradation. yet, many corporate private investors involved in agribusiness are currently ill-equipped to respond to these challenges and are making little progress in reducing their ecological footprint and exposure to environmental cost (eco agriculture partners, 2013). fourth, specifically in ethiopia, agricultural sector particularly horticulture production bottlenecks are many which includes land related problems, lack of access to capital/long-term loan and weak support in business skill, marketing and post production (samuel gebreselassie 2012). regarding to land related problems, even though over recent years tenure security has improved by government, land rental markets operate under different restrictions. beyond their use right, farmers cannot use their land as collateral and they have difficulty to access long-term loan, because in ethiopia the banks and other financial institutions to provide loans they need collateral and most of the time provide loan for large-scale producers with collateral. these can have impact on small farmer productivity and production. on the other hand, lack of organized market system and broader agricultural policy of the country that overlooked emerging group of small-investor farmers reduce production and productivity of horticulture sector. these cause for low contributions of the sector to country’s economy and even less than 10% potential have been used. the above mentioned problems caused agriculture industry to have little connectivity with the end market and most of agribusiness firms didn’t take any initiatives to manage risks associated agri-business (ulrich hess eta’2015). these risks are related to internal and external agri-business value chain. risks of internal factors that affect horticulture business value chain include cultural related factors, strategic factors, chain structure, performance measure and feedback and technology related factors. hence this study conceptualized prevailing risk in tomato value chain and examined the impact of internal factors. therefore this, study findings will significantly contribute to knowledge gaps related to information sharing amongst actors in the value chains to minimize risks. in addition, the research findings will contribute to the national strategy for growth and poverty reduction by facilitating ways to add value to agricultural outputs. the 2008 world development report outlined that investments in agribusiness will produce significant multiplier effects through their forward and backward linkages, generating demand for agricultural products and associated inputs and services and creating on and off-farm employment. in ethiopia, this has been put into practice by the federal government through the agricultural development led industrialization (adli) followed by the growth and transformation programme that currently enters its second phase. while the first phase still focused on increasing production, the second phase focuses on agro-processing and industrialization. however, agribusiness entrepreneurs interviewed by agribusiness innovation initiation (aii) expressed their needs for professional education aimed at increasing marketing knowledge, value and supply chain analysis, and networking. most importantly, the needs assessment conducted by embassy of kingdom of the netherlands in ethiopia (ekn,2014) indicates that customs related issues and work ethics in national labour force, leadership skills, entrepreneurship, knowledge of risk management were ranked by agribusiness companies to be among the top five biggest problems in doing business in ethiopia. also, agribusiness entrepreneurs demands tertiary level studies should exert their efforts in imparting knowledge in disciplines such as: financial management, marketing, human behavior, operational management, and agribusiness project analysis as part of the common body of business knowledge and policies and regulations affecting agriculture, value chain management, international businesses, risk management, examining prevailing internal value chain risks in horticulture values chains and its management in ethiopia: the case of east showa tomato producers 27 strategic management, and applications of concepts and techniques of agribusiness-firm management (i.e., managerial or production economics) as part of agribusiness management. hence it is possible to deduce that, agribusiness entrepreneurs especially those who invested in horticulture are highly sensitive for risk causing factors compared to other investors. therefore, this study is going to analyze prevailing internal risks in horticulture values chains and its risk management. in order to fulfill these objectives the following research questions will be used. 1. what are internal risks faced by tomato value chain actors and how do these risks impact on their performance? 2. which factor is the most significant in enterprise risk management activities? 3. what are the adaptation strategies of tomato value chain actors to mitigate risks? 1.1 hypotheses based on extensive literature made for this study the following hypotheses were developed to examine the relationship between independent variables (internal factors) and dependent variables effective value chain). h1: favorable internal factors increase effectiveness of value chain actors. 1.2 general objectives the general objective of this study was to assess prevailing internal risks in horticulture value chains specifically in tomato production value chain and risks its management. 1.2.1 specific objectives to achieve the general objectives, the following specific objectives are set 1. examine internal risks that affect performance of tomato value chain actors in east showa zone. 2. to identify the most significant internal factor in tomato value chain risk management east shawa zone. 3. to analyze value chain actors’ adaptive strategies in response to risks and determine the policy implications of the research findings. 2. theoretical review 2.1 introduction agriculture is often characterized by high variability of production outcomes. unlike most other producers, agricultural producers are not able to predict with certainty the amount of output that the production process will yield due to internal and external factors s world bank, 2005). risk and shocks in agriculture, also resulted in uncertainty in output prices. this can result in severe income losses and fluctuations in consumption (haile, 2007). low and middle-income countries rural households are highly vulnerable to agricultural risks and suffer the most, because they have limited ability to offset risks and shocks (linnerooth-bayer and mechler, 2009).this leads to extreme farm income fluctuations even though farmers have developed ways of reduce and cope with risk (e.g. crop diversification, selling livestock, storage, borrowing and safety net) (haile, 2007). 2.2 internal risks in horticulture value chain the risks faced by agriculture have often been classified internal risks and external risks. internal risks include cultural, strategy and chain structure. 2.2.1 share organizational culture and value chain actors’ performance shared organizational culture includes involves creating proactive inclusive management style, developing an environment which increase customers and consumers loyalty and foster a learning environment within and between partner organizations. of all the critical success factors, organizational culture is arguably the most important in determining companies’ suitability to partner. since the 1970s, recognition of the impact that organizational culture zerihun ayenew birbirsa & emnet negash debele 28 has upon the operations that occur within a company, and between itself and its business partners, has grown markedly (ivancevich, olekalns& matteson, 1997). culture affects how a business and its employees view the world around them (dunne, 2004). it influences attitudes towards collaborating as a cohesive unit, the desire to learn from new experiences, the ability to adapt to new situations, the length of time horizons, autonomy vs.autocracy, empowerment vs. disempowerment, and attitudes towards risk; just to name a few. unless the company’s culture is suited to working within an alliance and looks to proactively take advantage of opportunities from within, rather than continually reacting to external threats in a defensive manner, it is highly unlikely that a business will make a suitable partner withwhich to form an alliance. study conducted by teeratansirikool, siengthai, badir, &charoenngam (2013) shows that sharedorganizational culture among value chain actors’ influence competitive strategies positively and significantly enhance firm performance. khan &pillania (2008), argued that supplier evaluation, strategic supplier partnership, sourcing flexibility and trust in value chain members have asignificant effect on supply agility and firm’s performance. qrunfleh&tarafdar (2014) posits that in small firms, efficient value chain integration plays a more critical function for sustainable performance improvement, while, in large firms, the close interrelationship between the level of vcm practices and competition capability have more significant effect on performance improvement. li, ragu-nathan, ragu-nathan, &subbarao (2006)in their study they conceptualized on five dimensions of scm practices (customer relationship, quality of information sharing, strategic supplier partnership, level of information sharing, and postponement) and tested the relationships between competitive advantage, scm practices, and organizational performance. their results indicate that higher levels of scm practices can lead to improved competitive advantage and enhanced firm performance. therefore it is possible to conclude these scm practice will improve competitive advantage and enhanced performance of value chain actors. this leads to the hypothesis: 2.2.2 strategic factor and value chain actors’ performance companies with complementary attitudes, cultures, and leadership styles choose to coordinate their business arrangements over a short to medium timeframe. a more strategically aligned structure than the one exemplified above causes at least part of the chain to think and act from a strategic – and not only operational or tactical – perspective. a strategic perspective arises from operating in an external environment that allows this type of approach to occur. over time, the participants come to steadily acknowledge the benefits of conducting mediumterm business deals with chosen suppliers and buyers, leading to increased levels of commitment and the development of more sophisticated value chain management capabilities. on the other hand companies engage in longer-term strategic arrangements that involve collaboratively sharing resources and/or investing in the capabilities required to achieve mutually beneficial outcomes. successfully adopting this type of model requires the involved businesses to possess compatible cultures, vision, and leadership, these can improve performance and competitiveness of value chain actors.in addition working collaboratively, members of a closely-aligned value chain can simultaneously minimize their transaction costs, increase their profit margins and maximize the value of the final product (womack & jones, 2005). this leads to the hypothesis: 2.2.3 value chain structure and value chain actors’ performance a value chain map lays out all kinds of activities, transactions, flows (e.g. information), and processes pertinent to a value chain. it is also a useful tool to identify the captured value at each link in the chain, to look at the value chain structure itself and to identify the different actors in value chains. value chains tend to be long and lack integration, involving a number of intermediaries on the other side short value chain structure especially in export market may lock-in of farmers within value chains: as producers often are not able to bear high costs of certification, exporters take over this financial burden and hold certification rights. looking to recover these costs, exporters enroll smallholders in ‘contract farming’-like arrangements. small producers become locked into these value chains. this increases producer dependency from one exporter, but also improves access to information, knowledge, and facility upgrading and quality improvement. but in the case local market the benefits of short value chain structure is greater than its cost because if the middlemen number is reduced the producer sell their product by fair price and final consumers also pay price fair price for products. examining prevailing internal value chain risks in horticulture values chains and its management in ethiopia: the case of east showa tomato producers 29 the above discussion focused on internal factor elements leads to the hypothesize the following h1: favorable internal factors increase effectiveness of value chain management 3. research methodology 3.1 research philosophy the study adopted positivist philosophy of science, which according to buttery & buttery (1991) and stiles (2003) assumes unity of scientific method, searches for causal relationships, believes in empiricism and views the foundation of science as based on logic. positivist research is characterized by testing one or more hypotheses. consequently, problem-solving under the positivist paradigm follows a pattern of formulating hypotheses, in which assumptions of social reality are made, thereafter hypotheses are tested, often using quantitative techniques; this process leads to verification or rejection of the hypotheses. thus, through the positivistic approach the researcher will able to establish the nature of relationships that underlie them, test the formulated hypotheses and make generalizations from the research findings. this is because the reality surrounding the phenomenon of risk management factors and the performance of tomato production value chain actors in ethiopia studied objectively. given that the first study seeks to identify the relationship between operational factors and value chain actors’ performance. the second seeks to examine the relationship between external factors and value chain actors’ performance. 3.2 research design for these studies cross-sectional survey design was used. according to umma (2006), the positivist approach places a high priority on identifying causal linkages between and amongst variables. given this approach, a cross-sectional survey method used to obtain the empirical data to determine the linkages between variables. both qualitative and quantitative data was collected by using interview schedules, structured and unstructured questionnaire and focus group discussions. 3.3 population of the study and unit of analysis the target population was all actors in tomato production value chains in east showa zone. east showa zone is a potential vegetable producing area for both export and local markets in ethiopia. the unit of analysis was tomato production value chain actors which include farmers, input dealers and market traders found in east showa zone. to conduct this study potential woredas and kebeles in the zone were randomly selected. to select respondents’multi-stage stratified sampling technique was used. the base for creating strata was the type of activities involved by value chain actors, such as; farming, agro-processing and marketing and proportional sample was taken from each stratum. to determine sample size the research used population-based survey which determined largely by three factors according to (kothary, 2004, p. 180). the estimated percentage prevalence of the population of interest 5%; the desired level of confidence and the acceptable margin of error. for a survey design based on a simple random sample, the sample size required can be calculated according to the following formula. where: n = adequate sample size within a given amount of confidence level z= table value of the confidence level from normal distribution e = tolerable amount of error the researcher accepts p = the probability of success (proportion of the study unit who may give adequate information) zerihun ayenew birbirsa & emnet negash debele 30 q = the probability of failure since there is no prior figure concerning the proportion of success and failure, it is advisable to take 50-50 approach which is conservative. the researcher intends to pursue for 95% confidence level with 5% level of tolerance. hence, the computation of sample size was preceded as follows: n= 384.6 385 385+15= 400 the total sample size of respondents =400 therefore four hundred tomato production value chain actors were sampled and contacted. . in this study, tomato production value chain actors have been stratified into four levels by considering the actors activities. accordingly sample was taken from farmers, tomato traders large scale producers and agro-processor and the total sample size was proportionally allocated to potential kebele's found in east showa zone by using the following formula. where nh is the sample size for stratum h, nh is the population size for stratum h, n is total population size, and n is total sample size. table 3.2 sample size for each woreda’s zones potential woreda’s total target population sample size east showa zone dugda woreda 2303 143 bora woreda 1630 101 zuway/batu 2511 156 total 400 3.4 research methods and sources of data the study employed multiple data collection tools, including interview schedules, structured and unstructured questionnaire and focus group discussions. to conduct this study both primary and secondary data collected. primary data was collected from farmers, agro-processor managers, market traders and government officials found at different level of administration starting from zonal to kebele level. secondary data was collected from journal, books, articles, government legislation and policies. 3.5 research strategy data was collected using both survey and case study methods, and presented a combination of interpretive and exploratory research. survey shall collect data about the prevalence of risks in selected tomato value chains. while case studies included in-depth studies to identify the most influential elements from both internal and external element. 3.6 data analysis quantitative data was statistically analyzed using computer software programs, statistical package for social sciences (spss) to yield some statistics for comparison and establishment of nature of relationship between variables. content analysis was applicable with case studies with quantitative data. 3.7 validity and reliability of the instruments credibility of findings depends on the extent to which the analysis corresponds to how the study participants really interpret and construct their realities. validity in this sense is the extent to which a description is credible (slevitch, 2011). therefore to ensure that this study produces credible and transferable results the researchers adopted a within-method triangulation. this triangulation involves the use of multiple data collection techniques such as those that described above as well as adopting a multi-source approach in data collection. the variety of techniques and data sources will make it possible to cross-check information in order to enhance its credibility. further, in qualitative research, being aware of and accepting one’s personal biases is part of validating the research. researchers may frame examining prevailing internal value chain risks in horticulture values chains and its management in ethiopia: the case of east showa tomato producers 31 their questions and shape their studies based on their personal experiences and personal bias. as a researcher, we have acknowledged that my biases in framing the topic could relate to my academic background and personal interest. it is also important to note that the results of this study was context specific, meaning they will be much more applicable to the value chains that was studied and cannot therefore be inferred on the entire agriculture output value chain except for tomato value chain in ethiopia. however, the findings will still provide an understanding of the dynamics of local agricultural value chains which could be relevant for the sector in ethiopia and across the region. reliability refers to the extent to which a study produces consistent findings on repeated trials (mikkelsen, 2005).to check reliability of instrument cronbach's alpha value was calculated. 4. research limitations some of the limitations which researcher aware of but cannot totally eliminate are based on the qualitative approach that was used in this study which requires more time in order to enable one to understand the dynamics of tomato value chains and their surrounding environment in depth. to counter this threat, the researcher collected as much secondary data as is possible prior to embarking on field work so as to gain a deeper insight of the study sector and the target value chains were information is available. the researchers also familiarized themselves with government documents relating to promotion of the private sector development, agriculture marketing and input support. the use of digital voice recorders (where acceptable) was engaged so as to have maximum utilization of time in the field as this was more efficient and faster compared to jotting down notes. 4.2 result analysis and interpretation this study was conducted in east showa zone. the woredas which were targeted for the study include: bora woreda, dugda woreda and batu(ziway) which are the hub of tomato production. the sample size of the study was a total of 400 farmers, input dealers and market traders found in three selected woredas. .accordingly 400 questionnaire was distributed to sample respondents’ and on average 270 questionnaire were filled properly and used for this study. but in filling questionnaire same of questions were not responded and overlooked by data collector, therefore there is no uniform number of respondents for all question. table 4.1 number of respondents from each woreda frequency percent valid percent cumulative percent ziway 155 56.8 56.8 56.8 bora 30 11.0 10.5 67.3 dugda 89 32.7 32.7 100.0 total 274 100.0 100.0 source: survey 2018 the above table illustrated the sample respondents in targeted woredas (districts) whereby the research is conducted. accordingly, 56.8%, 11% and 32.2% are from ziway, bora and dugda woredas respectively. from this it is possible to infer that ziway (batu) woreda contributes more sample respondents as more organized tomato producers are engaged there. zerihun ayenew birbirsa & emnet negash debele 32 table 4.2 the existence of efficient risk management program frequency percent cumulative percent yes 71 25.9 27.4 no 155 56.6 87.3 not sure 33 12.7 100.0 total 259 100 source: survey 218 as shown in the above table regarding to the existence of risk management program in selected woredas’ 71(25.5%) of the respondents replied that there is risk management program in selected woredas’. while the remaining 155(56.6%) and 33(12.7%) of the respondents replied that there is no risk management program and they are not sure about the existence of risk management programs in selected woreda respectively. therefore from the above data it is possible to conclude that there is no efficient risk management program in selected woredas’ table 4.3 the availability of risk assessment methods li the method your organization use for risk assessment? yes 72 26.3 no 168 761.3 not sure 19 7.3 total 259 100.0 source: survey 218 as shown in the above table regarding to the use of risk assessment method in selected woredas’ 72(26.3%) of the respondents replied that there is risk assessment methods in selected woredas’. while the remaining 168(61.3%) of the respondents replied that there is no risk assessment methods and 19 (7.3%) respondents replied that they were not sure about the existence of risk assessment methods in selected woredas’. thus from the above result it is possible to conclude that there is no risk assessment methods used in selected three woredas’ table 4.4 availability of framework to identify risks frequency percent yes 67 24.5 no 173 63.1 not sure 23 8.4 total 263 100.0 source: survey: 2018 the above table shows that 67(24.5%) of the respondents replied that there is framework to identify risks and 173(63.1%) of the respondents replied that there is no framework to identify risks. the remaining 23(8.4%) of the respondents replied that there were not sure about the availability of framework to identify risks. thus it is possible to conclude that in selected woredas’ there was no designed framework to identify risks in tomato value chain. examining prevailing internal value chain risks in horticulture values chains and its management in ethiopia: the case of east showa tomato producers 33 table 4.5 organizational concern about value chain risks is your organization/business unit concerned about value chain risks? frequency percent yes 83 30.3 no 171 62.4 not sure 20 7.3 total 274 100.0 source: survey: 2018 the above table shows that 83(30.3%) of the respondents replied that business unit involved tomato value chain were concerned value chain risks and 171(62.4%) of the respondents replied that business unit involved in tomato value chain were not concerned value chain risks. the remaining 20(7.3%) of the respondents replied that there were not sure whether business unit involved in tomato value chain were concerned about value chain risk or not. thus it is possible to conclude that in selected woredas’ the majority (62.4%) business unit involved in tomato value chain were not concerned about value chain risks signed framework to identify risks in tomato value chain. table 4.6 discussion about value chain risk management among value chain actors’ have you had at least preliminary discussions with value chain actors about value chain risk management frequency percent cumulative percent yes 110 40.1 40.9 no 141 51.5 93.3 not sure 17 6.2 99.6 total 274 100.0 source: survey: 2018 regarding to discussion with value chain actors about value chain risks to manage risks 110(40.1%) of the respondents replied that they have made preliminary discussions with value chain actors to minimize risks and 141(51.5%) of the respondents replied that they didn’t make any preliminary discussion with value chain actors to minimize risks. while the remaining 22(6.6%) of the respondents’ were not sure whether preliminary discussion was made with chain actors or not to minimize value chain risks . from the above results more than half(51.5%) of chain actors were not made preliminary discussion to minimize value chain risks. therefore it is possible to conclude that in selected woredas’ value chain actors were not working together to minimize risks. integrated risk management at business level zerihun ayenew birbirsa & emnet negash debele 34 fig 4.1 integrated risk management at business level the above figure show that whether business organization involved in tomato value chain were integrate risk management activities in their businesses. accordingly 94(34.3) of the respondents replied that there were integrated risk management activities in their usual business and 137(50%) of the respondents replied that they were not integrated risk management activities at business level. while the remaining 37(15.7%) of the respondents’ were not sure whether they integrate risk management activities or not. therefore from the above discussion it is possible to conclude that almost half (50%) of tomato value actors in selected woredas’ were not integrate risk management activities in their usual businesses. table 4.7 the existence of strategy to mitigate value chain risks have you developed value chain risk mitigation strategy frequency valid percent cumulative percent yes 106 41.4 41.4 no 109 42.6 84.0 not sure 41 16.0 100.0 total 256 100.0 source: survey 2018 the above shows that 106(41.4%) of the respondents replied that their organization developed strategy to mitigate value chain risks and 109(42.9%) of the respondents replied that their organization did not developed strategy to mitigate value chain risks. the remaining 41(16%) of the respondents replied they were not sure whether their organization developed strategy to mitigate value chain risks. therefore from the above findings it is possible to conclude that less than half (41.4%) of tomato value actors were developed strategy to mitigate value risks. table 4.8 the existence of alternative strategy to mitigate value chain risks do you have other strategies to deal with suppliers who are not willing to partner with you frequency valid percent cumulative percent yes 87 35.5 35.5 no 110 44.9 80.4 not sure 48 19.6 100.0 total 245 100.0 source: survey 2018 the above table shows 87(35.5%) of the respondents replied they have their own strategies to deal with supplier for those who are were not willing to be partner in value chain and 110(44.9%) of the respondents replied they have no examining prevailing internal value chain risks in horticulture values chains and its management in ethiopia: the case of east showa tomato producers 35 strategies to deal with supplier for those who were not willing to be partner in value chain. the remaining 48(19.6%) of the respondents’ were not sure whether they have been used any strategies for suppliers not willing to form partnership to reduce value chain risks. thus from the above results it is possible to conclude that in selected three woredas’ greater proportion of tomato value chain actors were not use any alternative strategies for suppliers unwilling to make partnership. table 4.9 the availability of shared data/information from a risk perspective, how effectively availability of shared data/information is managed? frequency valid percent cumulative percent very effectively 85 32.2 32.2 effectively 33 12.5 44.7 not effectively 85 32.2 76.9 do not know 61 23.1 100.0 total 264 100.0 source: survey 2018 the above table indicated that to what extent available information or data was shared to manage risk along tomato value chain. accordingly 85(32.2%) of the respondents’ replied available information or data was very effectively shared to manage risk.33(12.5%) of the respondents’ replied available information or data was effectively shared to manage risk along tomato value chain.85(32.2%) and 61(23.1%) of the respondents’ replied that available information or data was not effectively shared to manage risk and they did not know about the availability of information or data to manage risk along tomato value chain. therefore from the above results it is possible conclude that there is no available information or data to manage risk along tomato value chain since more than half of the respondents’ replied not effective and do not know in their responses’. 4.2 analysis on tomato value chain risk management elements this part of the paper deals with risks associated with tomato value chain in east showa zone. the data was collected from three potential tomato producing woredas’ for this study the internal value chain factors that affect tomato value chain actors performance were analyzed. to indicate level of importance of each factor that affects value chain risks the respondents were requested to rank in three likert scale ranging from 1( low importance) to 3 (high importance) and the results are presented below table 4.10 analysis on internal risks in tomato value chain risks of the internal factors n min max mean std. deviation complexity of internal logistic chains (many processes, flows, components), 262 1.00 3.00 2.01 .88405 low quality against negotiated requirements 258 1.00 3.00 1.99 .91464 unreliability of manufacturing facilities, storage 254 1.00 3.00 1.94 .91753 zerihun ayenew birbirsa & emnet negash debele 36 systems, information systems error rate of employees in the manufacture, warehouses, and by maintenance 263 1.00 3.00 1.84 .88371 dependency of processes on the know-how of several key employees 266 1.00 3.00 1.70 .87726 financing of operations 266 1.00 3.00 1.52 .79243 over all mean 1.83 the above table shows risks associated with internal factors that have importance for tomato value chain actors. accordingly financing operations have low mean value (1.52) which indicates it has low importance for managing value chain risk and overall mean value (1.83) indicate that internal factors have medium importance to manage value chain risks. therefore from the above findings it is possible to conclude that in selected woredas’ tomato value chain actors were given moderate attention to internal factor related risks. 4.3 the relationship between value chain management and internal value chain risks according to stevens (1996) recommendation for social science research, about 15 subjects per independent variable are required for a reliable result. hence for four independent variables used in this study, the minimum required sample size should be 60 (15 x4). tabachnick and fidell (2001) again gave another alternative formula for calculating sample size required, taking into account the number of independent variables to be used: n > 50 + 8m (where m = number of independent variables). therefore, for the four independent variables, a sample size could be atheist 82 (50 + 8x4). hence, 68.5% response rates is above the requirement of the aforementioned method to compute multiple linear regression. multivariate regression analysis is appropriate for examining the simultaneous impact of many independent variables on the dependent variables. therefore, to reveal out the factors that significantly affect effectiveness of value chain risk management, multiple linear regression analysis is computed in the following fashion. table 4.11 regression model model unstandardized coefficients standardized coefficients t sig. collinearity statistics b std. error beta tolerance vif (constant) 1.686 .190 8.887 .000 ds -.098 .092 -.068 1.063 .289 .791 1.265 ss .214 .111 .166 1.923 .056 .432 2.314 if .305 .094 .294 3.260 .001 .396 2.525 ef -.008 .111 -.006 -.068 .946 .489 2.044 a. dependent variable: rm from the four independent variables supply side risk and internal factors were significantly correlated with effective value chain at 10% and 5% significant level respectively. therefore internal factors were significantly and positively influence effective risk management. examining prevailing internal value chain risks in horticulture values chains and its management in ethiopia: the case of east showa tomato producers 37 table 4.12 correlations ds ss if ef vif ds pearson correlation 1 .457 ** .350 ** 1.265 sig. (2-tailed) .000 .000 1.265 n 266 266 265 2.314 ss pearson correlation .457 ** 1 .700 ** 2.525 2.314 sig. (2-tailed) .000 .000 2.044 n 266 269 267 vif if pearson correlation .350 ** .700 ** 1 2.525 sig. (2-tailed) .000 .000 1.265 n 265 267 271 2.314 ef pearson correlation .222 ** .598 ** .691 ** 2.525 2.044 sig. (2-tailed) .000 .000 .000 2.044 n 265 267 271 272 **. correlation is significant at the 0.01 level (2-tailed). as it is shown in the above matrix, the correlation coefficients among all the variables are less than 0.9 which implies multicollonearity does not exist among the four independent variables. also variance inflation factor (vif) is the measure of the speed with which variances and covariance increase and it is the most commonly used method for detecting multicollinearity problem. there is no formal cutoff value to use with the vif for determining the presence of multicollinearity but neter, wasserman and kutner (1990) recommended, looking at the largest vif value. a value greater than 10 is often used as an indication of potential multicollinearity problem. if vif < 10, no multicollinearity problem, therefore, the study had no multicollinearity problem as vif < 10, as shown in the regression table below table 4. 13 summary of hypothesis testing hypothesis finding 1. favorable internal factors increase effectiveness of value chain actors supported 4.4 discussions the study reveals out that internal factors affect risk management positively and significantly. therefore, to reduce value chain risks, controlling internal factors such as internal logistic chains, quality of material used, reliability of manufacturing facilities, storage systems and information systems should be given attention to reduce risks in the tomato value chain risk. this is consistent with study conducted by teeratansirikool, siengthai, badir, &charoenngam (2013) that internal process affect value chain actors’ influence competitive strategies positively and significantly enhance firm performance. khan &pillania (2008), argued that supplier evaluation, strategic supplier partnership, sourcing flexibility and trust in value chain members have a significant effect on supply agility and firm’s zerihun ayenew birbirsa & emnet negash debele 38 performance. qrunfleh&tarafdar (2014) posits that in small firms, efficient value chain integration plays a more critical function for sustainable performance improvement, while, in large firms, the close interrelationship between the level of vcm practices and competition capability have more significant effect on performance improvement. li, ragu-nathan, ragu-nathan, &subbarao (2006)in their study they conceptualized on five dimensions of scm practices (customer relationship, quality of information sharing, strategic supplier partnership, level of information sharing, and postponement) and tested the relationships between competitive advantage, scm practices, and organizational performance. their results indicate that higher levels of scm practices can lead to improved competitive advantage and enhanced firm performance. 5. conclusion the finding shows that in selected three woredas’ the value chain actors were not using efficient risk management program and they did not use risk assessment methods to minimize risks in the chain. most of tomato value chain actors were not designed frameworks to identify possible risks and also they were not concerned about value chain risks. as per the findings more than half(51.5%) of chain actors were not made preliminary discus sion to minimize value chain risks which indicates lack of cooperation and coordination among value chain actors is to minimize value chain risks. almost half (50%) of tomato value actors in selected woredas’ were not integrate risk management activities in their usual businesses and didn’t collect related risk information from their critical suppliers. the study findings revealed that demand size risks, supply side risks, internal factor risks and external environmental elements have medium importance for respondents business activities and were not give high priority to manage and controlled risks associated with these factors. specifically the respondents believe that financing operations have low importance to manage value chain risks. the regression model show that internal factors were significantly and positively influence effective risk management references abernethy, m. a., & brownell, p. 1999. the role of budgets in organizations facing strategic change: an exploratory study. accounting, organizations and society, 24(3): 189–204. a. gunasekaran, c. patel, and r. e. mcgaughey, “a framework for supply chain performance measurement,” int. j. prod. econ., vol. 87, no. 3, pp. 333–347, 2004. belderbos, r., tong, t. w., & wu, s. 2014. multinationality and downside risk: the roles of option portfolio and organization. strategic management journal, 35(1): 88–106. bromiley, p., mcshane, m., nair, a., & rustambekov, e. 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(2013). competitive strategies and firm performance: the mediating role of performance measurement. international journal of productivity and performance management, 62(2), 168–184. http://doi.org/10.1108/17410401311295722 world bank, helping countries combat corruption: the role of the world bank, poverty reduction and economic management network, september 1997. see pages 19-20 on definitions of corruption. ulrich hess, kaspar richter, andrea stoppa, weather risk management for agriculture and agri-business in developing countries ifc, world bank and procom agr, rome. international journal of commerce and finance, vol. 4, issue 2, 2018, 12-24 12 corporate culture and financial risk management in islamic social enterprises (indonesia evidence) lucky nugroho universitas mercu buana, jakarta, indonesia wiwik utami universitas mercu buana, jakarta, indonesia zuraidah muhammad sanusi universiti teknologi mara, malaysia hari setiyawati universitas mercu buana, jakarta, indonesia abstract this research aims to investigate the implementation of corporate culture and financial risk management in islamic social enterprises. the methodology in this research is qualitative descriptive that using manager self-assessment questioner in islamic social enterprises. the sample in this research is 24 respondents from the total 100 respondents that we distribute in jakarta and java island. the results are financial risk management has an average score above 80 that reflect it has implemented well in islamic social enterprises but for corporate culture still need improvement implementation. keywords: corporate culture, financial risk management, islamic social enterprises 1. introduction islamic developing countries are countries with low average income, inadequate infrastructure, and a lack of human development index compared to developed countries. therefore, compensation for these conditions, developing countries have various kinds of problems that still need to be addressed such as social problems. social issues in developing countries such as indonesia are one of the priorities to be addressed by all stakeholders and especially by the government. the emergence of social problems due to problems in meeting the needs of life that must be met while there is a scarcity of sources of fulfillment so that competition is needed to meet these basic needs (hilgartner & bosk, 1988). meanwhile, according to soetomo (2011), the causes of social problems arise because there is something wrong in social life, and is a complex social reality, so the source of the problem is also complex. therefore, the source of the causes of social problems can come from individual and collective levels (hilgartner & bosk, 1988; soetomo, 2011). furthermore, the main social problems in developing countries are poverty (glewwe & van der gaag, 1990; coleman et al., 2001). the concept of poverty is very diverse, ranging from the inability to meet basic consumption needs, lack of opportunities to work, to a broader understanding that includes social and moral aspects. according to suryawati (2005), the occurrence of poverty is due to inadequate development in developing countries so that there are still many low-income people who have not been able to meet their minimum living needs. efforts to overcome and resolve these social problems required social policies, especially those derived from policymakers of a country, namely the government (kingdon & thurber, 1984). to overcome the problem of poverty in need of a method or strategy, namely by increasing investment, savings, and depreciation. the more investment and savings, then development will also increase so that it has an impact on the welfare of the community. governments in developing countries have tried various kinds of efforts to overcome poverty through policies and mechanisms, one of which is direct cash assistance. however, this mechanism does not solve the problem and even opens up opportu nities for in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e corporate culture and financial risk management in islamic social enterprises (indonesia evidence) 13 irregularities in the use of funds, causing social conflicts (pattinama, 2009). besides the government, there are nongovernmental organizations that have the same vision and mission in overcoming social problems. the organization is not only aimed at making the profit, but more than that is making social values embedded in their business activities (zahra et al., 2009; rostiani et al., 2014; arafah et al., 2018) that commonly referred to the social enterprises. the phenomenon of social activities in indonesia over the past ten years has grown significantly. this growth is due to the growing awareness and knowledge of the public of the importance of balance in social life but also supported by the development of islamic financial institutions, especially islamic banking, whose growth exceeds the growth of conventional banking (anugroho et al., 2017). the growth of sharia financial institutions has a contribution to the growth of social enterprises because there are portions of profit islamic financial institutions that are not distributed to shareholders or owners will be a source of funds for social enterprises to be distributed to those who are entitled such as zakat, infak and shodaqoh (hassan & syafri harahap, 2010; aribi & gao, 2010). also, islamic banks also have the principle of profit sharing as well as cooperatives and carry out business activities with transparency and accountability principle so that according to defourny & nyssens (2010) and cornee & szafarz (2014) islamic banks can be included in social enterprises category. further understanding of social enterprises is a company or organization whose vision and mission are established social objectives (rostiani et al., 2014). also, this social company has been proven to be able to assist the government in overcoming social problems such as poverty alleviation, improving public health, increasing education levels and improving the quality of life (seelos et al., 2006; barafah & nugroho, 2016). however, according to hudon & périlleux (2014) and hudon et al., (2018) social enterprises are companies that enter social missions through commercial activities. in the concept of islam eradicating poverty is part of jihad fi sabilillah. eradicating poverty and ignorance is one of the essential points stressed by al-shaykh al-nawawi that poverty and ignorance are conditions that endanger humans so that alleviating poverty and increasing the level of education is also in the category of jihad (nurcholis, 2013). therefore, the philosophy of social enterprises has in common with the islamic concept of empowering people to improve their welfare based on the principle of help (ta'awun) and its financial resources can be derived from zakat, infaq and shodaqoh (reginald & mawardi, 2015; sukmadilaga & nugroho, 2017). some quranic verses relating to the importance of creating prosperity through the alleviation of poverty and ignorance and the obligation of muslims to carry out zakat, infaq, and shodaqoh, among others, in q.s. an-nisa verse 9 which means: “and let those [executors and guardians] fear [injustice] as if they [themselves] had left weak offspring behind and feared for them. so, let them fear allah and speak words of appropriate justice.” referring to the above verse, we can conclude that worries about a weak generation are representations of poverty, which is the opposite of welfare, the verse encourages humans to avoid poverty by working hard is an effort and trusts in allah. furthermore, for muslims who are able to be materially in accordance with certain conditions, paying zakat is an obligation as stated in q.s al-baqarah verse 83: “and [recall] when we took the covenant from the children of israel, [enjoining upon them], "do not worship except allah; and to parents do good and to relatives, orphans, and the needy. and speak to people good [words] and establish prayer and give zakah." then you turned away, except a few of you, and you were refusing.” based on q.s al-baqarah verse 83, then humans are obliged to do good and help one of them is to carry out zakat. in indonesia, there are social enterprises based on religion, such as islam which have a mission to alleviate poverty, eradicate ignorance, improve health and preserve nature. of course, so that the social enterprise gets the trust of the community, it requires cultural values in the company and the risk of financial management. therefore, this study aims to determine the implementation of corporate culture and the application of risk of financial management in social enterprises based on islamic religion so that the research questions in this study are as follows: lucky nugroho & wiwik utami & zuraidah muhammad sanusi & hari setiyawati 14  how the implementation of corporate culture in the islamic social enterprises?  how the implementation of financial management risks in islamic social enterprises? 2. literature review 2.1 social enterprises and islamic social enterprises the according to kerlin (2012), there are still debatable perceptions among researchers, mainly from america and europe, related to the definition of social enterprises. there is a broad and unclear definition related to social enterprises in america which consider that social enterprises are companies that carry out market-oriented economic activities that also serve social purposes. whereas europe has the perception that social enterprises are organizations or companies that have social objectives that are explicitly stated in their vision and mission to provide benefits to humans or people. furthermore, according to shaw & carter (2007), there are three business formats of social prices which include: social enterprises that are purely social aims, social enterprises that seek profits, and social enterprises that combine profit and social missions (hybrid types). whereas the business structure of social enterprises can be an independently owned operation or can be in the form of a public-private partnership (o'hara, 2003; shaw & carter, 2007; hynes, 2009). however, based on the research of rostiani et al., (2014) which conducted on eight types of social enterprises that are distinguished based on their social objectives as follows:  donation for the poor, socialize the alms habit  environment-friendly lifestyle  street children care  education funding for underprivileged, high potential children  vegetarian healthy lifestyle  disabled children care  organic agriculture and fair trade, organic lifestyle  organic agriculture the eight types of social enterprises, there are similarities in the mission, namely aiming at purely achieving social performance even though it can be distinguished based on the motivation established, which includes personal values, religiosity, and social norms. furthermore, there are also similarities related to the characteristics of social enterprise which its activities always consider aspects of sustainability in achieving their social goals. whereas in carrying out its activities, company growth is not the main goal, but this growth is due to the impact of the implementation of social activities. nevertheless, the going concern of social enterprises relies on social networks such as friends, relatives, and colleagues to support and disseminate the activities information. meanwhile, to achieve its goals, social enterprises not only have the right program but also must have creativity and innovation that embedded with their social activities to attract the donors. based on the establishment motivation of social enterprises, religiosity is also a dominant factor because if explicitly the aspects of carrying out religious orders is stated in the mission and vision, then the donors who have the same beliefs will be very interested in investing their funds and even engaging in social activities (constable, 1983; aarafah & nugroho, 2016). in islamic thought creating social-wellbeing is a joint obligation for all people that stated in alqur’an, (qs. al-baqarah verse 201) which means “but among them is he who says, "our lord, give us in this world [that which is] good and in the hereafter [that which is] good and protect us from the punishment of the fire." the essence of the verse is the orientation of human activity is happiness in the world with the ultimate goal is to reach happiness afterlife. in nature, all human activities must be balanced not only looking for material but also helping each other in doing good (social aspects). furthermore, islam is a comprehensive religion that regulates all aspects of life so that a muslim must carry out orders of god and stay away from his prohibitions in daily life or make islam as a way of life (dusuki, 2008; bnugroho, 2017). according to chapra (2001) and cnugroho et al., (2017) prosperity corporate culture and financial risk management in islamic social enterprises (indonesia evidence) 15 based on ibn khaldun's theory states that welfare will be realized if there is a collaboration of all elements consisting of government, development, community, and justice. furthermore, islam as a religion that aims to deliver its people towards happiness, both happiness in the world and the hereafter, in other words, islam is very concerned about the material and spiritual well-being of humans (sodiq, 2015). thus, realizing prosperity is a joint obligation of all stakeholders and the community. in the qur'an, (qs. annisaa verse 9) stated: “and let those [executors and guardians] fear [injustice] as if they [themselves] had left weak offspring behind and feared for them. so, let them fear allah and speak words of appropriate justice.” based on this verse, concerns about a weak generation are representations of poverty, which is the opposite of welfare. so, the verse encourages humans to avoid poverty by working hard as a form of endeavor and trust in allah, as the hadith of the prophet was narrated by al-baihaqi "verily allah likes someone who does his work diligently and disciplines (professional)" (qardhawi, 1995: 256). the concept of sustainable development in the perspective of islam is an extension of "triple p" to "quad p" (profit, people, planet and prophet), according to nugroho et al., (2018) islam is very concerned about the next generation. therefore, development and all current activities may not threaten or damage the welfare of the people and also environmental sustainability. when described in a pyramid, human activities in the sharia economy must be based on figure 1.1: figure 1. principles of islamic economics versus the sustainable development concept source: nugroho et al., (2018) referring to figure 1.1, maqasid sharia is the basis or foundation of islamic economics, while the components of islamic maqasid according to nugroho et al. (2018) consist of six components, which include (1) maintaining religion, (2) maintaining soul, (3) maintain intellect, (4) maintain descent, (5) maintain property, (6) maintain the environment. furthermore, the six components must be implemented in community life in meeting basic needs (daruriyat), secondary needs (hajiyat) and tertiary needs (tahsiniyat). maslahah is the goal of fulfilling these three human needs (daruriyat, hajiyat, and tahsiniyah) in order to stay away from the prohibition of allah swt and carry out all the commands of allah swt. therefore, the result of the islamic economy is to guarantee that all human activities based on the principle of maqhasid sharia will give happiness in the world and the hereafter (falah). based on the components of islamic economics, the islamic economy is not only intended to gain profit but must also have a positive impact on the benefit of humanity as well as environmental sustainability. more than that, then by carrying out all of his commands and avoiding his prohibition, all human activities should be a continuous activity that has a good impact on other humans and their environment. lucky nugroho & wiwik utami & zuraidah muhammad sanusi & hari setiyawati 16 according to qodri (2014) and and baidowi (2016) god created all things in this world, varying in nature, form, and function. this diversity makes one another influence and depends on one another. therefore, according to shidiq (2018) the expected relationship is a good relationship and bring prosperity so that humans as the highest creature created by god are also created with a variety of abilities must be able to work together, help each other in order to maintain balance as well as contained in the qur'an, (qs. al qamar verse 49) “indeed, all things we created with predestination.” also, allah has created this nature to be used by humans to fulfill their needs and provide welfare for humanity. however, humans must manage these natural resources well. if humans are not able to manage it well and tend to be greedy in exploiting it, then what happens is the opposite is not good, but disaster will befall humans. the human obligation to exploit nature by their needs and its contained in the qur'an (qs. al haj verse 65) “do you not see that allah has subjected to you whatever is on the earth and the ships which run through the sea by his command? and he restrains the sky from falling upon the earth, unless by his permission. indeed allah, to the people, is kind and merciful.” the basic principle of islam related to the management of natural resources is rahmatan lil alamin, which is giving as much as possible and as optimal as possible for all beings. thus, if a person controls a resource, then it should distribute it fairly. the owner of the resource can manage it but cannot monopolize it and use it for mutual benefit and may not sell it at an inappropriate price. humans should realize that every pleasure, comfort, and fortune they possess and that they get to have an impact on the obligation to balance between gratitude and mandate. the implementation of gratitude and trustworthiness is through the use of the possessions it has spent on as much as possible for the good of humanity (maslahat) according to the qur'an (qs. ibrahim verse 7) “and [remember] when your lord proclaimed, 'if you are grateful, i will surely increase you [in favor]; but if you deny, indeed, my punishment is severe." thus, every human being who is given a favor then is responsible for using it to provide well for all beings so that they cannot be complacent with the blessings and fortune that has been given to be used for personal gain. 2.2 corporate culture in islamic perspective the basic concept of corporate activity in islam is that all business activities must be embedded with social objectives and environmental sustainability called maqashid sharia. besides that, in islamic teachings, there are social instruments implemented by social companies to distribute zakat, infaq, shodaqoh, and waqaf to people who deserve it (doctoralina & bahari, 2017). therefore, the company in carrying out activities must get the trust of the people who gave the funds. to get this trust, it must have a good work culture and the application of financial risk management. there are several concepts related to the definition of corporate culture, according to some previous researchers, corporate culture is a system that instills beliefs and values developed by an organization as a code of conduct for all employees (keesing, 1974; denison & mishra, 1995; widuri & paramita, 2007). also, organizational culture can be defined as a system adopted by members in an organization that distinguishes the organization from other organizations (peters & waterman, 1982; collins & porras, 2005; gultom, 2015). however, there is also a definition of corporate culture as part of the identity and reputation of a company (rossi & o'higgins, 1980; jo hatch & schultz, 1997). furthermore, according to reichers & schneider (1990), corporate culture can improve company performance and company effectiveness in achieving its goals. corporate culture can improve performance if the company has a strong culture so that it can affect all employees in the company to carry out agreed commitments aimed at improving company performance. the effectiveness of work culture in achieving company performance according to denison & mishra (1995) and denison et al., (2003) includes the following:  involvement; effective organizations are organizations that can empower their people, build their organizations through a solid team, and enhance the ability of members of the organization at all levels (riordan et al., 2005; lawler, 2008). executives, managers, and employees should be committed to their work and feel part of the organization. also, people at all levels feel that they are involved in determining decisions that will affect their work (spreitzer, 1995; seibert et al., 2004). corporate culture and financial risk management in islamic social enterprises (indonesia evidence) 17  consistency; organizations also tend to be effective because they have a very consistent "strong" culture that is well coordinated and integrated (davenport, 1993; schlicht, 2008).  adaptability; organizations that can adapt are organizations that are motivated by the needs of their customers, learn from their mistakes, and have the ability and experience to create change (nadler, 1997; wang & huang, 2009).  mission; a successful organization is an organization that has clear goals and directives that can define organizational goals and strategic goals and expresses a vision of how the organization in the future (hamel & prahalad, 1994; johnson & leenders, 2001). islamic perspective related to work culture is work is part of good deeds practiced by humans to seek blessings from allah swt and give goodness to other people (maslahah). furthermore, the work must be based on good intentions, because everything that gives good results must be based on good intentions as well. also, the concept of working in islam is to carry out goodness, prevent damage and carry out the teachings of islam in totality because work is worship that qur'an (qs. adh-dhariyat verse 56) “and i did not create the jinn and mankind except to worship me.” also, the holy book of the qur'an does not provide an opportunity for a muslim to relax in this life (qs. as. sharh verse 7) “so when you have finished [your duties], then stand up [for worship].” thus, the work culture that is owned by every muslim must have the ability to make the maximum contribution in creating maslahah. 2.3 financial risk management in islamic perspective financial and business activities are one of the main activities of human life to fulfill their needs. furthermore, in carrying out business and financial activities, it will cause two things, namely profits and losses in the future. therefore, the benefits and losses caused by current business activities cannot be guaranteed that these activities will provide benefits. thus, the risk is an inherent component of business activities in human life so that islam does not recognize risk-free business activities (wahyudi et al., 2013; soekapdjo et al., 2018). humans in their efforts to find income to meet their life needs are also faced with conditions that are uncertain what will happen in the future. as a human being, we can make plans to anticipate everything that might happen, but we cannot ensure the results of the operations that we will achieve whether profits or losses are stated in qur'an (qs. lukman verse 34) “indeed, allah [alone] has knowledge of the hour and sends down the rain and knows what is in the wombs. moreover, no soul perceives what it will earn tomorrow, and no soul perceives in what land it will die. indeed, allah is knowing and acquainted.” also, according to nugroho et al., (2018) the risks in the perspective of islam are al al ghunmu bil ghurmi and al kharaj bid dhaman which means that all income will certainly have the risk of the insured, but the risk must be managed responsibly. also, there is also the principle of la darara wa la dirara which means that humans cannot suffering in weak condition but must try to minimize and avoid the badness, it is also explained in the qur'an (qs. al hasyr verse 18) “o you who have believed, fear allah. moreover, let every soul look to what it has put forth for tomorrow and fear allah. indeed, allah is acquainted with what you do.” therefore, islam has put risks as something inherent in every activity so that a comprehensive calculation and planning is needed in anticipation of risks that may occur in the future. 3. methodology the the methodology used in this study is a qualitative descriptive method. the data used is obtained through selfassessment by filling out questionnaires from the management of islamic social enterprises. nevertheless, the research is limited through the following research questions:  how the implementation of work culture in islamic social enterprises?  how is the implementation of financial risk management in islamic social enterprises? lucky nugroho & wiwik utami & zuraidah muhammad sanusi & hari setiyawati 18 furthermore, this research uses questionnaires aimed at the management of islamic social enterprises located in jakarta, central java, and yogyakarta. furthermore, from the 100 questionnaires that we distributed to the managers of islamic social enterprises, the questionnaires were filled in 24 questionnaires. the categories of islamic social enterprises are as follows:  orphan foundation  health foundation  foundations that distribute zakat, infaq, and shodaqoh furthermore, the source of funds from islamic social enterprises in this study is sourced from donations. 3.1 questionnaire  questionnaire of corporate culture questionnaires submitted to managers of islamic social enterprises related to corporate culture are as follows: table 1. corporate culture questionnaire no corporate culture disagree agree 1 my organization upholds the teamwork orientation as one of its culture 2 my organization encourages the management to be people oriented rather than task oriented 3 my organization has no information asymmetry between top management and lower level employees 4 my organization promotes collaborations between other organizations 5 my organization provides opportunities for employees’ professional growth 6 my organization rewards employees for good performance  questionnaire financial risk management questionnaires submitted to islamic social enterprises managers related to financial risk management are as follows: table 2. financial risk management questionnaire corporate culture and financial risk management in islamic social enterprises (indonesia evidence) 19 no financial risk management disagree agree 1 my organization has a comprehensive annual budget which includes all sources and uses of funds for all aspects of operations. 2 my organization has written policies and procedures for fiscal operations, including procedures for processing payroll, purchases etc. 3 resources are distributed and programs developed based on the budget plan. 4 the board of trustee establishes an investment policy that guide investment and financial decisions 5 all financial transactions are recorded and documented 6 a financial statement is produced annually 7 the board of trustees reviews the financial statement carefully 4. discussion and results 4.1. the implementation of work culture in islamic social enterprises the results of the questionnaire from islamic social enterprises management related to work culture can be seen in figure 2. below: my organization upholds the teamwork orientation as one of its culture my organization encourages the management to be people oriented rather than task oriented my organization has no information asymmet ry between top management and lower level employees my organization promotes collaborations between other or ganizations my orga nization provides opportunities for e mploye es’ profe ssional growth my organization rewards employees for good performance figure 2. corporate culture implementation in islamic social enterprises agree percentage disagree perc entage 62,50% 62,50% 66,67% 83,33 79.17% 95.83% 37,50% 37,50% 33,30% 16,67% 20,83% 4,17% lucky nugroho & wiwik utami & zuraidah muhammad sanusi & hari setiyawati 20 based on figure 2 above, it can be seen that the islamic social enterprises organization upholds teamwork orientation as a culture with a value of 95.83%, however the rewards given to employees who perform well are still low, indicated by a value of 62.50 % so that the impact on islamic social enterprises is not yet the choice of place for a career with a value of 62.50%. according to sarker (1999), organizations based on islamic principles should have good teamwork especially in islamic organizations that have social goals. the motivation to carry out good teamwork in sharia-based organizations in accordance with qur'an (qs. al maidah verse 2) “o you who have believed, do not violate the rites of allah or [the sanctity of] the sacred month or [neglect the marking of] the sacrificial animals and garlanding [them] or [violate the safety of] those coming to the sacred house seeking bounty from their lord and [his] approval. however, when you come out of ihram, then [you may] hunt. moreover, do not let the hatred of a people for having obstructed you from al-masjid al-haram lead you to transgress. and cooperate in righteousness and piety, but do not cooperate in sin and aggression. and fear allah; indeed, allah is severe in penalty.” however, because this organization aims to carry out social activities, then profit is not the main objective so that the impact on compensation received by workers is not large enough so that the motivation of workers in a career in islamic social enterprises becomes low. islamic social enterprises still treat their employees with a task approach so that they do not consider employee self-development as indicated by a score of 79.17%. also, islamic social enterprises also have not cooperated with other organizations much, which is indicated by the value of 66.67%. furthermore, islamic social enterprises have had transparency in conveying information with a value of 83.33%. transparency on sharia principles is found in qur'an (qs. al baqarah verse 143) “and thus we have made you a just community that you will be witnesses over the people and the messenger will be a witness over you. and we did not make the qiblah which you used to face except that we might make evident who would follow the messenger from who would turn back on his heels. and indeed, it is difficult except for those whom allah has guided. and never would allah have caused you to lose your faith. indeed allah is, to the people, kind and merciful.” the meaning of al baqarah verse 143, explains that muslims are made righteous people in obtaining and conveying choices, as they will be witnesses to the deeds of the deviant ones of the truth both in the world and hereafter. 4.2. the implementation of financial risk management in islamic social enterprises the results of the questionnaire from islamic social enterprises management related to financial risk management can be seen in figure 3. below: corporate culture and financial risk management in islamic social enterprises (indonesia evidence) 21 my organization has a comprehensive annual budget which includes all sources and uses of funds for all aspects of operations. my organization has written policies and procedures for fisc al operations, including procedures for processing payroll, purchases etc. resources are distributed and programs developed based on the budget plan. the board of trustee establishes an investment policy that guide investment and financial decisions all financial transactions are recorded and documented a financ ial statement is produced annually the board of trustees reviews the financial statement carefully figure 3. financial risk management implementation in islamic social enterprises agree percentage disagree perc entage 87.50% 83.82% 83,33% 83,33% 87,33% 81,50% 83,33% 12.50% 16.67% 16.67% 16.67% 12.50% 18.18% 16.67% according to figure 3, all items in financial risk management in islamic social enterprises have values above 80%, thus indicating the implementation of financial risk management has been going well. this is in line with islamic principles in anticipation of future risks in accordance with the hadith narrated by ibn abbas "take care of five things (i) take care of your youth before your old age, (ii) keep your healthy days before your illness, (iii) your time before your poor period (iv) keep your time before your busy time, (v) keep your life before your death." taking into account and anticipating things that haven't happened is important because we need to make good plans. the importance of a good plan is to anticipate future risks so that in the event of a failure can be minimized so that there is no sense of disappointment that causes despair, and so that people always try and pray that failure does not happen to them. 5. conclusion the implementation of financial risk management in islamic social enterprises is good enough because the management that manages the organization has an awareness of the importance of managing risk in anticipating future conditions. however, the implementation of corporate culture in the islamic social enterprise needs to be improved, especially about compensation and improvement of employee career levels. lucky nugroho & wiwik utami & zuraidah muhammad sanusi & hari setiyawati 22 references arafah, w., & nugroho, l. 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(indonesia and malaysia comparison) adela sarah vania universitas sangga buana, bandung, indonesia erik nugraha universitas sangga buana, bandung, indonesia lucky nugroho mercu buana university, jakarta, indonesia abstract the purpose of this study was to determine the differences in earnings management practices in islamic commercial banks in indonesia and malaysia. the method used in this research is descriptive and comparative method. the results of this study occur earnings management in islamic banks in indonesia and malaysia, and there are significant differences. the results of the spss statistical tool obtained a significance value of 0.02 <0.05, so there are significant differences between the practice of earnings management in islamic commercial banks in indonesia and malaysia. keywords: earning management, islamic bank 1. introduction financial statements are a source of information that can be used by various parties as a basis for making deci sions. furthermore, financial statements are disclosure of financial position and financial performance of an entity (anugroho et al., 2018). also, it is by the purpose of the financial statements that it serves to provide information concerning financial position, performance, and changes in the financial position of an entity including sharia entities that are useful for users to make business decisions. financial statements are significant for the users as for investors. investors use financial statements to make investment decisions. components of financial statements that are often used by investors to measure the performance of a company is a statement of profit (loss) because in the report contains information about a company's earnings for a certain period. information on earnings as stated in the statement of financial accounting concepts (sfac) number 2 is the main element in the financial statements and is very important for those who use them because they have predictive value. thus, the party responsible for financial statements is the management of the company. therefore, company management is also responsible for information on profits reported in the financial statements. furthermore, earnings information is one of the elements used to measure company performance so that there is a tendency for management to carry out various ways that make it possible to maintain the company's performance while maintaining a good reputation. islamic banking has recently experienced a relatively rapid growth the financial services authority (ojk) noted that the distribution of islamic bank financing in february 2017 reached rp. 289.99 trillion or grew by 14.76 percent compared to the same period last year. the growth of this financing comes from 13 sharia commercial banks, 21 sharia business units (uus), and 167 sharia rural credit agencies (bpr) in indonesia, indicating growth in the functioning of the intermediation and financial soundness of the islamic banking industry. the islamic banking financial ratio is monitored in good condition. the capital adequacy ratio (car) is maintained at 18.62 percent. meanwhile, the ratio of non-performing financing (npf) was recorded at 4.31 percent or below the ojk safe threshold of 5 percent (halimah & komariah, 2017; soekapdjo et al., 2018). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e adela sarah vania & erik nugraha &lucky nugroho 48 furthermore, the total assets of islamic banks in november 2017 reached rp. 400 trillion for the first time. islamic banking statistics of the financial services authority (ojk) noted that islamic bank assets in november 2017 grew 12.6% to rp 401.45 trillion from the position of the previous year. the amount consists of rp. 278 trillion islamic commercial bank (bus/bank umum syariah) and a sharia business unit (uus/unit usaha syariah) worth rp. 123.4 trillion. the graph of the development of islamic banking assets in indonesia is as follows: figure 1.1 chart of sharia banking asset growth source: https://databoks.katadata.co.id according to suryanto (2017) and sukmadilaga & nugroho (2017) the growth of islamic banking assets, the potential for fraud and scandal in islamic banks has the same possibilities as conventional banks. cases of corruption that occurred at bank jabar banten syariah (bjb syariah) there were allegations of disbursement of fictitious credit/financing by bjb syariah and high non-performing financing (non-performing financing / npf) from bank muamalat due to a large number of bad loans. also, the npf phenomenon of islamic banking also experienced a significant increase in 2008 of 1.42% to 4.84% in 2015 (nugroho et al., 2017). supposedly, one of the important requirements of islamic banks on the principle of implementing sharia accounting is to do disclosure with full disclosure without being covered, one of which is halal or illicit income sources as a form of sharia accountability that does not only account financially to capital owners but more accountable to the people of the world and allah swt in the hereafter, for all business transactions carried out in islamic banks so that they can achieve maslahah or social benefits and not bring badness to society (bnugroho et al., 2018). islamic accounting has an organization of international sharia accounting standards which serves to diversify the accounting treatment of global sharia financial institutions. the organization of international sharia accounting standards aaoifi or accounting and auditing organizations for islamic financial institutions is an organization founded in 1991 and based in bahrain. central banks or financial authorities have adopted aaoifi standards in some countries that carry out islamic finance both in full adoption (mandatory) or as a guiding basis (the basis of guidelines). some central banks support aaoifi, financial authorities, financial institutions, accounting and audit companies, and legal institutions in more than 45 countries including indonesia. indonesia and malaysia make sharia standards and aaoifi accounting standards as a guiding basis for compiling sharia standards and sharia accounting standards (syafri harahap, 2003). although both countries make aaoifi a guiding basis for the preparation of sharia accounting standards, indonesia and in malaysia have several differences, sharia accounting standards in indonesia are prepared by the sharia accounting standards board (dsas) of the indonesian accountants association based on the approval of the https://databoks.katadata.co.id/ does earning management happen in islamic bank? (indonesia and malaysia comparison) 49 indonesian institute of accountants national board. therefore, provisions related to sharia accounting previously issued by the sharia financial accounting board (dsak) are transferred to the sharia accounting standards board (dsas), besides that the preparation of sharia accounting standards must also refer to fatwas issued by the indonesian ulema council. however, in malaysia the sharia accounting standards used are the standards issued by the malaysia accounting standard board (masb), where malaysia also adopted the full international financial reporting standards (ifrs) in 2012, but because ifrs standards do not regulate transactions for the financial system sharia, the malaysia accounting standard board (masb) has a standing committee on islamic financial reporting that functions as an advisor so that existing or proposed accounting standards can be made applicable to islamic financial transactions. also, in malaysia, special laws are governing the transfer of islamic finance, namely the islamic financial services act 2013. therefore, this study aims to determine are there differences in the practice of earnings management in islamic commercial banks in indonesia and malaysia?. 2. literature review 2.1 positive accounting theory this research is based on positive accounting theory from watts & zimmerman (1990). positive accounting theory is an accounting theory consisting of a broader set of principles or concepts that can explain or provide answers to applicable accounting practices and predict phenomena that occur where accounting is applied to construct theories and verify theories. positive accounting theory arises when jensen & meckling (1976) states that research carried out in the field of accounting becomes unscientific because the focus is more normative and definitional. the normative approach further explains what information should be communicated to users of accounting information and how the information is presented rather than explaining why it happened. so the development of positive accounting theory in empirical research needs to be done to provide arguments that can explain accounting practices. there are three reasons for the shifting of normative to positive accounting theory which includes: (i) the inability of the normative approach to test theory empirically; (ii) the normative approach is more focused on the prosperity of investors individually than the wider community; (iii) the normative approach does not encourage or allow the optimal allocation of economic resources in the capital market. empirical research is emphasized to test the truth of a theory. a positive theory view states that a theory that can survive is a theory that is empirically tested and able to explain the reality in the capital market. positive accounting theory aims to emphasize the importance of empirical research to justify various accounting methods and practices that are now valid with a descriptive approach. a positive approach is also expected to provide a basis for in-depth empirical research in the field of accounting theory. 2.2 agency theory according to jensen & meckling (1976) and utami (2015) agency relations as a contract in which one or more principals hire other people (agents) to do some services for their interests by delegating some decision-making authority to the agent. conflict of interest will arise from a delegation of tasks given to agents, namely agents, not in the interests of maximizing the welfare of owners but tend to pursue their interests at the expense of the interests of the owner. this contractual relationship is usually carried out using the accounting numbers stated in the financial statements as the basis. because of the possibility of the agent not always acting by the interests of the principals. therefore, francis & wilson (1988) suggest that to reduce conflict of interest, principals can supervise in the form of the presentation of periodic financial statements made by agents with the existence of an audit function. so, to reduce conflicts of interest, the agent must account for the trust given by the principals through audited financial statements. audited financial statements can provide adequate assurance that the financial statements presented by the agent are free of material misstatements, thus ensuring stakeholders. besides the existence of conflicts of interest, the delegation of tasks given to agents of principals can lead to information asymmetry, according to scott, (2009: 13) information asymmetry is a condition where there is an imbalance in information acquisition between management as a provider of information with shareholders and stakeholders in general as information users (users). there are two types of asymmetrical information, namely: (i) adverse selection, namely that managers and other insiders usually know more about the condition and prospects of the company than outside investors and facts that adela sarah vania & erik nugraha &lucky nugroho 50 may can influence the decisions that will be taken by the shareholders not to convey information to shareholders; (ii) moral hazard, namely that activities carried out by a manager are not entirely known by shareholders or lenders. so that managers can take action beyond the knowledge of shareholders who violate the contract and ethically or norms may not be feasible. 2.3 earning management operational accounting profit is defined as the difference between realized revenues derived from transactions in a period and related to historical costs (riahi-belkaoui, 2004), whereas according to agustina & kianto (2013), accounting profits can be interpreted through three approaches: (i) in terms of syntax, profit is defined as the difference between income and expenses. profits are considered to have arisen if there is an increase in the value of the net assets as a result of the transaction; (ii) profit regarding semantics is interpreted as being welfare or interpreted as a change in prosperity, or a change in capital. someone is said to be prosperous if a person can consume a flow of services or prosperity for a certain period and at the same time at the end of the period as at the beginning of the period; (iii) accounting earnings regarding pragmatics have the following meanings:  profit as a predictor, profit figures can provide information as a tool for estimating and estimating cash flow for dividend distribution, and as a tool to assess the company's ability to predict earnings power and company value in the future;  profit as a management control tool, profit can be used as a benchmark for management in measuring the performance of managers or divisions of a company. the announcement of the issuer's financial statements, especially the statement of financial position and comprehensive income statement is a moment awaited by investors in the stock market, because with the financial statements investors can find out the performance achievement of the issuer so that it can be used as a consideration to buy or sell shares they have. the profit achieved by the company is one measure of performance and becomes an investor's consideration in making investment decisions. godfrey et al. (2010) and cnugroho et al., (2018) state that one of the factors expected to be increased by investors is company profits. the higher the company's profit, the higher the income per share obtained by investors. therefore, in making investments, investors will always look for information about the company's financial statements that can forecast company profits. thus, financial information that publishes information on profits obtained in a period will affect investor expectations related to the ability of the company to generate profits in the future and will be reflected in changes in the price of shares of the company concerned in the capital market. when annual profits are announced, investors will immediately react to reported earnings information. accounting standards have limitations that can make financial statements less reliable (reliable). these limitations include flexibility in the application of accounting methods that lead to opportunities for management to conduct subjectivity in using the chosen accounting method and the timing of discretionary expenditures that can be used by management to influence profits by accelerating or delaying these expenses and shifting in another period. this financial report limitation is what causes earnings management activities by the company management to the company's financial statements. riahi-belkaoui (2004) defines earnings management as an intervention with a specific intention to process external financial reporting intentionally to obtain some personal benefits while according to scott (1997) earnings management can be described as management behavior in selecting specific accounting policies, or through the application of certain activities, which aims to influence profits to achieve a specific goal. an understanding of earnings management can be divided into two perspectives — first, earnings management from the perspective as the manager's opportunistic behavior to maximize its utility in the face of compensation contracts, debt contracts, and political costs. second, earnings management from the perspective of efficient contracting, where earnings management gives managers the flexibility to protect themselves and the company in anticipating unexpected events for the benefit of the parties involved in the contract (scott, 1997). according to healy & wahlen (1999), earnings management occurs when managers use their considerations in financial reporting and preparation does earning management happen in islamic bank? (indonesia and malaysia comparison) 51 of transactions to change financial statements, with the aim of manipulating reported earnings to stakeholders related to the economic performance of the company or to influence the outcome of the agreement (contract) based on the reported accounting figures. healy & wahlen (1999) also states that the definition of earnings management contains several aspects as follow:  earnings management interventions on financial reporting can be done using judgment, for example, judgment is needed in estimating the number of future economic events to be shown in financial statements, such as estimated economic life and residual value of fixed assets, liabilities for pensions, deferred taxes, losses receivables and impairment of assets. also, managers also have choices for accounting methods, such as depreciation methods and cost methods.  the purpose of earnings management is to mislead stakeholders regarding the company's economic performance; this arises when management has access to information that is not accessible to outsiders. 2.4 discretionary accruals detection of the possibility of doing earnings management in financial statements is generally examined through the use of accruals. accrual basis has been agreed as the basis for preparing financial statements, accrual basis is seen as more rational and fair compared to the cash basis. the purpose of accrual basis selection is to make financial statements more informative, namely financial statements that reflect the actual conditions. however, this accrual basis can be slightly changed, so that it can change the rate of profit generated. these opportunities are often used by managers when they want certain incentives for themselves. financial accounting standards use accrual basis in preparing financial statements to be able to achieve financial reporting objectives. the main purpose of accrual accounting is to protect investors in estimating the economic performance of a company over a period, through the use of basic accounting principles such as revenue recognition and revenue comparison. on this accrual basis, the effect of transactions and other events is recognized at the time of the event (not when cash or cash equivalents are received or paid) and recorded in accounting records and reported in the financial statements of the period. financial statements prepared based on accruals provide information to users not only past transactions involving cash receipts or payments, but also future cash payment obligations and resources that immediate cash that will be received in the future. according to healy & wahlen (1999), financial statements prepared on an accrual basis are expected to reflect the real conditions of the company. in applying accrual policy, accruals, referrals are used, and allocation procedures aim to adjust the burden and income with the period, rather than linking expenses and income based on expenditure and cash receipts (cash basis). therefore, accrual policy in applying accounting standards can be used to conduct earnings management. for example, to increase profits, management can take advantage of judgment by lowering the estimated level of uncollectible accounts or extending the period of depreciation of assets, changing the accounting method for depreciation of fixed assets, and can shift costs and revenues. according to scott (1997) that the development of earnings management conducted through accrual basis is caused by three things which include: (i) accruals are the main subject of generally accepted accounting principles, and earnings management has more opportunities to occur on accrual-based reports compared to reports cash-based; (ii) studying accruals will reduce problems that arise in measuring the impact of various choices of accounting methods on profit; (iii) if the indication of earnings management is not observed from accruals, the investor will not be able to explain the impact of management on the income reported by the company. there are two accrual concepts, namely: discretionary accrual and non-discretionary accrual. discretionary accrual is the recognition of profit or expense accruals that are free, unregulated and are a management policy choice. according to riahi-belkaoui (2004) discretionary accruals is a way to reduce earnings reporting that is difficult to detect through manipulation of accounting policies related to accruals, for example by increased amortization and depreciation costs, recording large liabilities for product guarantees, contingencies and price adela sarah vania & erik nugraha &lucky nugroho 52 discounts and records obsolete inventory. non-discretionary accrual is the recognition of reasonable profit accruals, which are subject to generally accepted accounting standards or principles. non-discretionary accruals are reasonable accruals, and if violated will affect the quality of financial statements (unnatural). therefore the accrual form analyzed in this study is a form of discretionary accrual which is abnormal accruals and is a management policy choice in selecting accounting methods. the discretionary accrual value used in the analysis is the absolute value, this study uses absolute value because what is to be measured is the magnitude of profit management, where the higher the absolute discretionary accrual value indicates the higher earnings management. the model used to measure earnings management in this study is the jones model modified by dechow et al. (1995), the reason for choosing this model is because it is considered better among other models for measuring earnings management because this model separates non-discretionary accruals with discretionary accruals. the stages of discretionary accruals include: a. tait = nit – cfoit remark:  tait = the total sharia bank that carries out accrual policy is i in period t  nit = islamic bank net income i in period t  cfoit = cash flow from operating activities of company i in period t b. tait / ait-1 (tait) = α1 (1/ ait-1) + α2 (δrevit / ait-1 δrecit / ait-1) + α3 (ppeit / ait-1) remark:  tait / ait-1 = total islamic banks that carry out accrual policy i for year t, divided by total assets of islamic banks i at the end of year t-1  tait = the total sharia bank that carries out accrual policy is i in period t  ait-1 = total assets for islamic banks i at the end of year t-1 then the equation is estimated and used to calculate the nondiscretionary accruals as follows: ndait = α1 (1/ait-1) + α2 (δrevit / ait-1 δrecit / ait-1) + α3 (ppeit / ait-1) furthermore, after obtaining the value of nondiscretionary accruals, the value of the discretionary accruals can be calculated using the formula: dait = tait ndait remark :  dait = total discretionary accruals of islamic banks i in period t 2.5 conceptual framework agency theory can be seen as a version of game theory (noviana & yuyetta, 2011; azlina, 2012; hill & jones, 1992) which makes a contractual model between two parties called an agent and another party is called a principal. the principal delegates responsibility for decision making to the agent, this can also be said that the principal gives a mandate to the agent to carry out specific tasks by the agreed work contract. the authority and responsibility of the agent and principal are regulated in the work contract with the agreement. management as a company manager knows more about internal information and future company prospects than the owner (shareholder). therefore as a manager, management is obliged to give a signal about the condition of the company to the owner. the signal provided can be done through the disclosure of accounting information such as financial statements. the financial statements are intended to be used by various parties, including the management of the company itself. however, those who are most interested in financial statements are external users (outside of management). these financial statements are essential for external users especially because this group is in the most uncertain condition (mcnally et al., 1982; lisa, 2012). internal users (management) have a direct relationship with the entity or company and know the significant events that occur. thus, the level of dependence on accounting information is not does earning management happen in islamic bank? (indonesia and malaysia comparison) 53 as strong as those of external users. management or agent has more information (full information) than the principal on the other side, giving rise to asymmetric information. information that is more owned by managers can trigger to take actions by the desires and interests to maximize their utility. whereas for investors in this case investors, it will be difficult to effectively control the actions taken by management because they only have little information available. therefore, sometimes specific policies are carried out by company management without the knowledge of the capital owners or investors. according to elsa et al., (2018) and padmantyo, (2011), agency theory is very relevant for islamic banking. this is related to the problem of the level of accountability and transparency in the use of customer funds. first, regarding "liabilities" because islamic banking must account for various categories of investor funds carried out through some specific investment contracts in islamic banking. second, from the "assets" revenue-based financing (financing) carried out by islamic banking requires an effective "monitoring" process to provide confidence that funded projects have adequate supervision and reporting to prevent moral hazard and mismanagement such as engineering profit. although theoretically, the system implemented by islamic banking can prevent moral hazard and mismanagement from occurring, in practice there can be a conflict of interest between the agent and the principal. one form of conflict of interest is the practice of earnings management. riahi-belkaoui (2004) defines earnings management as an intervention with a specific intention to deliberate the external financial reporting process to obtain some personal benefits. according to healy & wahlen (1999) and elias (2002), earnings management occurs when managers use judgment in financial reporting and preparation of transactions to change financial statements, with the aim of manipulating the magnitude of profits to several stakeholders about the company's economic performance or to influence the outcome of the agreement (contract) which depends on the accounting figures reported. detection of the possibility of doing earnings management in financial statements is generally examined through the use of accruals. financial accounting standards use accrual basis in preparing financial statements to be able to achieve financial reporting objectives. the primary purpose of accrual accounting is to protect investors in estimating the economic performance of a company over a period, through the use of basic accounting principles such as revenue recognition and comparison, there are two accrual concepts, namely: discretionary accrual and non-discretionary accrual. according to dechow et al., (2003), discretionary accrual is the recognition of profit accruals that are free, unregulated and are management policy choices while non-discretionary accruals are reasonable accruals, and if violated will affect the quality of financial statements (unnatural). therefore, the accrual form analyzed in this study is a form of discretionary accrual which is an abnormal accrual and is a management policy choice in the selection of accounting methods. abdullah & razazila, (2012). shows that the practice of earnings management in the form of income decreases occurs in shariah-approved companies. padmantyo (2011) stated that the earnings management actions carried out were by doing smoothening of profit and lost sharing deposit returns, namely by providing incentives in the form of returns to investment account holders that matched the market rate as the benchmark. also, this policy is also often done using bank management forming a reserve fund taken from the allocation portion of iah from the previous accounting period. thus, this situation will potentially increase the potential for asymmetric information for sharia banking stakeholders. aaoifi standards have been adopted by central banks or financial authorities in some countries that carry out islamic finance both in full adoption (mandatory) or as a guiding basis (the basis of guidelines). indonesia and malaysia make aaoifi a guiding basis in the preparation of sharia accounting standards, but indonesia and in malaysia have several differences, the difference is where islamic accounting standards in indonesia are compiled by the sharia accounting standards board (dsas) of the indonesian accountants association and refer to fatwa issued by the indonesian ulema council (mui). meanwhile, the state of malaysia sharia accounting standards used are the standards issued by the malaysia accounting standard board (masb), malaysia accounting standard board (masb) has a standing committee on islamic financial reporting that functions as an advisor so that existing or proposed accounting standards can be adela sarah vania & erik nugraha &lucky nugroho 54 made applies to islamic financial transactions. also, there is a special law in malaysia that regulates islamic financial transactions, namely the islamic financial services act 2013. based on the description above, the framework can be described as follows: based on the conceptual framework described and figure 1.2 above, the research hypothesis is as follows: "there are differences in earnings management practices in islamic commercial banks in indonesia and malaysia." 3. methodology the research method used in this study when viewed from the level of exploration is descriptive and comparative methods. descriptive method is a method used to describe or analyze a research result but not used to make broader conclusions. the comparative method is research that compares the state of one or more variables in two or more different samples or two different times. 3.1. types, data sources of research, population, and sample this study uses a type of cross-sectional data which is a type of data whose value is taken at a certain time (one shoot time) within the limits that are by certain measurement attributes. the data sources used are secondary data sources, namely data that comes from parties or institutions that have used or published it. therefore the data used can be ascertained its use and has been published; it is no longer necessary to test the validity and reliability (gulo, 2002). if there are errors or inaccuracies, it is not the responsibility of the researcher but is the responsibility of the parties or institutions that publish it. the population is a collection of elements that have specific characteristics that can be used to make conclusions. the population in this study is sharia commercial banks in indonesia, which are 13 banks and in malaysia which are as many as 15 banks in 2017. the sampling technique used is the census sampling technique, the census is the overall retrieval technique from members of the population. 3.2. operational variable as for providing an overview of the variables under study, the following are presented as follows: table 1.3 operational variable does earning management happen in islamic bank? (indonesia and malaysia comparison) 55 3.3 data analysis technique according to ghozali (2016), a different test t-test is used to determine whether two samples that are not paired or related to each other have different mean values. not mutually pairing can be interpreted that the study was conducted for two different sample subjects. in this study, the independent t-test was used to identify earnings management differences in islamic commercial banks in indonesia and malaysia. before the independent t-test was carried out the normality of the data was tested by the shapiro-wilk test. if the data is normally distributed, homogeneity of variance test is performed with the f-test or levene’s test. in this study, the two data groups had the same variant so that the independent t-test test value was read at equal variance. data is stated to have the same variance (f) if f-count <f-table and vice versa, the data variant is an unequal variance if f-count> f-table. the form of the variance of the two data groups will affect the standard error value which will finally distinguish the test formula. the independent t-test for the same variant (equal variance) test uses the polled variance formula. hypothesis testing is done using the independent t-test at a 95% confidence level with an error rate of analysis (α) of 5%. the acceptance or rejection criteria for the hypothesis will be based on the p-value. decisions are based on probability as follows.  if p-value> 0.05, the hypothesis is rejected (not significant)  if p-value is <0.05, the hypothesis is accepted (significant) 4. results and discussion 4.1. research result data analysis techniques in this study were carried out by using independent t-test, in this case, the analysis was carried out to test hypotheses, before testing the data normality test first as a requirement for parametric statistics. the data normality test uses the shapiro wilk test. the decision on the normality test is if the significance value of shapiro wilk is greater than 0.05, then the data is normally distributed. likewise, vice versa if the significance value is smaller than 0.05 then the data is not normally distributed. the following is the data normality test using the shapiro wilk test: table 1.1 data normality test source: spss based on the results of the above tests (table 1.1), the results obtained are that the data are not normally distributed because the values of the significant level of shapiro-wilk are below 0.05, which means that the data are not normally distributed. therefore, the independent t-test cannot be done, considering that the independent t-test is a parametric statistic that requires data to be normally distributed. to test the hypothesis, the authors used non adela sarah vania & erik nugraha &lucky nugroho 56 parametric statistics for the unpaired difference test, using the mann-whitney test. the statistical hypothesis is as follows:  ho: there are no differences in earnings management practices in islamic commercial banks in indonesia and malaysia.  ha: there are differences in earnings management practices at islamic commercial banks in indonesia and malaysia. following are the results of the mann-whitney test as follows: table 1.2 mann-whitney test source: spss based on the data above (table 1.2), hypothesis testing can be done by comparing the significance level as follows:  if sign. > 0.05, then ho is accepted  if sign. <0.05 so ho is rejected based on table 1.2, it is shown that the significance is 0.02 <0.05, then ho is rejected, and ha is accepted, meaning the hypothesis which states that there are differences in earnings management practices at islamic commercial banks in indonesia and malaysia are accepted. 4.2. discussion this study uses the mann-whitney test to find out whether there are differences in earnings management practices carried out by islamic banking in indonesia and malaysia through discretionary accruals. the average discretionary accrual in islamic banking in indonesia is lower compared to islamic banking in malaysia. this shows that the business of decreasing profit by management is more significant in islamic banking in indonesia compared to islamic banking in malaysia. testing to prove the method of what the company does in doing if the discretionary accrual value is positive (da> 0) then it can be assumed that a company has implemented earnings management by increasing the company's accrual profit reporting (income maximization). whereas if the value of discretionary accrual is negative (da <0), it can be assumed that a company carries out earnings management in the form of decreasing income accruals. moreover, if the value of discretionary accrual results (da = 0), the company does not do earnings management. the lowest discretionary accrual value in islamic banking in indonesia is -0.138 (da <0) owned by bank muamalat indonesia (bmi). this means that the islamic banking made the highest profit reduction among the 13 other islamic banks in indonesia because the discretionary accrual value of bmi has a negative discretionary accrual value (da <0) and has the lowest da value of other islamic banking. so that it can be said that islamic banking practices earnings management in the form of accrual income reduction (income minimization). the highest discretionary accrual value in islamic banking in indonesia is 0.607 (da> 0) owned by bank aceh syariah (bac). this means that the islamic banking has the highest profit increase among the 13 other islamic banks in indonesia because the discretionary accrual value of bmi has a positive discretionary accrual value (da> 0) and has the highest da value of other does earning management happen in islamic bank? (indonesia and malaysia comparison) 57 islamic banking. so that it can be said that islamic banking practices earnings management in the form of accrual earnings increase (income maximization). the lowest discretionary accrual value in islamic banking in malaysia is -0,138 (da <0) owned by al rajhi banking & investment corporation (malaysia) berhad (al rajhi bank). this means that the islamic banking made the highest profit reduction among 15 other islamic banks in malaysia because the discretionary accrual value of bmi has a negative discretionary accrual value (da <0) and has the lowest da value of other islamic banking. so that it can be said that islamic banking practices earnings management in the form of accrual income reduction (income minimization). the highest discretionary accrual value in islamic banking in malaysia is 0.041 (da> 0) owned by ambank islamic berhad (ambank). this means that the islamic banking has the highest profit increase among the 15 other islamic banks in malaysia because the discretionary accrual value of bmi has a positive discretionary accrual value (da> 0) and has the highest da value from other islamic banking. so that it can be said that islamic banking practices earnings management in the form of accrual earnings increase (income maximization). most islamic banking in indonesia has decreased profits. as many as ten sharia banks make an effort to reduce profits or around 77% of sharia banks that make a decrease in profits. as well as three other sharia banks or around 23% doing business to increase profits. it can also be seen from the processed discretionary accrual value that islamic banking in malaysia decreased profits in 2017. as many as 10 islamic banks made an effort to decrease profits or around 67% of sharia banks which made a decrease in profit. as well as five other banks or around 33% of islamic banking in malaysia that make efforts to increase profit/income maximization. the results of this study are consistent with the research conducted by marliana (2017) who examined earnings management in indonesia and malaysia in the era of asean economic society. the results of his research proved that there are earnings management practices in indonesia and malaysia in the era of the asean economic community with observational data up to 2015. this study is also consistent with the research conducted by putri & adityawarman (2017) who tested the analysis of the influence of sharia and non-corporate status sharia towards earnings management practices in non-financial service companies in indonesia. his research proves that the practice of earnings management occurs in companies with sharia status. the research conducted by abdullah, & razazila, (2012) on earnings management: evidence concerning shariah-approved companies in malaysia was also consistent with this study. the results obtained are the practice of earnings management, namely a decrease in profits occurs in companies with sharia status. 5. conclusion after testing using the mann-whitney test with a significance result of 0.02 or <0.05, it can be concluded that there are differences in earnings management practices in islamic commercial banks in indonesia and malaysia. the implications of this research are expected to be an evaluation material to improve the quality of reporting of financial information that can minimize earnings management practices that conflict with sharia principles in indonesia and malaysia. references abdullah, w., & razazila, w. 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(1990). positive accounting theory: a ten year perspective. accounting review, 131156. international journal of commerce and finance, vol. 5, issue 2, 2019, 31-44 31 effect of nonfinancial compensation on the employees’ job performance: a case of jimma geneti woreda health centers in horro guduru , ethiopia kituma merera jaleta jimma university, ethiopia chalchissa amentie kero jimma university, ethiopia lalise kumera jimma university, ethiopia abstract the main purpose of this study was to assess the effect of non-financial compensation on the of employees’ job performance. the crosssectional, descriptive and inferential design with field study were used in the study. accordingly, 136 samples of respondents’ from 206 populations were taken. the study used mainly primary data and secondary data. survey data collected from respondents were analyzed by descriptive statistics such as frequency, percentage, and inferential statistics such correlation and multiple linear regressions analysis. the findings of the study indicated that there was a significant relationship between non-financial compensation and employee job performance in particular. but also, non-financial compensation; recognition positively and significantly affects employees’ job performance with is highly correlated with (r=0.605, p=0.000), and followed by work condition (r=0.590, p=0.000) and empowerment (r=0.554, p=0.000). finally, it is recommended that health centers needs to continually review and adjust the compensation system from time to time focusing more on nonfinancial compensation in order to influence employees to perform better. this may help to motivate the employees to perform well and will decrease the rate of turnover and absenteeism with in health centers. keywords: compensation, non-financial compensation, employee job performance 1. introduction human resource is one of the most important assets and major foundations that should exist in the organization because the organization without machine can still be run by the work force. however, the organization without human will not be able to run at all even with the help of advanced machines. therefore, the human resources need to be increased their skills because the function of human (employees) cannot be replaced by other equipment. consequently, employees must be managed as well. managing employees is one of the continuing responsibilities for manager and team leader. (mangkuprawira, 2007), state that “employees’ performance is a result of work both quality and quantity are achieved by employees in performing their duties in accordance with the responsibilities given to them.” these issues would be the responsibilities for managers and team leaders to increase employees' performance, for example keeping employees feel happy and satisfy because the organization believe that when employee feels happy and satisfy then it have an effect on employees' performance. as per of (sopiah, 2013),compensation is one of the strategies used in hrm for attracting and retaining useful employees as well as facilitating them to improve their performance through motivation. (ryan.et.al, 2000), indicate that non-monetary types of compensation can be very meaningful to employees and very motivating for performance improvement. banker et al. (2000) confirm that firms are increasingly adopting nonfinancial incentives. mushrush (2002) identifies lack of non-monetary rewards as an important cause for employee turnover. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e kituma merera jaleta & chalchissa amentie & lalise kumera 32 in discipline of hrm different writers suggest the following indicators for measuring employee performance. as per of (aguins, 2007) and (inuwa.m, 2015), job performance is employees’ overall performance which is meeting the expected quality and achievement of tasks under the policy and time requirements of the organization. ali and raza (2015) indicate their opinion that employees only stay in an organization to give their best when they believe the compensation process is matching to their input. this has constituted a high rate of employees leaving their employers, moving sometimes away from their city or the country just to find greener pastures. tausif (2012) conducted a study on the influence of non-financial rewards on employee in educational sector of pakistan. the findings of the study reveals that employee performance is positively and considerably associated with non-financial rewards such as promotion, job enrichment and task autonomy. aktar, et.al (2012) examined the impact of intrinsic rewards (recognition, learning opportunities, challenging work and career advancement, and extrinsic rewards (basic salary and performance bonus) on employee performance in twelve commercial banks of bangladesh. the study found that each factor within intrinsic reward was a highly significant factor which affects employees‟ performance. a study conducted by sheila &josephat (2015) with objective of finding the influence of compensation and reward on performance of employees at nakuru county government. the findings indicated that there was a strong relationship between compensation and reward on employee performance. in jimma geneti woreda there are four (4) health centers which have about 206 employees. still, there is major movement of individuals (turnover), absenteeism (woreda health office report, 2018) lack of motivation through compensation. these shows as there is poor compensation practice and employee motivation those increase an employee job performance. these situation are then examined in this paper in relation to case and empirical evidence on different factors of nonfinancial and employee job performance relationship 1.1. statement of the problem employees’ performance is an important element to build a good status for the outsider towards the image of an organization and also within an organization. if the employees are not satisfied with the compensation provided by the organization they will reduce their effort in performing their jobs or less committed to organizational goals (marris, et.al 2004) as cited in ermias n.(2017). philip (2014), states that employees’ performance is dependent on the way they are treated in the organization and the extent to which organizational strategy fits with employees’ interest. in the study area, there was a sign of demotivation among employees like: low morale, indiscipline, absenteeism, and turnover. these demotivations may rise from inappropriate compensation, which is the reason for lower the performance of the employee as a result. it is evident that highly motivated employees are more likely to have high productivity. however, according to certo (2006) as cited in elizabeth w.(2017), good performance is not as a result of motivation only, but also includes ability i.e. skills, equipment, supplies and time. different people are motivated by different factors. it is important for managers and supervisors to understand what motivates individual employees, and not assume a one-size-fits-all approach (george and jones, 2013) with that in mind, the researcher decided to carry out research in jimma geneti health centers, interested on the effect of non-financial compensation on employee job performance. besides, the researcher considers the unavailability of study in this area in the health centers, previous studies focus on the bank industry by considering some variables of compensation, as a huge gap which needs research. thus, the researcher was interested to study on selected elements of; non-financial compensation: (recognition, working condition, and empowerment) as they might be a triggering factor for performance in public organization. 1.2. basic research questions the study was guided by following questions: 1. what is the effect of recognition on employees’ job performance? 2. what is the effect of work condition on employees’ job performance? 3. what is the effect of empowerment on employees’ job performance? effect of nonfinancial compensation on the employees’ job performance: a case of jimma geneti woreda health centers in horro guduru , ethiopia 33 general objective the general objective of the study is to determine the effect of non-financial compensation on employee job performance at jimma geneti woreda health center. specific objectives more specifically, the study aims at the following objectives:  to determine effect of recognition on employees’ job performance.  to evaluate effect of work condition on employees job performance.  to examine effect of empowerment on employee job performance 2. literature review 2.1. compensation compensation is all income in the form of money; goods directly or indirectly received by the employee in exchange for services rendered to organization .appropriate compensation will have a positive effect against employees, because it cannot be denied that compensation becomes the main goal for most employees working within an organization. odeoye (2014) states that compensation aims to get employees interested in work so as to have good retention for the organization. compensation is reviewed from shape, including financial and non-financial, while viewed from the way of delivery consists of direct and indirect compensation. odeoye (2014) stated that compensation is divided into three types; i.e., material, social, and activity. compensation is all form of payment or gift given to employees and emerges from their work (dessler, 2007: 46). the term compensation is used to indicate the employees gross earnings in the form of financial and non-financial rewards. compensation means the reward that is received by an employee for the work performed in an organization. the term “compensation‟ is often used as an alternative to “reward‟ or “remuneration‟, especially in the usa, although it is becoming more common in the uk (armstrong, 2010).compensation is the remuneration given to the employees for the work they do for the organization. in other words, an employee is entitled to both the financial and the nonfinancial benefits in return for his input to the organization. martocchio,(2016). define compensation as a feedback received by employee in form of monetary and nonmonetary. compensation is direct and indirect. direct compensation such as salary received every month and indirect compensation is a payment in forms others than money. compensation is an intrinsic and extrinsic reward received by employee after they done their work. compensation refers to all the provided tangible and intangible rewards an employee receives from the employer as part of the employment relationship. it can be said that compensation is the “glue” that binds the employee and the employer together in the organized sector. rewards and benefits are also type of compensation program that are important for employees (cascio, 2015). 2.2. employee job performance employee performance is the key dependent variable in the present research. different scholars have defined the concept of employee performance from different perspectives. according to shields (2016), employee performance has been defined as the degree to which an employee executes the duties and responsibilities. performance is the quality and quantity of the achievement of the tasks well individuals, groups or organizations vlaicu's (2015). performance can be improved through the establishment of clear and measurable job description for each employee so that they understand what their functions and responsibilities are states that performance is a theoretical implementation a balance that says someone will show an optimal accomplishment if he is get benefits , and there is stimulus in the work and rationally. job performance in the form of performance appraisal is an important development in human resource portfolio (bateman & snell, (2007). employee performance is a sign of individual job performance after a person does the work involved in the profile dessler (2000). in discipline of hrm, overachieving and talented employees are the driving force of all organizations so it is essential that, kituma merera jaleta & chalchissa amentie & lalise kumera 34 organizations strive to motivate and hold on to the best employees. the quality of human resources management is a critical influence on the performance of the institution (dessler, 2007). different writers suggest the following indicators for measuring employee performance and they include: quality that can be measured by percentage of work output that must be redone or is rejected; customer satisfaction that can be measured by the number of royal customers and customer feedback. also, timeliness, measured in terms of how fast work is performed by the employee when given a certain task; absenteeism/tardiness observed when employees absent themselves from work; and achievement of objectives measured when an employee has surpassed his/her set targets, he/she is then considered to have performed well to achieve objectives (hakala, 2008; armstrong, 2006). as per of (aguinis, 2007), indicators for measuring employee performance and they include quantity of work done (how much unit of a product has been produced), quality on work produced (how well the work has been done) and the timeliness of the work that has been done (meeting due dates, following to schedules and deadline). 2.2.1. the relationship between non-financial compensation and employees job performance compensating employees is associated with the motivation of the workforce of organization for better performance. the rationale behind the use of various components of compensation to employees is that motivated employees become satisfied in terms of fulfilling their wants, both financial and non-financial thus demonstrate improved performance. failure to do so, employees will be tempted to leave the organization (azasu, 2017. compensation that do not involve any direct payments and often arise from the work itself, for example achievement, autonomy, recognition, promotion, scope to use and develop skills, training, career development opportunities, working condition and high-quality leadership (armstrong and murlis, 2004).the study at hand therefore looked at the effect of nonfinancial (recognition, working condition and empowerment) on employees job performance. 2.2.2. recognition and employee performance in today’s work surrounding that is high paced, there has been reports that today’s workforce put into consideration how their work is acknowledged by their employers, however, efforts on this have normally reported as infrequent and rare (recognition rewards enterprises, 2007). deeprose (1994) argues postulated that recognizing employees in an organization causes a fundamental outcome on the productivity of employees. when recognition as a reward is used in an effective manner, it results in the performance of employees that is improved. in the real sense, workers have always taken recognition as part of what they feel; it results in improved work, which in turn leads to improved performance in turn to an organization’s efficiency. deeprose (1994) did mention that mangers that are good have a way of recognizing their workers via things which deem better to acknowledge the accomplishments they make in their assignments, and they compensate their employees by offering them tangible rewards. barton and gold (2013) described that recognition is considered the most important factor among non-financial rewards in order to increase job satisfaction level of employees and thus their performance. lawler (2016) suggested that the well-being of any organization depends on how its human resource is treated. organizations achieve its well-being through giving rewards and recognition to its employees to enhance their performance. andrew (2016) described that employees become more loyal to their organization and perform much better if the organization recognizes and appreciates their work in terms of certification, verbal appreciation among other components. organizations are missing the very valuable component in the organization that is recognition. andrew (2016) however says that the cost of practical implementation of this component is very low in many organizations. through recognition, employees are being realized that they are valuable for organization and employees feel appreciated through recognition. danis and usman (2010) found that there are different dimensions of work motivation and satisfaction that are significantly correlated and reward and recognition greater impact on performance of the employees. effect of nonfinancial compensation on the employees’ job performance: a case of jimma geneti woreda health centers in horro guduru , ethiopia 35 2.2.3. working condition and employee performance working condition covers a broad range of topics and issues, from working time (hours of work, rest periods, and work schedules) to remuneration, as well as the physical conditions and mental demands that exist in the workplace. lekha p., & dr. r. magesh, (2016) defines working environment as an entirely which comprises the totality of forces, actions and other influential factors that are currently and, or potentially contending with the employee’s activities and performance. working environment is the sum of the interrelationship that exists within the employees and the environment in which the employees work. they also defines working environment is a composite of three major sub-environments: the technical environment, the human environment and the organizational environment. technical environment refers to tools, equipment, technological infrastructure and other physical or technical elements. the technical environment creates elements that enable employees perform their respective responsibilities and activities. the human environment refers to peers, others with whom employees relates, team and work groups, interactional issues, the leadership and management. this environment is designed in such a way that encourages informal interaction in the work place so that the opportunity to share knowledge and exchange ideas could be enhanced. this is a basis to attain maximum productivity. organizational environment include systems, procedures, practices, values and philosophies. the quality of work depends upon safe and healthy working conditions in determining employee’s job behavior. the organizational climate is an important indicator of employee behavior as a combination of social and psychological factors. it is found that working conditions are attached with employees’ job involvement and job satisfaction that ultimately leads to better performance of the employees (scott et al., 2000). it is reported that there is a positive correlation between perceived supervisor support and nurse occupation related outcomes (hall, 2007). kazmi et al. (2008) examines the effects of stressful work environment on the performance of medical house officers. the results reveal an inverse relationship between job stress and job performance. high job stress in the house of officers results in low job performance. similarly, it is reported that perceived adequacy or inadequacy of work environment, both physical and psycho-social, extends noticeable effect on employees’ job satisfaction, performance and perception of effectiveness of an organization (srivastava, 2008). 2.2.4. empowerment and employees’ performance the aim of the employee empowerment is to develop individual and organizational performance and to help employees achieve their goals by authorizing employees to participate in the decision-making process. employees think about their own jobs, and find and solve problems related to their job. empowerment is the process of enabling or authorizing an individual to think, behaves, take action, and control work and decision making in autonomous ways. danit and menon (2012) have noted that ‘employee empowerment’ has been most preferred option in many organizations during the time of business decline. hechanova et al. (2006) did a study on the relationship between psychological empowerment, job satisfaction and performance among filipino service workers. the study found that psychological empowerment was positively correlated with performance. pride et al. (2009) explained that employees of any organization that feel empowered work with better efficiency and help the organization to achieve its ultimate goals. employee performance becomes crucial and the organizations attempt to ensure uninterrupted employee performance through many non-monetary methods, including ‘employee empowerment’. kituma merera jaleta & chalchissa amentie & lalise kumera 36 figure 1. conceptual frame work the concepts and variables with associated indicators and measures were developed as follows. table 1: operationalization of variables 3. research methodology the cross-sectional design with field work was used in the study. in this study, the descriptive and explanatory research design was used to fulfil the objectives of the research, because descriptive method was used to investigate the major factors that affect employee job performance in the health centers while explanatory method was used to examine the relationship between independent variables and dependent variable and to determine effects of each factors on employee job performance. in this study the researchers took stratified random sampling technique. the criterion for creation of strata was position level. three strata namely management staff, supportive staff and technical staff and non-managers had been used. since the distribution are no equal the variance of these three strata is unequal (disproportional stratified was used). further for these strata, simple random sampling was proposed. as the study comprises of three strata, a reasonable sample size from each strata was taken up to cover a sample out of 26 management staffs 17 respondents, from 39 supportive staffs 26 while out of 141technical staffs 93 respondents were selected as a sample representative. totally out of 206 employees 136(66.02%) samples had taken. this study the sample size was determined using the formula given by (yamane.t, 1967) . for the study both primary and secondary sources of data were used. primary data: for the purposes of this research, questionnaire and interview were used to gather the necessary information. questionnaire is developed based on the research hypotheses. the aim of questionnaire is to capture the data and information required to establish the parameters of the model, the relationship between the independent and dependent variables, evaluate the final model and hypotheses. five points likert scale ranging from 1 (strongly disagree) to 5 (strongly agree) was used to measure responses. secondary data: these include all types of published and unpublished, documents and other such types of information. such as, reports of the organization personal database (internets). data analysis procedure: the processed data was analyzed by using statistical package for social sciences (spss) version 20. the researchers used descriptive analysis such as; frequency, and percentage and inferential analysis like; pearson’s correlation and multiple linear regressions to determine the effect of independent variables on dependent variable (employee job performance) of health center employees from transformed qualitative data to quantitative were applied. vital qualitative information obtained during interview is used to substantiate the qualitative result. model specification concept variable indicator measure nonfinancial compensation  recognition fairness in appraising performance questions  work condition facility in work area questions  empowerment participation in decision making questions employee performance  quality  quantity  timeliness high or low questions recognition employees’ job performance working condition empowerment effect of nonfinancial compensation on the employees’ job performance: a case of jimma geneti woreda health centers in horro guduru , ethiopia 37 the resulting estimator or parameter can be expressed by a regression formula (gujarati.d.n, 1995). thus, the following multiple linear regressions was developed to make the research more effective in analyzing the influences of in dependent variables ejp= f (rec, wc, emp) ejp= β0 + β1rec + β2wc + β3emp +e---------------------(1) where:ejp = employee job performance which is the dependent variable, β0= average performance β1= unstandardized regression coefficient of recognition (rec) = recognition, β2= unstandardized regression coefficient of work condition (wc) =work condition β3= unstandardized regression coefficient of empowerment (emp) = empowerment and e = error term or residual or unexplained variable. 4. findings and discussion 4.1. response rate of respondents the analysis is based on the information obtained from 136 employees. out of these 136 questionnaires distributed to the respondents, 131 questionnaires were properly filled and returned and five were not. thus, the analysis is based on 131 (96.32%) response rates. 4.2. reliability of research instruments measuring reliability is a good way to show evidence of consistency within the construct. gregory (2000) stressed that coefficient alpha is a useful internal consistency technique to estimate the reliability, where 1 (one) indicates the perfect reliability, while 0 (zero) indicates no reliability. . table below represents the spss generated conbach’s alpha for each dimension of the study variables. table 2. table represents the spss generated conbach’s alpha for each dimension of the study variables source: researcher own survey & spss output, 2019 the table above shows that reliability coefficient with cronbach’s alpha. hair et al (1998) have suggested that exploratory research could reduce the value to 0.60 as the minimum acceptable limit for the conbach’s alpha. according to the cronbach’s alpha test, all the values are greater than 0.60 which surpass the acceptable value. it seems that the questions used in the questionnaire are good measurements of measuring the independent variable i.e. non-financial rewards. 4.3. descriptive statistics descriptive analysis was carried out in order to depict the demographical profile of respondents using frequency and percentage analysis. independent variables cronbach's alpha n of items recognition .807 5 work condition .789 5 empowerment .763 5 kituma merera jaleta & chalchissa amentie & lalise kumera 38 4.3.1. descriptive statistics of independent variables this part presents the descriptive statistics of the independent variables by frequency and percentage table based on the five-point likert scale (i.e. 5= stands for strongly agree, 4= agree, 3= neutral, 2= disagree and 1= strongly disagrees). table 3: descriptive statistics results likert scale variables recognition work condition empowerment n % n % n % strongly disagree 9 6.87 50 38.17 16 12.21 disagree 35 26.72 51 38.93 47 35.88 neutral 55 41.98 14 10.69 25 19.08 agree 22 16.80 15 11.45 38 29.01 strongly agree 10 7.63 1 0.76 5 3.82 total 131 100 131 100 131 100 source: researcher own survey & spss output, 2019 4.3.2. recognition as per the above table majority 41.98% (n=55) of the participants were neutral and 33.59% (n=44) were responded negatively to recognition while only 22.43 %( 32) positively responded about the existing recognition. according to health center employees, the existing recognition practices differentiate among them based on their performance. the results resonate with barton and gold (2013). during key informants, interviews health center workers explained their ideas as “we are working very hard to meet the set goals of health program.” but looking at our acceptance toward appreciation was not equally fair. for your surprise, there is only some employee repetitively recognized (get a promotion) by friendship this is a pain for me. therefore, the management should improve the recognition system and make recognition fair, free from bias to boost the performance of an employee and hence the organization performance. 4.3.3. working condition as per the above table majority 77.1 %( 101) of the participants were negatively responded with the facility of health centers and 10.69 % (n=14) were neutral respondents with work condition of health centers. 12.21 %( n=16) were positively responded. this implies that health center workers were not satisfied with the working conditions in the study area. during key informant interview respondents (workers) said “frankly speaking, what is expected from us to do and the basic facility provided by the government do not much. therefore the organization makes sure the confortable and supportive work condition in order to increase employees’ performance in health centers. 4.3.4. empowerment the above table indicates the majority of 32.83 % (n=43) of the respondents were positively responded and 48.09% (n=63) were responded negatively with empowerment. this implies that more than half of the perception of the employee towards empowerment negative. this indicates low empowerment to apply new skills, which is likely to reinforce the values of personal development thus improving employee performance and organizational performance. during key informant interview one person from technical said,” i do my work freely but only those individuals who are highly relate to managements get the more chances in all direction. therefore the managements improve communication system and develop team decision making in organization in order to increase employees performance in health centers. 4.4. correlation analysis in this part the pearson’s correlation coefficient was computed to determine the relationships between recognition, working condition and empowerment with employee job performance. for this study diction rule given by bartz (1999) as cited by ermias b. (2017) was used. effect of nonfinancial compensation on the employees’ job performance: a case of jimma geneti woreda health centers in horro guduru , ethiopia 39 table 4.the correlation analysis: nonfinancial and employee job performance variables person correlation (r) level of significance (p) recognition .802** 0.000 work condition .780** 0.000 empowerment .777** 0.000 source: researcher own survey & spss output, 2019 the results reported in the table above shows that recognition (r=0.802, p = 0.000) has a very strong relationship on employee performance. it means that increase or decrease in recognition will bring corresponding changes on employee job performance. as well as it shows work condition, empowerment and employee performance have strong relationship which have correlation values of (r=0.780, p < 0.000) and (r=0.777, p<0.000) respectively. therefore, overall finding showed that there is a strong, positive and significant relationship between recognition, work condition, empowerment and employee performance. thus, increase or decrease in nonfinancial compensation is associated with similar change in employees’ performance, quality of work, and quantity of work and affect absenteeism. finally, based on the overall results implied that there is a strong, positive relationship between nonfinancial compensation and employee job performance. it means recognition; work condition and empowerment have significant impact on employee job performance. 4.5. regression analysis the study proposed that there exist a relationship between compensation and employee job performance of health center in jimma geneti woreda. table 5. regression analysis model summary model summaryb model r r square adjusted r square std. error of the estimate 1 .870a .757 .751 .15037 a. predictors: (constant), empowerment , recognition, work condition b. dependent variable: employee job performance source: researcher own survey & spss output, 2019 the table above describes the relationship between compensation and employees’ job performance. the model had an r square value of 0.757 indicating that the dependent variable percentage of the variance that was explained by the independent variables was 75.7% such a percentage indicates a very good level of prediction, that is, 75.7% of the variations in employee performance of health centers of jimma geneti could be explained by the changes in recognition, work condition and empowerment , while the remaining 24.3% unexplained is because of either error or random sample. the pvalue of 0.000 (lesser than 0.01) implies that employee performance model of health center is significant at the 1 per cent significance. kituma merera jaleta & chalchissa amentie & lalise kumera 40 table 6: results of anova output model sum of squares df mean square f sig. 1 regression 8.944 3 2.981 131.865 .000b residual 2.871 127 .023 total 11.816 130 a. dependent variable: employee job performance b. predictors: (constant), empowerment , recognition, work condition source: researcher own survey & spss output, 2019 the anova output indicates that the multiple regression model itself is statistically significant or not significant. because r2 is not a test of statistical significance (it only measures explained variation in y from the predictor xs), the f-ratio is used to test whether or not r2 could have occurred by chance alone. in short, the f-ratio found in the anova output measures the probability of chance departure from a straight line. on results of the output found in the anova table, the model is statistically significant when non-performance adequacy ratio were included (f=131.865, p<0.01). therefore, the overall equation was found to be statistically significant. table 7: regression analysis of non-financial compensation on employee job performance coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) .723 .170 4.248 .000 recognition .352 .068 .370 5.187 .000 work condition .270 .069 .282 3.934 .000 empowerment .215 .048 .310 4.524 .000 source: researcher own survey & spss output, 2019 have significant effect at a pvalue of less than 0.01. multiple regression estimates the coefficient of the linear equation involving one or more independent variables that best predict the value of the dependent variable and the regression equation is presented as: ejp= f (rec, wc, emp) ejp= β0 + β1rec + β2wc + β3emp +e---------------------------------------(1) ejp= 0.723 + 0.352*rec + 0.270*wc + 0.215*emp +e---------------------(2) these results conclude that non-monetary types of compensation can be very meaningful to employees and very motivating for performance improvement. from the above table of regression coefficient recognition contributes more to employee performance of health center, followed by work condition, empowerment. this study is in line with the study of barton and gold (2013) who described that recognition is considered the most important factor among non-financial compensation in order to increase employee’s motivation and thus their performance. danis and usman (2010) found that there are significantly correlated and compensation and recognition greater impact on performance of the employees. also a research conducted by minarsih (2015) which explain working environment variable has significant influence on employees’ performance also supports these findings. the study revealed that empowerment had a direct and positive effect on employee performance, which is supported by tuuli & rowlinson (2009) who analyzed the relationship between psychological empowerment and employee job performance. effect of nonfinancial compensation on the employees’ job performance: a case of jimma geneti woreda health centers in horro guduru , ethiopia 41 5. conclusion and reccomendation 5.1. conclusion human resource provides the basis for an organization to achieve sustainable competitive advantage. attracting and retaining competent workforce is a challenging task for every organization. it is illustrious that employee job performance can be improved when employees are motivated to achieve their goals. based on the findings of this study, it can be summarized that employee compensation package plays a significant role in employee performance. it means that compensation is directly proportion to employee job performance. the changes in compensation directly affect to the changes of the employee performance. hence, rewards offered to employees in health centers are increased, and then there would be an equivalent enhancement in work motivation and employee job performance. a health center is a public sector service organization. in order to attract and retain their workforce, health centers needs to make improvements in their existing reward system by integrating reward strategy with human resource strategy. the study concludes that reward plays a vital role in employee performance in health centers. from the above it can be concluded that diverse compensation package can influence employees to perform assigned task in an efficient and effective manner. considering the fact that management of health centers is the responsible party to develop a unique compensation strategy with the aim of achieving sustainable competitive advantage. a compensation system can be a cluster of different reward components, but it should be integrated with the organizational strategy which means aligning compensation practice with both goals and employee values. in addition to above suggestions health centers can improve their existing reward system by linking performance with, the handling the compensation in a positive manner and maintaining internal equity and external competitiveness 5.2. recommendation actually nonfinancial compensation gives benefit to the organization because it did not need to spend a lot of money if compared with financial compensation. taking into account the findings of this study, the researcher needs to recommend the following points in relation to the effect of compensation on employees’ job performance at jimma geneti health centers.  the health centers should redesign its compensation system in general and its non-financial compensation in particular based on the workload of employees. because the highest influential factors for employee performance were nonfinancial compensation in health centers but there was less attention given.  nonfinancial compensation in order to influence employees to perform better especially focusing more on appreciation, praise, giving education chance, giving promotion, giving a certificate for the better performer, verbal thanks, making favorable working environment and facilitate the full participation of the employee in the decision to motivate the employees. therefore adjustment in nonfinancial compensation can boost the performance of health centers employees.  making comfortable working condition improve employees’ job performance through reduces the level of stress in work. therefore the organization makes sure the comfortable and supportive work condition is often provided for the employees in order to increase their performance. 5.3. limitations and suggestions for further study the sample size was too small and considered the jimma geneti district only. present study focused on one public sector organization and findings may not be generalized to a wider sector such as public sector organizations in jimma geneti. in this study focused on three independent variables and it is recommended for future researches;  to investigating the impact of compensation on organizational commitment and human resource development in private and public organization. because future research would be benefited from large sample size and using a variety of samples for this kind of research study. kituma merera jaleta & chalchissa amentie & lalise kumera 42  to examining the relationships between compensation and 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(1967). statistics: an introductory analysis, 2nd edition,. new york: harper and row. international journal of commerce and finance, vol. 2, issue 1, 2016, 1-13 funds used by the european union in the convergence approach and turkey ömer özkan, (phd) istanbul commerce university, turkey ahmet keleş, (ph.d. candidate) istanbul commerce university, turkey abstract the article is to show the twinning mechanism as a convergence tool in a states accession process. since it’s beginning in 1998 more than 1300 projects have been carried out in the scope of candidate states’ convergence process. due to these projects the states’ administrative and judicial systems have been restructured. thus, the capacity of union legislation’s applicability enhanced and the programs have been used to strengthen the institutional structures in all the sectors in the scope of instrument for pre-accession assistance. starting from the december 17, 2001 various funds were launched for use in turkey in order to ensure compliance with the eu acquis communautaire within the accession process of the state and to facilitate the fulfillment of the obligations which are specified in the acc ession partnership document and national programme of turkey. the eu funds and their use within the scope of the approach and the contributions provided to institutions implementing the projects to the legislative system of turkey are to be discussed in the research. keywords: european union, convergence, eu funds, ipa, twinning project 1. introduction the convergence tool of eu is the twinning projects mechanism during the new states’ accession process. thanks to these projects, the candidate countries’ corporate structures are strengthened and restructured in line with the objectives. thus, the capacity of union legislation’s applicability is enhanced. those programs are used within the scope of pre-accession assistance (ipa) in order to strength the corporate structures in all sectors. the twinning projects are provided directly to some of the countries that are within the scope of partnership and cooperation agreements between eu and new independent states from 2003. for example, the support programs were initiated to implement the partnership agreements between eu and those countries in order to enhance the joint work based on the objectives of euro-mediterranean partnership (meda) agreements. the twinning projects, which are the tool for implementation of partnership agreements in the corporate structuring area, are the powerful corporate structuring tool in the context of european neighborhood and partnership system (enpi). the twinning programs are a good preparation stage in the eu enlargement process as stated in the ipa and enpi regulations, and are created in order to structure all public capacities of candidate states in cooperation with eu. 2. enlargement strategy of european union and its convergence approach toward the candidate countries the idea on united europe of dante alighieri, the italian poet, is available in the book, de monarchia (about monarchy) written in 1310. it had been the objective which was dream of european lawyers, historians, politicians and scientists for years. the endeavors toward united europe were gradually enhanced upon establishment of usa, and even though there were many ideas on establishing the union after the first world war, it took time to adopt those ideas. after the second world war, the works on united and strong europe were accelerated and the idea on unification was begun to be declaimed. the first step toward united europe, which was mentioned by jean monnet (secretary of united nations) during 1930s, was taken upon establishment of european council in strasbourg, 1949. robert schuman (french minister of foreign affairs) published the schuman plan on 9 may 1950 showing the fact that the cornerstone of united in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 2 grzegorz zajac http://ijcf.ticaret.edu.tr europe was the french-german friendship. he prescribed that france and germany should have produced the coal and steel together, and all european countries should have participated in the organization to be established. germany, france, italy, netherlands, belgium and luxembourg established the european coal and steel community (ecsc) in paris, 1951. ecsc became a supra-nationalist organization which the states granted some of their sovereignty powers to it. it provided a sustainable peace environment strengthened the unification in europe and thus, the foundations of eu were laid down. upon being aware of that the unified europe could be established on the economic foundations, six countries, the member of ecsc, had, first, signed the convention establishing the european economic community (eec) in roma on 25 march 1957. the european atomic energy community (euratom) was established through roma convention on 1 january 1958, and the single council, commission and parliament were established for ecsc, eec and euratom, and the merger treaty (fusion treaty) was signed in 1965, the budgets were merged and for the first time, it was begun to use the term "european communities". copenhagen criteria are the essential conditions which must be met by all candidate countries that their application for eu membership is accepted on june 1993. the criteria that are brought into the force are generally as follows; political criteria include the conditions on stable corporate structure, superiority of law, human rights and respect to the minority rights; economic criteria envisage a well-functioning market economy and providing the capacity to resist against the market forces within eu and competition pressure; acceptance of eu acquits communautaire entails that eu should adhere to the various political, economic and financial objectives. unless adopting the eu acquits communautaire, there will be no unification. the accession process cannot be started with the country that doesn’t meet those criteria. 2.1. eu enlargement process the first enlargement process is the summit held in hague, 1969; the first enlargement process resulted the accession of uk, ireland and denmark to the community on 22 january 1972 upon starting the accession process, taking two years, of uk, ireland, denmark and norway that would like to access to the community, and the number of member increased from six to nine. the second and third enlargement process; the accession treaty was signed between greece and eu on may 1979; and after the treaty was approved, the number of member increased to 10 upon accession of greece to eu on 1 january 1981. spain and portugal; the accession process for those countries started during 1978-1979 and resulted the accession of those countries to the union in 1986, and thus, the number of member of the union became twelve. fourth enlargement process; upon accession of austria, sweden, finland to eu in 1995, eu enlarged toward the center and northern europe, and the number of member became fifteen. copenhagen summit was another important milestone during the enlargement process of european union. during the summit in 2002, the accession process was completed with check republic, hungary, poland, slovakia, estonia, latvia, lithuania, slovenia, gcasc (greek cypriot administration of southern cyprus) and malta. 10 candidate countries signed the accession treaty in athena on 16 april 2003 and became the eu member countries on 1 may 2004 (tezcan, 2015). it was stated that turkey met the political criteria sufficiently on 3 october 2005 and was decided to start the accession process (tezcan, 2015). fifth enlargement process; european commission offered the roadmap to bulgaria and romania on 13 november 2002 in order to make them full members of union in 2007, and they became the member on 1 january 2007 (tezcan, 2015). thus, the number of eu member became 27 and the official languages 23. sixth enlargement process; croatia became the 28th member of eu on 1 july 2013 and thus, the number of official languages in eu became 24, and population reached to 508 million (tezcan, 2015). 2.2. today’s eu enlargement policy eu determined the problematic areas specific to structure of each candidate country waiting for accession to eu through the experiences gained during the enlargement processes, and laid down them as the customized criteria to such countries. after the enlargement wave during 2004 and 2007, the enlargement fatigue that was felt throughout eu and the debt crisis, which affected eu within the euro zone in 2010, brought the problems arising from the scope of state aid and public service obligation for airports and air carriers in the light of european law 3 http://ijcf.ticaret.edu.tr enlargement into the forefront. this made the enlargement receded into background for eu in the priority list, and made the conditions for accession to eu more difficult (tezcan, 2015). at this point, eu council began to have a voice more efficiently in the enlargement policy, and the commission, having attitude toward enlargement, began to make the special attempts on enlargement policy considering the special case of each country and the difficulties that it encountered. the positive agenda, which was started to accelerate the accession process with turkey, was implemented based on this approach. european commission adopted the new approach which put the superiority of law into the center of eu membership process in the enlargement strategy document in 2012. at the framework of new approach, it was envisaged that the negotiation chapters of “jurisdiction and fundamental rights” and “justice, freedom and security” would be negotiated with priority, be followed studiously during the accession process and would be the last negotiation chapters to be closed (karluk, 2013). european commission declared in the 2013-2014 enlargement strategy that it would attach a special importance to the subjects on superiority of law, economic governance, strengthening of democratic institutions, fundamental rights and good relations with the neighbors during 2014 (karluk, 2013). 2.3. the eu’s convergence model of candidate countries now, eu is an economic and political community consisting of 28 countries. other countries such as turkey, continuing the accession process with eu, macedonia, serbia and bosnia-herzegovina also try to become the member of eu. the question whether any convergence occurred between the countries within the enlarged eu is one of the primary questions about the decision enforcement related to eu toward the future from commencement of union to today. the convergence fact, which is defined as becoming similar of various economic indicators between one group country or region during the course of time, is assessed in two processes which are separate from, but integrate each other within eu: real and nominal convergence (atalay, 2007). the real convergence is considered as the economic criteria which are one of copenhagen criteria that are the criteria of accession to eu. it means convergence of economies to each other in the indicators related to living standard, notably the gross national product per capita, harmonization of business cycles and similarity of production and commercial structures (atalay, 2007). it is stated in the establishment objectives of union that the benefits, which eu countries gain from the membership, are determined as “directing the community policies and activities so as minimizing the economic development differences between the regions and providing the economic development of underdeveloped regions”. 1 convergence analyses primarily give information about at which level the enlargement matches with the union’s objectives. nominal convergence may be identified with the maastricht criteria that are the criteria on accession to economic and monetary union. it means the convergence of economies in the areas such as inflation, budget deficit, public debt and stability of exchange rate (atalay, 2007). it is provided the convergence of countries that will be involved in the economic and monetary union through the convergence in the real and nominal senses, and tried to secure the economic stability. 3. european union funds various funds were allowed by eu for being used2 by turkey from 17 december 2001 in order that turkey complies with the eu acquits communautaire during accession process of turkey to european union (eu), and in this context, to facilitate that turkey fulfills its obligations under the accession partnership document provided by eu and national program issued by turkey. the second term of instrument for pre-accession assistance (ipa) in the european union’s ipa ii program started so as covering 2014-2020 as of 1 january 2014. approximately 4.5 billion euro was allocated by eu to our country 1 council of the european union, “article 158 of treaty, establishing the european communities”, 2001 2 letter from ministry of eu to the ministry of internal affairs, letter related to eu funds, 2010 4 grzegorz zajac http://ijcf.ticaret.edu.tr under the instrument for pre-accession assistance based on the methods and principles changed during the new period (ipa ii) for 7 years3. table 1: eu funds “eu funds consist of (6) programs as follows: a. instrument for pre-accession assistance (ipa), b. multi-beneficiary and multi-annual programming (mmipd), c. technical assistance and information exchange office (taiex), ç. supporting of integration process to eu (sei), d. support program for improvement in management in the central and eastern european countries (sigma), e. community programs.”4 furthermore, social transformation (matra), economic transformation (pso) and environment programs (g2g.nl)5 are created by the netherlands government in order to provide the assistance from eu member countries to the eu candidate countries in accordance with the decision taken by eu council. the annual share is paid by the participant countries that are participant of community programs in order that they may benefit from those funds only. other funds are the donations and no share is paid. however, 25% is contributed to the section related to the material procurement of project budget in the projects that are implemented within the scope of ipa. 3.1. pre-accession fiscal cooperation program (ipa) 3 ministry of eu, turkey-eu relations during 62nd government, 2014, s. 14. 4 ministry of eu, annotation related to eu funds, 2010 5 ministry of eu, turkey-eu relations during 62nd government, 2014, s. 10. the scope of state aid and public service obligation for airports and air carriers in the light of european law 5 http://ijcf.ticaret.edu.tr upon giving to turkey the candidate country status during 1999 helsinki summit, the fiscal cooperation mechanism between turkey and european union was restructured as being in other candidate countries. in this scope, “framework regulation related to pre-accession financial aid for turkey” was adopted by eu council as of 17 december 2001. in the pre-accession fiscal cooperation program, the accession partnership document, progression report, adaptation to the acquits communautaire regarding the legal, administrative, economic and social priorities in the national program and pre-national development plan, creating the administrative capacity, economic and social adaptation projects are executed. the prime ministry circular, no. 2001/41 and dated 18 july 2001, was issued in order to program, implement, monitor, evaluate and direct the projects by turkey itself, instead of by eu commission. pursuant to the provisions of circular, the units6 such as national fiscal aid coordinator, fiscal cooperation commission, national fund and national authorization officer, partnership monitoring commission and central finance and procurement unit are created. the project offers, which are issued by the state institutions and organizations under the coordination of secretary general of eu, are delivered to the eu commission through the letter signed by the minister of foreign affairs. following the approval by (28) representatives from the member countries in phare steering committee of eu commission, the “financial minute” is signed between eu commission and turkey and comes into force upon being published in the official journal. at the next stage, the financial source to be donated by eu to turkey is transferred to the “national fund” in the undersecretariat of treasury. national fund is managed by the central finance and contracts unit (cfcu) on behalf of undersecretariat of treasury. the “fiscal cooperation committee”, consisting of the representatives from the ministry of foreign affairs, the ministry of finance, undersecretariat of state planning organization, undersecretariat of treasury and secretary general of european union, was formed in order to provide the necessary harmonization between the works that are carried out at the framework of fiscal cooperation. fiscal cooperation committee is responsible for distributing, implementing and evaluation of financial sources according to the priorities7. furthermore, there is a “joint monitoring committee”, consisting of the national financial assistance coordinator, national authorization officer, and the representatives from the fiscal cooperation committee and european commission, and meets at least once a year. sector monitoring sub-committees were formed under the joint monitoring committee. the ministry of internal affairs is the member of sector monitoring committee, no. 1 on justice-freedom and security together with the political criteria. the reports from the joint monitoring committee include the general matters related to the projects and those reports are also sent to the ministry of internal affairs. memorandums of understanding, which create the legal infrastructure related to this new structuring on fiscal cooperation between eu and turkey, and the central finance and contracts unit and national fund are formed through it, were signed on 14 february 2002. the aforesaid documents were approved by tgna (turkish grand national assembly) on 30 january 2003 and came into force upon being published in the official journal on 4 february 2003.8 eu commission passed its decision on which the created mechanism met the necessary requirements on 8 october 2003, and the actual implementation of projects within the scope of financial assistances was started from this date. in this scope, total budget size of (152) projects in all sectors is beyond euro 1.5 billion involving; (a) 18 projects amounting euro 126 million in 2002, (b) 28 projects amounting euro 144 million in 2003, (c) 38 projects amounting euro 126 million in 2004, (ç) 35 projects amounting euro 300 million in 2005, (d) 35 projects amounting euro 441.650.000 on in 2006.9 6 pm circular, pm circular, no. 2001/41 and dated 18 july 2001, http://www.ab.gov.tr/index.php?p=231&l=1 7 pm circular, 2001/41 8 memorandum of understanding between turkey and european commission related to formation of central finance and contracts unit (cfcu), annex no. 1, 14 february 2002, http://www.cfcu.gov.tr/files/addendum_no1_tr.doc 9 ministry of eu, personal interview, 2015. http://www.cfcu.gov.tr/files/addendum_no1_tr.doc 6 grzegorz zajac http://ijcf.ticaret.edu.tr the projects are implemented in the tender method, and the tenders are announced on service, procurement and currently the construction, even if in the less number. significant number of project is implemented by using the twinning mechanism envisaging the cooperation of eu member countries with the concerned state institutions. in the twinning mechanism, turkish state institutions are brought together with the state institutions of eu member countries and it is allowed them to work together. in the twinning mechanism, the representative from the state institution of one eu member country works in a turkish state institution minimum for one year. another method, which is not used frequently, is to conclude the contracts directly with the international organizations, especially which have the know-how on certain subjects. in the twinning project mechanism, the view is mentioned by eu commission, stating that first, the work on corporate structuring and adaptation to eu acquits communautaire should be carried out, and that this work may be carried out upon working with a member country on legislation and best practices, and that at the second stage, the infrastructure projects may be implemented, and this system was implemented in the former candidate countries. 10 30% of twinning projects consist of legislation (bill drafting, strategy document, action plan), 10% material procurement and 60% training provided by the foreign experts in turkey. project training also covers the business visits of less number of staff in the eu member countries. the subsistence and national travel allowances of staff, who participate in the business visit, are paid by eu from the project budget and international travel expenses by turkey. the project offers related to the next year are sent by the state institutions to the general secretary of eu in september per year. the project offers, which are deemed proper by the general secretary of eu, are notified to the eu commission as “turkish project offers”, and following the examination by the commission, the project offers, which had the preapproval during the meeting held upon participation of the representatives from the concerned institutions and eu commission under the coordination of secretary general of eu, are listed.11 the project receipt, involving the details of listed project offers, is issued by the representatives from the concerned institutions and eu commission and sent to the secretary general of eu with the official letter from the concerned institution. at the next stage, the project receipts are sent by the secretary general of eu to the eu commission with the letter signed by the minister of foreign affairs. the project receipts, which are approved by the project steering committee, are circulated throughout the eu countries in order to determine the country that will implement the project. (the project steering committee (phare steering committee)12 is the affiliate of eu commission’s general directorate of enlargement and consists of the representatives from (28) member countries after 01 january 2007. it is a committee which passes the high-level decisions related to the projects that are implemented in the new member countries and candidate countries. the committee meets (4) times a year. the officers of eu commission avoid submitting change of decision which is passed to the committee, because it is not easy to obtain the consensus of (28) member countries. after the projects are approved in brussels, the financing agreement is concluded between turkey and eu commission. this programming process takes about (9) months. the country that will implement the project is determined by turkey.13 the prepared project contract is signed by the officer from the selected country/international organization, officer from the concerned ministry of country that offers the project, officer from the concerned institution, president of central finance and contracts unit and the chairman of the turkish delegation of eu commission. as is, the project contract is an international agreement. “direct donation program” was initiated covering the project implementation with the international organizations within the scope of fiscal cooperation in 2003. all costs are paid by eu from the project budget in direct donation program. in case of project cancellation, the sanctions may be imposed such as; a. protesting turkey at the ministry of foreign affairs, 10 secretary general of european union directorate of education and corporate structuring, twinning mechanism and turkey, ankara, 2011, s.1. 11 a.g.e., s. 3. 12 a.g.e., s. 8. 13 a.g.e., s. 9. the scope of state aid and public service obligation for airports and air carriers in the light of european law 7 http://ijcf.ticaret.edu.tr b. being obliged to compensate the expenses which are incurred by the turkish state institutions from the project budget until such time, (in case of cancelling a project which is implemented within the scope of fiscal cooperation program, all expenses, incurred by the eu commission for the project until such time, is claimed from the concerned country together with the legal interest as a legal obligation, and the said amount is requested from the concerned state institution.), c. pending the negotiations, ç. criticizing turkey and the turkish state institution, cancelling the project with the high expressions in the progression report issued by eu commission, d. blocking our membership, representation in the international organizations and assigning the personnel in the bdk movements and missions that are implemented under the eu coordination. e. in this scope, disregarding the project offers to be made by the turkish state institution cancelling the project for the future and excluding it from the international organizations within eu constitution may be in question. the fiscal cooperation program is regulated by eu again as “instrument for pre-accession” (ipa) so as being implemented during period covering 2007-2013. there are (5) main topics in the instrument for pre-accession. those are as follows; a. developing the corporate capacity, b. regional and cross border cooperation, c. regional development, ç. human resources, d. rural development.14 3.2. multi-beneficiary and multi-annual programming (mmipd) the aim of program is to solve the problem of integration with eu which the balkan countries encounter and to have the reforms that are necessary to become the member of eu implemented. the project offers within the scope of mmipd program are made by eu commission, candidate countries (turkey, croatia) potential candidate countries (albania, bosnia-herzegovina, macedonia, kosovo, montenegro and serbia) and eu member countries (minimum two countries). the international organizations (united nations, organization on security and cooperation in europe osce, interpol, europol, eurojust and south east european cooperation initiative-seci) may also participate in the projects. implementation period of projects varies between (3) years and (6) years. secretary general of eu is responsible for the coordination of mmipd program in turkey. (2) projects were offered by the eu commission related to participation of turkey in justice and internal affairs within the scope of mmipd program until today. the ministry of internal affairs did not participate in the said projects (project of supporting the social institutions and criminal justice: witness protection project in the organized crimes). since more than one country and international organizations participate in the projects within the mmipd program, it is almost impossible to cancel the project or to leave of any institution from the project. however, in case leaving from the project, eu commission claims all expenses incurred for that country within the scope of project together with the legal interest until such time from the concerned country, and the said amount is also claimed from the concerned state institution. 3.3. technical support and information exchange office (taiex) it was established as the affiliate of eu commission’s general directorate of enlargement in 1996 in order to assist to the candidate countries of eu in the works of adaptation to legislation.15 taiex fund was made available to turkey from 15 march 2002. the budget of activities to be carried out within the scope of taiex is limited. the information exchange is provided via expert support, business visit, workshops and seminars in order to meet the short-term needs in 14 a.g.e., s. 15. 15 general information about taiex, http://www.ab.gov.tr/index.php?p=42118, (accession date: 11.11.2015) http://www.ab.gov.tr/index.php?p=42118 8 grzegorz zajac http://ijcf.ticaret.edu.tr establishing the administrative structures that are necessary for adaptation of legislation and implementation in the candidate countries.16 for example, gendarmerie general commandership participated in (26) activities which were carried out by other state institutions and organizations within the scope of taiex with (101) staff during 2001-2008. (the said activities are generally the seminaries and workshops on the protection of financial interests of eu and euro forgery, environmental crimes, crimes related to the cultural assets, new eu legislation on refuge and immigration, freedom of expression, anti-terrorism, illegal trafficking of narcotics and human between turkey and eu.) (1) workshop and (1) business visit, among the offers made by gendarmerie general commandership within the scope of applications for the 3rd term of taiex in 2008, were accepted by eu commission. the execution of any activity, which is approved in taiex fund, is fully under the initiative of institution which makes the offer. the activity is kept waiting in the program for two years, and at the end of two years, if it is not executed yet, it is omitted from the program itself, and the budget, allocated to the activity, is returned to the eu commission. 3.4. fund for support activities to strengthen the european integration process-sei it is executed under the coordination of secretary general of eu in order to meet the short-term technical support needs related to the works on project preparation and adaptation to eu acquits communautaire of institutions during the european union (eu) adaptation process. sei fund is also similar to taiex. however, the program of any activity in sei is planned in coordination with the secretary general of eu or central finance and contracts unit (cfcu). in the event that any activity within the scope of sei is cancelled, the budget allocated to the activity is used by secretary general of eu for another activity. sei is executed in three fields. those are; a. supporting the preparation of projects that are planned to be implemented by using eu funds (feasibility and detailing works for the projects), b. strengthening the adaptation to eu acquits communautaire (developing of corporate capacity and human resources), c. supporting of institutions responsible for coordination of eu pre-accession fiscal cooperation program (such as central finance and contracts unit).17 the activities that may be demanded at this framework may be executed such as; a. issuing the technical specifications of projects (methods of preparing the tender files on procurement of construction, audit and material in line with the prag (practical guide) rules, forming the eu legislation on tender), b. technical assistance activities (administrative legislation examinations, issuing the bill drafts, etc. in order to adapt the eu acquits communautaire), c. works on increasing the awareness related to the eu fiscal cooperation process (training on project loop, etc.), ç. business visits, participation in the conferences, organizing the workshop or seminary in eu countries with sei on the bases of aforesaid matters, however, it is not possible to make request such as including the material procurement or making construction.18 3.5. support program on developing the management in the central and east european countries (sigma) sigma program is a program which was started with the common initiative of eu and oecd in 1992. at the beginning, it was planned for central and east europe, but then, enlarged toward the western balkan countries. program targets a quality public management. in this scope, (9) primary areas were determined. those are the design and application reform, external and internal audit, fiscal issues, legal framework, service to the citizen, justice, policy 16 technical support and information exchange office (taiex) 2002, http://ec.europa.eu/enlargement/taiex/index_en.htm, (accession date: 09.11.2015) 17 ministry of eu directorate of project implementation, activities of supporting the integration process to european union sei, ankara 2012, s.6. 18 a.g.e., s.12 http://ec.europa.eu/enlargement/taiex/index_en.htm the scope of state aid and public service obligation for airports and air carriers in the light of european law 9 http://ijcf.ticaret.edu.tr and strategy, public integrity system, public expense management, public procurement regulation policies (acar, 2011). the organizations such as anti-fraud and corruption office (olaf) of eu, european agency for restructuring (ear), european neighborhood and partnership instrument (enpi) may participate in the sigma projects upon request by the institution which offers the project. a. community programs; there are (21) “community programs” available to turkey in order that the activities related to integration of turkey to eu are executed, except the projects which are executed within the scope of eu fiscal cooperation program. the community programs are created in order to support the placing of europeanism consciousness and innovation and entrepreneurship understanding and to contribute to the creation of common solutions to the problems which union encounters with upon developing the cooperation between the eu member countries. the candidate countries must provide the contribution to the program cost in order to participate in the community programs. the contribution is determined based on the gross national product or population of each country. some part of the said contribution is paid from the eu’s funds themselves in the payment of contribution in order to support the candidate countries. however, since there is not any amount to be donated in the funds allocated to turkey from 2007, the ministry of foreign affairs requests the institutions which would like to participate in the community programs to pay the contribution themselves. under these circumstances, it is quite difficult that the institutions participate in the community programs. the candidate countries should sign a memorandum of understanding involving the information about accession principles and contribution to be paid with the european commission in order to participate in the community programs. the memorandum of understanding is signed individually for each program. turkey, which gained the candidate country status during the helsinki summit in 1999, acquired the right of participation in all eu programs which are open to the candidate countries as a principle. “framework convention on general principle related to the participation of republic of turkey in the community programs between the republic of turkey and european community” was prepared in order to establish the legal basis for participation of turkey in all community programs which are open to all candidate countries (karluk, 2014). the aforesaid convention was approved by turkey on 26 february 2002 and came into force upon being published in the official journal on 05 september 2002. text of the same convention was approved by eu on 17 december 2001 and also came into the force upon being published in the official journal of eu on 02 march 2002 (karluk, 2014). according to the framework convention which consists of total (10) articles, all programs that are open to the participation of candidate countries from east and central europe are also made available for participation of turkey, and it is envisaged that turkey shall contribute financially to the general budget of european union for all programs which it will participate in. through the contribution to be provided, the projects or initiatives prepared in turkey are subjected to the same conditions, rules and procedures as those applied to the member countries. 3.6. agis program it is targeted to provide the high level of patronage to eu citizens in the fields of freedom, security and justice, developing the eu policies valid in such fields, information exchange, and to support the education and research.19 three sub-programs were added to agis program in 2007 as follows; a. prevention of and fight against the crime, b. criminal justice, c. management and prevention of the results of other risks related to the terrorism and security20. 3.7. pericles program the activities are carried out on increasing the awareness in currency, enhancing the mutual trust by developing the cooperation environment, and organizing the high level of education activities. 19 sakarya university international relations coordinatorship, financial assistance available to turkey, project support and donation programs, 2009 20 agis program 10 grzegorz zajac http://ijcf.ticaret.edu.tr the third countries having the specialism on a specific field and eu candidate countries are invited to the program. the staff of anti-fraud institutions, intelligence staff, the staff of national central banks and commercial banks, judicial staff and advocates specialized on this field may obtain the support from program. 3.8. jean monnet program it is a one year scholarship granted for master degree on headings of eu acquis communautaire. the french jean monnet, who was considered as the originator of eu, is the person who prepares the text of well-known schuman declaration advocating the idea of integrating europe. therefore, eu institutions attach the great importance to carry on his name, jean monnet. the eu professorship chairs, established under the name of jean monnet in many european countries including turkey, are supported and it is encouraged the establishment of new ones. jean monnet scholarships have been, for the first time, initiated with the agreement between turkey and european commission in 1989. 500 persons have benefited from the scholarship since 1990. the participation is provided in the seminars which, especially are organized by the gendarmerie of eu countries such as france, spain and portugal within the scope of “framework program on cooperation of the law enforcement officers and judicial authorities-agis program”. moreover, besides the agi̇s program, program of protection of euro against fraudulent (pericles) and jeanmonnet higher education scholarship programs were participate in once of each. 3.9. framework programs the framework programs were created by european union within the scope of community programs in order to converge the various policies and applications of candidate countries in the science, research and technology development areas to each other from 1984. eu framework programs are the primary community programs which multi-national research and technology development projects are supported within european union (eu). the framework programs, which the first one started in 1984, are the multi-annual programs, and the scope and the budget allocated to the program are enhanced pro rata the years. the primary objective of framework programs is to strengthen the scientific and technologic fundamentals, support the industrial competition and to encourage the interstate cooperation (demirkıran, 2010). within the scope of strategy which is mentioned during the summit meeting held by eu on march 2000 and called lisbon strategy, it is aimed that eu becomes the ''the most dynamic information-based economy of the world”. the framework programs provide the financial support to the “projects” which will contribute to realizing of lisbon objectives of eu and will create the economic and social value added in europe (demirkıran, 2010). no quota was allocated to the countries that participate in the framework programs of eu. the financial support is provided as a result of objectively evaluation of projects which meet the requirements indicated in the project offer invitations by the referees. the legal entities that would like to take the share from this pool are supported on the basis of their project achievements disregarding their nationalities and whether they reside in the candidate or associated countries (norway, liechtenstein, israel, switzerland and iceland). the candidate or associated countries that participate in the framework programs have the same rights and responsibilities as the eu member countries. framework programs include; a. the first framework program 1984-1987, b. the second framework program 1987-1991, c. the third framework program 1991-1994, ç. the fourth framework program 1994-1998, d. the fifth framework program 1998-2002 (the external participation was provided without payment of contribution by turkey), e. the sixth framework program 2002-2006 (the participation was provided upon payment of contribution at euro 231 million by turkey, but only euro 48 million was returned), f. the seventh framework program 2007-2013 (euro 425 million of contribution was paid by turkey.). the scope of state aid and public service obligation for airports and air carriers in the light of european law 11 http://ijcf.ticaret.edu.tr g. the 7th framework program, which started on 01 january 2007 and will be enforced until 2013, aims to collect all eu initiatives related to the research under the joint roof in order to achieve the lisbon objectives (akçam, 2006). ğ. it is expected that the scope of 7th framework program, which was built upon the achievements of previous framework programs, would play a key role to re-implement the lisbon strategy together with its organization, application structures and administrative tools (akçam, 2006). h. the cases that includes 7. framework programme; i. it is expected that it would take seven years, instead of four years different than other framework programs, ii. emphasizing the research themes rather than tools, iii. simplifying the activities and application tools, iv. focusing on research-development which meets the european industry’s needs through the technology platforms and the activities of new joint technology initiatives, v. forming the european research council which provides the support to the europe’s best scientific activities, vi. integration of international cooperation, vii. developing of information zones, viii. forming the financial structure including the risk sharing in order to enhance the participation of private sector in the research activities, ix. having 9 sub-zones under the special cooperation program. ı. legal and real entities, which are established in accordance with the national/international legislation and eu legislation, may apply to the framework programs. in this scope, the universities, research centers, industrial organizations and non-governmental organizations as well as the state institutions may also participate in the framework programs. the minimum number of participant in the projects and the requested qualifications vary according to the project type. the primary requirement that is requested in all applications to the framework programs is the cooperation. in general, there must be minimum (3) different eu member countries, and (3) independent organizations from the candidate countries or associated countries in the project. after the minimum number of participant is obtained, the international organizations and third country’s organizations may also participate in the projects. 3.10. matra, flex and g2g.nl programs there are pso, matra, flex and g2g.nl programs which are supported by the netherlands’ government in accordance with the eu commission’s decision, except the funds made available by eu commission. matra means the “social transformation” in dutch. this program aims to contribute to the formation of environment and structuring related to the implementation of eu acquits communautaire in the candidate countries, to support the civil society and private entrepreneurship, and to create the strong interaction mechanism between the citizens and public authorities during the candidature process. the priority of national program is taken as basis in the activities to be carried out within the scope of matra. matra projects are limited with the transferring of specialty and information to the beneficiary country, technical assistance, consultancy and education activities and creating of mechanisms related to the implementation of eu acquits communautaire. the infrastructure development activities, material procurement, humanitarian aid, inspection, research and academic studies are not financed within the scope of matra.21 the project budget should maximum be euro 400.000 and the project is completely financed from the matra budget, but no contribution is provided from the national budget. the equipment such as hardware, software and technical materials may be purchased with maximum 10% of the project budget. 15 matra projects were executed in turkey until today. 21 ministry of eu, matra,flex and g2g.nl programs, http://www.ab.gov.tr/files/mali_yardimlar/matra/list_of_projects_long_programmes_2008.xls (accession date: 09.11.2015) http://www.ab.gov.tr/files/mali_yardimlar/matra/list_of_projects_long_programmes_2008.xls 12 grzegorz zajac http://ijcf.ticaret.edu.tr the primary topics are determined as the riot policing, strengthening of justice, improvement of prison system, migration and development of lisbon strategy, strengthening the capacity of fighting against the organized crimes and anti-corruption within the matra program for the period 2009-2010. pso (programma samenwerking oost europa) pre-accession program aims to support turkey in order that it meets the economic criteria necessary for its eu membership. program is carried out under the coordination of netherlands’ ministry of economy, and includes providing the financial support to the full-scale and long-term projects including the information and experience exchange between turkey and netherlands, transferring of business, material and service. the business visits, seminary or short-term projects are also realized within the scope of pso. the state institutions and private sector firms may participate in the pso program individually or jointly. 15 pso projects were executed in turkey until today. the priorities are determined as protection of private sector from the crisis, strengthening of free market economy and financial management in conformity with eu in pso program during 2009-2010. g2g.nl program supports the projects related to the harmonization of primary and secondary eu acquis communautaire on environment and the environmental module within the big project. g2g.nl program is executed under the coordination of netherlands’ ministry of housing, map planning and environment, and its total budget is euro 4.300.000. the aim of g2g.nl is to support the state institutions in the eu candidate countries on development and implementation of national policy related to environment conforming to the eu acquis communautaire. 8 g2g.nl projects were execute din turkey until today.22 in the g2g.nl program, the priorities are determined as protection of water resources, waste management, renewable energy and food safety and development of rural area for 2009-2010. 4. conclusion determining which factors of eu candidate countries mostly play the role during the real convergence process is also very important regarding formation of policies of the candidate countries during the accession process. it is assumed that good understanding of which factors direct the real convergence process of new candidate countries during the eu accession process and detailed examination of country examples would be loadstar for turkey regarding the policies to be followed in the future period. in this scope, it is considered that turkey, which is strengthened and developed with the corporate twinning projects to be formed through eu funds and has the corporate structure in the eu standards, would be stronger in the journey to europe. references ministry of eu, turkey-eu relations during 62nd government, 2014, s. 10. letter from ministry of eu to the ministry of internal affairs, letter related to eu funds, 2010 ministry of eu, annotation related to eu funds and projects, ankara, 2010, s. 1. sgeu directorate of education and corporate structuring, twinning mechanism and turkey, ankara, 2011, s.1. akçam seda, avrupa birliğinde bilgi toplumuna geçiş çalışmaları, 2006, tobb bilgi hizmetleri dairesi, s. 16. atalay, s. serpil uzmanlık yeterlilik tezi, türkiye cumhuriyet merkez bankası dış i̇lişkiler genel müdürlüğü, ankara, 2007, s. 1. pm circular, pm circular, no. 2001/41 and dated 18 july 2001, http://www.ab.gov.tr/index.php?p=231&l=1 demi̇rkiran özlem ve diğerleri, türkiye-avrupa birliği i̇lişkilerinde son dönem, niğde üniversitesi i̇i̇bf dergisi, 2010, cilt:3, sayı:1, s.57-75. karluk, s. rıdvan, avrupa birliği, i̇stanbul: beta yayıncılık, 2014, s. 1. karluk, s. rıdvan, avrupa birliği türkiye i̇lişkileri, i̇stanbul: beta yayıncılık, 2013, s. 392. memorandum of understanding between turkey and european commission related to formation of cfcu (central finance and contracts unit), annex no. 1, 14 february 2002, http://www.cfcu.gov.tr/files/addendum_no1_tr.doc 22 ministry of eu personal interview, 2015. http://www.ab.gov.tr/index.php?p=231&l=1 http://www.cfcu.gov.tr/files/addendum_no1_tr.doc the scope of state aid and public service obligation for airports and air carriers in the light of european law 13 http://ijcf.ticaret.edu.tr general information about taiex, http://www.ab.gov.tr/index.php?p=42118, (accession date: 11.11.2015) taiex (technical support and information exchange office) 2002, http://ec.europa.eu/enlargement/taiex/index_en.htm, (accession date: 09.11.2015) tezcan ercüment, i̇lhan aras, altuğ günar, avrupa birliğinin doğu avrupa ve batı balkanlar genişlemesi, i̇stanbul: sentez yayıncılık, 2015, s. 46. http://www.ab.gov.tr/index.php?p=42118 http://ec.europa.eu/enlargement/taiex/index_en.htm international journal of commerce and finance, vol. 5, issue 2, 2019, 45-62 45 sectorial transition dilemma of smallholder grain farmers to light manufacturing industry in jimma zone, oromia regional state, ethiopia tesfaye melaku merra, jimma university, jimma, ethiopia leta sera, jimma university, jimma, ethiopia endeg tekalegn jimma university, jimma, ethiopia abstract this research was designed to assess willingness, ability, motive, preference and determinants of smallholder major grain farmer’s transition dilemma to light manufacturing industry in jimma zone, oromia region, ethiopia. the participants of the study were selected using two stage non probabilistic, purposive sampling. then, we prepared sample frame from each kebeles fall in our selection pool. finally, 399 household heads (farmers) were selected for this study, using stratified sampling. then, primary data collected via structured questionnaire was analyzed descriptively and in binary logistic regression. accordingly, majority of smallholder major grain farmers need to stay on their current crop farming. increasing these products productivity and price is one possible means of intervention to improve the areas smallholder farmer’s livelihood. the descriptive statistics depicts that, small holder farmers’ transitional dilemma to light manufacturing sector and the fate of industrialization plan in jimma zone is at its infant stage and those small holder farmers have almost no any awareness, no know how about technologies, not trained and they have no entrepreneurial skill. the result revels that the major determinants of smallholder grain farmers sectorial transition plan in the study area was significantly affected by age, sex, marital status, skilled labour access, access to credit, price product expectation, place,awareness, education level, entrepreneur skill, training, transport and energy.hence, effort should be geared in manner that build farmers capacity through adult literacy program, formal education and with short term training. keywords: grain, dilemma,teff, maize, smallholder farmers transition 1. introduction 1.1. background of the study transformationis the defining characteristic of the development process. it is both cause and effect of economic growth. one of the processes to define the structural transformation is characterized by a shift of predominant share of agriculture to manufacturing activities and a moderate to high level of increase in the share of services both for the national product and the work force. this pattern has not only been observed historically, but also holds across the countries with different levels of development (swiecki, 2013). according to lewis (1958), the economic transition from the backward agriculture to industrialization is considered as economic development. the transition process is associated with the expansion of the modern manufacturing sector. in the process the backward rural sector is the supplier of cheap labour to the advanced industrial sector. then the industry sector is believed to be profitable. via rapid capital accumulation and investing further, the sector drives growth depends on savings. for lewis’ this transition of economy from agriculture to industrialization is characterized by dualism. his concept of dual economy is rooted in the classical approach of smith and ricardo. they assume, there is almost unlimited supply of labour that keeps wages low and profits high. for them dualism is an economy consists of a small manufacturing sector and mainly large agricultural sector. dualism split labour market into two parts. labour in the in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e tesfaye melaku & leta sera & endeg tekalegn 46 manufacturing sector is comprised of relatively well-paid and skilled urban workers. for other scholars, industrialization is not only the concern of transitional economy. rather, the process includes reorganization of the existing industries, re-industrialization, and deindustrialization. the objective could be profit-making and competitiveness considerations could prevail over loss-making. it might occur via stockpiling activities flourishing under the state socialist system of soft budget constraints (haiduk et al., 2004). according to linz, (2000), the analysis of economic transition with the concept of dualism is emerged out of the soviet legacy. the choices made over the years by the countries’ policy makers explain the different pace at which the inherited economic structure is eroded. and it is replaced by a more market-oriented economic environment in the various post-soviet countries. almost, nearly all socialist economies were heavily industrialized. historically, industrial revolution is started in england around 1780. following the revolution for the last two hundred year many countries real incomes per capita rose, modern world was born and changed world economic history. since then modern economies start to experience steady rates of efficiency advance, every year more output is produced per unit of input and income per work-hour is growing in modern societies. like other countries, ethiopia has been striving to transform the structure of its economy since the end of the 19th century. modern manufacturing factories were emerged in the country in the 1920s though a conscious effort towards developing a modern industrial sector did not start till the 1950s. and the sector got momentum since then during which a comprehensive plan to promote industrialization and economic development was commenced (mulu, 2013). since then, the successive governments of the country pursue their own respective industrial policy. the three consecutive five years development plans of the imperial regime (1930-1974) were formulated that the development of the industrial sector and policies and strategies pertinent to materialize it were formulated. the dergue regime(1974-1991) and its claimed socialism led to planned means of production, production targets and allocate resources based on the deliberate decision of the authorities. production of large scale goods was almost entirely state owned. as a result, there was little room for private sector development. later on, the tenyear perspective plan of the same regime (1984/85-1993/94) sought to promote the production of intermediate and capital goods, and expansion of small-scale industries (sarah and mesfin, 2011). the eprdf regime, adopted agricultural development led-industrialization (adli) as a guiding economic principle which allows and promotes the participation of the private sector in most sectors of the economy. the first decade (1991-99) was marked by various reforms reversing the command economy of the preceding regime. the three phases of imf/wb sponsored reform programs and the 1998 export promotion strategy were the major policy measures in this regard. policy reform and adjustment continued of which a full-fledged industrial development strategy (ids) was formulated in 2002/03(kenichi, 2009). in ethiopia one of policy reform and adjustment continued to realize a full-fledged industrial development strategy (ids) was formulated in 2002/03. whereas, the policy dialogue in 2011, on the eighth high level forum of the ethiopian-japan industry stated that industrial performance was less than expected in the pasdep period, a five year overall development plan of the country from 2005/06 to 2009/10. in this period real gdp grew at an impressive rate of 11.0% per annum on average against the base case target of 7.0% and the high case target of 10.0%. this was the result of overachievement of the agricultural (8.4% against base case target of 6.0% and high case target of 6.4%) and services sector (14.6% against base case target of 7.0% and high case target of 10.0%). in the same vein, ministry of finance and economic development of ethiopia (2013) demonstrated that compared to the 2010/11 performance of 15 percent and the 2011/12 target of 17.9 percent, the growth rate of the industrial sector in 2011/12 showed short falls of 1.4 and 4.3 percentage points respectively. the share of industry in gdp remained stable at 13% though the target was 16.5%. in fact manufacturing has stagnated at about 5% of gdp over the last 20 years. the manufacturing industry is largely limited to simple agroprocessing activities like; sugar, grain milling, edible oil production, and leather tanning. industries that might help accumulate technological capabilities and create dynamic inter-industry linkages – such as chemical, electrical and electronics, metal-processing and other engineering industries – are almost non-existent (altenburg, 2010).overall, the technological level of firms is very low, even by regional standards. only 4% of firms use technology licensed from foreign companies, and likewise only 4% have iso certification, compared to 12% in both cases in subsaharan africa (world bank / ifc, 2006). ethiopian economic association (2008) argued that the ethiopian manufacturing industries are mired with complex problems of which industries operate with crude technology. they engaged in processing primary commodities and sectorial transition dilemma of smallholder grain farmers to light manufacturing industry in jimma zone, oromia regional state, ethiopia 47 employing a few hundred thousand unskilled labour. similarly, the critical constraints related to logistics and transport, access to land, as well as poor public services delivery. mofed (2013), stated that besides facilitation hinder industries to be effective and competent. to realize a full-fledged industrial development strategy via overcoming the constraint ethiopian government is showing policy commitment. one of the evidence was the concern given to industrial development and structural transformation of ethiopia growth and transformational plan ii, 2015. operationally, major grain farmers were defined as maize and teff for this particular study. we consider four woredas that have relative potential of producing these grains, two woredas for maize and two for teff. the definition of the grain is based on ethiopian food dish dependency. the industrial development strategic directions of gtp ii include establishment of light manufacturing industries and the micro and small enterprises development. the light manufacturing industries are believed to build heavy industries and industrialize the country in future. in addition the sector is expected to bring significant growth of the manufacturing industry. and, then it can play leading role in job creation, technology learning structural shift in ethiopia’s export and address trade imbalance. in its implementation strategy the directions are; to focus on the implementation of project and programs which gear towards attracting quality investment, enhancing production an productivity, boosting export shares, accelerating technological learning and strengthen the linkage among industries. great emphasis is also given to micro, small and medium enterprises in generating employment, to serve as school of entrepreneurship, and to broaden the base for value adding domestic private sector (gtp ii, 2015). commonly, light manufacturing industries are apparel products, leather products, agribusiness products, wood products, and metal products. in all the category context, ethiopia has many natural resources that can provide valuable inputs for light manufacturing industries serving both domestic and export markets. cotton is one of abundant producible resource, which can support the garments industry. cattles are the other abundant resource, which can be processed into leather and its products. the available agricultural land and lakes can provide inputs for agro processing industries. the country has forests, which can be managed for the furniture industry and again, the existing natural resources, abundant low-cost labor, which gives it a comparative advantage in less killed, labourintensive sectors like metal product. a favorable climate and the potential for cheap hydro-energy is a guaranty for the countries competitiveness in the stated sector (united nations industrial development organization, 2015). barbara et al., (2013) had done working paper on, determinants to leave agriculture and change occupational sector: evidence from an enlarged eu. they have stated the case by separating the determinant in term of pool and push factor. their result suggests that, younger individuals are more likely to leave farming activities. the largest outflows of agricultural labour are mainly associated with the retirement of people. self-employed and family workers are generally less likely to leave agriculture. those with low levels of educations are found to be significantly constrained in entering the non-farm economy. moreover, labour market conditions at the regional level do matter for switching occupational sector. kindeye (2014), had studied industry and industrialization in ethiopia: policy dynamics and spatial distributions. his study explored the formulation and implementation of industrial policy under the successive regimes of ethiopia and the sectors inter-regional and intraregional distribution. his research design was a mixed research approach using the analysis of the primary and secondary data. the study revealed that, industrial policy formulation in ethiopia has undergone several changes across the regimes. the industrial policy menu and practice at one time or another consisted of market-oriented development (under the imperial era and eprdf regime), public oriented (under dergue), foreign dominating industrialization (under imperial regime), and domestic ownership (under eprdf), and import substitution vs export promotion (under all regimes). besides this fact, agricultural land is fixed and there is optimum point of technological progress in the agricultural sector. as per capita income increases spending in agricultural output is inelastic and more elastic to service and industrial product. along with this population number is increasing at alarm rate and return leading fast urbanization. tesfaye melaku & leta sera & endeg tekalegn 48 in addition to the other means of intervention the way to minimize this regional difference is securing inclusive development. this can increase benefits from industrial development process, minimize risky in agriculture sector and with human population increment. the good proxy for this is increasing local farmer’s participation is intervention of light manufacturing industries development in industrial development process. considering this fact ethiopian government has been supporting the industrial transformation policy via building industrial parking and providing related infrastructure. jimma industrial parking centre is under construction to capacitate industrial transformation agenda in the area. in other way realization of this economic transformation plan in jimma area and in ethiopian is not only a function of paper work and it is matter of best written policy government strategy and other countries path of transition. frequently difficulty of firms and consumer future behavior limits the expected best policies outcome. again, unless agents behave and react accordingly the government strategy by itself is not the guaranty of implementing any plan. the world economic context is dynamic. means of production, mode of transaction and consumption decisions of agents are changing over time. to examine this context this thematic research paper was designed to investigate possibility of local smallholder farmer’s participation on light manufacturing industry development. will they remain in supplying major grain/maize/teff, go for alternative or change their occupation to light manufacturing industry. to address this purpose thematic research titled ‘’sectorial transition dilemma of smallholder farmers to light manufacturing industry in jimma zone, oromia region, ethiopia; evidence from major grain (maiza, teff) farmers’’ was investigated. in the investigation process farmer’s transition dilemma to light manufacturing industry, willingness, ability, motive, preference and determinants were addressed.the paper was designed to investigate sectorial transition dilemma of smallholder major grain farmers to light manufacturing industry in jimma zone, oromia region, ethiopia. 2. literature review the path of economic development is historically associated with structural transformation of national economies. economic growth is characterized by patterns of changing shares of different sectors in the national income and labour force. the transition of economy from agriculture to industrialization is characterized by dualism. dualism is an economy consists of a small manufacturing sector and mainly large agricultural sector (lewis, 1954). in the larger agricultural sector, the modes of production are more primitive and out-dated. whereas, the smaller manufacturing sector characterized by features of many modern industrial economy. this dualism split labour market into two parts. labour in the manufacturing sector is comprised of relatively well-paid and skilled urban workers whereasthe agriculture sector consists full of poorly paid and low-productive rural workers. in dualism economy the difference is not restricted to the production alone. there is dissimilarity in demographic behaviour, social systems, and ethnic backgrounds. the behaviour of consumer expenditure and consumer savings is different. another source of variation between large agricultural sector and the small manufacturing sector is the domestic and foreign sectors (key, 2005). again the economic transition from the backward agriculture to industrialization is considered as economic development. the transition process is associated with the expansion of the modern manufacturing sectorand, the shrinkage of the traditional agricultural sector. in the process the backward rural sector is the supplier of cheap labour to the advanced industrial sector. then the industry sector is believed to be profitable. via rapid capital accumulation and investing further, the sector drives growth depends on savings (lewis, 1958). of course, lewis’ concept of dual economy is rooted in the classical approach of smith and ricardo. they assume, there is almost unlimited supply of labour that keeps wages low and profits high. the explanation of barkley, (1990) indicates diminishing and not disappearing differences in production conditions through time that result in the mere attenuation of dualism. barkley argues that dualism cannot fully elapse since ‘some degree of dualism exists in virtually every economy. the examination of the lewis model with the assumptions of micro foundations, unlimited supply of labour is over, and agricultural sector is fully commercialized results in the elimination of dualism. structural change is, shifts in the allocation of labor and expenditure across broad sectors of agriculture, manufacturing and services. a number of theoretical explanations of this process have been proposed in the literature. there is little consensus, however, on the relative importance of the suggested mechanisms. sectorial transition dilemma of smallholder grain farmers to light manufacturing industry in jimma zone, oromia regional state, ethiopia 49 the first classic source of structural change is sector-biased technological progress. if productivity growth in a sector is slow relative to other sectors then the relative price of the sluggish sector increases over time. with sectoral outputs being gross complements in consumption, expenditures and labor shift towards sectors with relatively slow productivity growth. this substitution mechanism, which can be traced back at least to baumol (1967), is often modeled by combining homothetic cross elasticity of substitution preferences andwith elasticity of substitution less than one together with exogenous sector-specific productivity growth. the second classic explanation of structural change relies instead on non-homothetic preferences. as incomes rise, households spend relatively less on agricultural goods and more on services. in its simplest form, these income effects are frequently captured by stone-geary preferences. to allow both substitution and income effects to operate, he used a flexible specification of consumer preferences. the augmented of these preferences is that introduce to the structural change literature nest other commonly used preference specifications. the extra flexibility helped him to better asses empirically the importance of sector-biased productivity growth (substitution effect) and of the overall rise in aggregate productivity (income effect) for structural change in a broad sample of countries. international trade is the third channel affecting the sectoral composition of economies. matsuyama (2009) formalizes an argument that the same underlying forces can have quite different implications for structural change in a closed economy and in an interdependent world. for example, whereas fast productivity growth in manufacturing would lead to decline in the manufacturing labor share in a closed economy due to the substitution effect, in an open economy manufacturing employment can expand because of the specialization according to comparative advantage. this consideration is potentially important given that in recent decades many countries become substantially integrated with the world economy. he therefore embeds his framework in a three-sector general equilibrium model of international trade. he treats agriculture and manufacturing as tradable sectors as in the ricardian model of services are treated as non-tradable. in order to better capture the impact of openness on sectorallabor shares he allow for trade imbalances both at the sectoral and at the aggregate level. the last force influencing structural change is represented by changes in relative labor costs across sectors. it is well known that the breakdown of economic activity at a level of broad sectors looks different when measured in nominal terms (expenditure and value added shares) and in terms of factor allocation (labor shares). buera and kaboski (2009) observe that quantitative models therefore need to allow for factor cost differences across sectors in order to be consistent with both nominal and realmargins of structural change. in his model, as in most quantitative work on structural change, homogenous labor is the only primary factor of production. factor costs differentials are therefore summarized by inter-sectorallabor wedges. an open empirical question is the extent to which changes in wedges over time can account for the relocation of real resources across sectors. 2.1 conceptual framework from the above theoretical and empirical literature of the study, the following conceptual framework is developed. accordingly, conceptual framework is developed for, sectorial transition dilemma of smallholder major grain farmers to light manufacturing industry in jimma zone, oromia region, ethiopia. tesfaye melaku & leta sera & endeg tekalegn 50 figure 1.1 conceptual framework of smallholder farmers economic sectorial transition dilemma to light manufacturing industry 3. research methodology the study was conducted in jimma zone, oromia region, ethiopia. according to jimma zone agriculture office (2017), the zone is divided into 21 weredas. jimma zone is hostinga total population of over three million with an agro-ecological setting of highlands, midlands and lowlands. the zone is one of the major coffee, and khat growing area among cash crops and maize and teff among cereal. the area is well-endowed in oromia region with natural resources and contributing significantly to the national economy of the country. naturally, the area receives good rain, ranging from 1200-2800 mm per annum. the approaches employed in this research have both quantitative and qualitative aspects. the quantitative instrument is planned to capture the measurement of quantitative figure or amount. qualitative approach is concerned with subjective assessment of attitudes, opinions, and behavior. the data for the accomplishment of the study was collected from primary data source. probabilistic and non-probabilistic sampling technique was used to identify the representative sample. then, the data was collected using structured questioner. both non probabilistic and probabilistic sampling techniques were employed. from non-probabilistic sampling technique the study used two stage purposive sampling.from probabilistic we appliedagain two stage stratified sampling. with this a total of 399 farmers were considered for this study. the analysis of the data contains both descriptive and econometrics techniques. willingness, ability, preferences, and motive of smallholder farmer’s sectorial transition dilemma of smallholder grain farmers to light manufacturing industry in jimma zone, oromia regional state, ethiopia 51 transition to light manufacturing industry were discussed descriptively. smallholder farmer’s transition dilemma to light manufacturing industry and the determining factor was analyzed using binary logit model. in this study, the dependent variable was a dummy. which takes a value of one (1), yes response, for smallholder farmers needs to transit to light manufacturing industry. or zero (0), no response, for smallholder farmers needs to remain in producing the current crop. the independent variables were both continuous and discrete. there are several methods to analyze the data involving binary outcomes. for this particular study, logit model was selected over discriminant and linear probability models. if the independent variables are normally distributed the discriminant-analysis estimator which follows ordinary least square procedures (ols) is the true maximum likelihood estimator (mle) and therefore asymptotically more efficient than the logit model which requires maximumlikelihood method. however, if the independent variables are not normal in their distribution, the discriminantanalysis estimator is not consistent whereas the logit mle is consistent and therefore more robust (woodlridge, 2009). to estimate the transition dilemma of smallholder farmers to light manufacturing sector and the determinants logit model was specified as follow; pi = 1/ (1 + e-zi) ……………………………………….…………………………………. (1) zi = β0 + β1xii + β2x2i + ……..+ βnxni ……………………………………………….. (2) pi = 1[1 + e-(β0 + β1xii + β2x2i + ……..+ βnxni)] …………………………………….. (3) logit (zi) = ln (pi/ (1-pi)) = z𝑖 = 𝛽0+𝛽1𝑋1 + 𝛽2𝑋2 + -------𝛽n𝑋n + un ………………... (4) pi = probability of transit to light manufacturing industry in relation with explanatory variables. ezi = is irrational number to the power of zi. zi = a function of explanatory n variables. βs = parameters. 4. result and discussion this section presents both the descriptive and econometric result and findings of the study. the study examined smallholder grain farmers economic sectorial transition dilemma to light manufacturing industry and the fate of industrialization plan in jimma zone ethiopia, evidence from grain farmersbased on primary data collected from grain farmers in the study area. the questionnaire was designed in line with the pre-determined objectives of the study and distributed to the sampled respondents. the information given in the questionnaire was checked with semi-structured interview from randomly selected sampled respondents. 4.1. general characteristics of the respondents from the total sampled respondents, the data was collected from 396 respondents. of the total respondents 365 of them are males while remain 31 of them are females. regarding the response rate of the questionnaire, 99.74%of respondent returned the questionnaires and around 0.3% of the respondents were not willing to give information because some of them were on work and some others were not available at the time of the survey around their home or village. regarding sex of respondents, 307 (77.53%) of them were males and 89 (22.47%) of the respondents were female respondents. tesfaye melaku & leta sera & endeg tekalegn 52 figure 4.1 sexesof respondents source: own computation, 2018 the total sample result of age distribution depict that 17.57% respondents were between the age 18 to 34 while 44.59% of the respondents are between the age 35 to 55 and 25.68% of respondents are between the age of 56 to 72. from the total samples 12.16% of respondents are above the age of 72. the minimum and maximum age of the respondents is 18 and 73 respectively. the age distributions of the respondents indicate that most of the respondents are in the working or productive age group. table 4.1 age distribution of the respondents source: own computation, 2018 regarding marital status,the sample result show that 82.58% of the respondents were married whereas out of the total respondents 10.61%, 4.04% and 2.78% of them aredivorced, in relationship and single respectively.education status of respondents show that;35.10% of them were illiterate, 43.43% of them were learned from grade 1to 8 (elementary level) while12. 12% of them are learned from grade 9 to 12and 9.34% of them are having certificate (see table 6.2 and 6.3 below respectively). figure 4.2 martial status of respondnets source: own computation, 2018 variable obs min max age 396 18 73 sectorial transition dilemma of smallholder grain farmers to light manufacturing industry in jimma zone, oromia regional state, ethiopia 53 figure 4.3 respondents education level source: own computation, 2018 the respondents’ family size ranges from 3 to 14 individuals. the minimum and maximum family sizes of respondentwere3 and 14. table 4.2 family size distribution of the respondents source: own computation, 2018 on the other hand, regarding the capital status of respondents, the descriptive statistics revealed that, 45.78 % of respondents responded that they have the required capital to transit from the existing sector to light manufacturing keeping other things constant. but 54.22% of respondents were answered that they have no any capital, so that they said that they never think for transition. regarding respondents accesses to credit, 72.73% of the respondents said that they have no any access about credit, particularly for high credit which may use for transitional purpose since it requires large amount. as it can be seen from table 4.3 below, only 27.27 % of the total respondents have access to credit regardless of the size of credit. most respondents, indicated that accesses for credit should not measure with microfinance institution only because their loan size too small and never support transitional plan of respondents. table 4.3 credit service access distribution of the respondents access for credit freq. percent yes 108 27.27 no 288 72.73 total 396 100.00 source: own computation, 2018 family size frequency percent (%) 1-5 196 49.62 6-10 151 38.23 11-15 43 10.89 above 15 5 1.27 total 395 100.00 tesfaye melaku & leta sera & endeg tekalegn 54 respondents’ awareness to transit from the existing traditional framing to light manufacturing industries was almost to lowest stage. to put it in actual figure, around 93.18% of respondents considered under this study have no at all any awareness about transition to light manufacturing and they said that there is nobody around there who can give such kind of awareness. the data depicts that only 6.82 % of the respondents have such kind of awareness to light manufacturing (see table 4.4 below). figure 4.4 distribution of respondents’awarenessabout transition to light manufacturing industry source: own computation, 2018 the descriptive statistics depicts that only 8.33 % and 20% of respondents have entrepreneurial skills and have taken training regarding how to transit to light manufacturing from their traditional farming life. the rest 91.67% and 80 % of respondents told us they didn’t have any entrepreneurial skill and haven’t taken any training in this aspect respectively (see table 4.4 and figure 4.5 below respectively). table 4.4 distribution of respondents’ entrepreneurial skill source: own computation, 2018 figure4.5 distribution of respondents’ trainingabout light manufacturing source: own computation, 2018 entrepreneurial skill freq. percent yes 33 8.33 no 363 91.67 total 396 100.00 sectorial transition dilemma of smallholder grain farmers to light manufacturing industry in jimma zone, oromia regional state, ethiopia 55 respondents were asked about their know-how about different types of technology regarding light manufacturing industries and surprisingly, 83.21% of the total respondents answered that they have no any know how about those technologies. only 16.79% responded that more or less they have limited know how. on the other hand respondents were asked which infrastructure related factors may affect their plan to transfer to their preferred light manufacturing and they answered as follows. 64.29%, 89.09%, 78.83% 34.86% of the respondents said that transportation, communication, energy and water supply will significantly affect their transitional plan respectively. from this we can deduce that communication and energy related problems are the most factors that may hinder their transition plan. overall, from the total 396 respondents surveyed in this study, 104 respondents (26.26%) responded that they have sectorial transition plan like wood products, metal products and agribusiness products. while 212 (53.54%) household respondents said that they have no any sectorial transition plan particularly to any light manufacturing industries. the remaining 80 (20.20%) respondents said that particularly they have no any sectorial transition plan rather they have plan to diversify their existing farming style. figure 4.6do you have sectorial transition plan to light manufacturing? source: own computation, 2018 as we asked respondents what is (are) your final motive of sectorial transformation, around 84% of the responded that they have combined motives like profit making, to overcome loss, social pressure to transit from the existing sector, government incentive and personal preference. on the other hand 16% of the total respondents’ final motive of transition is only seeking profit making. 88.51% of respondents’ choice option was to transit from agriculture sector to light manufacturing sector and 11.49% of respondents’ choice was from agriculture to service sector. similarly, wood products, agribusiness products, apparel products, leather products and metal products were respondents’ first choicesamong light manufacturing industries respectively. their preference was 37.37%, 21.73%, 16.66%, 14.40% and 9.84%in a descending order as it can be seen from the table below. wood products and agribusiness was their first choice due to the ease accessibility of woods (dense forest around the study area) and they can easily access agricultural products in the area as they demand. tesfaye melaku & leta sera & endeg tekalegn 56 table 4.5 distribution of respondents’ preference among light manufacturing choice of light manufacturing sectors freq. percent apparel products 66 16.66% leather products 57 14.4% agribusiness products 86 21.73% 4wood products 148 37.37% metal products 39 9.84% total 396 100.00 source: own computation, 2018 in conclusion, the descriptive statistics depicts that, small holder farmers’ transitional dilemma to light manufacturing almost no any awareness, no know how about technologies, not trained and they have no entrepreneurial skill. 4.2. estimation econometric model under this sub-section, the result of thebinary logistic regression model was presented to determine the determinants of sectorial transition dilemma of smallholder grain farmers to light manufacturing industry in jimma zone, oromia region, ethiopia. before looking the econometric regression result, it is better to cheek the fitness of the model usually the problem of heteroscedascity and multicollinearity. accordingly, the problem of heteroscedascity which is common in crosssectional data was checked and solved by robustness of standard error before the estimation of the model.to detect multicollinearity problem, variance inflation factor (vif) was calculated and the result depict that the data had no problems of multicollinearity 4.2.1. determinants of smallholder grain farmer’s transition dilemma to light manufacturing industry the logistic regression model used nineteenexplanatory variables such as age, sex, marital status, capital, family size, land access to manufacturing, skilled labour access, access to credit, price product expectation, place, technology, awareness, education level, training,entrepreneur skill, transport, energy, water and communication.the dependent variable is a binary variable taking a value of 1 if “a farmer has a plan to transit to light manufacturing industry sectors and 0 if not. thebinary logistic regression estimate was made to identify factors that affect sectorial transition dilemma of smallholder grain farmers to light manufacturing industry in jimma zone, oromia region, ethiopia.among all variables employed in the model, farmers’ sectorial transition dilemma was affected by thirteen variables and six variables were insignificant in affecting their transition plan. accordingly the logit regression estimate depict that smallholder grain farmers sectorial transition dilemma was significantly affected byage, sex, marital status, skilled labour access, access to credit, price product expectation, place,awareness, education level, entrepreneur skill, training, transportand energy(see table 6.6 for detail information below). as it can be seen from the logistic regression below pseudo-r2is around 0.7682 which implies that the variables included in this analysisexplains the model about 77% and the fitness of the model is said to be so nice for such a large cross-sectional data’s. overall speaking, the fitness or goodness of the model is plausible as depicted by pseudo-r2. so, now we can proceed to the next step of estimating the model since we already fulfilled the preconditions in validating the data. sectorial transition dilemma of smallholder grain farmers to light manufacturing industry in jimma zone, oromia regional state, ethiopia 57 table 4.6 results of logistic regressionmodel logistic regression numberof obs=396 lr chi2(19)=331.64 prob> chi2=0.0000 log likelihood = -50.028581 pseudo r2=0.7682 grain farmers transition dilemma (gftd) coefficient robuststd. err. z-statistics p-value age 1.36337 .6833352 2.00 0.046** sex -17.99783 4.876872 -3.69 0.000* marital status(mstat) 4.380758 1.085154 4.04 0.000* capital (captl) -.1268041 .7667756 -0.17 0.869 family size (fs) 1.050867 .6493165 1.62 0.106 land access (la) .49981 .967533 0.52 0.605 skilled labor access (lsa) -11.70583 3.17658 -3.69 0.000* credit access (acsc) -3.142442 1.310998 -2.40 0.017** product price expectation (ppe) -4.144027 1.59332 -2.60 0.009* place -1.150256 .6915548 -1.66 0.096*** technology(tech) .7811438 1.480508 0.53 0.598 awareness (awar) -21.53031 5.722168 -3.76 0.000* education (edu) 3.928719 .7881433 4.98 0.000* entrepreneurial skill (entrskl) 5.069024 1.553029 3.26 0.001* tesfaye melaku & leta sera & endeg tekalegn 58 training -10.92641 2.972873 -3.68 0.000* transport (trns) 2.527803 .9009601 2.81 0.005* energy (enrgy) -9.476098 3.392518 -2.79 0.005* water (wtr) .7831606 .8348358 0.94 0.348 communication (commu) 1.480444 1.015285 1.46 0.145 _cons 80.58584 26.03889 3.09 0.002 source: authors computation from sample survey data (2018). asterisks like*, ** and *** are indicating variables that are significant at 1%, 5% and 10% significance level respectively the equation of the line found from the binary logistic regression output is summarized below as follow; logit(gftd) = 80.58584+1.36337age-17.99783sex+4.380758mstat+3.928719educ-21.53031awar-11.70583lsa1.150256place+5.069024entrskl+2.527803trns-9.476098enrgy-10.92641training-3.142442acsc-4.144027ppe as depicted from the above equation, explanatory variables like age, marital status, education level,having entrepreneurial skill and access to transportation services are the variables that positively determine grain farmer’s transition decision to light manufacturing industry. as it can be seen from the above equation, age of smallholder grain farmers were positively related to the chance of transition need to light manufacturing industry in the study area. this depicts that, older smallholder grain farmers are more likely to transit to light manufacturing industry than younger smallholder grain farmers. so that, if age of the smallholder grain farmers increase by one year, on average, thepossibility of grain farmers’ transition to light manufacturing industry increases by 1.36337factor. again the result of the model indicates that age of respondents was significantly affects grain farmers’ sectorial transition plan to light manufacturing industries at 5% significant level. this is may be because of aged grain farmers’ may have high interest to change from the existing way of life because they know that the existing grain farming doesn’t change their life significantly. similarly sex of the respondents affects grain farmers’ sectorial transition dilemma significantly at 1% level of significance. the implication is that, if the sex grain farmer is male, he has better chance to transform from the existing work to light manufacturing industries. if the sex of smallholder grain farmers is female, then the probability of transition to light manufacturing decreases by 17.99783 units. respondents’ level of education significantly affects grain framers sectorial transition dilemma to light manufacturing at 1% significant level. as the grain farmers level of education increases their awareness and attitudes towards light manufacturing industries and/or diversification. so, we can conclude that respondents level of education is one the basic determinants of grain farmers sectorial transition to light manufacturing sectors and this empirical finding is also supported by the theory.respondents’ level of education of was directly related to probability of transition to light manufacturing industry. the more educated smallholder grain farmers were more likely to transit to light manufacturing industry as compared to uneducated or illiterate farmers by 3.928719units. the justification is that educations increases the probability of searching and comparing different alternatives and assist to make rational decisions. the value of education is also theoretically supported that, it a key for any positive changes. similarly, grain farmers’ awareness for transition is one of the major determinants of grain farmers’ sectorial transition dilemma to light manufacturing and it affects significantly at 1% level of significance as it can be seen from table 6.6 above. this implies that awareness regarding transition to other sectors particularly, to light manufacturing industries is very essential. without any awareness nothing will happen because awareness is the beginning for the next action. sectorial transition dilemma of smallholder grain farmers to light manufacturing industry in jimma zone, oromia regional state, ethiopia 59 on the other hand, entrepreneurial skills and training were the major determinants of respondents’sectorial transition dilemma and both of them affects significantly at 1% level of significance. this is may be because of grain farmers’ needs entrepreneur skill to decide and to engage in light manufacturing industries and then to manage them wisely and sustainably. the same is true regarding training, training is very important to have the know-how and the overall characteristics of light manufacturing industries.as it can be seen from the above equation the coefficient of entrepreneur skill tells us, the more entrepreneurial smallholder grain farmer were more likely to transit light manufacturing industry as compared to non-entrepreneurial framers by 5.069024units. access for skilled labour, availability of transportation service, energy service, and product price expectation were the major determinants of grain farmers’ sectorial transition dilemma to light manufacturing industries and affects significantly at 1% level of significance. the coefficients of access to skilled labour depict that, if the accessibility to skilled labour of smallholder grain farmer increases by one unit, the probability of transition light manufacturing industrygoes down by 11.70583 units. this might be due to different reasons and it may associate with other factors or variables. as it can be seen from the above equation, smallholder grain farmer who have access to transportation services were more likely to transit light manufacturing industry as compared to in access farmers by 2.527803units. while credit service, and place or distance from the market center were the other major determinants of grain farmers sectorial transition dilemma to light manufacturing industries and affects significantly at 5% level of significance.if smallholder grain farmersaccess to credit increase by one unit, thepossibility of transition to light manufacturing industry goes down by 3.142442factors. this might be due to farmers’ unwise or unproductive use of credit services. 5. conclusion and recommendation 5.1. conclusion from the total surveyed 396 smallholder grain farmers surveyed in this study, 104 (26.26%) farmers replied that, they have sectorial transition plan to light manufacturing sectors like wood products, metal products and agribusiness products. but the largest proportion of the surveyed samplesof which 212 (53.54%) of the respondents said that they have no any sectorial transition plan particularly to any light manufacturing industries. probably this is because of low awareness, low (no at all) training provisions and lack of entrepreneurial skills. while the remaining 80 (20.20%) grain farmers said that particularly they have no any sectorial transition plan rather they have plan to diversify their existing farming style.thesediversificationsmight be towards horizontal diversification of the existing sector like form producing few agricultural crops to many crops, vegetable and fruits, irrigation and animal rearing. the major determinants of smallholder grain farmers sectorial transition plan in the study area was significantly affected byage, sex, marital status, skilled labour access, access to credit, price product expectation, place,awareness, education level, entrepreneur skill, training, transportand energy. in summing up, both the result of the descriptive statistics was supported by the econometric analysis and all the findings depicts that, small holder grain farmers’ sectorial transitiondilemma to light manufacturing industries and the fate of industrialization plan in jimma zone is at its infant stage. and those smallholder grain farmers have almost no any awareness, no know how about technologies, not trained and they have no entrepreneurial skill. 5.2. recommendation based on the findings of the study, the following policy recommendations were forwarded:  the findings of this studydepict that around74% grain farmers have no any plan or willingness to transform to light manufacturing sectors. this indicates that it is against the national government plan of transforming the agriculture sector to different agro or light manufacturing sectors. so that it is too recommended that, government and other responsible body should foster the institutional mechanism that support grain farmers in creating awareness, providing trainings at the grass rot levels.  more than one third (35.1%) of the sampled grain farmers are found to be illiterate in study sites. however, education has positive impact whether enabling grain farmers to transform from their existing agriculture tesfaye melaku & leta sera & endeg tekalegn 60 sector to light manufacturing industries. hence, effort should be geared in manner that build farmers capacity through adult literacy program, formal education and with short term training.  on the other hand from the econometric model analysis, we observed that access for credit service, access for energy and access for transport service were among the major determinants of smallholder grain farmers’ sectorial transition plan.therefore better credit provision, improved and sustainable energy service supply and well-furnished transportation services should be given priority. taking these actions may open paths one step to smallholder grain farmers’ to transform to light manufacturing industries and benefit from it in a diversified way.  agricultural offices should take appropriate measures to ensure its organizational mandates, objectives and commit to benefit smallholder grain framers from its services by providing training, advisory services and continuous follow-up to assist their transformation plan. linkages with other governmental organizations like trade and industry offices should be made to work cooperatively and address problems.  in-conclusion, additional researches should be carried out toacquire more empirical findings on sectorial transition dilemma of smallholder grain farmers to light manufacturing industries and the fate of industrialization in jimma zone in particular and ethiopia in general. references barbara t., alastair b., & sophia d. 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(2013). determinants of structural change. jel numbers: o11, o47. united nations development programme (2013). entrepreneurship development programme (covering from 2012 to 2016): vol. 3 no. 1. tesfaye melaku & leta sera & endeg tekalegn 62 united nations industrial development organization.(2015).the food and agriculture organization of the united nations and the united nations industrial development. organization by arrangement with cabinternational woodlridge, jeffrey (2009). introductory econometrics 4th editions. mason oh: south-western. world bank (2013).ethiopia economic update ii: laying the foundation for achieving middle income status. public disclosure authorize. international journal of commerce and finance, vol. 5, issue 2, 2019, 8-21 8 supply and demand side determinants of inflation in ethiopia auto-regressive distributed lag model (ardl) tekeber nigusse department of economics, college of business and economics, jimma university tekilu tadesse department of economics, college of business and economics, jimma university tesfaye melaku department of economics, college of business and economics, jimma university abstract inflation is defined as a persistent increase in general price level of goods and services. even though ethiopia has experienced a low inflation until 2008, recently, double digit inflation has become troublesome for policy makers as well as the society. so, this study tried to examine the supply and demand side determinant of inflation in ethiopia by employing the techniques of auto-regressive distributed lag model (ardl) for 32 years’ data spanning from 1985 to 2016. the study included macroeconomic determinant that alter or change inflation level measured by consumer price index such as money supply, real gross domestic product, world oil price, budget deficit and real effective exchange rate. the results of bound test confirmed that the long run relationship between explanatory variables and consumer price index in ethiopia. the empirical results implied evidence of a long-run positive impact of money supply, world oil price, budget deficit and real effective exchange rate on inflation in ethiopia whereas as real gross domestic product insignificantly affect price level . finally, from the finding of our study in the short run, real effective exchange rate, money supply budget deficit and world oil price are the main determinant of inflation in ethiopia. given these findings, the effectiveness of fiscal deficit and exchange rate as well as contractionary monetary policy as a mechanism of price stabilization in the long run and short run is recommendable for policy inference. keywords: ardl, bound test to coinegration, inflation, supply side, demand side 1. introduction according to(acharya, 2010) when the principal pointer of a country's macroeconomic performance measured by economic growth, inflation comes next for almost every countries macroeconomic objective. hence, price stabilization is considered as an imperative macroeconomic goal for sustainability of economic growth. regardless of development status of countries, nobody questioned about cross-border transmission of inflationary forces and one of the foremost and dynamic macroeconomic concerns provoking most economies across the globe. understanding inflation dynamics has received due attention in the recent years due to the high inflation levels occurred in developing countries. theoretical justification of keynesian macroeconomic of positive relationship between inflation and unemployment was disproved by different empirical studies that suggested an insignificant relationship between inflation and unemployment inferring the breakdown of the phillips curve and no possibility of trade-off between the two macroeconomic variables (kaur, 2017). generally agreed definition is that inflation is a continuous and persistent rise in general price level of goods and services or continual weakening in the purchasing power of money, caused by a rise in available money and credit beyond what the economy produced at all. the definition of inflation cannot be an indication of particular commodity price and not for particular period of time. for an inflation to be happened, the rise in the general price of goods and services should be sustained. a normal functioning of any economic activities in a given country is retained by the level of domestic price. in other words, majority of continuous instability of economic activity of a country is explained by erratic fluctuation in domestic price of goods and services (mishkin, 2009). hence, the in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e supply and demand side determinants of inflation in ethiopia auto-regressive distributed lag model (ardl) 9 national bank realized price stabilization as the focus of attention of monetary policy. this is because monetary policy of a country was mostly intended by giving attention toward responsible factors for raising the inflation rate. inflation in the long run is always and everywhere a monetary phenomenon (friedman, 1963). inflation in ethiopia has been low relative to other country over the last 30 years at the earlier time. as study of habtamu (2000) worked out it averaged about 7.3 percent during the 1967 to 1999 which is far below an average inflation rate of 10.3 percent, 39.8 percent 13.4 percent, 90 percent and 19 percent for asia, europe, middle east western hemisphere and africa respectively. additionally, according to yohannes (2009) in 1980, in most cases the ethiopian economy experienced rate of in inflation that is below 7.5 percent except for year at which a sudden shot in price where registered. the supply decrease specially related to agricultural sector, which determines food prices, was responsible for the spur inflation particularly in 1984/85 during which serious famine took surged to 18.4 percent. however, in the post 2003 inflation began to become visible problem because of the government plan and strategy towards adopting expansionary monetary and fiscal policy and huge government intervention so called developmental state in the economy. during this period, ethiopia economy registered as a fast growth, remarkable expansion of export revenue as well as generation of domestic tax revenue prevailed in the economy. due to expansionary fiscal policy emanated from huge government expenditures, the economy experienced by fast growing money supply (kibrom, 2008). to the best of our knowledge, there were few scholars conducted their study on the factors that determining of inflation in ethiopia. the descriptive analysis done by teklebirhan (1990) found the growth of money supply is an important cause of inflation in the country whereas samuel (2007) found that the monetarist model of interaction does not explain the inflation in ethiopia. both of them used the variables of money supply, real gdp, expected inflation and lagged real money balances factors determining inflation in the country. other latter study by kibrom (2008) suggested that the determinants of inflation differential between sectors (food and non-food) and found that most influential variable that affect food inflation in the long run were real gdp, money supply, inflation expectation and international food price. similar study done by (hagos, 2014) found that food inflation in the long run explained by broad money supply, narrow money supply, food consumption price index, non-food consumption price index, interest rate, real gdp and nominal gdp whereas non-food inflation determined by broad money supply, narrow money supply, food consumption price index, non-food consumption price index, interest rate, real gdp and nominal gdp variables. similar study conducted by(kashay, 2017) employed ols and found that gdp, money supply and national saving were significantly and positively contributed to inflation rate both in the short and long-run. in our study, we concerned an evidence oriented investigation to identify and examine the main driving factors of inflation in ethiopia in recent years. the aforementioned empirical literature on inflation in ethiopia stress basically on the demand-pull factors of inflation and failed to incorporate the supply side factors. previous studies considered only the variable world price as a as a measure of external supply shock for cost-push factors in their estimation and come up with insignificant result. moreover, one of the critical variables that have not been addressed is the effect of budget deficit from demand side and world oil price and real effective exchange rate from supply side factor on domestic price level. furthermore, to fill the methodological gap, this study used an auto regressive distributed lag (ardl) model as the core methodological framework due the fact that it provides consistent and efficient estimators as compared other any estimation method regardless of stationary and non-stationary properties series (pesaran, et al. 2001). the investigation is anticipated to offer the current policy issue in ethiopia with a consistent, precise and concrete result-based investigation on the major source of inflation. as long as price stabilization concerned as one of the pillar targets of the policy plan for current and the future, this study expected to dig out the problem and add to the macroeconomic policy formulation process. besides, we believe that the study will append essential outcome to fill existing knowledge gap and instigate for further study in the area due the fact that there is no clear cut solution on the causes of the rise in inflation. tekeber nigusse & tekilu tadesse & tesfaye melaku 10 2. literature review 2.1 theoretical literature review inflation is still an arguable word which has gone different adjustment over theoretical and empirical literature across the world. the first definition of inflation is forwarded by the neo-classical economists. according to them, inflation is defined as a sustainable rise in prices due to having too much rise in the quantity of money. as of keynesians argument, the main cause for the occurrence inflation is in situation where rise in money supply greater than the level of full employment in a given economy (jhingan, 1997). nevertheless plenty economists describe inflation in diverse ways; there is a general consensus that inflation is an unremitting rise in the general price level. despite the fact that inflation is a continuous rise in prices, its magnitude is differently explained. when the rise in prices is inconsequential like that of a snail or creeper, it is called creeping inflation. it is said to be creeping when inflation rate is less than 3 percent per year. such an increase is considered as secure and indispensable for economic growth. when average rise in price level is beyond 3 but less than 10 percent per annum, it is known as walking inflation. walking inflation is a forewarning hint for the government need to intervention through designing policies to control inflation prior to it turn into running inflation. an annual rise in prices at rate of 10 to 20 percent is categorized as running inflation. when inflation rate climb beyond 20 percent it is called hyper inflation (jhingan, 1997). 2.2.theories on causes of inflation 2.2.1 demand pull theory demand pull inflation theory is the conventional and most frequent categorization of inflation (jhingan, 1997). according to this theory, the main source demand ful1 inflation is raise in aggregate demand which sum up consumption, investment and government expenditure. when the economy experienced with large imbalance between aggregate demand and supply in which excessive demand manifested, the faster is the inflation (totonchi, 2015). as mentioned in keynesian general theory of employment, interest, and money, policy issue that targeted towards reduce in each section of aggregate demand is successful in decrease of pressure on demand and inflation. government tax increment is one the policy instrument in which expenditure is reduced and to control size of money alone or jointly, can be efficient in dropping effective demand and in controlling inflation as well (keynes, 1936). 2.2.2 cost push theory the main cause of cost-push inflation is raise in wage bargained by unions and pursuit of employer to increase the level of profit. the emergency of this type of inflation has not been current issue rather it goes back to a medie val period. however, to consider it as a chief cause of inflation, different scholars put pressure in reviewing and investigation its cause was started in 1950s and again later in the 1970s so called “new inflation” (totonchi, 2015). the fundamental cause of cost-push inflation is the nominal wages grow faster relative to the labor productivity. the labor unions enforce employers to subside remarkable wage increment so that it is increasing the cost of production of goods and services. consequently, employers in turn, charger higher prices for their products. higher wages allow employees to purchase as much as before, despites of higher prices. in contrast, the rise in prices associated with higher wage demand by unions which lead to cost-push or wage-push inflation. in other word, costpush inflation may be further provoked by upward alteration of wages to compensate adverse effect caused by increase in cost of living. moreover, another cause of cost-push inflation is profit-push inflation in which oligopolist and monopolist firms charge the price of their products so as to compensate the rise in wage and other cost of production to make higher profits. this is known as administered-price inflation or price-push inflation(totonchi, 2015). supply and demand side determinants of inflation in ethiopia auto-regressive distributed lag model (ardl) 11 2.2.3 quantity theory of money quantity theory of money is one of the earliest existing economic theories. the theory states that general level of prices change is mainly caused by changes in the quantity of money circulated at the hand of public. the quantity theory of money created the main dialogue issues of classical monetary analysis of 19th century, in line with offered the leading conceptual framework for infer in modern financial events and emergence of different scholars towards mainstream policy instruction intended to safeguard the gold standard. david hume (1711-76) came up with the first dynamic process analysis in which dissemination channel of monetary change across different economic sector, varying relative price and quantity simultaneously. he provided substantial modification, explanation and extensive investigation to the quantity theory of money. moreover, david ricardo (1772-1823), the most dominant of the classical economists, thought such disequilibrium effects short-lived and irrelevant in long-run equilibrium analysis. according to him, ricardo asserts that inflation in britain was exclusively the consequence of the bank of england's negligent over the printing of money. under the pressure of the napoleonic wars, britain missed the gold standard for a less liquid paper standard. he depressed discussions on likely valuable output and employment consequence of monetary injection (ricardo, 1817). in its rudimentary definition, quantity theory of money indicates that any prices change must be overwhelmed by the same proportional vary in the quantity of money. irving fisher (1876-1947) came up with his well-known equation so called fishers‟ equation of exchange which is mv= pt, where m refers to the nominal stock of money, v refers to its velocity money in circulation; t refers to the total number of transactions undertaken over period and p is the average general price level. the equation of exchange is obliged to grasp of the prerequisite because mv and pt are two ways of obtaining the same thing. accordingly, the aggregate value of all transactions undertaken over given period of time was the similar (jackman et al., 1981). all irving fisher as well as other classical quantity theorists did not supposed that v and t were constant rather their debatable issues is that in equilibrium velocity was affected by taste and preference of people and the technology of exchange, whereas t was determined by adjustment supply and demand by market force. moreover, monetarists superiority over keynesian in policy effectiveness could be approved by employing the common identity of exchange equation of fisher(totonchi, 2015). 2.3 empirical literature we have seen various studies conducted in developing countries, particularly in africa, where the inflationary upsurge threatened their development endeavor. in africa, both structural and monetary factors determined inflation, although specific factors differ from country to country. in theory, it is believed that when regressed inflation opens, it results in to observation increase in the general price level (habtamu, 2000). this situation has been seen in transition economics in the study of study (fischer, et.al, 2003). in ethiopia, one of the earliest works that of teklebirhan (1990) by considering variables such as broad money supply, import value index, pavement tax revenue, real gdp, rainfall, all velocity of money in his descriptive analysis, found that the existence of chronic drought has some impact in determining inflation in the country. money supply took by (teklebirhan, 1990) as an important cause of inflation in the country this study covers, however, the period when most prices are controlled, during the derg regime. moreover, the methodology he employed was only descriptive statistics which doesn’t explore the long-run and shortrun dynamics of variable of interest. another study done by dejan (2007) used factor forecasts for the general inflation and the disaggregated inflation namely energy inflation, industrial goods inflation, services inflation, processed food and the non-processed food inflation in the case of slovenia. the result from forecasts of the factor model was compare to autoregressive (ar) and vector autoregressive (var) models in terms of the root mean squared error (rmse). in his study, the factors were recognized so as to offer analysis to the forecasting. accordingly, results show that the factor model was significantly superior over the ar yardstick forecasts and is not poorer from the var forecasts for all disaggregated inflation and the headline inflation, which gives it an excellent apparatus for inflation forecasting in the case of slovenia. kibrom (2008) has studied the “sources of the inflationary experience in ethiopia whose study aimed to understand the forces behind the recent inflationary process in ethiopia. he used vector autoregressive (var) and single error tekeber nigusse & tekilu tadesse & tesfaye melaku 12 correction models to estimate inflation dynamics. this estimated model allows comprehending the long run as well as short-run dynamics of inflation in ethiopia between 1994/95 and 2007/08. the study reveals that the determinants of inflation for food and non-food are different, and depend on the time span under deliberation. 3. research methodology 3.1. data type and sources to conduct this investigation, the researcher used annul and time series data for the time starting from 1985/862016(17) that is 32 years’ data have been employed. this study was limited to macroeconomic variables determining inflation in ethiopia. so as to achieve study objective, secondary data was employed and the necessary data required to this study are obtained from different secondary data sources such as publications, annual bulletins and reports by concerned institutions like ministry of finance and economic development (mofed, 2016) for variables like real gross domestic product and budget deficit , ethiopian economic association (eea, 2016) for world oil price ,national bank of ethiopia (nbe, 2016) for variables like inflation and real exchange rate, central statistical authority (csa, 2016) for real exchange rate and others. 3.2 econometric model specification the model specification to undertake the study, the theoretical guideline was classical quantity theory of money. according to the classical economists, quantity theory of money implied that there are direct and indirect relationship between inflation and money supply because inflation is monetary phenomena. they expressed variable relationship given by the following identity where m is nominal money supply, v is velocity of money in circulation, p is general price level and y is real output the equation can be expressed in terms of price to show the determinant taking natural logarithm to both sides the equation can be rewritten as it is important to include other variables so as to investigate macroeconomic determinant of inflation. accordingly, the deterministic relationship would be given by: where, cpi is consumer price index; m2 -is broad money supply; bdis budget deficit; reer is real effective exchange rate; wpis world oil price and rgdpis real gross domestic product all the variables in the model are in the log form which is interpreted as elasticity. based on theoretical justification provided in literature part, the long run model of inflation is expected to vary positively with all variables. 3.3. model estimation procedure 3.3.1 unit root test it is fundamental to check for the statistical properties of variables while discussing with time series data. time series variables are hardly stationary in level forms. the necessary condition for testing unit root test when we applying supply and demand side determinants of inflation in ethiopia auto-regressive distributed lag model (ardl) 13 ardl model is to check whether the variables enter in the regression are not order two (i.e. i(2)), which is precondition in ardl model. therefore, it is prerequisite to test for time series variables before running any sort of regression analysis. augmented dickey-fuller (adf) test can be used to non-stationary proprieties of variable so to guarantee consistent outcome of test for stationarity. this test is carried out by supplementing the different equations by summing-up the lagged value of the dependent variable say δyt. if the t value or t-statistic in absolute value greater than the critical values, the first hypothesis (i.e. h0) is rejected and the conclusion is that the series is stationary. conversely, if the t-statistic in absolute value less than the critical values, the second hypothesis (h1) is rejected 3.4.2 the autoregressive distributed lag model (ardl) there are numbers of advantages of using ardl model also called ‘bound testing approach’ instead of the conventional engle-granger two-step procedure (1987), maximum likelihood methods of cointegration (johansen, 1988) and johansen and juselius (1990). first, the ardl model is the more statistically significant approach to determine the cointegration relation in small samples as the case in this study (pesaran et al., 2001; narayan,2004). a second advantage of the ardl approach is that while other cointegration techniques require all of the regressors to be integrated of the same order; the ardl approach can be applied whether the regressors are purely order zero [i(0)], purely order one [i(1)], or mixture of both. third, with the ardl approach it is possible to capture different optimum number of lengh for different variables (nasiru, 2012 as cited in tsadkin, 2013). finally, appling the ardl technique we can obtain unbiased and efficient estimators of the model (narayan, 2004), (harris and sollis, 2003; pesaran, 1995) as cited in tsadkin 2013. therefore, this approach becomes prevalent and appropriate for investigating the long-run relationship and extensively applied in empirical research in the recent years. hence, ardl model can be specified as:  respective variables and ut error term which is assumed to be serially uncorrelated.  β_1,β_2,β_3,β_4 & β_5 indicates coefficients that measure long run elasticies between the variable whereas α_i,α_j,α_k,α_l,α_m& α_n indicates coefficients that measure short-run elasticities among the variable. the first step involved in ardl model is to test the null hypothesis of no cointegration relationship which is defined as h_o= β_1=β_2=β_3=β_4=β_5=β_5=0 against the alternative hypothesis of h_1≠ β_1≠β_2≠β_3≠β_4≠β_5≠β_5≠0 of the existence of co integrating relationship between the variables. according to pesaran et al. (2001), there are two sets of critical value bounds for all classifications of regressors’ namely upper tekeber nigusse & tekilu tadesse & tesfaye melaku 14 critical bound value and lower critical bound value. the critical values for i (1) series are referred to as upper bound critical values; while the critical values for i (0) series are referred to as lower bound critical values. if the calculated f statistic is greater than the upper bound critical values, we reject the null hypothesis of no long run relationship among the variables. if the calculated f statistic is less than the lower bound critical values, we can’t reject the null hypothesis rather accept the null hypothesis of no co integration among the variables. however, if the calculated f statistic is between the upper and lower bound critical values, inference is inconclusive and we need to have knowledge on the order of integration of underling variables before we made conclusive inference (pesaran et al., 2001). accordingly, with the existence of cointegration, the short run elasticities can also be manipulated through building the error correction of the series as stated the follows. here all variables are as previously defined. the order of the lags in the ardl model is selected by either the akaike information criterion (aic) or the schwarz bayesian criterion (sbc) automatically, before the selected model is estimated by ardl model. 4. results and discussion 4.1 results of unit root test when we check stationarity of variable by adf, all variables is non-stationary at level so they are differenced. from the augmented dickey fuller test, the variables are integrated at different order and none of the variables are integrated of order two. table 1. augmented dickey-fuller (adf) test s no . variable with intercept with intercept and trend at level 1st difference order of integration at level 1st difference order of integratio n 1 inf -0.610064 -3.876628* i(1) at 1% -2.008248 -3.781685 i(1) at 5% 2 lnm2 -1.788559 -5.187734* i(1) at 1% -0.991645 -5.542462* i(1) at 1% 3 lnreer -0.606138 -3.598664* i(1) at 5% -2.718510 -3.543776 i(1) at 5% 4 lnbd 2.365709 -3.839873* i(1) at 1% -1.242459 -4.305291* i(1) at 1% 5 lnwop -0.268000 -7.224346* i(1) at 1% -3.270220*** -7.078391* i(1) at 1% 6 lnrgdp 0.324345 -3.926183 i(1) at 1% -2.054471 -4.276035 i(1) at 1% source: author’s computation of e view 9 result, 2018 supply and demand side determinants of inflation in ethiopia auto-regressive distributed lag model (ardl) 15 notes: the sign of ***, ** and * represents the rejection of the null hypothesis of non-stationary at 10%, 5% and 1% significant level respectively. the null hypothesis is that the series is non-stationary or the series has a unit root against alternative hypothesis that the series are stationary. akaike info criterion (aic) is used to determine the lag length while testing the stationarity of all variables. 4.2. model stability and diagnostic test to check the verifiability of the estimated long run model, some diagnostic test is undertaken. priority in doing any analysis, we required to check the standard property of the model. in this study, we carried a number of model stability and diagnostic checking, which includes serial correlation test (brush & god fray lm test), functional form (ramsey’s reset) test, normality (jaque-bera test), and heteroscedasticity test. in order to reject or accept the null hypothesis, we can decide by looking the p-values associated with the test statistics. that is the null hypothesis is rejected when the p-value are smaller than the standard significance level (i.e. 5%). table 2: long run ardl diagnostic tests test statistics lm version f version description a. serial correlation chsq(2)= 0.0454 f(2,15)= 0.3398 lagrange multiplier test of residual serial correlation b. functional form chsq(2)= 0.9597 f(1,10)= 0.9597 ramsey's reset test using the square of the fitted values c. heteroscedasticity chsq(17)= 0.3577 f(17,11) = 0.4224 based on the regression of squared residuals on squared fitted values source; own computation from eviews 9.5 the above table indicates that the long run ardl model estimated in this study passes all the diagnostic tests. this is because the p-value associated with both the lm version and the f version of the statistic was unable to reject the null hypothesis specified for each test. therefore, based on the result of the test the null hypothesis of no serial correlation (brush cod fray lm test) is failed to reject for the reason that the p-values associated with test statistic is greater than the standard significant level (i.e. 0.3398> 0.05). here lm test for testing serial correlation is applied because unlike the traditional durbin watson test statistic which is totally inapplicable when the lagged dependent variable appears as a regressors, lm test avoid such limitation of dw test. we could not reject the null hypothesis test for ramsey’s reset test, which tests whether the model suffers from omitted variable bias or not. as the test result indicates that we can’t reject the ramsey’s test, which means that the model is correctly specified. lastly, diagnostic test for heteroscedasticity seen from the above table, we cannot reject null hypothesis at 5% significant level due to its p-value associated with the test statistics are greater than the standard significance level (i.e 0.05<0.4224) tekeber nigusse & tekilu tadesse & tesfaye melaku 16 4.2.1 test of parameter stability the stability of the model for long run and short run relationship is detected by using the cumulative sum of recursive residuals (cusum) which helps as to show if coefficients of the parameters are changing systematically and the cumulative sum of squares of recursive residuals (cusumsq) tests which is useful to indicate if the coefficient of regression are changing suddenly. accordingly, if the blue line cross redline which is critical line and never returns back between two critical line, we accept the null hypothesis of the parameter instability whereas the cumulative sum goes inside the area (can returns back) between the two critical lines, then there is parameter stability in the short run and long run. figure 1: plot of cumulative sum of recursive residuals (i) figure 2: plot of cumulative sum of squares of recursive residuals (ii) as the result seen from the figure, the plot of cusum test did not cross the critical limits. in the same manner, the cusumsq test shows that the graphs do not cross the lower and upper critical limits. so, we can conclude that long-run estimates are stable and there is no any structural break. in addition to the confirming model stability by employing cusum and cusumsq test mentioned in above figure, we can look at goodness of fit statistics of the model containing the explanatory variables that was proposed actually explain variations in the dependent variable because it is important to have some measure of how well the regression model actually fits the data. accordingly, adjusted r2 was 81 percent of the model has been explained by the regressors respectively. hence the results of the estimated model are consistent and efficient. 4.3. long run ardl bounds tests for co-integration since we determined the stationary nature of the variables, the next task in the bounds test approach of cointegration is estimating the ardl model specified in equation (3.7) using the appropriate lag-length selection criterion. according to pesaran and shine (1999), as cited in narayan (2004) for the annual data are recommended supply and demand side determinants of inflation in ethiopia auto-regressive distributed lag model (ardl) 17 to choose a maximum of two lag lengths but for small data it is advisable to use 1 lag because when the lag length increases the observation fail to show the appropriate long run relationship among variables because to show the long run relationship the number observation must be greater than 30. as we discussed so far, the f-test through the wald-test (bound test) is performed to check the joint significance of the coefficients specified in equation (3.7). the wald test is conducted by imposing restrictions on the estimated long-run coefficients of real gdp, real effective exchange rate, money supply, budget deficit, world oil price. the computed f-statistic value is compared with the lower bound and bound critical values provided by pesaran et al. (2001) and narayan (2004) table 3 bound test source; own computation from eviews 9.5 from the above table calculated f statistics (7.9551) is higher than both the pesaran et al. (2001) and narayan (2004) upper bound critical values at 1% level of significance. this implies that the null hypothesis of no long -run relationship is rejected; rather accept the alternative hypothesis (there is long-run relationship) based on critical values at 1% level of significance. therefore, there is cointegration relationship among the variables in long run. 4.4 long run ardl model estimation after confirming the existence of long-run co-integration relationship among the variables, the next step is running the appropriate ardl model to find out the long run coefficients, which is reported in table below. table 4: long run coefficients co integrating equation variable coefficient stan.error t-statistics probabilities lbd 0.764 0.273 2.79 0.013* lgdp 0.1169 0.209 0.5581 0.587 lm2 0.5012 0.1864 2.689 0.021* lreer 0.491 0.348 4.276 0.0013* lwop 0.342 0.3029 7.733 0.000* c 9.708 2.173 4.466 0.0010 source; own computation from eviews 9.5, 2018 lags f statistics decision 1 7.9551 co integration significance lower bound upper bound 5% 2.62 3.79 2.5% 2.96 4.18 1% 3.41 4.68 tekeber nigusse & tekilu tadesse & tesfaye melaku 18 note: the sign *, ** and *** indicate that the variables are significant at the level of 1%, 5% and 10% respectively. the result of the above table indicates that all the variables entered in the regression have the expected signs regardless of their significant level. as we have discussed in the theoretical and empirical literature parts money supply, budget deficit, real effective exchange rate, world oil price, budget deficit and real domestic product have positive impact on ethiopian inflation rates. moreover, real gross domestic product has positive relationship and insignificantly affects inflation in ethiopia. as expected from economic theory, money supply has positive and significantly affect inflation in ethiopia which is evidenced with 1% significance level in the long run. this coefficient shows that assuming other things held constant, a percentage change in money supply would increase consumer price index by on average 0.5012 percent in the long run. the result supports the arguments of classical economists so called the theory of quantity theory of money which stated that an increase in money supply always come up with higher price levels. the classical economist monetary transmission channel to inflation implies that as money supply increase, economy investment encouraged through available credit and thereby high employment creation. aggregate demand automatically increases because of expanded investment and employment. finally, the economy experienced by increased inflation. as the result reveals that in the long run, the most significant variable that affects the rate of inflation is world oil price which possessed a direct positive relationship between world oil price and inflation. the long run coefficient of the variable shows that, holding other things constant, a one percent change in world oil price (wop) which is proxy by general world oil price of dollars leads to on the average 2.342 percent increase in cpi. as it is known that oil is major source of energy which affects almost every sector of the economy which manifested in an increase in cost of production. as result, prices rise in international market increase domestic price of goods and services due the fact that ethiopia energy demand is fully imported. this result confirms with the study of saleem, and ahmad (2015). as the result predicted that there is a positive real exchange rate (depreciation) and inflation measured by cpi which evidenced by conventional significance level; this indicates that, in the long run, holding other things constant, a one percent increase in real effective exchange rate (depression of domestic currency) lead to 1.491 increase in consumer price index. the rational justification behind this relationship is that exchange rate volatility can affect on price level their effect on both aggregate supply and demand. demand side; increase in exchange rate push up foreign demand for domestic goods and services, causing raise in net exports and hence aggregate demand. the boosted aggregate demand further accelerates the price of input, there by bid up domestic price level. on the supply side, exchange rates could affect prices paid by the domestic buyers of imported goods directly. developing countries like ethiopia categorized as an international price taker experienced by the domestic currency depreciation leads to higher cost of imported inputs which will raise marginal cost and come up with increased domestic price. this result confirms with the finding of vinh and fujita (2007) in vietnam and monfared and akin (2017) in iraq. another long run determinant of inflation that we observed from estimation is the budget deficit which has found positive relationship with consumer price index and statistically significant at 1 percent significance level. its coefficient in long run equation is 0.764 it means that in the long run taking other factors constant or negligible one percent increase in budget deficit causes increase in consumer price index by 0.764 percent. the result confirms with the study of akcay et.al, (1996) who proposed two possible channels in which higher deficit leads to higher inflation. first possibility is that the government's debt requirements drive up demand of credit in the economy, rise the interest rates and as result, private investment is crowded out. the declining of national income will lead to a decrease in the supply of good and service for a given level of cash balances and hence, come up with increase in the domestic good and services. second proposed justification for positive relationship is that when national bank refused to monetize the debt while the private sector monetizes the deficits. the implication of this channel indicates that when high interest rates encourage the financial sector to develop new interest bearing assets which are risk free asset and equivalent to liquid money. as result, government borrowing not monetized by the national bank is monetized by the private sector and consequently, higher price level experienced by higher deficit. 4.5. short run error correction model after the acceptance of long-run coefficients of the inflation equation, the short-run ecm model is estimated. the error correction term (ecm), as we discussed in chapter three, indicates the speed of adjustment to restore equilibrium in the dynamic model. it is a three lagged period residual obtained from the estimated dynamic long run supply and demand side determinants of inflation in ethiopia auto-regressive distributed lag model (ardl) 19 model. the coefficient of the error correction term indicates how quickly variables converge to equilibrium. moreover, it should have a negative sign and statistically significant at a standard significant level (i.e. p -value should be less than 0.05) table 5: short run coefficient variable coefficient standard error t-statistics prob. d(lbd) 3.656 0.942 3.879 0.026** d(lbd(-1) -1.648 0.843 -1.842 0.0924** d(lgdp) 0.201 0.383 0.524 0.610 d(lm2) 0.859 0.649 1.321 0.213 d(lm2(-1)) 1.223 0.715 1.711 0.115 d(lreer) 3.651 0.914 -3.994 0.0021** d(lwop) 1.623 0.579 2.802 0.017** d(lwop(1)) -1.775 0.705 -2.516 0.028** coineq(-1) -1.72 0.423 -4.064 0.019** source; own computation from eview 9.5 note: the sign *, ** and *** indicate that the variables are significant at the level of 1%, 5% and 10% respectively. r2=0.9765 adj r2=0.948 f-sta=31.54(0.0001) dw stat= 1.71 the coefficient of determination (r-squared) is high explaining that about 97 % of variation in the inflation is attributed to variations in the explanatory variables in the model. in addition, the dw statistic does not suggest autocorrelation and the f-statistic is quite robust. the large number f-statistic implies overall jointly significant the independent variables in the model. furthermore, the results also reveal that budget deficit, money supply, real exchange rate and world oil price are positive and significant determinant of the inflationary spiral in ethiopia in the short run ethiopia. surprisingly, real rgdp is not significant at least in the short run. this result justifies that emphasizing the importance of monetary policy and fiscal policy in the inflationary process could have immediate impact on real sector. the error correction coefficient, estimated at -1.72 is highly significant, has the correct negative sign, and implies a very high speed of adjustment to equilibrium. according to narayan and smith (2006) the highly significant error correction term further confirms the existence of a stable long-run relationship even though most economists recommend that ecm<-1. moreover, the coefficient of the error term (ecm-1) implies that the deviation from long run equilibrium level of inflation in the current period is corrected by 172 % in the next period to bring back equilibrium when there is a shock to a steady state relationship but higher than 100% ecm means that it has oscillating type of convergence to long run equilibrium and it takes less than one year to return to its long run equilibrium. 5. conclusion this research has been undertaken to assess the macroeconomic determinant of inflation in the country from 1985/6-2016 by ardl model bound test to co-integration. the result of the above table indicates that all the variables entered in the regression have the expected signs regardless of their significant level. as we have discussed in the theoretical and empirical literature parts, money supply, budget deficit, real effective exchange rate, world oil price and budget deficit have positive and statistically significant impact on ethiopian inflation rates. however, real tekeber nigusse & tekilu tadesse & tesfaye melaku 20 gross domestic product has positive relationship and insignificantly affects inflation in the long run. regarding to short run dynamics, the results also reveal that budget deficit, money supply, exchange rate and world oil price are positive and significant determinant of the inflationary spiral in ethiopia in the short run. surprisingly, real rgdp is not significant at least in the short run. this result justifies that emphasizing the importance of monetary policy and fiscal policy in the inflationary process could have immediate impact on real sector. therefore, concerned body should give care of in policy formulation to control inflation such as using alternative energy sources including using hydroelectric power, solar energy and other important energy sources; to revaluate or appreciate domestic currency not by direct intervention of government but by providing subsidies for those who produce exportable goods and imposing high tax rate for imports; to use contractionary monetary policy to fix the growing inflation and to keep budget deficit at low level by balancing budget revenue with 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ethiopia. working paper in economics. international journal of commerce and finance, vol. 4, issue 1, 2018, 134-149 134 a comparison of sharia banks and conventional banks in terms of efficiency, asset quality and stability in indonesia for the period 2008-2016 elsa satibi mercu buana university, jakarta, indonesia wiwik utami (prof.) mercu buana university, jakarta, indonesia lucky nugroho mercu buana university, jakarta, indonesia abstract this research aims to compare the efficiency, asset quality, and bank stability between islamic banking and conventional banking system in indonesia in 2008 – 2016. this research used secondary data based on financial statement derived from the financial service authority (otoritas jasa keuangan or ojk). the methodology of the study is descriptive by comparing efficiency, asset quality and stability between islamic banks and conventional banks. the variables used are: (1) overhead cost and cost income ratio as efficiency proxy; (2) the nonperforming loan is a proxy of asset quality; and (3) return on assets and z score are proxy of stability. the result from statistic data process showed that there were differences in efficiency, asset quality, and stability between islamic banking and conventional banking where conventional banking more efficient, have better asset quality and more stability than sharia banking. there are some causes of sharia banking weakness such as of information technology that still behind of conventional banking, competency, and experience of human resources and the consciousness of the muslim community to use sharia banking products for their primary financial transaction. nevertheless, the contribution of sharia banks in improving social welfare has an essential role because the higher the income received, the higher the zakat issued by islamic banks. sharia banks as a solution of conventional banking that caused the financial crisis because of the principle of justice and falah is an essential pillar of sharia banks. keywords: efficiency, asset quality, stability, islamic banking, conventional banking, falah jel: e5, e59, e6, e62 1. background in the economy of a country, the bank has a vital role in maintaining monetary and financial stability. also, the primary function of the bank as an intermediary financial institution that connects between the surplus (depositorsowner fund) with a deficit (the borrower-debtor). industrial bank is laden with risks and instability, primarily resulting from economic fluctuations and managerial operations (malik, 2017). bank failures can negatively impact other industries since banking has assets of the consumer and also from manufacturers (both as a bank customer). the inability of banking can have substantial economic costs. the experience of indonesia when the financial crisis in 1998, showed the cost incurred by the economy through restructuring programs reached 47 percent of the gross domestic product (stiglitz, 2000). the primary service in banking on the community is gathering funds (current account, savings, and deposits), disbursing funds in the form of loans and support to the community for delivery their money. therefore, the bank has a significant role in supporting business transactions. even in the days of prophet muhammad transaction storage of money or possessions, borrow money for business purposes, and consumption, as well as the services of remittances, was a common activity performed at the time. moreover, according to sukmadilaga and nugroho (2017) the business activity also should be supported by accounting that commanded in the qur'an to take copious notes, namely in al-baqarah verse 282, which means: "o you who have believed, when you contract a debt for a specified term, write it down. moreover, let a scribe write [it] between you in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e a comparison of sharia banks and conventional banks in terms of efficiency, asset quality and stability in indonesia for the period 2008-2016 135 injustice. let no scribe refuse to write us god has taught him. so let him write and let the one who has the obligation dictate. and let him fear allah, his lord, and not leave anything out of it. but if the one who has the obligation is of limited understanding or weak or unable to dictate himself, then let his guardian dictate in justice. and bring to witness two witnesses from among your men. and if there are not two men [available], then a man and two women from those whom you accept us witnesses-so that if one of the women errs, then the other can remind her. and let not the witnesses refuse when they are called upon. and do not be [too] weary to write it, whether it is small or large, for its [specified] term. that is more just in the sight of god and stronger u.s. evidence and more likely to prevent doubt between you, except when it is an immediate transaction which you conduct among yourselves. for [then] there is no blame upon you if you do not write it. and take witnesses when you conclude a contract. let no scribe be harmed or any witness. for if you do so, indeed, it is a [grave] disobedience in you. and the fear of god. and god teaches you. and allah knows of all things." the phenomenon of the development of the bank as intermediary financial institutions in indonesia was marked by the publication of deregulation in the financial and monetary fields in june 1983. the phenomenon of bank development as an intermediary financial institution in indonesia was marked by the issuance of deregulation in finance and monetary in june 1983 which led to liberalization in the banking sector. liberalization led to a growing number of banks thus increasing access to financial services for the community to meet consumption and business needs. it also affects the spread of outlets throughout indonesia to reach all the people who not only live in big cities but also in rural and remote areas. regarding anugroho et al. (2017) and mitton (2002), in 1997 the economy of indonesia is experiencing a crisis caused by the monetary crisis in asia so that the result is terrible for many sectors and also the banking sector is no exception. the impact of the crisis is there 16 national private banks liquidated and also impact government-owned bank merger (soes) into bank mandiri (bbd-bank bumi daya, bdn-bank dagang negara, bank exim-bank export import indonesia, bapindo-bank pembangunan indonesia). however, the monetary crisis at that time did not have an impact on islamic banking where there are no islamic banks are collapsing. the increase in the number of shariah public banks is rapidly in indonesia, where in 1992 by bank muamalat (only one bank) and in the year 2017 developed into totaled 13 shariah public banks (bank muamalat indonesia, bank syariah mandiri, bank mega syariah, bank bri syariah, bank syariah bukopin, bank bni syariah, bank jabar banten syariah, bca syariah, bank victoria syariah, maybank syariah indonesia, bank panin syariah, bank tabungan pensiunan nasional syariah, bank aceh). nevertheless, the rate of growth of islamic banking assets experienced a slowdown. where the asset growth of shariah banking based on statistics published by the central bank of indonesia, recorded growth of islamic banking assets continued to increase. the increase of asset sharia bank industries (full pledge sharia bank and subsidiary sharia bank) can be shown in the below graphic 1.1 the growth of sharia industries during 2008-2016. elsa satibi & wiwik utami & lucky nugroho 136 graph. 1.1 asset growth of sharia banking industries (2008-2016) in billion rp. source: indonesia central bank according to widyastuti & armanto (2013) and usman et al., (2018), the increase of competition in the banking sector in indonesia has started to noticeably since the existence of the policy related to the indonesian banking openness. the condition of the transparency of banks in indonesia was initiated with the promulgation of a policy package on june 1, 1983 (pakjun), which aims to modernize operational banks in indonesia. then, the pakjun continued with a policy package october (pakto) published on 27 october 1988. the pakto aims to give ease of permitting the establishment of the new bank, including the opening of a branch office. then, with the funds of rp 10 billion, investors can set up a new bank (deni & djoni, 2004), and this causes a significant increase in the number of banks. the goal of deregulation should be to create an efficient market mechanism (martin & scott, 2000). the increasing number of such banks is high among the banks so that banks are required for efficiency in the allocation of resources it has (mathisen & buchs, 2005; usman et al., 2018). also, the bank should also reduce its operational costs, in other words, the bank must be able to increase its productivity (allen and rai, 1996; dietsch and weill, 2000; weill, 2004). the current condition where there is rapid competition in banking industries enforce the bank to specialize and differentiate themselves to keep the profit for banks to survive in competition (schaeck et al., 2009). the same is also conveyed by zarutskie (2010), which in his research says that competition encourages banks to be more cost-effective than their competitors by specializing in certain types of loans and collecting retail funds which have a cheap cost of funds. for example: focus on the microloan segment with the support affordable fund sources (savings from micro and small entrepreneur). also, according to dick & lehnert, (2010), there are other alternatives in improving bank efficiency, namely through enhancing the quality of loan screening in specific segments, so that loans disbursed to borrowers are of good quality so as not to impact on the poor quality of loans. therefore, with the lowest number of problem loans (npf) will lead to lower costs to reduce the need for capital to ensure a financing reserves problem and increase bank profits compared with its competitors. sharia banks and conventional banks have different principles in which islamic banks do not practice transactions related to interest and apply profit and loss sharing in their business activities (chotib & utami, 2014; aarafah & nugroho, 2016; ). in other words, there are clear operational differences and principles between sharia banks and conventional banks (aprastowo, 2015). thus, the principal and operational differences between conventional and sharia banks can affect critical financial indicators such as efficiency, asset quality and stability. conceptually and in previous research, islamic banks should have better efficiency, better asset quality and stability compared to conventional banks because islamic banks can survive in the economic crisis that has ever happened (beck et al., 2013; bourkhis & nabi, 2013; rosman et al., 2014; mollah & zaman 2015; nugroho, l., & husnadi, t. c. 2017). therefore, further research is needed to know the level of efficiency, asset quality and stability between conventional banks and islamic banks in the period after the crisis so that the problem restrictions on research are based on research questions as follows:  is there a significant difference between the efficiency of sharia commercial banks with conventional commercial banks? a comparison of sharia banks and conventional banks in terms of efficiency, asset quality and stability in indonesia for the period 2008-2016 137  is there a significant difference between the asset quality of sharia commercial banks with conventional commercial banks?  is there a significant difference between the stability of sharia commercial banks with conventional commercial banks? 2. literature review 2.1. agency theory vs sharia principles the agency theory explains that in a company two parties interact with each other. the parties are the owners of the company (shareholders) and the management of the company. furthermore, shareholders are referred to as principals whereas management is a person who is authorized by shareholders to operate a company called an agent. companies separating management and ownership functions tend to be susceptible to agency conflicts because each party has conflicting interests to achieve their prosperity (jensen & meckling, 1976; chrisman et al., 2004; hayward & boeker 1998). nevertheless, in sharia principles, there is no difference of interest between agent and principal, because the business activity is to render benefit of all parties. the income generated by the company or organization must be capable of providing benefits or goodness for humanity (jalb almanafi') and avoiding humanity from badness or destruction (dar'u almafasid) so that the concept of jalb almanafi' and dar'u almafasid is called maslahah (kara, 2012; nugroho & husnadi, 2017; iqbal & mirakhor, 2011; rahman, 2003). furthermore, with the concept of maslahah this will bring all human activity, including managing companies and organizations not only to achieve the goals of the world individually, but hereafter as the final destination (falah) (anugroho et al., 2017; bnugroho et al., 2017; iqbal & mirakhor 2011; aris et al., 2013; kara, 2012). regarding the concept of falah, profit maximization restricted by ethics and morals. maqasid shariah is an activity to fulfill basic needs (dharuriyat), secondary needs (hajiyat) and tertiary needs (tahsiniyah). thus, to meet those needs, it must comply with the rules of shariah (maqasid) which include: maintain the religion; maintain the soul; maintain the reasonable; maintain family/descent; maintain the property and keep the environment (aarafah & nugroho, 2016; barafah & nugroho, 2016; bprastowo, 2015; nugroho, 2014; mohammad & shahwan, 2013; wajdi, 2008). sharia principles can eliminate the causes of conflict in agency theory. asymmetric information is one of the reasons of disputes in agency theory (willenborg & mckeown 2000; defond & zhang, 2014; nugroho et al., 2018) because there is biased information due to different interests. however, asymmetric information can be eliminated with the existence of maqasid syariah which causes the similarity of goals among stakeholders is to provide maslahat. based on the maqasid shariah, the knowledge and awareness of every muslim becomes very important in carrying out his religion in totality (kaffah) in the event of a financial crisis in 1998, it required the considerable cost to save financial stability, but it took a long time to foster public confidence in the national financial system. the precarious financial system tends to be vulnerable to turbulence, and then it disrupts the economic system of the state bank stability is one of the pillars in strengthening the country's economic system. thus the stability of banks is essential and the focus of government policy in a country. former studies have benchmarked business models, efficiency and stability between sharia banks and conventional banks in times of financial crisis (beck et al., 2013). while the proxy of bank stability can be reflected by z score and return on asset (roa) (laeven & levine 2009; koehn & santomero, 1980; buser et al., 1981; beck et al., 2013). conventional banks and sharia banks have different objectives, islamic banks have a goal to achieve falah so that the existence of sharia banks should provide social wellbeing for people who also consider justice, morals, ethics, and equations while conventional banking aims solely for goodness in the world. nevertheless, in its current development, all banks, both conventional and sharia banks must implement sustainable islamic banks, and conventional banks must deliver a triple p concept (profit, people, and planet) (nugroho & chowdhury, 2015; sobhani et al., 2012; bhardwaj & malhotra, 2013; cnugroho et al., 2017). then, based on previous studies some critical financial indicators commonly used in measuring bank performance, in general, are efficiency ratio, asset quality, and financial stability (sukarno & syaichu, 2006; margaretha, 2018; beck et al., 2013; schaeck & cihák 2014). elsa satibi & wiwik utami & lucky nugroho 138 2.2 efficiency based efficiency is the ratio between output and input, a company, especially a bank can be said to be efficient if it can produce more output than inputs issued. bank efficiency is one of the crucial indicators to analyze the performance of a bank and also as a means to further improve the effectiveness of bank policy (fuentes & vergara, 2003; rozzani & rahman, 2013) efficiency can be seen from two sides, namely the cost efficiency and profit efficiency (sherman & gold, 1985; sathye, 2001). some ratios can be used to measure efficiency such as operating cost ratio. the operational cost ratio is used to measure the efficiency and ability of bank in conducting its operation. there are some researcher opinions and studies about the comparison of the efficiency of the sharia bank and conventional bank. these belong to beck et al., (2013), bourkhis & nabi, (2013) and rosman et al., (2014).all of them explains that sharia bank is more efficient compared to a conventional bank. indicators used by previous researchers to measure efficiency in the banking industry are the overhead cost and cost income ratio (beck et al., 2013; rosman et al., 2014; saeed & izzeldin, 2016). regarding the research aims, the hypothesis 1 is “there is a difference in efficiency between sharia commercial banks with conventional commercial banks in indonesia.” 2.3 asset quality regarding the size of the organization, large banks have a higher probability of having better performance compared to smaller banks, as large banks are managed more professionally and have better-diversified asset portfolios (beck et al., 2013; humphery-jenner & powell, 2011; stanwick & stanwick, 1998). banks can manage funds in productive assets as a source of income used to finance their overall operational costs, such as labor costs, interest costs, and other operational costs. therefore, productive assets must be managed well to generate profits. asset quality assessment is intended to evaluate the condition of bank assets and the adequacy of credit risk management. this aspect shows the quality of assets concerning the credit risks faced by banks due to lending and investment of bank funds in different portfolios. every investment of bank funds in earning assets has assessed its quality by determining the level of collectibility are substandard, doubtful or loss. the differentiation of the collectibility level is necessary to decide on the minimum reserve requirement for the elimination of productive assets which must be provided by the bank to cover possible losses (anugroho et al., 2017; de bock & demyanets, 2012; chan et al., 1986). furthermore, based on previous research the appropriate indicators used to measure asset quality are non-performing loans (shrieves & dahl, 1992; bernstein, 1996; klein, 2013). regarding the research aims, the hypothesis 2 is “there is a difference in asset quality between sharia commercial bank with the conventional bank in indonesia.” 2.4 bank stability banking stability is one of the pillars of economic growth. therefore, the central bank not only maintains monetary stability but also maintains banking stability to support sustainable economic growth. in indonesia, not only conventional banking but also sharia banking also plays a role in promoting economic growth (bnugroho et al., 2017). the stability of sharia and conventional banking can be seen from bank soundness. the financial system plays a vital role in the economy, as part of the economic system. the financial system serves to place funds from those who experience surplus to the deficit. if the financial system is not stable and does not work efficiently, then the placement of funds will not run well so that it can hamper economic growth. the results of previous research conducted by beck et al., (2013) that the stability of islamic banks is better than conventional banks, while the research results myirandasari & manzilati (2014). the stability of conventional banks is better than in islamic banks. according to previous researchers who reviewed related to the stability of banks, they use indicators of return on assets roa and z score (koehn & santomero, 1980; buser et al., 1981; laeven & levine 009; beck et al., 2013) regarding the research aims, the hypothesis 3 is “there is a difference in stability between sharia commercial banks with conventional commercial banks in indonesia.” 2.5 conceptual framework based on literature review and hypothesis, the research framework can be illustrated as follows: a comparison of sharia banks and conventional banks in terms of efficiency, asset quality and stability in indonesia for the period 2008-2016 139 figure 1.1 conceptual framework 3. research methodology the research was conducted at sharia commercial bank and conventional commercial bank period 2008-2016 and indirect observation that using secondary data. the data used in this study obtained from financial statements collected and published through the website financial services authority www.ojk.go.id (ojk) and each website bank. also other reference sources such as scientific journals, reference books, and previous research. 3.1 research design the research design in this research is a comparative descriptive study. comparative research is a study to compare the similarities and differences between two or more specific phenomena or populations that can be individual, industrial organizations or other perspectives. so this study aims to compare the level of efficiency, asset quality, and stability between sharia banks and conventional banks. the statistical process in this study objective to show significant differences in efficiency, asset quality, and stability between sharia commercial banks and conventional banks. furthermore, the data in this research used are secondary data, so that the processing using two different test statistical techniques average (independent sample t-test). 3.2 research variables 3.2.1 efficiency there are two indicators used in this study to assess bank efficiency, namely overhead cost (oc), and cost income ratio (cir). according to pasiouras et al., (2009) and beck & levine (1999) then the formulation of oc and cir as follows (1) (2) 3.2.2 asset quality sharia banks conventional banks efficiency ratio stability efficiency ratio asset quality stability asset quality comparison elsa satibi & wiwik utami & lucky nugroho 140 non-performing loan (npl) is one of the indicators to assess the quality of financing or credit disbursed by the bank. according to wibowo & syaichu, (2013), firmansyah, (2014) and soekapdjo et al., (2018), the formulation of the npl ratio is (…): (3) 3.2.3 stability the variable of stability of sharia banks and conventional banks refer to wibowo & syaichu, (2013) and usman et al., (2018) are roa and z score, the formula of the indicator as follows (…): (4) (5) 4. discussion and analysis the population used in this study are sharia commercial banks and conventional commercial banks in 2008-2016 with the acquisition of data from the financial services authority that available online at www.ojk.go.id. this research, using a purposive sampling method to determine the sampling and the selection criteria of this sample are as follows: 1. conventional banks and sharia banks registered at bank indonesia in 2008 2. conventional banks and sharia banks registered at bank indonesia and published their financial statements for the period of 31 december 2008-2016 and use rupiah as reporting currency. 3. conventional commercial banks and sharia banks do not include foreign banks, mixed banks, or banks bpd (regional banks). 4. conventional banks and sharia banks that have an asset difference are not too large between banks with other banks, so there is no standard deviation, and the results become representative. according to the sample criteria, the amount of sampling can be generated in the table below: table 1 population and samples no description number of banks 1 conventional commercial banks and sharia commercial banks registered at bank indonesia (central bank) in 2008 124 2 conventional commercial banks and sharia commercial banks in indonesia that publish financial statements for the period of 2008-2016 116 a comparison of sharia banks and conventional banks in terms of efficiency, asset quality and stability in indonesia for the period 2008-2016 141 3 conventional commercial banks and sharia banks that publish financial statements for the 2008-2016 period have a total asset range of rp3 trillion to rp34 trillion at the end of 2008 11 4 number of research samples for 9 periods (2008-2016) 99 source: own based on these criteria, 11 banks become research samples, consisting of 3 sharia banks and 8 conventional banks. the following is a list of banks that are the sample of this study: table 2 list of banks that were sampled in this study no bank name total assets in 2008 (in a million rupiah) 1 pt bank mega syariah 3.096.201 2 pt bank muamalat indonesia, tbk 12.596.715 3 pt bank syariah mandiri 17.065.938 4 pt bank nusantara parahyangan, tbk 3.694.809 5 pt bank mestika dharma, tbk 4.989.983 6 pt bank mayapada internasional, tbk 5.512.694 7 pt bank victoria internasional, tbk 5.580.480 8 pt bank sinarmas, tbk 6.064.626 9 pt bank tabungan pensiunan nasional, tbk 13.697.461 10 pt bank bukopin, tbk 32.649.246 11 pt bank mega, tbk 34.860.872 source: own elsa satibi & wiwik utami & lucky nugroho 142 4.1. descriptive statistics efficiency efficiency in this research is proxied with overhead cost ratio and bopo; following is the table of descriptive statistic result from efficiency proxy by using spss version 23.: table 3. statistics-descriptive efficiency indicator bank n min max mean std. dev overhead sharia bank 27 3.09 12.21 5.65 2.62 cost conventional bank 72 1.31 7.52 4.01 1.60 cir sharia bank 27 73.00 99.51 87.38 8.36 conventional bank 72 54.02 98.52 83.08 9.67 source: data that has been processed the results of descriptive statistics from the table 3. above can be seen the number of samples used during the observation period 2008-2016 is 11 banking companies which consisting of 3 syariah banks which consist bank mega syariah; bank muamalat, bank syariah mandiri and in another side 8 conventional banks that state in table 2. the average value of the efficiency of sharia bank, which is represented by overhead cost is 5.65%. this figure shows that the average overhead cost of sharia bank is higher than the average overhead cost of the conventional bank that is equal to 4.01%, it shows that the conventional commercial bank is more efficient than the sharia commercial bank. the minimum value of sharia bank is 3.09% at bank muamalat indonesia, while the minimum value of conventional commercial banks is 1.31% of the victoria international bank, the maximum value of sharia bank is 12.21% in bank mega syariah, while the maximum value of conventional commercial bank is 7.52% at bank tabungan dan pensiun nasional, the value deviation of sharia banks by 2.62% while conventional commercial bank deviation of 1.60%. the average value of the efficiency of sharia banks represented by the cir is 87.38%. this figure shows that cir of sharia banks is larger than the conventional cir of 83.08% of total operating income, it means that conventional commercial banks are more efficient than with sharia commercial banks, the minimum value of sharia banking is 73.00% in bank mandiri syariah and the minimum value of conventional commercial banks is 54.02% in bank mestika dharma. the maximum value of sharia bank is 99.51%, i.e., at bank mega syariah with a deviation of 8.36%, while the maximum value of a conventional commercial bank is 98.52%, i.e., bank nusantara parahyangan with the deviation of 9.67%. it can be explained that the average value of overhead cost and cir of sharia commercial banks higher than conventional commercial banks illustrates the low efficiency of sharia commercial banks in comparison with conventional commercial banks, this is due to the relatively young and still growing age of sharia banks can mean that the operational burden of sharia banks is high, unlike conventional commercial banks that have operated earlier (longer) so that in terms of cost structure of conventional banks is not too high when compared to sharia commercial banks. 4.2 descriptive statistics of asset quality asset quality measurements in this study were proxied by npl (non-performing loan), following table 4 results from descriptive statistics of asset quality using spss version 23 .: table 4. descriptive statistics of asset quality indicator bank n min max mean std. dev npl sharia bank 27 0.78 4.76 2.36 1.22 conventional bank 72 0.00 9.65 1.65 1.41 a comparison of sharia banks and conventional banks in terms of efficiency, asset quality and stability in indonesia for the period 2008-2016 143 source: data that has been processed according to table 4, the average value of asset quality of sharia banks represented by npl is 2.36%, higher than the average value of conventional commercial banks of 1.65%, indicating that conventional banks have better asset quality than sharia commercial banks. the minimum value of sharia commercial banks is 0.78% at bank muamalat indonesia, while the minimum value of conventional commercial banks is 0%, namely victoria international bank, while the maximum value of sharia banks is 4.76%, i.e., in muamalat indonesia bank with the standard deviation of sharia banks by 1.22 %. nevertheless, the maximum value of conventional commercial banks is 9.65% in mestika dharma banks with conventional standard bank deviation of 1.41%. the average value of npls of sharia banks is higher than conventional banks, which means that sharia banks have the more significant potential loss due to nonperforming loans and decreased income compared to conventional banks. however, if it refers to the provisions of bank indonesia that the best npl standard is below 5%, the shar ia bank is still in ideal condition because it is still in the provisions of bank indonesia. 4.3 descriptive stability statistics the research variable of bank stability in this study is proxy with roa and z score, following table 5 result from statistical sampling with spss version 23: table 5. descriptive stability statistics indicator bank n min max mean std. dev roa sharia bank 27 0.17 3.81 1.43 0.95 conventional bank 72 0.15 5.42 2.17 1.29 z score sharia bank 27 6.08 23.22 13.45 4.92 conventional bank 72 15.91 81.24 36.98 13.95 source: data that has been processed according to table 5, the average value of roa in sharia banks is 1.43% smaller than the average conventional bank's general roa of 2.17%, indicating that conventional commercial banks are more stable than sharia commercial banks. the minimum value of sharia commercial banks is 0.17%, i.e., at bank muamalat indonesia while the minimum value of conventional commercial banks is 0.15%, i.e., in bank nusantara parahyangan, while for the maximum value of sharia commercial banks is 3.81% at bank mega syariah with a standard deviation of 0.95 % and the maximum value of conventional commercial banks amounted to 5.42%, i.e., at bank mestika dharma with the standard value of deviation of 1.29%. the average value of z-score of sharia banks is 13.45% smaller than the conventional commercial bank z-score of 36.98%, which means that conventional commercial banks represented by z-scores are more stable than sharia banks. the minimum value of sharia banks is 6.08%, i.e., at bank muamalat indonesia while the minimum value of conventional commercial banks is 15.91% at bank victoria international. however, the maximum value of commercial banks is 23.22% in bank mega syariah with a standard deviation of 4.92%. the maximum value of conventional commercial banks is 81.24% in bank bukopin with a standard value of 13.95% deviation. elsa satibi & wiwik utami & lucky nugroho 144 4.4 the efficiency of sharia commercial banks vs conventional commercial banks hypothesis test of efficiency variables is done by using the independent t-test, following test results independent sample t-test variable efficiency: table 6. independent sample t-test efficiency variables indicator mean difference t sig. (2 tailed) overhead cost 1.63 3.03 0.01 cir 4.30 2.04 0.04 source: data that has been processed based on the t-test of overhead cost variable (table 6), t value of 3.03% with average difference 1.63% which is overhead cost bank conventional general is lower than sharia commercial bank, and the value of significance is 0.01 which is less than 0.05. this means that there is a difference in average overhead cost between sharia commercial banks and conventional commercial banks. its also shown from descriptive statistic table 1 whereas the average value of overhead cost sharia banks obtained by 5.65% while the average value of overhead cost conventional commercial banks amounted to 4.01%. therefore, the conventional commercial bank overhead cost more efficient if compared to the overhead cost of sharia commercial banks. another variable of efficiency ratio is cost efficiency ratio (cir). the result of independent hypothesis t-test (table 4) obtained t value for cir indicator of 2.04% with an average difference of 4.30% where conventional bank cir is lower than cir of sharia commercial bank, and the significance is 0.04. based on the significance value less than 0.05 indicates that there is a significant difference between sharia bank cir and conventional bank so it can approve that hypothesis 1 is acceptable. it is also according to the above descriptive statistical results; it is known that the average cir value of sharia bank is 87.38% and conventional commercial bank cir is 83.08%, it can be interpreted that conventional bank cir is more efficient than cir of sharia bank. the inefficient condition of sharia banks could because of information technology (it) is still behind the conventional bank and the gap establishment of sharia banks (1992-the oldest sharia bank) with conventional banks (1896-the oldest conventional bank) so vast that the caused experience and competence of human resources islamic banks still lower than the human resources in conventional banks (rusydiana, 2016; sari et al., 2013; anugroho et al., 2017). there is also a decline in the performance of islamic banks from 2010 to 2016 which is marked by the decrease in the rate of asset growth of islamic banks. the decreasing of asset growth in sharia bank is low from the collection of third-party funds and financing distribution. there are significant factors that can reduce the ability of islamic banks in raising funds, and the distribution of financing is the ability network (outlet) expansion (bnugroho et al., 2017; nugroho & husnadi, 2017; aysan et al., 2013). 4.5 the quality of assets of sharia banks vs conventional banks hypothesis test of asset quality variable is done by using an independent t-test, following test independent sample ttest from asset quality variable: table 7. independent sample t-test for asset quality variable indicator mean difference t sig. (2 tailed) npl 0.71 2.29 0.02 source: data that has been processed a comparison of sharia banks and conventional banks in terms of efficiency, asset quality and stability in indonesia for the period 2008-2016 145 the result of t-test (table 7) of the npl variable was obtained at 2.29% with an average difference of 0.71% and obtained a significance value of 0.02. so, there is a significant difference between sharia banking npl and conventional banking because the amount of significance is less than 0.05. therefore, hypothesis 2 is acceptable because there is a significant difference between sharia banking npl and conventional npl. referring to descriptive statistic, islamic banking npl is 2.36% higher than npl of conventional banking which is only 1.65%. the cause of the high npl of sharia banks during the period was the decrease of assets caused by the low distribution of financing. low disbursement of financing causes financing portfolios with good quality to decline and impact on rising npls (popita, 2013; firmansyah, 2014; sari, 2016). also, the low competence of account officers from sharia banks in understanding the appropriate islamic banking products can cause the risk of problem financing (npl) also increased (anugroho et al., (2017). 4.6 stability of sharia commercial banks vs conventional commercial banks table 8 below is the result of the t-test of roa and z score as stability variable using spss version 23 statistical software: table 8. independent sample t-test for stability variables indicator mean difference t sig. (2 tailed) roa -0.73 -2.69 0.01 z-score -23.53 -12.39 0.00 source: data that has been processed based on the data in table 8 above, it is known that roa and z-score are 0.01 and 0.00. thus, those variables have significant value <0.05. the significance value means there is a significant difference between financial stability of sharia bank and conventional bank. furthermore, based on table 3 of descriptive statistics of stability variable, the average of roa and z-score from sharia commercial bank is 1.43% and 13.45% lower than the conventional commercial bank which is 2.17% and 36.98%. financial stability of sharia banking is related to high npl and the inefficiency of the sharia bank which have an impact on the profit sharing obtained by sharia bank become lower than profit obtained by a conventional bank. also, based on previous research, indonesian people although the majority of muslims, but their knowledge and understanding of islamic banks are still low so that the impact on the number of customers of islamic banks is less than the conventional bank customers (mu’allim, 2003; kara, 2013; rohaya, 2008). the lack of sharia bank outlets also causes this condition compared to conventional banks and the presence of sharia banks as newcomers in serving financial transactions when compared with conventional banks whose presence has exceeded one decade in indonesia (anugroho et al., 2017; nugroho & husnadi, 2017; bnugroho et al., 2017; rohaya, 2008). nevertheless, the presence of shariah banks is a solution of the current conventional banking system that can lead to financial crisis. the existence of shariah banking is to create a balance between the world's goals and the hereafter so that the ultimate goal of a sharia bank is not only to achieve profitability (roa and z score high) but also to create social welfare. therefore, every sharia bank profit is also embodied with an element of zakah which aims to improve elsa satibi & wiwik utami & lucky nugroho 146 the welfare of the community (zaher & kabir 2001; hassan & syafri, 2010). furthermore, the existence of islamic banks has the purpose of falah is to provide prosperity for all people, because islam is a religion that brings grace and welfare for all the entire universe, including animals, plants, jinns and moreover humans. following the word of god in surat al-anbiya verse 107: “and we have not sent you, [o muhammad], except as a mercy to the worlds.” therefore, islamic banks in their operations must be based on morals and ethics so that the maximization of income and profit is not the primary purpose of sharia banks, but falah. in doing its business syariah bank using profit sharing system, therefore there is no risk transfer to borrower customer which usually done by the conventional bank. the condition of sharia banks is possible may not be better than conventional banks when the economic condition is good because islamic banks do not maximize their income by applying the principle of profit sharing. 5. conclusion the condition of sharia commercial banks after the banking crisis is no better than conventional banks. the inefficiency of sharia banks and the low quality of sharia bank assets compared to conventional banks have an impact on the low stability of sharia banks compared to conventional banks. islamic banks have not been able to compete with conventional banks that have been present first to serve financial transactions in indonesian society that majority of muslims. based on this matter to be able to compete with the conventional bank sharia bank must do things as follows:  enhance information technology (it) to provide optimal financial services for the community  increase the speed of service to compete with conventional banks that can offer faster service than sharia banks supported by it and professional human resources.  maintain the asset quality. the sharia banks must be able to mitigate risks to core business in channeling financing to customers at an early stage by improving the account officer's ability to conduct loan loyalty analysis supported by qualified information sources.  optimizing operational costs through the effective organizational structure and optimizing services through it to maintain the reputation of sharia banks. shariah bank is a bank operating on the basis of sharia principles that aims not only to seek profit but also to provide a positive contribution to improve social welfare so that it can be possible although the financial stability of islamic banks is lower than conventional banks, the contribution of islamic banks in improving the welfare of the community can be more compared to conventional banks. references allen, l., & rai, a. 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(2010). competition and specialization in credit markets. in url: http://www. newyorkfed. org/research/conference/2008/fi/9-00am. pdf. international journal of commerce and finance, vol. 5, issue 2, 2019, 187-194 187 antecedents and consequences of green innovation prof. dr. ahu tuğba karabulut istanbul commerce university, turkey abstract the purpose of this study is to shed light to antecedents and consequences of green innovation. antecedents and consequences are important to understand why companies decide to proceed green innovation and what are their benefits to the companies and their stakeholders. antecedents are motivations of companies to conduct green innovation whereas consequences are contributions of them to the world. keywords: green innovation, antecedent, consequence 1. introduction green innovation has been a popular concept in the management literature which reflects sensitivity of companies to environmental management for sustainability. antecedents and consequences need to be reviewed to understand the importance and feasibility of the concept. green innovation is the development of software and hardware solutions related to green products and processes. it involves problem-solving related to pollution-prevention, energy-saving, green product design, waste recycling, and corporate environmental management (chen et al., 2006) (song and yu, 2018, p. 139). green innovation is concerned with the environmental issues such as eco-design, energy saving, waste recycling, and pollution prevention (chang, 2011; chiou et al., 2011; bocken et al., 2014; cai and zhou, 2014) (huang and li, 2017, p. 309). green innovation is the enhancement of products and processes to reach targets of sustainability and reduce environmental burden (rennings, 2000). green product and process innovation are the most widely accepted green innovation types (chen et al., 2006; chang, 2011; amoressalvado´ et al., 2014; lin et al., 2014). green product innovation is efforts to enhance product quality and safety for product differentiation and environmental issues by promoting sustainability, which in turn it increases profits and competitve advantages (chen, 2008). testa et al. (2011) reveal that companies want to increase their investments in green innovation to enhance energy efficiency and decrease environmental impact due to regulatory pressure. yalabik and fairchild (2011) show that companies make more green product investments to have competitive advantages. companies will be forced to make more green product innovation investment and develop more green products to meet regulatory requirements and have competitive advantages due to social expectations for environmental legitimacy for climate change and environmental regulatory pressures. green process innovation is modifications for manufacturing processes and systems to save energy, prevent pollution, and recycle waste (kammerer, 2009). the implementation of green process innovation lets companies recycle wastes, reduce usage of resources, raw materials and costs, and increase resource productivity (porter and van der linde, 1995; chen, 2008). environmental legitimacy pressure encourages companies use their resources completely, minimize usage of energy, recycle wastes, and improve production processes continously (li et al., 2018, p. 1092). green process innovation is related to saving energy, preventing pollution, recycling waste, and reducing manufacturing toxicity (zhu and sarkis, 2004; chiou et al., 2011). green process innovation shows organizational ability to improve current processes and develop new ones to prevent pollution, recycle waste, save energy, and leave less toxicity in innovation processes (chen et al., 2006; chen, 2008) (huang and li, 2017, pp. 311-316). companies practice green innovation to satisfy goals related to environmental protection (chen et al., 2006). green organizational identity helps this process by combining different skills and expertise for facilitating innovation (benet-martínez et al., 2002; chang and chen, 2013). companies can stimulate innovation by using their knowledge in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e prof. dr. ahu tuğba karabulut 188 to generate ideas appealing and useful to their stakeholders (ancona and caldwell, 1987; chang and chen, 2013). green organizational identity can motivate employees for discovering new customer needs and technologies. this effort leads companies to use of their resources to improve green innovation (dougherty, 1990; chang and chen, 2013) (song and yu, 2018, p. 139). trend toward environmentalism leads companies face customer consciousness for environmental issues, regulatory pressures and practice environmental management (huang and wu, 2010; cai and zhou, 2014). green innovation describes organzational contributions to sustainable development to enhance competitiveness (oecd 2010; zhu et al. 2012; bocken et al. 2014). green innovation is an innovation which decreases environmental impact (oecd, 2010; cai and zhou, 2014). green innovation leads industries conduct sustainable production and facilitates evolution of sustainable production initiatives. companies can control their environmental impacts if they comply with international environmental conventions and apply technological breakthroughs which strengthen green innovation (chen, 2008; chiou et al., 2011). many green innovation researches focus on incremental innovations such as products, processes, organizations, institutions, and marketing methods (oecd, 2010; oecd, 2012). products’ energy consumption and production processes’ redesign lead industry efforts to enhance recycling possibilities. the main concern of green innovation efforts is technological advances of products and processes (chen et al., 2006; chen, 2008; chiou et al., 2011). green innovation is development of green products and processes to modify a current product design to decrease negative effect on the environment during a product life cycle (chen et al., 2006; chen, 2008; chiou et al., 2011). green product innovation focuses on innovation of products for recovery and recycling, environmentally friendly material and packaging, and eco-labeling (chen et al., 2006; chen, 2008) (huang and li, 2017, p. 311). 2. antecedents of green innovation antecedents of green innovation lead companies feel more responsible and make efforts for green practices. also, they reflect expectations of their stakeholders. when companies want to survive longer, they have to adopt themselves for requirements of their stakeholders and perform green innovation practices. adopting green practices is a major concern for companies nowadays (shu et al., 2016). societal pressures, resource limitations, regulatory policies, and customer preferences lead countries to a more balanced approach to environmental sustainability and economic growth (lópez et al., 2008; dhakal, 2009) (tang et al, 2018, p. 39). environmental management requires adoption of green products, processes and practices which are less detrimental to the environment than previous ones (zhu and sarkis, 2004; zhu et al., 2012) (huang and li, 2017, p. 309). managers are concerned about environmental performance because of several reasons such as public perception, competitive advantages, and regulatory and contractual compliance (zhu and sarkis, 2004; chiou et al., 2011) (huang and li, 2017, p. 316). companies can invest more in green innovation to gain and maintain environmental legitimacy (rennings, 2000) (li et al., 2018, p. 1090). innovation is an essential mechanism to improve organizational ability to maintain competitive advantages (eisenhardt and martin, 2000). green innovation has an essential role to create competitive advantages in environmentalism era (oecd, 2010; bocken et al., 2014; przychodzen and przychodzen, 2015). green innovation can offer business and customer values which contribute to sustainable development and reduce environmental effects and costs (hillestad et al., 2010; zhu et al., 2012; bocken et al., 2014; cai and zhou, 2014). companies can demonstrate green concepts in designing and packaging to enhance advantages of product differentiation (chen et al., 2006; chen, 2008). managers can be concerned about environmental performance due to several reasons such as competitive advantage, regulatory and contractual compliance and public perception (zhu and sarkis, 2004). green product and process innovation increase competitive advantage and decrease the negative effect on the environment (chen et al., 2006; chiou et al., 2011) (huang and li, 2017, p. 314). companies try to protect the environment by decreasing their wastage for their corporate social responsibility. thus, they face a lot of pressure to protect the environment (delmas and toffel, 2003) (shafique, asghar and rahman, 2017, p. 94). companies trying to cope with environmental regulations are should consider the green innovation strategy which require to initiate creative thinking, accept new ideas, and use resources efficiently to enhance green creativity. tough antecedents and consequences of green innovation 189 competition and environmental concerns can push companies to develop flexible product and process strategies (chang and chen, 2013). companies should focus on green products to meet customer demands for environmental responsibility (lin et al., 2013). green innovation strategy is critical for companies to survive and achieve competitive advantages. green innovation strategy can improve green awareness level of a company and stimulate its ability to create beneficial ideas for green product and processes (song and yu, 2018, p. 137). companies have develop environmentally friendly programs such as green technologies and products to enhance their capacities for green innovation (zhu et al., 2008; chiou et al., 2011; yung et al., 2011). several studies have examined factors which affect green innovation (friedman and miles, 2002; chang, 2011; lin et al., 2013; tseng et al., 2013). many studies have examined external contextual factors affecting green innovation capabilities of companies (chiou et al., 2011; lin et al., 2013; ford et al., 2014). chiou et al. (2011) showed that greening of suppliers could enhance green innovation. lin et al. (2013) revealed that demand affected green product innovation in the motorcycle sector. ford et al. (2014) pointed out that environmental regulations could affect green innovation level positively. some researchers have examined internal factors expanding organizational capability for green innovation. chang (2011) searched the relationship between corporate environmental ethics and competitive advantages. they (2011) showed that corporate environmental ethics positively motivated green product and processes innovation to enhance competitive advantages (chang, 2011; marin et al., 2017). external pressures to be more environmentally responsible and green product demand motivate companies to strive for green innovation (chang, 2011; lin et al., 2013). there are few researches which revealed internal organizational factors affecting green innovation, and identified green innovation strategy as a substantial factor to enable green product and process innovation (eiadatetal, 2008). green innovation strategy can enhance business models and change management attitudes to create a green organizational identity for triggering green innovation (chen, 2011). green creativity can be defined as ‘the development of new ideas about green products, green services, green processes, or green practices that are judged to be original, novel and useful’ (chen, 2011). when a company with a strong sense of green organizational identity faces with external pressures to address environmental issues, creative responses to this pressure can result useful and novel ideas to trigger organizational capability for green creativity (chen, 2011; chen and chang, 2013). then, these useful and novel green ideas can support green innovation (song and yu, 2018, p. 136). according to hart and sharma (2004), social collaboration between the company and its stakeholders can lead innovative ideas which cause organizational difference. chang and lin (2014) believe that social collaboration is a main driver of green innovation by creating environmentally friendly products. lee and kim (2012) highlight that the success of green innovation depend on collaboration between the company and its suppliers (handayani, wahyudi, and suharnomo, 2017, p. 153). globalization created awareness among ngo’s, customers, and government organizations to protect the environment. thus, they make pressure on companies to reduce their wastages and protect the society. also, international standard organization set standards for companies to protect the environment (shafique, asghar and rahman, 2017, p. 93). paraschiv et al. (2012) mention that companies can innovate sustainable products and update their product range continously to develop strong relationships with their stakeholders (handayani, wahyudi, and suharnomo, 2017, p. 154). according to de medeiros, vidor and riberio (2018, p. 334), critical factors of green innovation is as follows: investing in basic r&d infrastructure, cleaner technology research and qualified employees, creativity, fulfilling customer expectations, gathering knowledge about factors which lead sustainable purchase, integrating r&d, production and marketing, integrating with stakeholders, eliminating cultural barriers, complying with regulations and laws, gathering knowledge of competing products, predispositioning culturally towards collaboration, experimentation, proactivity of leader, and developing critical reflective analysis capability. green innovation practices are affected from corporate social responsibility, business ethics, environmental participation, public care, social collaboration, integration of resource capabilities, social interaction, minimizing hazardous emission, efficiency of natural resource utilization, production by environmental standard and product recycle (handayani, wahyudi, and suharnomo, 2017, p. 156). prof. dr. ahu tuğba karabulut 190 researches related to critical success factors of green innovation are highlighted in table 1: table 1. critical success factors of green innovation factor variables authors legislation and market knowledge fulfilling customer expectations iyer (1999), rennings (2000), chen (2001), pujari et al. (2003), beise and rennings (2005), zhu et al. (2005), mickwitz et al. (2008), visser et al. (2008), kammerer (2009), carrillo-hermosilla et al. (2010), doran and ryan (2012), horbach et al. (2012) complying with regulations and laws rennings (2000), chen (2001), beise and rennings (2005), zhu et al. (2005), mickwitz et al. (2008), kammerer (2009), horbach et al. (2012) information or financial support from government köhler et al. (2013), kiss et al. (2013) gathering knowledge about cultural variables affecting buyer behavior hanssen (1999), baker and sinkula (2005), beise and rennings (2005), lee et al. (2006), peng and lin (2008), gonza´lez-benito and gonza´lez-benito (2008), brito et al. (2008), naranjo-gil (2009) gathering knowledge about factors which drive sustainable purchase foster jr et al. (2000), bre´card et al. (2009), brouhle and khanna (2012), lin et al. (2013) gathering knowledge about consumption patterns of reference persons bhate and lawer (1997), halme et al. (2006), houe and grabot (2009), welsch and kühling (2009) gathering knowledge of competing products cetindamar (2007), triebswetter and wackerbauer (2008), yalabik and fairchild (2011) antecedents and consequences of green innovation 191 collaborating crossfunctionally predisposition culturally towards collaboration gonzalez-benito (2008), hallstedt et al. (2010), albino et al. (2012) integrating r&d, production and marketing pujari et al. (2003), pujari et al. (2004), pujari (2006) integrating with stakeholders (suppliers, environment specialists, universities etc.) byrne and polonsky (2001), jos and jabbour (2008), carrillohermosilla et al. (2010), aschehoug et al. (2012), de marchi (2012), jabbour et al. (2012) innovation oriented learning eliminating cultural barriers eder (2003), jamali (2006), battisti (2008) developing a set of green competences (creativity, leader proactivity, and experimentation) chen (2007, 2008), arago´n-correa et al. (2008), hallstedt et al. (2010), chen and chang (2012) developing critical reflective analysis capability jos and jabbour (2008), arevalo (2010) investing in r&d investing in cleaner technology research porter and linder (1995), hemel and cramer (2002), horbach (2008) investing in methods for sustainable product development hemel and cramer (2002), montalvo (2003, 2008), horbach (2008), boons and wagner (2009) investing in basic r&d infrastructure montalvo (2003, 2008), testa et al. (2011), horbach et al. (2012) investing in qualified employees montalvo (2003, 2008), zailani et al. (2012) resource: janine fleith de medeiros, gabriel vidor, & jose´ luı´s duarte ribeiro (2018), “driving factors for the success of the green innovation market: a relationship system proposal”, journal of business ethics, 147, p. 329. design, materials, recyclability, reusability, packaging and labeling of current and new products, products using less energy, materials and resources in the development and design stages are some important issues (chen et al., 2006; chen, 2008) whereas the ease of recycling products at the end of their lives, the use of non-toxic materials (chiou et prof. dr. ahu tuğba karabulut 192 al., 2011) and environmentally friendly packaging (wong et al., 2012) are other important issues (tang et al, 2018, p. 43) for green innovation. 3. consequences of green innovation companies want to achieve green innovation for its consequences, mainly benefits for themselves and their stakeholders. if companies achieve successful green innovation practices, they can improve their business practices, processes and performances. they can also make contributions to their stakeholders and the world. natural resources are diminishing in the world and companies can decelerate this process by conducting green innovation practices. also, they can decrease their costs and increase their efficiencies as well. green management focuses on how green practices influence organizational profitability and competitiveness (banerjee, 2002; pane haden et al., 2009). companies can initiate green innovation based on green product and process innovation. companies which have environmental concerns can consider green innovation as a business opportunity (zhu et al., 2012; bocken et al., 2014) (huang and li, 2017, p. 310). scholars started to discuss green innovation in the late 1990s. it presents a shift from current production technologies to innovate products and processes to line up with environmental regulations and environmental, economic, and social considerations to improve long-term production and reach sustainable industrial development (cleff and rennings, 1999; oecd, 2009). many studies explored development and performance of green innovation management (chiou et al., 2011). green innovation leads companies to gain incentives from using natural resources and assets, increasing productivity, reducing pollution, energy consumption and waste (cheng et al., 2014), and improving corporate image, competitive advantages and long-term profitability (porter and van der linde, 1995; oecd, 2009) (tantayanubutr and panjakajornsak, 2017, p. 195). there are three studies related to managerial environmental concern (eiadat et al., 2008; qi et al., 2010; ar, 2012). they consider centrality of environmental innovation to a company strategy and perceive its importance and effectiveness to achieve strategic goals (tang et al, 2018, p. 44). environmental performance can improve through implementing eco design during manufacturing (diabat and govindan, 2011). the main purpose of eco design is to recover investment by reusing products repeatedly. it will decrease remanufacturing costs and wastage. thus, eco design affects environmental and economic performances. customers prefer eco-friendly designs as well (miroshnychenko et al., 2017) (shafique, asghar and rahman, 2017, p. 96). the integration of green concept into product design and packaging can enhance product quality and product differentiation advantages (chen et al., 2006; chen, 2008; hillestad et al., 2010) (huang and li, 2017, p. 310). technological environmentally friendly innovation is socially acceptable interms of environmental sustainability and may enhance company performance. green innovation may enhance product quality. products become more efficient in the energy use and cost, need shorter time for product development (boonkanit and kengpol, 2010) (handayani, wahyudi, and suharnomo, 2017, p. 154). chen (2008) highlights that if companies pioneer in green innovation, they can have first mover advantages and charge higher prices for their green products. also, green innovation enhances corporate image (huang and li, 2017, p. 315). companies can increase economic efficiency and decrease production costs by applying environmental practices such as reusing materials, reducing energy consumption, and redefining production and operation processes (zhu and sarkis, 2004; huang and wu, 2010; dong et al., 2014) (huang and li, 2017, p. 310). continuous and endless innovation is the sole option for companies to invent, adopt and implement new procedures. innovation can reduce institutional pressure directed from competitors and customers to improve company performance (porter van der linde, 1995) (shafique, asghar and rahman, 2017, pp. 92-93). managers should realize the importance of green innovation and engage in green innovation practices. corporate commitment to environmental issues focuses on this and enhances environmental concern of management which has a positive impact on company performance (pipatprapa et al., 2017). the relevance of environmental concern of management enhances positive impact of innovation on performance. by making the environment a relevant concern for management, companies can promote green innovation as a means to improve performance (tang et al, 2018, p. 48). antecedents and consequences of green innovation 193 companies can adopt green innovation based on green product and process innovation to improve their performances (chiou et al., 2011) (shafique, asghar and rahman, 2017, p. 98). companies can adopt proactive green innovation strategies to merge ecological protection goals with economic performance (chen et al., 2006; janicke, 2008; zhu et al., 2012) (huang and li, 2017, p. 315). cheng and shiu (2012) pointed out that green product and process innovation improved corporate environmental performance. green process innovation influences environmental performance more significantly by improving organizational confidence to disclose carbon information. green product innovation creates more competitive advantages in the financial performance (rennings, 1998) and enhances financial performance (gonza´lez-benito and gonza´lez-benito, 2005) (li et al., 2018, p. 1101). green product innovation lets companies respond to environmental needs of governments and markets to enhance resource effectiveness to optimize environmental benefits in a product life cycle (chiou et al., 2011; dong et al., 2014). green process innovation requires to decrease pollutant emissions and clean production costs to comply with environmental regulations (chiou et al., 2011; dong et al., 2014). companies aiming to decrease environmental costs make efforts toward green innovation to increase productivity and minimize production waste (huang and wu, 2010; chiou et al., 2011). companies which practice green innovation can avoid punishments and protests from government regulators and satisfy environmental protection requirements (chen, 2008; zhu et al., 2008; chang, 2011). green product and process innovation are positively related to environmental performance because of that (huang and wu, 2010; chiou et al., 2011; dong et al., 2014) (huang and li, 2017, p. 315). green innovation decreases institutional pressure and improves environmental and economic performances (lee min, 2015). product innovation, process innovation and managerial innovation are three types of green innovation which are interlinked and equally important in companies (li et al., 2017). companies face environmental pressure from competitors, suppliers, customers, and regulatory bodies (fikru, 2016) to formulate strategies to apply higher standards to improve their performances and gain competitive advantages (weerakkody et al., 2016) (shafique, asghar and rahman, 2017, p. 93). chang (2011) shows that there is positive relationship between green innovation and competitive advantage. chiou et al. (2011) add that green innovation can enhance competitive advantages and environmental performance. huang and wu (2010) find that high-tech companies can develop green product and process innovation to convert their products and operations more environmentally efficient. green innovation has a positive effect on financial performance (huang and li, 2017, p. 315). 4. conclusion antecedents and consequences of green innovation are main motivators and contributions of companies. as it is reviewed, green innovation practices should be enhanced for sustainability and profitability of companies and leave a more livable world to new generations. although, it requires substantial investments and efforts, companies should conduct green innovation to satisfy their stakeholders, have more responsible presence and play leadership roles in their sectors. when the number of sensitive stakeholders increases, companies will feel more responsible to protect the world via green innovation practices. green innovation efforts will yield to higher performance and chance for long term survival of companies as well. prof. dr. ahu tuğba karabulut 194 references handayani, r. wahyudi, s., & suharnomo, s. (2017), “the effects of corporate social responsıbility on manufacturing industry performance: the mediating role of social collaboration and green innovation”, business: theory and practice, 18, 152-159. huang, j-w, & li, y-h (2017), “green innovation and performance: the view of organizational capability and social reciprocity”, journal of business ethics, 145, 309-324. li, d., huang, m., ren, s., chen, x., & ning, l. (2018), “environmental legitimacy, green innovation, and corporate carbon disclosure: evidence from cdp china 100”, journal of business ethics, 150, 1089-1104. de medeiros, j. f., vidor, g., & ribeiro, j. l. d. (2018), “driving factors for the success of the green innovation market: a relationship system proposal”, journal of business ethics, 147, 327-341. shafique, m. n., asghar, m. s., & rahman, h. (2017), “the impact of green supply chain management practices on performance: moderating role of institutional pressure with mediating effect of green innovation”, business, management and education, 15(1), 91-108. song, w., & yu, h. (2018), “green innovation strategy and green innovation: the roles of green creativity and green organizational identity”, corporate social responsibility and environmental management, 25, 135-150. tang, m., walsh, g., lerner, d., fitza, m. a., & li, q. (2018), “green innovation, managerial concern and firm performance: an empirical study”, business strategy and the environment, 27, 39-51. tantayanubutr, m., & panjakajornsak, v. (2017), “impact of green innovation on the sustainable performance of thai food industry”, business and economic horizons, 13(2), 192-209. international journal of commerce and finance, vol. 5, issue 2, 2019, 63-75 63 a systematic review of cryptocurrency scholarship isaiah adeleke nile university of nigeria, nigeria umaru mustapha zubairu federal university of technology minna, nigeria bilkisu abubakar baze university, nigeria faiza maitala nile university of nigeria, nigeria yakubu mustapha federal university of technology minna, nigeria ekanem ediuku nile university of nigeria, nigeria abstract purpose – the purpose of this paper was to conduct a systemic review of extant cryptocurrency research in order to identify important features of these studies and to provide directions for future cryptocurrency research. methodology the systematic quantitative assessment technique (sqat) was used to identify and review relevant peer-reviewed journal articles that investigated various facets of cryptocurrency. findings – 54 journal articles were identified from 12 high-quality databases. the findings of the review revealed that most of the studies took place in europe, north america and asia, while africa has been largely ignored. the main focus of cryptocurrency articles has been on a call for regulation of cryptocurrency without much work done on how to mitigate its vulnerability to the financing of terrorism and as a tool for money laundering. finally, most cryptocurrency articles adopted a single research method – survey. there is a need for future studies to combine a variety of methods so as to gain additional insight into the issues of cryptocurrency’s vulnerability, r isk identification and mitigation, regulation and acceptability. research limitations the use of limited but high quality academic databases means that some articles were not considered for this review. originality/value – this study is one of the few studies to conduct a systematic review on a phenomenon which has the potential to transform the global financial landscape. keywords: cryptocurrency, systematic review, regulation. jel classification: g23, g38 1. introduction one of canada's largest cryptocurrency exchanges, quadrigacx, was shut down in january 2019 amid a torrent of uproars arising from huge financial losses suffered by 76,319 clients due to the sudden death of 30-year-old gerald cotton, the founder/chief executive officer of the exchange in december, 2018. he was the only person who knew the encrypted passwords to gain access to quadrigacx's offline cryptocurrency reserves stored in what are called cold wallets and he was gone with the passwords! $214.6million was lost by investors and clients in this incident! (alexander, 2019; scotia 2019; disparte, 2019). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e isaiah adeleke 64 in the last two decades, cryptocurrency has evolved as a response to the world’s search for an alternative to money that would be devoid of central banks’ controls, serve as a medium of exchange, store of value, unit of account, have reduced transaction costs, be fast, highly secured and capable of allowing for the creation of self-enforcing smart contracts that do not rely on financial institutions, lawyers or accountants for their execution(mahmoud et al., 2019; tredinnick, 2019; masciandaro, 2018).“crypto” means “conceal” or “secret”, and thus cryptocurrency is a virtual coinage system that functions much like traditional money, enabling users to provide virtual payment for goods and services (sele, 2018; masciandaro, 2018; zalan, 2018)). it uses strong secret codes to secure financial transactions, control the creation of additional units, and verify the transfer of assets. validation of transactions is without the need for a trusted third party such as a bank, credit-card company or escrow agent. its production and transactions ride on blockchain technology – a system that enables distributed public ledgers to hold immutable data in a secure and encrypted way and makes alteration impossible (conte de leon, et al, 2017; kirkby, 2018; miseviciute, 2018; tredinnick, 2019; zalan, 2018; pao, et al., 2018). the first cryptocurrency to go live was bitcoin in 2009, followed two years later by namecoin; today, there are hundreds of cryptocurrencies being traded globally, with major examples including etherum, ripple and litecoin (hileman and rauchs, 2017; brauneis, 2018; hu, 2019). the four key cryptocurrency industry sectors are: (i) exchange – purchase and sale of cryptocurrency (ii) wallet storage of cryptocurrency (iii) payments facilitating payments using cryptocurrency and (iv) mining securing the global ledger ('blockchain') generally by computing large amounts of hashes to find a valid block that gets added to the blockchain (hileman and rauchs, 2017; shahzad, 2018, koutmos,2018). as of june 28, 2019, the total market capitalisation of the top 100 cryptocurrencies stood at $336,669,705,557(coinmarketcap, 2019). this constitutes a significant volume of financial transactions and all indications show that it is on upward trajectory (coinmarketcap, 2019). however, loss of investment due to anonymity and decentralization of exchange system and other challenges such as high price volatility, lack of wide acceptance, irreversibility of transactions and possibility of serving as a haven for money laundering and other forms of criminality are the contending issues against cryptocurrency (gkillas and katsiampa, 2018; shahzad, et al., 2018; phillip, et al., 2019). recent scholarship on cryptocurrency has described and tested various significant aspects of the digital currency for example, scholars have recommended that cryptocurrency should be regulated but the “how” was not addressed (peters, 2015; corbet et al., 2018; phillip et al., 2018; wei, 2018; caporale and zekokh, 2019). other scholars have recommended the inclusion of cryptocurrencies in the investment portfolio mix because it is considered as a profitable financial asset (feng et al., 2018; saksonova and kuzmina-merlino, 2018; platanakis and urquhart, 2019). in terms of valuation, recommendation was made that the fair value should not be determined without considering the risk elements in cryptocurrency and hedging is regarded as a preferred measure against price movement risk (conte, 2017; feng et al., 2018; zhang et al., 2019). other scholars are of the opinion that purchasing power parity and social cognition have a role to play in decision making to invest in cryptocurrency (li and wang, 2017; reynolds and irwin, 2017; shahzad, 2018) it is observed that as much as the significance of cryptocurrency as an alternate currency has attracted much attention, so far there is little discussion on how to mitigate the risks posed by cryptocurrencies and the “exact” form of regulation that will make the virtual currency fully integrate into the world financial system as a medium of exchange – should the production and control of cryptocurrencies remain with the non-government entities or should central bank’s digital currencies? the reality of digital currency is not what the world can shy away from; however, there is an urgent need for governments to ensure a safe and reliable cryptocurrency that will not be shrouded in anonymity, and devoid of being a haven for criminality (miseviciute, 2018, zalan, 2018; van wegberg, 2018, kraus 2019). it is in recognition of the importance of cryptocurrency, the riskiness and complexity around it and the need to determine the “perfect fit” type of regulations to make it safe and secure that this study sought to conduct a systematic review of published scholarship dealing with these issues as this paper sets out to conduct a systematic review of cryptocurrency research, two main objectives were set to be achieved. first, identification of important features of cryptocurrency research (i.e. the number of journal articles published, the time and geographic distribution of these articles, the type of articles (conceptual vs. empirical), the research themes explored by these articles, and the research methods adopted).second, it attempted to provide a systematic review of cryptocurrency scholarship 65 directions for future research on cryptocurrency which will be beneficial to existing digital currency researchers as well as providing a starting point for new researchers who are considering delving into the issue of digital currency. the remaining part of this paper is structured as follows: the next section presents the methodology section, which discusses the method and procedures utilized in conducting this systematic review. this is followed by a section that discusses the findings of the review, and highlights directions for future research based on these findings. finally, the conclusion is provided with the limitations and additional suggestions for future research based on these limitations. 2. methodology i in conducting this systematic review of cryptocurrency research, this study adopted the “systematic quantitative assessment technique” (sqat) developed by pickering and byrne (2013). sqat is systematic in the way papers are assessed to determine their inclusion or exclusion in the review process, and the focus of this review was on peerreviewed original journal publications on cryptocurrency in order to maintain a high quality of papers. sqat enabled the reviewers to identify “important geographic, scalar, theoretical and methodological gaps in the literature” (pickering and byrne, 2013, p. 11). sqat recommends five important steps in conducting an effective systematic review. each step and how it was applied in this study is described in table 1. a total of 54 peer-reviewed english cryptocurrency articles met the selection criteria from 12 academic databases outlined in table 1. table 1: description and application of sqat step application in current study 1. define topic cryptocurrency scholarship 2. formulate research questions five research questions: 1. what is the time distribution of cryptocurrency research articles? 2. in which countries were these articles written? 3. what kind of cryptocurrency articles were published? (conceptual vs. empirical) 4. what are the specific themes these articles explored? 5. what research methods were utilized to conduct the research? 3. identify key words (not for your study, but for your search terms) “cryptocurrency” 4. identify and search databases 1. 12 databases utilized: elsevier; springer; wiley; taylor and francis; jstor; emerald; sage; inderscience; cambridge journal; oxford, mit, ssrn; 2. “all in title” search using one search term: “cryptocurrency” 5. read and assess publications 1. abstracts of papers found were read to ensure that they were dealing with cryptocurrency 2. literature reviews book chapters and conference proceedings were isaiah adeleke 66 not included; only peer-reviewed conceptual and empirical articles. 3. discussion and findings 3.1. time distribution of articles on cryptocurrency based on this study’s sample of 54 articles, the earliest publication dealing with cryptocurrency appeared in 2014 (dostov and shust, 2014).during the first 6 years (2009 to 2014) of the 10 years range the study focused on, there were almost no research publications, but interest picked up in 2015 as can be seen in the increase in publications from 2015 as shown figure 1. a peak was reached in 2018 (27 articles) and half of 2019 has witnessed 13 articles; if the search results for 2019 are extrapolated, it can be expected that a total of 26 cryptocurrency articles will be published at the end of 2019. going by the deluge of issues around cryptocurrencies, it is expected that researchers need to do more in the area of publications to address the pressing issues of risk mitigation and what form of regulation will be appropriate for cryptocurrency to make it globally recognised and acceptable. 3.2. geographical distribution of cryptocurrency articles a systematic review of cryptocurrency scholarship 67 figure 2 presents the geographical distribution of the 54 cryptocurrency articles reviewed in this study. 5 out of 7 continents have articles published on cryptocurrencies. europe with 26 out of 70 (spread across 14 countries) led the pack, followed by north america (largely the usa) with 21 articles and asia with 17 articles spread across 10 countries. from a country perspective, 70 countries out of 195 countries that make the world as contained in worldatlas.com (world map, 2019) had articles published on cryptocurrency research. going by 54 articles considered, it can be observed from figure 3 that the countries with the most publications on cryptocurrency were usa (20), uk (10), china (5) and germany (4). the countries in europe, north america and asia continents account for 90% of global market capitalisation of cryptocurrencies which stood at usd336 billion as at 28 june, 2019 (coinmarketcap, 2019). this is not a surprise because in the last 10 years that cryptocurrencies emerged, they have become very prevalent in the usa, europe and asia continents. even the exchanges that have recognized cryptocurrencies so far are only in these continents. isaiah adeleke 68 future research on cryptocurrencies needs to have a special focus on the countries in africa and nations of other continents that currently have no representation. this is because cryptocurrency is a global phenomenon because it has to do with the world financial system which is interconnected among nations. thus, it is important that researchers in these countries conduct studies to determine the adoption or not of cryptocurrencies as a form of digital currency and how its benefit can be optimised and its downsides can be minimized. 3.3. article type the 54 articles reviewed were divided into two categories: conceptual and empirical. conceptual articles were defined as those that provided a theoretical discussion on cryptocurrency, whilst empirical articles were those which collected data qualitatively or quantitatively in order to test a particular hypothesis in the real world (saksonova and kuzmina-merlino, 2018). figure 4 presents the breakdown of the 54 articles based on this categorization. it can be seen from figure 4 that the majority of articles reviewed (65%, 35 out of 54) are conceptual in nature, whereby the authors offered recommendations (brown, 2016; guadamuz and marsden, 2016; hayes, 2017; gkillas and katsiampa, 2018) and theoretical models on how cryptocurrencies are mined as better alternatives to regular currency (moore and stephen, 2016; li and wang, 2017; hacker and thomale, 2018;gregoriou, 2018; milunovich, 2018; corbet et al., 2018).the remaining35% of the articles were empirical in nature (avdeychik and capozzi, 2018; shahzad, 2018, van et al., 2018). this imbalance represents an obvious gap in cryptocurrency research which future researchers should address. as commendable as it is that cryptocurrency researchers are thinking and putting strategies in place, about ways to minimize the risks cryptocurrrency poses and make it acceptable as a virtual currency, empirical research will determine how effective these strategies are in achieving their important objectives. 3.4. cryptocurrency research themes figure 5 reveals that five cryptocurrency themes were explored by the 54 articles reviewed in this study. 18 articles which constitute one third articles (33%) dealt with regulation of cryptocurrencies (c.f. dostov and shust, 2014; a systematic review of cryptocurrency scholarship 69 marian, 2015). typically the authors in this category were of the view that conceptually, cryptocurrency is not a legal tender in any nation yet, but they recognised cryptocurrency/blockchain as a disruptive technology that is capable of altering the financial system, aiding money laundering and terrorism financing because of the anonymous and decentralised nature of its transactions (peters, 2015; brown, 2016). they recognised the efforts of some countries towards regulation of cryptocurrencies (guadamuz and marsden, 2016; luther, 2016). they also recommended that regulation is required across board to legitimise or outlaw cryptocurrencies because it poses to become “2nd life” in another decade (reynolds, 2017; yeoh, 2017). they would then conclude by making recommendation that if legitimised, guidelines, policies, and framework are needed for the activities of the operators and transactions to contain the risks and also to protect the investors (miseviciute, 2018; catania et al., 2019). the second biggest theme after regulation was cryptocurrency acceptability (24%) i.e. 13 out of 54. the articles in this cateogry made an observation that cryptocurrencies are unlikely to generate widespread acceptance in the absence of government support (conte de leon, 2017; avdeychik and capozzi, 2018). governments of many nations agreed that cryptocurrencies as virtual currency have come to stay but are indecisive whether to give it a government legal backing or not and if they are to do, how? (brown, 2018; zalan, 2018) sympathetic citizens’ intention to use cryptocurrencies as a mode of exchange is high, but government has to come out with clear policy statements regarding the legal recognition and usage of cryptocurrencies (geiregat, 2018; kirby, 2018; koutmos, 2018). cryptocurrency portfolio management (21%) i.e. 11 out of 54, were the third most common theme amongst the articles reviewed. the articles in this category emphasized the recognition of cryptocurrency as financial assets with unique mechanisms for determining the price and high price volatility, behaviour of returns on cryptocurrencies (gkillas and katsiampa, 2018; saksonova and kuzmina-merlino, 2018). these studies further advocated for cryptocurrencies to be considered as part of portfolio of financial assets of individuals and government, because in their view, it offers a window of investment diversification to investors (dierksmeir, 2018; caporale and zekokh, 2019). the next group of articles (13%) i.e. 7 out of 54, were on asset classification. they established a dynamic relationship between cryptocurrencies and other financial assets. the puzzle here was “is cryptocurrency a currency or financial product? (koblitz and menezes, 2016; ammous, 2016). these studies revealed that some countries viewed cryptocurrencies as securities, some viewed them as virtual currency and some, as commodity (moore and stephen, 2016; baur, 2018). some studies in this category opined that cryptocurrencies can serve as a medium of isaiah adeleke 70 exchange but are too unstable to be used as unit of account as they do not possess all features of money (brauneis and mestel, 2018; corbet et al., 2018; milne, 2018).it is up to the government of every nation to take a clear position on cryptocurrencies and decide whether to accept it a legal tender or simply a financial product which can serve as an investment tool (corbet et al., 2018; milne, 2018) finally, the last and fifth most common themes were vulnerability and criminality (9%), i.e. 5 out of 54. the submission here was that cryptocurrency’s two distinct features – decentralisation and anonymity made it a safe haven for money laundering and terrorism financing; as such it constitutes a substantial danger in terms of criminal enterprise (brenig, 2015; feng et al., 2018).criminal justice professionals, law enforcement officers, financial regulators should be aware and take more drastic steps in regulating the usage of cryptocurrencies (teichmann, 2018; van wegberg, 2018; foley et al., 2019) based on the cryptocurrency themes identified in this review, it is observed that a vast majority of researchers focused on the potentially negative aspects of cryptocurrencies and recommended that there is a need to regulate their usage in order to minimize the level of criminality it is prone to and not to cause an upset to the global financial system, but there is none that prescribed the exact type of regulation – should it be regulation of the exchanges, the current miners or the trading activities? should central banks be the only agencies authorized to produce cryptocurrency? should it be outlawed outright? it is thus incumbent for future cryptocurrency research to focus on these unanswered questions. another area that calls for further research is the ethical issues (criminality) surrounding cryptocurrency. for both defenders and detractors, cryptocurrencies beckon a revolution of global finance as we know it. the detractors condemn cryptocurrencies as downright evil because they can facilitate nefarious commerce (e.g., weapons, drugs, and sex) and they often escape public scrutiny or regulation while the defenders hail cryptocurrencies as a solution to some of the most pressing societal ailments (e.g., poverty, debt crises, and hyperinflation) of the current economic system, then, where is the balance? (brenig, 2015; dierksmeier 2018).with only 5 out of 54 papers dealing with this issue. future researchers should thus explore this area and find a way to optimise the benefits of cryptocurrency while mitigating the risks. another gap that has been identified is lack of standards for classification of cryptocurrency. large percentage of people believe it is a digital currency while some believe that it is a digital asset like stock or any other commodity.? there needs to be distinct empirical studies that actually address this. only 7 out of 54 papers addressed this issue. it is time to move beyond the theoretical assumptions of “what it seems to be” to “what it is”. 3.5. research methods the objective here was to identify the primary research method used in each of the 54 cryptocurency articles reviewed in this study. figure 6 provides a summary of the findings. a systematic review of cryptocurrency scholarship 71 as shown in figure 6, more than half of the studies reviewed, precisely 63% adopted a survey as their primary research method (c.f. brown, 2016; guadamuz and marsden, 2016; moore and stephen, 2016; hayes, 2017). these surveys were largely used to gather data so as to help in unravelling each component of the cryptocurrency’s major themes – regulation, acceptability, portfolio management, asset classification and criminality and identify key issues in them (li and wang, 2017; baur, 2018; corbet et al., 2018; gkillas and katsiampa, 2018; gregoriou, 2018). this was followed by content analysis (c.f. jaag and bach, 2017; teichmann, 2018). next was the interview of various stakeholders in cryptocurrency (c.f. avdeychik and capozzi, 2018; shahzad, 2018,). in addition, there was a mix of surveys and interviews in some cases (c.f seele, 2018; foley et al., 2019). this accounts for 10.5% of the data gathering method andit was lastly followed by observations which accounted for 5.5% (c.f. van et al., 2018) two opportunities for future cryptocurrency research have been identified in terms of research methods. from figure 6, it can be seen that a lot of prior studies have adopted the use of surveys. while this method is valuable for data gathering in order to understand cryptocurrency perceptions, there is a need for future studies to explore more of content analysis, case studies, questionnaire and observation for deeper insights on this research area. the second opportunity for future research lies in the fact that most of the studies reviewed adopted a single research method. future research can combine two or more research methods so as to attain greater insight as to the different perspectives of the cryptocurrency as it pertains to regulation, acceptability and vulnerability controls. 4. conclusion this paper reviewed 54 peer-reviewed journal articles dealing with cryptocurrency. the articles were examined along five key categories, including the time distribution of the articles, geographical distribution of the article, article type, research themes and research methods. the results of the review were discussed and directions for future research were provided. whilst a reasonable number of cryptocurrency studies have been conducted, there is still significant room for more empirical research in this area, particularly considering the crucial importance that cryptocurrency has set out to play as a digital currency; capable of being a major disruption in the world financial system. this is even more pertinent for countries that are deemed to be sitting on the fence regarding regulation of this global phenomenon. some limitations exist in this study, which serve as additional gaps which future reviews of cryptocurrency scholarship can explore. the main limitation concerns the method used to gather studies for review, which was the use of a title search in twelve databases. whilst the databases contained high quality, peer-reviewed articles, they isaiah adeleke 72 definitely do not contain all peer-reviewed cryptocurrency articles. future systematic reviews can widen the scope of databases to gain further insight in cryptocurrency research. another limitation is the fact that only journal articles were included in the review, while excluding book chapters and conference proceedings. this was done in accordance with the sqat methodology to maintain the high quality of articles reviewed. however, there is potentially very useful insight in book chapters and conference proceedings, which future research would do well to include. a further limitation is the fact that a title word search was utilized rather than a key word search. a title word search provides a more precise search of articles that are dealing with cryptocurrency. however a key word search would have produced a greater number of articles for the review. some of the papers might not have been directly addressing cryptocurrency, but might have provided additional insight. however, despite these limitations, this systematic review was important as it provided a clear picture on the current state of cryptocurrency research and gave clear directions on the areas that future research needs to address in order to make cryptocurrency a near risk free digital currency and widely accepted. references alexander, d. 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(2019), “extreme value analysis of high‐frequency cryptocurrencies” high frequency, 2(1), 61-69. international journal of commerce and finance, vol. 1, issue 1, 2015, 45-51 consumer insight as competitive advantage using big data and analytics adnan veysel ertemel, (phd) istanbul commerce university, turkey abstract: digital revolution serves as a competitive advantage to businesses that are able to analyze consumer behavior in order to gain insights for their strategic advantage. after the advent of internet, the past two decades witnessed generation of vast amount of business data. the amount of data is so huge that traditional database management system approaches falls short of managing and analyzing this data. this paper explores the characteristics of this phenomenon called big data together with analytics as a tool for marketers to gain insights about consumer behavior and hence provide competitive advantage to the businesses. it also discusses some best practices as case studies. keywords: big data, big data analytics, consumer insight, social media, sentiment analysis 1. introduction: data provide behavioral insights about consumers. in today’s highly competitive environment, translating those insights into market advantage is a key differentiator as described by fayyad et al. (1996). in recent years, businesses generate more data than they are able to use. now, the marketers are not only capable of getting rich data on consumer behavior, they can also do this in real time. formerly possible but not feasible idea of capturing and analyzing in depth data about individual customers now also became feasible. this is because the rapid developments in technology enabled widely available data, which is much cheaper to access and store as stated by mcafee et al (2012) analytics generally refers to the tools that help find hidden patterns in data. what is different today is the enormous volume, velocity, and variety of data available about individual consumers. this results in a big data revolution that has the potential to lead to entirely new ways of understanding consumer behavior and hence help formulate new marketing strategies. in this paper, big data analytics is defined as the extraction of hidden insight about consumer behavior from big data applying that insight in business decisions. big data is considered a new form of capital in today's marketplace as described by mayer-schönberger and cukier (2013). this paper first examines the big data and big data analytics phenomenon as a strategic weapon for the marketer to gain insights on consumer behavior. data, big data, and big data analytics concepts are investigated first. afterwards, some of the best practices of the field are discussed. 2. literature review 2.1 . from data to insights data is fundamental to information and information is fundamental to insights. these concepts are sometimes mistaken with each other. the concepts are explained below.  data: data can be defined as the raw numbers captured to measure something according to some agreed to standards. having consistent standards is critical in this definition. it’s also important to note that data is raw. it has no meaning on its own. it could be the ip address of a visitor, or for weather reports, temperature, air pressure, humidity etc. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 46 adnan veysel ertemel http://ijcf.ticaret.edu.tr figure 1: from data to insights source: http://sageassessments.blogspot.com.tr/  information: information refers to the sum of data points used to understand something about what’s being measured. collectively all data points give some very useful information. in the end, information is there to interpret the data and give it a meaning.  insight: insight is gained by analyzing data and information to understand what is going on with the particular situation or phenomena. . insight is acquired when conclusions are drawn from data and information. insight building is the ultimate goal for data analysis and the world of big data. insight serves as a means to make more informed and better business decisions. as an illustration of the concept in weather situation, knowing the average temperature for your location might be helpful, but knowing that the average is steadily increasing over five years gives a better understanding and puts the information into context. and the context is relevant to the business problem at hand. 2.2 . big data the estimate size of the digital universe in 2013 was 4.4 zettabytes according to cisco (2014) (1 zettabyte is equivalent to 250 billion dvds). by 2020, idc group (2014) predicts that the digital universe is expected to reach 44 zettabytes. big data volume, in other words, the market for storing and analyzing big data is expected to double in size every two years. this data includes but is not limited to emails, audios, videos, images, logs, posts, search queries, health records, online transactions, social networking interactions, scientific data, sensor obtained data in smart devices and smartphone generated data, eaton et all (2012). the massive growth of data made it impossible to manage it with conventional database management systems (dbmss). this leads to the definition big data. gartner (2013) defines big data as high-volume, high-velocity and high-variety information assets that demand cost-effective, innovative forms of information processing that enable enhanced insight, decision-making, and process automation. big data can be characterized with three distinct dimensions; high volume, high velocity and high variety. http://sageassessments.blogspot.com.tr/ consumer insight as competitive advantage using big data and analytics 47 http://ijcf.ticaret.edu.tr figure 2: big data characteristics source: http://hadooptrainingsinhyderabad.blogspot.com.tr  volume: more than ninety percent of data created in history was created in the past two years. by 2020, the data generated is going to be 50 times more than the amount of data in 2011. with conventional methods, the creation of so much data used to cause serious problems. but now, with decreasing storage costs such big data this is no longer a problem to the marketer.  velocity: data velocity refers to the speed at which the data is created, stored and analyzed. in the past, big servers required substantial time to process data. in the big data concept, data is created almost in real-time. the new phenomenon, internet of things takes this one step further with machines sending their data at the moment of creation. data is created at an enormous speed. as an example, as of year 2015, every minute, 100 hours of video is uploaded to youtube, and 20 million photos are viewed.  variety: many sources of big data provide a diverse richness that far surpasses traditional data from the past. a major difference between contemporary big data and traditional data, according to integreon insight (2012) is the shift from structured transactional data to unstructured behavioral data. structured data like scanner or sensor data, records, files and databases have been collected by marketers for some time. unstructured data include textual data like from blogs and text messages and non-textual data like from videos, images, and audio recordings. much unstructured data are captured through social media, where individuals share personal and behavioral information with friends and family. semi-structured data incorporate various types of software that can bring order to the unstructured data. the ever-increasing amounts of big data lead to the question of value. the task is to eliminate unimportant and irrelevant data, so that the remaining data are useful. according to lycett (2013), the remaining pertinent data also needs to be valuable for obtaining insight and domain-specific interpretation. the challenge, according to oracle (2012) is to identify what is relevant and then rapidly extracts that data for timely analysis. 48 adnan veysel ertemel http://ijcf.ticaret.edu.tr 2.3. big data analytics big data analytics is classified as descriptive, predictive and prescriptive analytics.  descriptive analytics: descriptive analytics aims at counting data and summarizing it with understandable reports. for example, with descriptive analytics, the impact of an advertising campaign can be analyzed. additionally, the hidden patterns, trends in consumer behavior etc. can be spotted with descriptive analytics tools.  predictive analytics: predictive analytics uses historical data to detect recurring patterns and make trajectory about the future by making use of this historical data. weather forecasts are a typical example to predictive analytics phenomenon. to infer data that we either can’t collect, didn’t collect or haven’t collect yet.  prescriptive analytics: prescriptive analytics uses simulation modeling, optimization, what-if analysis, times series models and the like techniques to identify the best alternatives to minimize or maximize some objective. it’s being used in many areas. for instance, it can be used by to determine the best pricing and advertising strategy for revenue maximization. the statistical methods for predictive analytics can be combined with optimization to make decisions assessing the uncertainty in the data. 3. using big data and analytics as a competitive advantage: for centuries, the most common practice in business management used to be making strategic business decisions based on highest paid person’s opinion (hippo) in the company as stated by mcafee and brynjolfsson (2012). this intuition-based approach was not an option but a necessity due to the lack of an alternative. in the last decade, thanks to the technical advances in consumer analytics and big data phenomenon, marketing has become much more measurable and technical than ever before. marketers are now able to afford storing and analyzing vast amount of big data about their customers coming from a variety of sources to get 360-degree view of customer behavior. a lot of insight could now be obtained out of analyzing such big data. according to athey (2013), there are now companies, which throw away the opinions of their senior executives and started to build genius teams of data scientists making sense of customer data. the valuable insights and conclusions these teams make give the direction as to where should the organization should be heading to. past research undertaken by lavalle et al (2013) shows that many top performing organizations use analytics as a key differentiator the past research has also found that top-performing organizations made decisions based on this approach double the rate of lower-performing organizations. in another study by, mcafee and brynjolfsson (2012), it’s concluded that the more companies characterized themselves as data-driven, the better they performed on objective measures of financial and operational results top third of their industry in the use of data-driven decision making were on average, 5% more productive and 6% more profitable than their competitors. 3.1 new channels, new data, new insights: the social media revolution opens up brand new channels that enable more thorough view of consumer behavior analysis and insights. with foursquare-like services, marketers gain more understanding on consumer geospatial data whereas mere text messages, when aggregated, can give a tone of emotional reactions of consumers to a specific phenomenon. a hypothetical scenario the following scenario can explain, in a broader sense, the potential and capabilities of big data concept: imagine you are a blogger with thousands of followers. you decided to buy a new tablet from the online retailer, amazon.com. when you unbundle the box and try to open your brand new tablet, you discover that it came broken. consumer insight as competitive advantage using big data and analytics 49 http://ijcf.ticaret.edu.tr as a result of this bad experience, you sat on your table and write a very negative blog revealing your experience. imagine a call agent from amazon calling you to apologize and correct their mistakes by sending a brand new tablet to your address and saying: ‘when we looked at your linkedin profile we saw that you changed your job recently, when we looked at your foursquare check-ins, it seems that you’re on holiday. so, where do you want us to deliver your new tablet?’ this interesting scenario illustrates the promise and potential of big data: it doesn’t only imply the data the businesses own about their customers, but it also implies the data that’s out on the internet about those customers. as data is available in more varieties, more valuable insights could be found. 4. big data case studies 4.1. sentiment analysis and brand associations – nike example sentiment analysis is an emerging domain regarding social media analytics according to rajani (2009). it analyzes raw text data within user generated content to look at jargon, sentiment, orientation, polarity, label and the like and collapse the tone of the individual message down to 1 dimension, whether the message is positive or negative. by analyzing the degree of satisfaction of individual stakeholder, corrective action can be taken based on priorities, if necessary. a combination of keyword specific classification approaches as well as semantic classification approaches such as linguistic meaning may be used to achieve this goal. such methods open up the possibility to address customer concerns in general. taking this one step further, some advanced software packages even produces fairly rich brand association maps, as a result of analysis of all publicly available data accumulated since year 2007. as an illustration, below is a brand associations map showing associations the public society attribute to nike brand based on tens of thousands of tweets, public posts etc. figure 3: nike brand associations map source nielsen, 2009 50 adnan veysel ertemel http://ijcf.ticaret.edu.tr with the valuable insights brand associations map provide, the brand can; • understand, in order, how a category relates to a brand (i.e. for nike, shoes, trainers, socks, shirts etc.) • see how consumers see as the brands’ closest competitor and other competitors with relative importance • see related concepts and illuminate popular markets with great potential • identify early warning signs to potential threats and • recognize messaging attributes that can resonate to consumers in advertising efforts 4.2 netflix as an online streaming movie provider platform, with more than 60 million worldwide subscribers and more than 30 million daily movie plays, netflix has got a very large data on consumer viewership habits. it doesn’t only look at apparent rating data, but it looks more deeply on customer behavior data including; when consumers pause, rewind, or fast-forward, what day they watch content. the date they watch. what time they watch content. where they watch (zip code). what device they use? when pause is pressed and content left and if they ever come back again., the ratings given, searches browsing behavior, and even data within movies by taking various screenshots to look at “in the moment” characteristics (bulygo, 2013). after analyzing this wealthy data, netflix was pretty confident to say what content is ideal to hit the mainstream market and they went on to make a tv-series production from scratch. this production named house of cards became a real success, bringing an estimate of 17 million new subscribers. even in promoting the content to different audiences, netflix prepared ten different versions of house of cards trailer. for instance, the starring actor kevin spacey fans watched the trailer focusing on him whereas people who liked female oriented movies saw a different variation of the content. netflix is also very successful with its recommendation engine. based on its deep understanding of each and every customer, it’s able to suggest the content that’s most likely to interest the individual audience. therefore, netflix earns two thirds of its revenue attributing to recommendation engine carr (2013) 4.3 zest finance as a payday lender, zest finance is an internet based financial company. since the foundation in 2009, it received more than 100.000 loan applications. it makes heavy use of data to augment traditional underwriting. using a regression model with thousands of variables and more than 10 models it tries to come up with insights on whom to depend more and whom to avoid as borrowers. by analyzing data, it found out that contrary to the normal way of filling the form where initials are in uppercase and other letters are in lowercase, those who do not plan to give back money fill in the initial application form all in capitals or all in lower case. after this finding, it began to discriminate and tend to reject those applications flagged as riskier. as a result of its data-driven innovative efforts, zest finance has achieved a %40 reduction in loan default rates and enjoyed a %25 increase in market share. zest finance also received interest of venture capitalists since 2011; it has attracted $62 million in venture financing, plus 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"the effect of influence type and performance outcomes on attitude toward the influencer", journal of marketing research, 29(1), 128-142. international journal of commerce and finance, vol. 5, issue 2, 2019, 140-146 140 the recent evolution of ghana’s financial system: the ‘‘momo’’ effect shafiq abass istanbul commerce university, turkey abstract this study analyses how the widely use of telephone and similar electronic gadgets has reshaped transactions and the payment system in ghana. the not very long ago introduced mobile money system widely known in the country as momo, tends to have astounding effects on the banking sector that has been in existence since time immemorial. this research focuses on the impact the mobile money industry has had on the lives of the average citizen and also on communities where banks are inaccessible in relation to banking and financial inclusion in general.data from the bank of ghana, world remit, survey on social media platforms and other sources show that the mobile money sub industry of the fintech industry has made and achieved significant performancesand milestones within the past decade or so. the numbers infer that patrons tend to rely more upon the newly born mobile money system and continue to show reluctance in patronising the orthodox system of banking. we look at the changes in the amount of banking transactions as well as mobile money transactions within specific periods. from statistical data and individual opinions accumulated it is clearly a wake up call for banks.based on data evidence the possible reasons which might have been the causes of the situation at hand are as well discussed and recommend possible s olutions are arrived at. keywords: fintech, mobile money, financial inclusion, orthodox banking, financial institutions jel classification code no: g14, g21, g23, g32 1. introduction since 1957 when ghana gained her independece and after the establishment of the bank of ghana, ghanaians have been accustomed to more or less just one institution or medium for money transaction; the banks. years later, the inventon of the mobile phone device and subsequently the birth of fintechs have lead to the introduction of the mobile money payment (momo) and other payment systems like e-zwich, point of sale (pos) devices and ghana instant pay (gip). the orthodox banks seem to have lost the pole position in the financial market with the introduction of these new technologically innovaative products. fintechs through digital finances since the beginning of the decade have locked horns with existing and well established players in the sector and in parallel have increased the opportunities available in the system. global investments in fintechs have spiralled from just usd 4.05 billion in 2013 to usd 12.21 billion in 2014 (gomber, koch and siering, 2017, p. 2). this escalation is noticeably due to the ease fintechs and mobile money in particular have brought to the average ghanaian. previousely it took hours the least, to make a transaction of as low as ghs 500 but with momo it is possible to make purchases and payments, such as flight tickets, medical and utility bills in the worst, minutes. all of these transactions do not involve the hustle and bustle of going to banks and joining long and frusrating queues but rather in the comfort of one’s workplace, home or even while at recreational locations. for an economy to be fully operational and functional it needs a well-functioning payment system that is capable of ensuring the safety and stability of its financial system. the quickness by which money flows in and out of the system plays a significant role in determining the speed at which a country develops or grows. (chakravorti, 2016, p. 4) lists eight attributes or conditions that payment innovations like the momo system should possess in order to be successful. they are as follows: increase benefits to end-users, penetrate a niche market, change end-user behavior, provide incentives for adoption and usage, offer profit opportunities for payment providers, forge partnerships between new and existing payment providers, provide necessary security and adopt or create industry standards. from the discusions presented the momo clearly falls within the innovative payment category. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the recent evolution of ghana’s financial system: the ‘‘momo’’ effect 141 the clear or direct effects of a quick payment system may be undermined because it is not as conspicuous as other elements within the economy, but it should be understood that economic growth and improved living standards are made evident in the unemployment rate of a country. countries with very low unemployment rate tend to create adequate jobs which are made possible by timely and secure completions of financial transacions due to efficient payment systems available. in summary a very reliable payment system leads to economic prosperity and higher living standards. the inter-industrial linkages within an economy the payment system has make it one of the most important players if not the most important.(bank of ghana, 2017a, p. 1). in ghana money transactions between two or more economic bodies is facilated by various institutional arrangements that make up the payment systems. some of these instituions include but not limited to ghana automated clearing house (gach), mobile money, ezwich, direct credit and direct debit and many other payment service providers. however of the afore mentioned service providers mobile money tends to have outdone its competitors over the last decade (bank of ghana, 2017a, p. 2). 2. background and terminology for a clear and conceptual grasp of the discussions we shall have the following key terms: fintech, momo, financial inclusion and orthodox banking are described and analysed within the contect of this research paper. 2.1. fintech fintech is a portmanteau of financial technology which literally refers to the technological advancements evident in the fast, innovative and transformative changes happening in the financial services sector. (gomber, koch and siering, 2017, p.3) relate fintech generally with the connection between internet related technologies such as cloud computing and mobile internet, and established business activities of the financial services sector. fintechs focus mainly on business modelinnovations and new solutions for existing challenges in the financial sector. financial innovations resulting from fintech include devices like the e-zwich, atm, qr codes as well as our topic for the day, momo. these innovations have been major game changers in the financial services industry and have played a huge role in terms of financial inclusion in ghana. between 2010 and 2018 the number of e-zwich cards issued have increased by more than 550%, with the total volume of transanctions from e-zwich cards increasing from 460 746 in 2010 to 7 759 354 in 2018 (bank of ghana, 2017b, p. 2). this in a way paints a general picture on the impact fintech has made in the financial services industry in the country. 2.2. financial inclusion according to approximations by the world bank group, just about a third of the population within sub-sahara africa of which ghana is part has accessto formal financial services, according to the world bank group (ky, rugemintwari and sauviat, 2019a, p. 2). however the rapid growth of technology-driven financial innovation i.e fintech is gradually changing these underwhelming statistics in the positive direction. more and more people are being included in formal, semi formal and informal banking service. the ease by which individuals from underdeveloped and remote areas access formal services is generally what is termed as financial services. serrao, (2013) describe financial inclusion as the timely delivery of financial services to the disadvantaged and low income group at an affordable cost. it is term used to refer to the delibrate attempt to make the poor, margi nalised people and those vulnerable to low economic power to engage in formal economic process through ownership and usage of formal financial service at regular interval (aina and oluyombo, 2014, p. 2). in ghana particularly, mobile money has caused the number of people who own and participate in formal financial transactions and services to double (bank of ghana, 2017b, p. 4). and this is also evident in the recent reduction in the length of queues at the banks during prime banking hours of the day. its simplicity and ease (no paperworks needed) has come in handy for senior citizens most of which are either semi literate or completely illiterate. shafiq abass 142 2.3. orthodox banking before fintech and momo in particular took over the country’s financial market sector the banks and insurance companies, established under government permits after rigorous paper works and various procedures, were the big sharks in the markets. most of such banks are usually run in high rise intimidating structures which just by the look at them sometimes scares away the less previlleged in the our societies. these are the banks i refer to as the orthodox banks. hence orhodox banking is simply the process of conducting banking transactions and delivering banking and other financial service through engaging in the ‘ancient’ ways of banking. these pld ways include the issuance of large bank account books, banking halls being the only access points, internet banking being a hoax, etc. in general, orthodox banking is the kind of banking operations and service with minimal use of fintech. 2.4. mobile money (momo) mobile money is the general term used to refer to banking or other financial transactions made using the mobile phone. these transactions are generally made via mobile wallets in the sim cards issued by mobile service providers in the country. these bank-like services are not delivered in conjuction with the orthodox banks but rather it is betwee the sim card owner and his or her telecommunication network. mobile money may be described as electronic cash backed by equivalent amount of the bank of ghana notes and coins stored using the subscriber identification module (sim) in a mobile phone as an identifier (bank of ghana, 2017a, p. 1). the introduction of momo into the country has resulted in a massive financial inclusion within almost every demographic categorisation. 2.4.1. momo’s gradual dominance the mobile money service is gradually taking over the mantle from the orthodox ways. a large percentage of ghana’s rural population is unbanked mostly due to the lack of bank branches in the regions as well as the excessive bureaucratic work involved in opening bank accounts. another reason is that the banks generally consider these remote areas to be less profitable because of insufficient businesses and large scale production firms. hence they decide not to establish branches at those locations. so most rural settlers find solace in the simple-touse, reliable, affordable and convenient mobile money service. the presence of momo has uplifted and caused a high influx in the level of financial inclusion among adults and young individuals alike not forgetting the less educated senior citizens who are one of the prime beneficiaries. however, the ‘love’ for momo is also aparent in the country’s urba n regions. most of the urban dwellers in the country have momo accounts besides their already active bank accounts. this increased use of the service is hugely due to the inundation of mobile phone devices in the country, particularly in the rural areas in the last couple of years. improvement in mobile network functionality and little capital needed in building and upgrading a mobile money point-of-sale infastructure have also serve as significant rationale for the service’s increased patronage. as compared to the orthodox banking method mobile money has proven to be faster convenient flexible and affordable (gsma 2013, p. 3). mobile money is a transformational service that uses ict and non-bank retail channels to extend the delivery of financial services to clients who cannot easily be reached profitably with traditional branch-based financial services. examples of mobile money services include electronic wallets used for two or multiple party transactions either between two parties or between a party or parties and the government through salary payment. globally daily average mobile money transactions between parties is estimated at usd35.00 (gsma, 2013, p. 3). there are two main ways the mobile money payment service is used; either to make or receive payme nt between peers (p2p) or between a government and a person (g2p). in ghana mobile money services are mainly required in the payment of utility bills such as television bills(dstv), taxi and uber fares, money transfer to friends and family, payment for the purchase of airtime and internet bundles, etc. all these generally fall under the p2p kind of service. the g2p usage method is not very often implemented since government generally prefers the traditional payment method of sending through registerred bank accounts (bank of ghana, 2017a, p. 2). just like fiat money mobile money also possesses the store of value function of money and as such, quarterly payments of interest are made on mobile money floats. compared to banks it is faster, convenient, flexible, affordable and now just like normally banks it pays interests. what more is in store for users? the recent evolution of ghana’s financial system: the ‘‘momo’’ effect 143 2.4.2. momo operating companies and their role in the economy there are currently four mobile network companies that are engaged in the mobile money busines namely; mtn (mtn mobile money), tigo (ti̇go cash), airtel (airtel money) and vodafone (vodafone cash). the industry has created various jobs to ghanaians as mobile money agents, service providers, merchants, retailers and aggregators. before january 2016 the number of mobile money agents under these four companies was 107415. the chart below shows the contributions from the various nertwork service companies. from 2013 to 2016 as the number of bank customers increased steadily mobile money customers rather went exponential, growing by more than four times. as reporeted by the bank of ghana in 2016, mobile money volume of transactions multiplied by over seven times (737%). for a concise depiction of the figures in chart 2 below s how the number of mobile money customers as compared to orthodox bank customers. (the numbers 1-4 depict years december 2013december 2016). chart 2. momo customers as compared to bank customers it is clear that in less than a decade the mobile money industry has been able to attract much more customers than the traditional banking sector. these are due to the numerous benefits the sector has delivered to both the ghanaian shafiq abass 144 residing in very remote communities and the urban ghanaian, which the orthodox banks have failed somewhat drastically in the past decade. 3. discussions looking at developing trends it can be infered that mobile money is definitely here to stay for the foreseeable future. the industry has cemented its position in the country’s staple payment system in enhancing huge economic growth through the provision of hundreds of thousands of jobs, enhancement of faster, much secure and affordable medium of monetary transaction and in addition paying quarterly interests on mobile money accounts. furthermore the number of banked persons in the country has spiralled and continues to improve. most ghanaians have lost trust in the orthodox banks and its processes. a recent incident incolving a chief executive officer of one of the local banks and its customers has landed a major and possibly industry-sinking blow to the banking sector. the said bank ceo is said to have absconded with the hard earned savings and investments of customers leaving them stranded with nothing. if instant action is not taken by various stakeholders within the banking sector, the industry might not withstand the pressure exerted on it by the momo sector and this could cause its collapse by the next half century. plans for the long run should also be in place. for the banks and other financial services providers to keep up the pace with the rapid insurgence momo seems to be making, there is the need for major collaborations with fintech companies and the principal momo service providers in the country. as well as large investments in the research and development departments within banks, insurance companies and other financial services providers. in short technological knowhow should be incorporated into the systems within banks if any luck of catching up with momo is hoped for. to see how overwhelmingly impactful momo has been on ghana’s financial market the table below demonstrates just that. the recent evolution of ghana’s financial system: the ‘‘momo’’ effect 145 4. suggestions and conclusions the alarming figures show that since 2012, the mobile money industry continues to grow in every aspect of the overall payment system industry from number of mobile money payment system accounts available to the number of agents operating to total annual transaction volumes to total balance on floats. it has outgrown the traditional banks in these areas too within a short period of time. with its beneficial attributes this service has well and truly taken the payment system in ghana to a whole new phase. for the traditional banks to keep operating and not run out of business within the foreseable future important mearsures should be put in place. collaborating with telecom operators in providing the mobile money service could be one of such mearsures. bank accessibility in the rural community and reduced banking time plus cheaper bank transactional fares may help play roles in keeping banks alive. in this era of technological advancements in every aspect of life it should not come as a surprise that the mobile money system is surging far ahead of its competitors since it is a kind of technological application itself. hence banks should definitely make a technological as well as human capital overhaul in order to serve consumers appropriately. shafiq abass 146 references aina, s. & oluyombo, o (2014), the economy of financial inclusion in nigeria: theory, practice, and policy. cibn occasional paper series. vol. 1. no. 1, pp. i̇32… bank of ghana, payment systems department, (2017), impact of mobile money on the payment system in ghana: an econometric analysis, pp. 18 bank of ghana, payment systems department, (2017), payment system statistics, pp. 14 chakravorti, s. , new payment technologies: back to basics (2016). http://dx.doi.org/10.2139/ssrn.2781264 gomber, p. , koch, j-a. & siering, m. digital finance and fintech: current research and future research directions (2017). journal of business and economics, fourthcoming. gsma (2013): mobile banking. www.gsma.com ky, s. , rugemintwari, c. & sauviat, a. (2016). does mobile money affect saving behavior? evidence from a developing country. http://dx.doi.org/10.2139/ssrn.2815090 ky, s. , rugemintwari, c. & sauviat, a.(2019). is fintech good for bank performance? the case of mobile money in the east african community. http://dx.doi.org/10.2139/ssrn.3401930 ky, s. , rugemintwari, c. & sauviat, a. (2018). friends or foe? mobile money interaction with formal and informal finance. http://dx.doi.org/10.2139/ssrn.3324718 international journal of commerce and finance, vol. 3, issue 1, 2017, 41-50 the effect of organizational change on trust and an application taylan şahin, (phd candidate) istanbul commerce university, istanbul ahu tuğba karabulut, (assoc. prof. dr.) istanbul commerce university, istanbul mustafa emre civelek, (phd) istanbul commerce university, istanbul abstract: the purpose of this study is to examine the effect of organizational change on organizational trust. the questionnaire of this study was given to 500 people who worked for a private company in the mining sector in kütahya. 404 valid questionnaires were collected back and analyzed. first of all, explaratory factor analysis was conducted to the data to find out factor distribution. then, confirmatory factor analyses and reliability analysis were conducted to determine the reliability and the scale validity of the questionnaires, respectively. subsequently, the hypotheses of the model were tested with the structural equation modeling. according to the findings, planned change positively and significantly affects organizational trust. keywords: organizational change, organizational trust, mining sector jel codes: 1. introduction nowadays, companies face change in local and global markets. thus, they need to conduct change in their organizations. change can be made in mission, vision, goals, strategies, processess, organizational culture, management and business functions in organizations. change is required for surviving, transforming, gaining competitive advantages, and building core competencies. the only unchangeable thing is change in organizations. organizational trust shows the trust of employees to the management and practices of the company. it has two dimensions namely cognitive trust and affective trust. frequency of change, planning the change and uncertainity of change affect the acceptance and success of change in organizations. if companies conduct change with appropriate frequency, by planning and without uncertainity, the change process can increase organizational trust level of employees. the purpose of this study is to examine the effect of organizational change on organizational trust. to this end, the second section of this article addresses organizational change; the third section addresses organizational trust, the fourth section presents the research findings, and the fifth section reveals the conclusion and the discussion. 2. organizational change employees try to achieve organizational goals to succeed. they need to face organizational change due to swot analysis. companies need to decide the frequency of the change, plan the change and get rid of uncertainities related to the change to succeed. according to carnall (1986), an organizational change is perceived as the process which changes the structure or the mission of an organization (iqbal, 2011). an organizational change may be defined as the transition of an organization from one stage to another in a planned or unplanned manner and conducting transition in organizational culture, technology and structure (saylı & tüfekçi, 2008). organizations conduct change as planned, unconventional or deliberate effort to achieve their goals more quickly and effectively. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 42 taylan şahin & ahu tuğba karabulut & mustafa emre civelek http://ijcf.ticaret.edu.tr organizational change has been discussed from different perspectives in the literature. it may be defined as positive or negative, planned or unplanned, quantitative or qualitative changes which may occur in all subsystems, elemens and their relationship systems in an organization (peker, 1995). according to sabuncuoğlu and tüz (1998), an organizational change is adaptation of organizational structures to their environments. balcı (1995) defines an organizational change as changing structure, processes and behaviors of organizations. dinçer (1992) points out that an organizational change which includes creativity, innovation, and growth is comprehensive (töremen, 2002). jones (1998) defines organizational change as an organizational transition process from the current status to the desired status to increase productivity (çapraz, 2009). according to huber et al. (1993), organizational change is differences in functions, members, leaders, forms or allocation of resources in organizations (weick & quinn, 1999). 2.1. dimensions of organizational change dimensions of change are considered as frequency of change, planned change, and uncertainity of change in this study. frequency of change and uncertainity of change are expected to have negative effects whereas planned change is expected to have a positive effect on organizational trust. frequency of change: frequency of change reveals how often change has occurred in an organization and is an important change characteristic which is salient to employees. according to glick et al., if the change occurs more infrequently, it will be more likely perceived as a discrete event. on the other hand, if change occurs frequently, employees will likely feel that change is highly unpredictable and less likely perceive the change as discrete event. if change occurs very frequently, employees will likely feel fatigued and have more anxiety because of unpredictability of change (rafferty & griffin, 2006). according to boyne and maier (2009), environmental changes may force organizations to conduct frequent changes. employees who deal with a set of changes or multiple changes concurrently can strive to deal with time, complexity and energy. wolfram cox (1997) reported that changes in jobs, team structures, pay and staffing levels caused negative emotions in an organization. woodward and hendry (2004) showed that changes in structure, technology, staffing levels, and targets required problem and emotion focused handling skills. kiefer (2005) revealed that change caused negative emotions which were mediated by perceptions of organizational trust, status, security, and working conditions (smollan, sayers, & matheny, 2010). planned change: several authors have revealed that employees are concerned whether planning is made before change or not (levy, 1986; porras & robertson, 1992; weingart, 1992; orlikowski & hofman, l997; armenakis, harris, & field, 1999; french & bell, 1999; eby, adams, russell, & gaby, 2000; korsgaard, sapienza, & schweiger, 2002). planned change is the perception of employees that preperation and deliberation have taken place before change implementation. when there is an effort to plan change beforehand, change seems more predictible because employees gather information about imminence and possible duration of change. also, when planning is made before implementation of change, the novelty of change decreases. korsgaard et al. (2002) reveal that when planning is done before organizational change, the well being of employees can be improved (rafferty & griffin, 2006). planned change requires sharing information about the process and impacts of change. according to miller and monge (1985) and schweiger and denisi (1991), information provided regarding organizational change reduces anxiety and uncertainty of employees. schweiger and denisi (1991) examined two groups of emploeyes. one group of employees was given planned program of information about the merger of their company with another company whereas another group of employees was given limited information about that merger. emploeyes in the first group had less uncertainity and perceived the organization as more caring, honest, and trustworthy than did employees in the other group (wanberg & banas, 2000). the effect of organizational change on trust and an application 43 http://ijcf.ticaret.edu.tr the uncertainty of change: organizational change causes uncertainity for employess. decreasing uncertainity can increase desired outcome. difonzo et al. (1994) describe uncertainty as a psychological doubt state about what an occurance signifies or portends (difonzo & bordia, 1998). the uncertainty of change was addressed as a situation arising from change itself in this study. schweiger and walsh (1990) found that uncertainity about the future was the organizational change’s characteristic. wanberg and banas (2000) revealed that giving information about change increased acceptance of change (chawla & kelloway, 2004). planning before the change and information dissemination during the change process are accepted to reduce uncertainty. 3. organizational trust organizational trust shows the trust of employees to their organizations. the organization should provide appropriate infrastructure, systems, processes, mechanisms to initiate and increase the trust levels of employees. there are several trust definitions in the literature. some of them are as follows: table 1. trust definitions author year definition rotter 1967 interpersonal trust is the expectation of a person that the another person will respect their oral and written assurance. zand 1972 the decision of a person based on pragmatic expectation as a result of uncertain occurances which cause weakness and lack of control of another party. golembiewski and mc konkie 1975 subjective and pragmatic belief regarding the desired results of occurances based on individual perception and experience. meeker 1983 the expectation of cooperative behavior from another person. butler and cantrell 1984 the expectation of right, sufficient, consistent, reliable and open behaviors from another person. coleman 1984 the relationship between two parties. the trust of one party to another changes according to the state of being included. lewis and weigert 1985 trust is a concept motivated by strong emotions (emotional trust), logical reasons (cognitive trust) or both toward an object. rempel and holmes 1986 predictability, reliability, and acceptability are equally important. butler 1991 the explicit promise of one person not to try to harm another person. bromiley and cummings 1992 the belief of a person that another person will act in accordance with his promise, be honest in negotiations and not behave pragmatically even when the opportunity arises. mayer, davis and schoorman 1995 a person’s desire to be vulnerable to actions of another person. mcallister 1996 the person’s belief that actions and decisions of another person are accurate. rousseau, siktin, burt and camerer 1998 positive expectations of a person regarding intentions or behaviors of another person. zaheer, mcevily and perrone 1998 the expectation that a person will fulfill his obligations, act as he promised and negotiate fairly without being pragmatic. shockley-zalabak, ellis and winograd 2000 another person’s being sufficient, open, considerate, reliable and identified with his goals, values, norms and beliefs. source: i̇.k. tüzün (2006). örgütsel güven, örgütsel kimlik ve örgütsel özdeşleşme i̇lişkisi; uygulamalı bir çalışma. unpublished doctoral dissertation, gazi üniversitesi sosyal bilimler enstitüsü i̇şletme anabilim dalı. ankara. luman (1989) believes that organizational trust is based on trust of employees to the company. nyhan and marlowe (1997) points out that organizational trust differs depending upon organizations and leaders. according to mishra and morrisey (1990), organizational trust is defined as the perception of an employee related to the organizational support, beliefs of an employee that the leader will tell the truth and keep his promises and principal of all organizational relations. according to matthai (1989), the organizational trust shows employees believe that organizational commitments and behaviors are consistent when they face uncertain and risky situations (demircan & ceylan, 2003). 44 taylan şahin & ahu tuğba karabulut & mustafa emre civelek http://ijcf.ticaret.edu.tr bromiley ve cummings (1996) evaluate trust as common belief of a person or a group on another person or a group. trust shows the effort for having a good belief for another person, being honest and not getting the advantage of another person. trust has social, personal and optimistic characteristics in interorganizational and intraorganizational relations (tüzün, 2006). 3.1. dimensions of organizational trust the dimensions of organizational trust are considered as cognitive trust and affective trust in this study. cognitive trust: cognitive trust means trustable behaviors should be consistent with personal desires (tüzün, 2006). according to lewis and wiegert (1985), trust has cognitive and affective dimensions. lewis and wiegert (1985) add that the person chooses whom to trust, in which respect and under what conditions he is going to trust in cognitive trust. the person decides on them based on good reasons which show the evidence of trust-worthiness. when according to simmel (1964), the amount of information required for trust lies between total ignorance and knowledge. luhman (1979) and simmel (1964) acknowledge that when there is total ignorance there is no basis for rationally trust and when there is total knowledge there is no need to trust. on the other hand, good reasons and available knowledge are foundations for trust decisions which are based on faith (mcallister, 1995). affective trust: affective trust means behaving trustable or in an appropriate way to initiate commitment. (tüzün, 2006). according to butler (1991) and cook and wall (1980), competence and responsibility are basic elements of organizational trust. johnson-george and swap (1982) and rempel et al. (1985) believe that reliability and dependability are included as new elements for interpersonal trust. lewis and wiegert (1985) state that affective trust is composed of emotional bonds between people. pennings and woiceshyn (1987) and rempel et al. (1985) acknowledge that people can make emotional investments in trust relations, express concern and care for other people, believe in the intrinsic virtue of these relations, and consider that these sentiments are reciprocated. emotional ties which link people may provide the basis for trust (mcallister, 1995). 4. measures and sampling the questionnaire of this study was given to 500 people who work for a private company in the mining sector in kütahya. 404 valid questionnaires were collected back and analyzed. first of all, demographic questions were asked to the participants to collect information about their ages, genders, marital statuses, educational levels, positions in the company, work experiences in the company and in their careers. the change scale used in this study was developed by rafferty and griffin and consisted of 13 items and three dimensions to measure organizational change perceptions of employees. three dimensions of the scale are as follows: the frequency of change dimension (3 items), the planned change dimension (3 items), the uncertainity of change dimension (4 items) (rafferty & griffin, 2006). this scale was used in karakuş and yardım’s (2014) study. the trust scale which consists of 12 items and two dimensions is the short form of the organizational trust inventory developed by cummings and bromiley to measure organizational trust levels of employees (cummings & bromiley, 1996). two dimensions of the scale are as follows: the cognitive trust dimension (7 items) and the affective trust dimension (5 items). the scale was translated into turkish, tested for validity and reliability by tüzün (2006). both scales are designed as 5-point likert scales and items are scored as follows: 1: strongly disagree, 2: disagree, 3: undecided, 4: agree, 5: strongly agree. most of the employees were between the ages of 30-39, males, had associate or bachelor degrees, total work experiences of 0-5 years in their careers and 0-5 years in the company. 5. analysis method this is a cross-sectional study. the collected data were analyzed and the hypotheses were tested by “structural equation modeling” which is a multi-variable statistical technique. this method has been widely used in social sciences. the effect of organizational change on trust and an application 45 http://ijcf.ticaret.edu.tr tabacnick and fidell (2001) state that measuring direct and indirect relationships between variables within a single model is the advantage of this model (meydan & şen, 2011). first of all, explaratory factor analysis was conducted to the data to find out factor purification. then, confirmatory factor analysis and reliability analysis were conducted to determine the reliability and the scale validity of the questionnaires respectively. finally, the hypotheses of the model were tested with the structural equation modeling. spss and amos statistical softwares were used for analysis. 6. hypotheses and conceptual model the conceptual model of the study is shown in figure 1. table 2 shows the hypotheses of the study. table 2. hypotheses h1 the frequency of change affects organizational trust negatively. h2 the planned change affects organizational trust positively. h3 the uncertainty of change affects organizational trust negatively. figure 1. conceptual model 7. validity and reliabilty of the scale this section presents the results of validity and reliability tests. scale validity was addressed separately as convergent validity and discriminant validity. confirmatory factor analysis (cfa) was conducted to determine convergent validity. ave (average variance extracted) values were calculated for determining discriminant validity. the goodness of fit scales is used to determine the fitness of the cfa model. cmin/df, cfi, agfi, gfi, and rmsea are widely accepted scales in the literature (çemberci, 2012). this goodness of fit scales are explained as follows: cmin is the likelihood ratio chi-square test. this test shows the fitness between suggested model and the actual model (meydan & şen, 2011). cfi is a fitness index which compares the independent model to be tested where dimensions of the model are not related with the saturated model. it can take values between 0 and 1. cfi values which are above 0.90 and close to 1 indicate good fitness (schermelleh-engel, moosbrugger, & müller, 2003). gfi is a goodness of fit scale which shows the degree of variance and covariance explained by the model. the gfi value increases as the sample size increases. the gfi value varies between 0 and 1. a gfi value which is 0.90 or above indicates an acceptable model. it shows that the covariance between observed variables is calculated (maccallum & schee, 1997; bryne, 2001; mels, 2004; blunch, 2008). agfi goodness of fit scale is calculated using the degree of freedom and influenced by sample size. higher sample sizes result higher agfi values. the agfi value varies between 0 and 1. an agfi value which is close to 1 indicates good fitness (maccallum & sehee, 1997; hayashi et al., 2008). rmsea is a goodness of fit scale which compares the average difference of each degree of freedom which may possibly emerge in the population. this scale is influenced negatively by sample size as well. a rmsea value which is 0.05 and below indicates good fitness whereas a rmsea value between 0.05 and 0.08 indi46 taylan şahin & ahu tuğba karabulut & mustafa emre civelek http://ijcf.ticaret.edu.tr cates acceptable fitness (kline, 2005; hayashi et al., 2008; hooper et al., 2008; blunch, 2008; kenny, 2010) (bayram, 2013). table 3. goodness of fit statistics of confirmatory factor analysis goodness of fit indices model statistics cmin/df 3.269 cfi 0.891 agfi 0.843 gfi 0.879 rmsea 0.075 table 3 shows the goodness of fit statistics of the confirmatory factor analysis. these values indicate adequate fitness. table 4. confirmatory factor analysis results note: for all values p<0.01 the values in table 3 show that goodness of fit statistics of the confirmatory factor model are valid. table 4 shows standard factor loads of the confirmatory factor model which are above 0.50. these results indicate convergent validity. the value which shows discriminant validity for each dimension is the ave (average variance extracted) value. as shown in table 5, the extracted ave value is greater than the values in the same column. this result points out the discriminant validity. after testing dimensions for scale validity via the confirmatory factor analysis, a reliability analysis was performed for items of each dimension. the cronbach’s alpha coefficient was found to be above 0.7 for each dimension. a cronbach’s alpha value which is above 0.7 indicates that internal reliability of the scale is acceptable. as a result of the reliability analysis, removing any item was unnecessary. table 5 shows the cronbach’s alpha coefficients and ave values calculated for each dimension and correlation values between research variables. items factors standardized regression weights unstandardized regression weights standard errors t-value (critical ratio) ogb15.2 cognitive trust 0.660 1 ogb14.1 0.669 1.118 0.094 11.890 ogb20.7 0.757 1.190 0.090 13.207 ogb18.5 0.834 1.390 0.098 14.259 ogb19.6 0.783 1.194 0.088 13.578 ogb16.3 0.652 1.045 0.090 11.631 ogb17.4 0.729 1.159 0.091 12.801 ogd22.1 affective trust 0.560 1 ogd24.3 0.689 1.204 0.124 9.713 ogd23.2 0.740 1.369 0.136 10.083 ogd25.4 0.775 1.473 0.143 10.285 db10.1 uncertainty of change 0.537 1 db13.4 0.670 1.129 0.119 9.522 db11.2 0.764 1.340 0.131 10.200 db12.3 0.877 1.485 0.141 10.551 ds2.2 frequency of change 0.639 1 ds3.3 0.765 1.147 0.099 11.570 ds1.1 0.840 1.315 0.115 11.470 pd6.3 planned change 0.728 1 pd5.2 0.838 1.292 0.092 14.060 pd4.1 0.734 1.094 0.083 13.141 the effect of organizational change on trust and an application 47 http://ijcf.ticaret.edu.tr table 5. descriptive statistics, correlation coefficients and reliability results avg. std. dev. 1 2 3 4 5 1. cognitive trust 3.43 0.82 (0.729) 2. affective trust 3.32 0.83 0.440** (0.695) 3. uncertainty of change 2.79 0.88 -0.123* -0.323** (0.723) 4. frequency of change 2.87 1.02 -0.097 -0.207** -0.302** (0.752) 5. planned change 3.24 0.89 0.545** 0.250** -0.095 -0.026 (0.768) cronbach’s alpha reliability coefficient 0.888 0.785 0.797 0.787 0.807 average variance extracted (ave) 0.532 0.484 0.523 0.566 0.590 * p<0.05, ** p<0.01 note: values in parentheses indicate the square root of the ave value. 8. analysis result this section involves testing of hypotheses in the conceptual model of the research. the path analysis results of the structural model are shown in figure 2 whereas hypothesis testing results are shown in table 6. fitness statistics of the structural model can be seen in table 7. figure 2. path analysis results h1 hypothesis assumed that the frequency of change affected the organizational trust negatively. the hypothesis was rejected at 0.05 level of significance with the standard β coefficient of -0.097. h2 hypothesis assumed that the planned change affected the organizational trust positively. the hypothesis was accepted at 0.05 level of significance with the standard β coefficient of 0.655. table 6. hypothesis testing results relationship standard β p accepted/rejected h1: frequency of change → organizational trust -0.097 0.079 not supported h2: planned change → organizational trust 0.655 0.000 supported h3: uncertainty of change → organizational trust -0.081 0.138 not supported h3 hypothesis assumed that the uncertainty of change affected the organizational trust negatively. the hypothesis was rejected at 0.05 level of significance with the standard β coefficient of -0.081 found as a result of the path analysis. table 7 shows goodness of fit statistics of the structural model. 48 taylan şahin & ahu tuğba karabulut & mustafa emre civelek http://ijcf.ticaret.edu.tr table 7. fitness statistics of structural model goodness of fit indices model statistics cmin/df 3.678 cfi 0.924 agfi 0.891 gfi 0.933 rmsea 0.082 figure 3. the final model figure 3 shows that final form of the conceptual model of the research after validity analysis and hypothesis test. accordingly, the second hypothesis was supported, whereas the first and the third hypotheses were not supported. 8. conclusion and discussion the purpose of this study is to examine the effect of organizational change on organizational trust. nowadays, communication has improved, environmental and technological developments have accelerated, and organizations engage in change efforts due to ease of access to information. the frequency of change, planned change and uncertainty of change were considered as dimensions of change in this study. each dimension of change may have different effects on organizational trust levels of employees. if the trust of employees is not lost during the change process, change will succeed. organizational change and its dimensions are important to maintain an optimum level of organizational trust. the effects of frequency of change, planned change and uncertainty of change on organizational trust were examined in this study. as a conclusion, h1 was rejected. the effect of frequency of change on organizational trust has been found insignificant. h2 was accepted in the study. planned change had significant and positive effect on organizational trust. according to this finding, including employees to planning process of the change can increase their organizational trust level. on the other hand, h3 was rejected. the effect of uncertainity of change on organizational trust has been found insignificant. if the research model is implemented to larger samples in future studies, h1 and h3 may be accepted. this study is a unique study conducted to find out the effects of organizational change on organizational trust in the mining sector. thus, it is expected to encourage scholars to conduct further studies in this field in the mining sector and other sectors. references bayram, n. 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(1999). organizational change and development. annual review of psychology, 50, pp. 361-386. international journal of commerce and finance, vol. 5, issue 1, 2019, 25-33 25 firm size and financial-leverage choice evidence from an emerging economy saira sundas university of management and technology , lahore, pakistan abstract this paper intends to study the effect of firm size on financial leverage choice while controlling for determinats like profitability and performance.fixed effect regression model has been employed over an unbalanced panel data of non-financial firms of pakistan from 2005-2014.results report negative relation between firm size and leverage ratios; implying less dependence of firms on debt.profitability shows negative significant association with short term debt and total debt while performance reports insignificant relation.the study reveals that in case of emerging country like pakistan which is politically and economically instable; results tend to affirm a high influence of pecking order theory in firms financing patterns. keywords: financial leverage, firm size, profitability, firm performance jel classification code no: g39 1. introduction financial leverage decisions have remained the topic of interest among financial analysts and scholars for several years. prevalent research has been conducted by researchers elucidating how to form best leverage level (considering risks and benefits associated with it) but till now no one has come up with a definite theory (baltaci and ayaydin, 2014, myers and majluf, 1984). rajan and zingales (1995),opler and titman (1994) and booth et al. (2001) in their studies examined that firm size, risk, growth opportunities, profitability, amount of fixed assets and tax debt shield are important determinants of financial leverage choice. analyzing the past studies, firm size is considered among the most theorized module of financial leverage which plays a vital role in evaluating the liaison enjoyed by firms within and outside firms’operating domain. emergent influence of firms in today’s global economy signifiess the role played by firm size in firms’environment.kumar et al. (1999) argued that an attractive feature of economic escalation is that most of it is acquired through growth in the firms’ existing size. schwartz and van tassel (1950) are among the preliminary researchers who verified positive association between firm size and leverage while numerous other reseachers support negative association between firm size and leverage like cooley and quadrini (2001) who found that smaller\younger firms rely more on debt, have more investments and pay fewer dividends. the impact of firm size on the leverage–performance was analyzed by vithessonthi and tongurai (2015) during the financial crisis of 2007–2008 in thailand. their findings showed that the impact of leverage on performance is negative in case of large firm while it is possitive in case of small firms. another important aspect of financial leverage which this study will investigate is profitability; which is regarded as the measure of economic triumph attained by a firm in association to the capital invested. mostly highly profitable firms do not rely excessively on external funding for its development, as profitability has a negative effect on leverage (marete, 2015).studies by negash (2001), phillips and sipahioglu (2004) & myers (2001) determined negative relationship between leverage and profitability while robb and robinson (2014), ruland and zhou (2005) deemed that there exists a positive association between leverage and profitability.the current study extends the literature by scrutinizing impact firm size have on financial leverage choice in presence of control variables like probitability and performance by empirically examining the relationship between them in an emerging economy. the paper is organized as follows. the next section gives a review of the existing literature on the subject matter. the following section explicates the data set and variables used in the analysis; then the model used in the analysis is estimated. the subsequent section confers the results of the empirical analysis. the last segment recapitulates the findings of the research and concludes the discussion. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e saira sundas 26 2. literature review literature illustrates that firm size influences the use of financial leverage by firms. according to hol and wijst (2008) size of the firm will determine its leverage.this is because large firms enjoy tax deduction and reputational benefit among prospective investors. recent recearches on capital structure continue to assess the legitimacy of earlier studies; these studies report that firm size has both negative and positive relationship with financial leverage depending on the country. most of the studies laid emphasis on analyzing the financing choices of smaller\younger firms and larger\mature firms while another mounting assumption among researchers is that the impact of size on leverage may vary across countries. according to marete (2015) large firms are more stable and can easily expand their assets and enhance their capacity to qualify for debt by minimizing their risks. further, he states that financial leverage is significantly correlated to firm size and profitability. from theoretical aspect, pecking order theory argues negative association between size and leverage while trade off theory oppose this theory.faulkender and petersen (2005),bevan and danbolt (2002) and marsh (1982) are among the authors that confirm negative association between firm size and leverage while other empirical studies support that there exists a positive relationship between firm size and financial leverage for example; mahfoudh (2013), li and hwang (2011),njoroge (2014) and mwangi (2014). one of the important postulation encountered in prior studies was the varrying effect of firm size on leverage across countries. barbosa and moraes (2003) affirmed that financial leverage varies across size and then across countries. according to them, small firms depend more on short term borrowing and has the propensity to finance long term asset with short term funding relative to large firms. barbosa and moraes (2003) cited tamari (1980) as the first person to study influence of firm size on leverage across countries. li (2005) and li et al. (2009) work interestingly demonstrated that large economies benefit firms of different sizes, especially small firms to access long-term debt while rapidly growing economies only increase the access of large and medium firms to long-term debt. according to caprio (1997) developing countries firms tend to rely less on long term debt in comparision to the firms in developed countries due to varied distinctiveness while bhaduri (2002) stated that optimal financing choice was influenced by growth, size, cash flow and industry characteristics by considering developing economies like india. his finding can be viewed as contribution to the working of rajan and zingales (1995) and titman and wessels (1988). on the other hand, profitability and performance are accounted as important aspects for firms financial leverage choice. kinsman and newman (1999) reported that average debt utilized by firms have mounted significantly over the last years which requires an elucidation of debt’s impact on firms performance. according to trade-off theory, a positive relationship could be expected between debt level and firm’s performance (i.e. profitability).this hypothesis is verified by studies conducted by taub (1975);roden and lewellen (1995);champion (1999);ghosh et al. (2000); hadlock and james (2002). several other studies opposed this theory and document a negative correlation between leverage level and firm performance including fama and french (1998);gleason et al. (2000); simerly and li (2000). roden and lewellen (1995) in their study of leverage buyouts found a significant positive association between profitability and total debt; their findings suggested that leverage usage was one of the way to improve the firm performance . abor (2005) research showed that short term debt and total debt are positively associated with firm’s profitability; whereas long term debt is negatively related with firms profitability while considering firms in ghana.while pecking order theory, initially presented by myers (1984) and myers and majluf (1984) states that when financing issues have been faced by firms they prioritize their funding sources, initially internal funds are utilized later debt is used and when debt capacity is attained firms issues equity. profitable the firms will more likely rely on internal financing therefore a negative relation is expected between debt and profitability. fama and french (1998) found that corporations financial performance is negatively impacted by debt financing. this relation is among the most systematic findings in empirical literature (harris and raviv, 1991, rajan and zingales, 1995, booth et al., 2001). friend and lang (1988) and kester (1986) reported a significantly negative association between profitability and debt/asset ratios. rajan and zingales (1995) and wald (1999) also confirms a significant negative correlation between profitability and leverage. according to jensen (1986) there exists positive correlation between probitability and leverage as profitable firms signify quality by leveraging up, whereas titman and wessels (1988) observed that highly profitable firms have subordinate levels of leverage than less profitable firms as earnings are utilized by them firm size and financial-leverage choice evidence from an emerging economy 27 before opting for external funds. few researchers have inspected no relationship between leverage and profitability; including studies made by long and malitz (1985) , hall et al. (2000)and amjed (2007). from above cited empirical studies. it is clear that most of the research concerning capital structure and firm size were conducted in developed countries; few studies examined this relationship in emerging economies. this study primarily seeks at investigating the actual effects of firm size on the financial leverage choice in an emerging economy. this study contributes to the research of ebel ezeoha (2008); an effort has been made to conduct this study by analyzing emerging economies like pakistan. 3. objective the objective of the paper is to study the impact of firm size on leverage by using 3 different measures of leverage.a sample of 396 non financial firms listed on kse from 2005-2014 has been analyzed for this purpose. 4. data and sampling firm level data consists of an unbalanced panel data of all pakistani firms (non-financial sector) listed on the karachi stock exchange from 2005-2014. since, firms data was not available for same years that’s why unbalance panel data has been used on annual basis. data has been collected from state bank of pakistan publications i.e. “financial statement analysis of companies (non-financial) listed at karachi stock exchange”. firms who started their business during the study period are considered while the firms having data less than three years are eliminated from the sample. merger and acquisition of firms are considered. final sample of the study creates an unbalanced panel data covering 10-year period from 2005-2014 with observations of 396 firms approximately. 5. variables and measures the " key variables used in the estimation are firm size and financial leverage ratios, with profitability and firm performance as a control variable. financial leverage serves as dependent variable while firm size is used as independent variable. three measures of financial leverage are used which are listed below 1. financial leverage= short term debt/ total assets=std/ta 2. financial leverage= long term debt/ total assets=ltd/ta 3. financial leverage=total debt/total assets=td/ta financial leverage ratios are calculated based on the study of ebel ezeoha (2008) and ahmed sheikh and wang (2013). profitability is measured as net profit after tax divided by total assets (sajid et al., 2015).performance is measured as return on equity (roe) (yang et al., 2016) while firm size is taken as log of assets (yang et al., 2016, pandey, 2004) regression equations used for estimation are mentioned below; = (i) = (ii) (iii) hypothesis analyzed from previous researches that will be tested in the study are h_0: there is no relation between financial leverage choice and firm size h_1: there is relation between financial leverage choice and firm size saira sundas 28 6. empirical results table 1 summarizes the mean and standard deviations of different measures of financial leverage(short term debt, long term debt and total debt) and other exogenous variables which are estimated by using stata 12. the average short term debt stands at 21% while long term debt ratio is 15%. these averages represents greater dependence of pakistani firms on short term debt which confirms the findings of demirgüç-kunt and maksimovic (1999) and ahmed sheikh and wang (2013)that firms in emerging countries have substantially lower amounts of long-term debt. this illustrates that pakistani firms generally finance their operations with short term debt and depend less on long term debt. the average ratio of total liabilities to total assets among pakistani firms stands at 37% which indicates the proportion of assets financed with total liabilities. table 1. summaries of basic descriptive statistics variable obs mean std. dev. min max short term debt 1513 .2156455 .1989471 0 2.4191 long term debt 1513 .1586572 .1939236 0 1.730722 total debt 1513 .3743027 .2715472 0 2.4191 firm size 1513 14.85426 1.587161 8.71029 19.49226 profitability 1513 .0124136 .24701 -6.831975 3.126064 performance (roe) 1513 9.116933 116.5026 -1277.82 2893.03 in order to confirm collinearity error among variables, the data was tested for multicolinearity before estimating the coefficients. the results are presented in table 2 shows pair-wise correlation among variables and they do not appear to indicate any concern over the multicollinearity problem in estimating the regression. as predicted,the results indicate that both long term and short term debt measures are positively correlated with total debt measured at 68% and 70%, respectively.hausman’s test is used to decide among the two basic approaches for panel estimation i.e. model-the fixed effect model and random effect models that best fit our estimation model. results of hausman’s test support fixed effect model as the p-value is less than 0.05 .thus, fixed effect panel regression is opted as a basis for assessing the impact of firm size on financial leverage choice. table 2. correlation results of estimation variables variables short term debt long term debt total debt firm size profitability performance short term debt 1.0000 long term debt -0.0447 1.0000 total debt 0.7007 0.6814 1.0000 firm size -0.0193 -0.1189 -0.0990 1.0000 profitability -0.3021 -0.1249 -0.3105 0.1113 1.0000 performance -0.0076 -0.0617 -0.0496 0.0243 0.0486 1.0000 firm size and financial-leverage choice evidence from an emerging economy 29 results reported in table 3 indicate that firm size is negatively related with short term, long term and total debt ratio. the results are consistent with the propositions of pecking order hypothesis i.e. firm size is negatively and significantly associated to financial leverage. these findings are in consonance with the empirical findings of cooley and quadrini (2001), titman and wessels (1988), gupta (1969) and faulkender and petersen (2005). according to these researchers, larger firms have easy access to equity market and may have more accumulated internal finances as compared to smaller firms. this indicates that larger firms have less likelihood of using debt financing (ebel ezeoha, 2008).profitability, on the other hand, has negative and significant relation with short term and total debt ratio. the results are similar to the findings of myers and majluf (1984), kester (1986), negash (2001), fama and french (2002) who reported negative relation between leverage and profitability and contradicts the findings of ferri and jones (1979) and rajan and zingales (1995).firm performance report significant negative relation with short term debt while insignificant relation with long term and total debt ratio. fama and french (1998);gleason et al. (2000); simerly and li (2000), tale (2014), zeitun and gang tian (2007) and several other studies also document a negative correlation between leverage and firm performance. table 3. fixed effect regression results variables short term debt long term debt total debt firm size -.0601*** (.0101) -.0865*** (.0102) -.1466*** (.0133) profitability -.1711*** (.0114) -.0141 (.0115) -.1852*** (.0151) performance -.00007** (.00003) 6.31e-06 (.0000) -.0001 (.0000) 0.0180 0.0147 0.0241 no. of obs 1513 1513 1513 no. of groups 345 345 345 table 3. reports regression results ***significant at 1%, **significant at 5%, *significant at 10% in short, descriptive statistics shows the average short term and long term debt utilized by pakistani firms. this difference indicates that pakistani firms usually prefer short term debt rather than long term debt. these findings are congruent with the findings of ahmed sheikh and wang (2011) and ahmed sheikh and wang (2013) suggesting that pakistani firms prefer short term debt due to limited and underdeveloped bond market in the county or because of the high cost long term bank debt. regression results show that all measures of leverage are negatively associated with firm size which confirms the prior findings of mat nor and ariffin (2006),drobetz and fix (2003),fama and french (2002) ,cosh and hughes (1994) and baskin (1989) and reaffirmed the validity of the pecking order theory. as far as control variables are concerned profitability reports negative relation with all leverage measures while firm performance shows insignificant relation with long term and total debt ratio.since,it is observed that in pakistan non securities market are more dominant which include finance institutes and banks; as these institutions prefer to extend short term loans on favorable terms as compared to risky long term loans because of political and economic conditions in the country. because of these reasons , it can be concluded that firms appear to prefer short-term debt even for financing their long term investment. saira sundas 30 7. conclusion leverage measures and firm size have been the subject to extensive prior discussion in the literature of finance. this study contributes to the literature by investigating the impact of firm size on firm financing behavior considering emerging countries like pakistan.using unbalanced panel data from pakistani non financial firms, the study finds that basic trait of firms are more reliable with fixed effect model rather than a random effect model. pecking order patterns are found in financial leverage choice of pakistani firms, i.e. firms tend to depend more on other sources of financing rather than debt financing. the study confirms that due to political and economic instability, inefficient and complex financial system and financial constraints; pakistani firms rely on short term financing irrespective of their firm size as only 15% on average long term debt is utilized by firms.even larger firms may remain constrained due to predominant usage of short term debt in making basic capital investments for development. firms need to take benefit of their sizes to build vigorous collateral values that help to access long term equity and debt finances.results indicate that all measures of leverage are negatively related to firm size, whereas profitability reports negative and significant relation with short term debt and total debt. on the other hand, performance is negatively related to short term debt and total debt while insignificant relation is found in the case of long term debt. findings of this study have important implications for researchers and investors. it contributes to the literature by estimating results considering an emerging economy. the results entailed in the study will enable investors and researchers to evaluate the impact of firm size on leverage in pakistan. based on the conclusion drawn from the study; in the future, research can be conducted with a larger sample as in this study sample has been restricted to 10 years, i.e. 2005-2014; for future analysis more recent data and other varaibles like sales, assets tangibility etc can be used along with different measures of leverage e.g. assest-liability ratio etc. research can also be conducted by incorporating the effect of different externalities like financial crises of 2007-2008 in order to get more factual results. references abor, j. 2005, the effect of capital structure on profitability: an empirical analysis of listed firms in ghana, the journal of risk finance, 6, 438-445. ahmed sheikh, n. & wang, z. 2011, determinants of capital structure: an empirical study of firms in manufacturing industry of pakistan, managerial finance, 37, 117-133. ahmed sheikh, n. & wang, z. 2013, the impact of capital structure on performance: an empirical study of nonfinancial listed firms in pakistan, international journal of commerce and management, 23, 354-368. amjed, s. 2007, the impact of 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tian, g. 2007, does ownership affect a firm's performance and default risk in jordan? corporate governance: the international journal of business in society, 7, 66-82. international journal of commerce and finance, vol. 5, issue 2, 2019, 1-7 1 implementation of good university governance and intellectual capital in university context (case study at mercu buana university) nurul hidayah, universitas mercu buana, jakarta indonesia ahmad badawi, universitas mercu buana, jakarta indonesia lucky nugroho, universitas mercu buana, jakarta indonesia abstract this study aims to determine the implementation good university governance (gug) and intellectual capital (ic) at the university with the unit of analysis at mercu buana university. the data used are primary data using questionnaires. the population in this study is all structural officials in the university environment. using stratified random sampling in which only the structural officials who became the study sample, from all questionnaires distributed, only 60 were able to be processed. this research uses a descriptive qualitative approach. the data analysis method used is partial least square. results outer test research models meet the criteria of validity and reliability, while from the inner test models indicate that the implementation of good university governance at the university of mercu buana related to intellectual capital. gug as the main factor ic appeal. ic implemented, will improve the ability of an institution, but there are some areas that need improvement. keywords: good university, intellectual capital, university 1. introduction the meaning of good corporate governance demands that companies create enterprise value by utilizing all available resources, aiming to run into the prosperity of stakeholders. in order to meet the prosperity of shareholders and other stakeholders that good management is in need of an enterprise. good corporate governance can also be applied to public sector organizations such as universities. according to trakman & south (2008) that good university governance (gug) can be seen as an application of the basic principles of the concept of "good governance" in the system and the process of governance in higher education institutions. higher education institutions evolved in a transformation of creation and capitalization of knowledge itself and eventually higher education institutions become more comparable, flexible, transparent and competitive in terms of education. universities viewed from the concept of education are an industrial economy, so the concept of good governance and the right to apply to college-university good (good university governance) reflects the performance and success of the university to produce graduates qualified students and competencies to compete with other universities both in the country or other countries (modood, 2016). to achieve good graduates must be supported by good infrastructure, for it takes hard work and discipline in giving guidance, educational and cultural values taught in the university environment. as the embodiment of good governance, then a university course lecturers are required to have qualified and superior competence and high productivity in implement of three principles-tri dharma higher education are included the learning, community services, and research. alred & garvey (2007), defines the university is part of the system of science, education, and innovation of a nation and producers of knowledge. the most important output produced from universities is knowledge, incorporated into new research results, publications and student manuscripts educated. so that the most valuable resource of the university is the research conducted by faculty and students. the main purpose of college is to produce and in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e nurul hidayah & ahmad badawi & lucky nugroho 2 disseminate knowledge, and no less importantly, the research and development of human resources (cañibano & sánchez, 2004). the college is a nonprofit organization that does not have a structure like private companies, but it has a long life cycle. associated with the main function is the production and dissemination of knowledge, universities need to improve competitiveness and service, as well as universities must report to stakeholders what had happened at the college from the standpoint of the development of knowledge and contribute to the transparency and increase trust (bratianu, 2009). strategic issues that continue to grow in the various circles of the country of which is the demand for good governance and accountability throughout the organization. demands the implementation of good governance not only in non-governmental sectors, especially in public companies and the like, the phenomenon is still weak competitiveness of universities in indonesia in the international arena indicate that the application of good university governance is still not good, it was delivered by the president joko widodo, who often poked the performance of the ministry of research, technology and higher education (kemristekdikti) regarding the competitiveness of universities in indonesia he considered unsatisfactory. finally, last october, jokowi wonders why only three universities who managed to enter the world's top 500 universities in the 2018 version of quacquarelli symonds (qs). the president questioned the university management is less able to respond to global demands (website almi, november 16, 2018). in the middle of the university's internationalization policy that is being promoted, the ministry of research recently released the findings of a number of ethical violations publications by researchers, managers, and administrators scientific periodicals public university. ethics violations discovered publication includes multiple publications, citations of his own works or self-citation that is not natural, and the policy of publishing scientific papers without a disciplined review process. results of research conducted by ulum & novianty (2012) at three universities in indonesia based webometrics ranking of the world organization, show that disclosure of the ic at the three state universities in indonesia is still low, and none of the universities in indonesia, which revealed the full item. ulum & novianty (2012), the use of the internet for the university are very appreciated by organizations that aim to improve the quality for universities in the world to evaluate and rank acknowledged to the web, such as webometrics. bezhani (2010), stated that 30 universities in the uk in the practice of intellectual capital disclosure in the annual report of the college are still low. the university is obliged to be able to dig funds by collaborating with business partners in developing the business unit. safieddine et al., (2009) examined the relationship gcg and ic in institutions and the result is that the application of gcg in the faculty becomes a major factor in the university ic disclosure. through the vision and mission, a university should be able to develop the governance of universities by implementing superior management, where the mission of the college is looking for, find, and disseminate scientific truth. 2. literature review and hypotheses 2.1 good university governance university governance is defined as the shape and the constitutional process when universities set their own affairs (shattock, 2013). governance is the way in which the organization's power or authority in allocating and managing resources. governance involves policies and procedures for decision-making and control over the direction and management of the organization to be effective (lucianelli, 2017). it refers to the practice of requiring the monitoring, control, disclosure, and transparency (muktiyanto, 2016; quyên, 2014), the structure of the university, delegation and decision-making, planning, organizational coherence and direction (swansson et al., 2005). the application of the values of good corporate governance in higher education can be internalized into the college culture so that it becomes a system that strengthens competitive advantage. the goal of good corporate governance policy in higher education is that the parties involved in running the university management to understand and carry out the appropriate functions and roles of authority and responsibility. world bank (2012) gug concept can be measured by using five dimensions: 1) overall context, mission, and goals; 2) management orientation; 3) autonomy; 4) accountability; and 5) participation. measurements for gug variable component based on the partial accreditation. implementation of good university governance and intellectual capital in university context (case study at mercu buana university) 3 2.2.intellectual capital intellectual capital has begun to flourish in indonesia since the advent of ias 19 regarding unfulfilled assets (endi, 2011; ulum, 2009; utami, 2005). unfulfilled assets are an identifiable non-monetary asset without physical form. some examples of intangible assets include science and technology, design and implementation of new systems or processes, licenses, intellectual property rights, market knowledge and trademarks (including product brands and publicity titles). the term intellectual capital, ic is used to describe the intelligence of individuals who are developed, maintained and use the knowledge to develop innovations in the form of business strategies (martín-de-castro et al., 2011). intellectual capital is the knowledge, information, experience used to create value (laswad & roush, 2000). disclosures intellectual capital (human capital and structural capital disclosure) has no effect on the company. however, the disclosure of customer capital disclosure affects the value of the company. this proves the importance of the disclosure of customer capital disclosure in the competitive strategy of business so as to contribute to increasing the value of the company (pujianto, utami, & sastrodiharjo, 2016). while kok (2007) argument, this intellectual capital is an intangible asset that consists of employee competence, internal and external structures are used effectively and generate value for the organization. according to the previous research from bontis (2006), ic consists of three sub-criteria, namely:  human capital: knowledge, expertise, knowledge of pent contained in the mind of an employee.  structural capital: routine activity, hardware and software, the data, organizational structure  relational capital: the knowledge that is built through the cooperation of both customers and other organizations. 3. methodology this study is qualitative research looking at the relationship gug with ic. the object of research is the event, phenomenon or a problem that has been abstracted research into a concept or variable (arikunto, 2015), the object of this study is the concept of good university governance and intellectual capital. the sample in this study using a stratified sampling, where the data is taken only at the level of structural officials by using the tool questionnaire. respondents consisted of 75 officials of the structural and questionnaires collected 60 respondents. data were analyzed using partial least square, by testing the outer and inner models. 4. results and discussion 4.1. evaluation measurement (outer) model convergent validity tests against reflexive indicators considered valid if it has a correlation value above 0.70 (figure 1). however, in the research stage of development of the scale, the load factor of 0.50 to 0.60 is still acceptable (ghozali, 2014). figure 1 the results of pls algorithm 2 source: data processed nurul hidayah & ahmad badawi & lucky nugroho 4 the results of the testing modifications to two convergent validity that shown in figure 1 above, the indicator variable constructs gug and ic after re-testing by eliminating the correlation values below 0.5, has filled the validity criteria. the indicators above are considered valid and further test can be carried out, namely reliability testing. 4.2. test reliability having tested the validity, the next step is to test the construct using a reliability test the reliability test can be done by measuring the construct of two criteria: reliability and cronbach alpha compositing. the construct will be declared reliable if the value of composite reliability and cronbach alpha above 0.70 (ghozali, 2014). pls algorithm on reliability testing results in table 1 are as follows: table 2 result of cronbach's alpha and composite reliability source: data processed results composite output and cronbach's alpha reliability, both to construct gug and excellent ic is above 0.70 so it can be concluded that all indicators of the construct are reliable or meet the reliability test. 4.3. inner measurement evaluation model (structural model) testing the inner model is the development of models based on concepts and theories in order to analyze the relationship between exogenous and endogenous variables described in the conceptual framework (ghozali, 2014). stages testing of structural models (inner model) is done with the following steps:  test rsquares the r-square value which is a test for goodness-fit model (table 2) as follow: table 2 test results of r-squares value source: data processed refer to table 2 it can be seen that the value of r-squares or the coefficient of determination is 0.535. this means that 53.5% of the variation or change in the ic affected by gug, while the remaining 46.5% is explained by other causes. from the above results can be seen the value of r-squares for ic variables by 0,535, which means that it is included in the high category.  test of path coefficient the second test is realizing a substantial impression on the ic gug see the value of coefficient parameters and the substantial value of t statistic on the path coefficients. implementation of good university governance and intellectual capital in university context (case study at mercu buana university) 5 table 3 test results of path coefficients value source: data processed in table 3 above shows that the relationship between the variables good university governance (gug) on intellectual capital (ic) is statistically significant with a value of 13.493 t (greater than 1.96) and the value of p values of 0.000 (less than 0.05), so it can be concluded that the good university governance significantly related to intellectual capital. 4.4. discussion discussion of empirical test results for the formulation of each problem and the hypothesis that use the results of the questionnaire results, open information from the respondents and interviews with several sources are utilized in addition to resolving the problem. the first hypothesis in this study is there is a relationship implementation good university governance by intellectual capital. the results of hypothesis testing conducted to ascertain the amount of p-value 0,000 less than the level of uncertainty of 0.005. the outcomes of this study provide empirical evidence that the better university governance applied will reflect the university has implemented intellectual capital so that it will produce superior graduates who can compete in the face of globalization. the university integrates strategies and aims to achieve a competitive advantage. these results prove that faculty members see that the implementation of intellectual capital (ic) in every academic activity in each faculty (improving the quality of lecturers, availability of facilities and infrastructure, quality management, graduate data base, maintaining good relations with the business and society, collaboration with universities in the country and abroad, improving the university's image, paying attention to stakeholder satisfaction) can improve mercu buana's university governance (good university governance) through achieving the university's mission, faculty goals and strategies, and achieving unit performance. this study confirms previous research that intellectual capital influences good university governance. this research was carried out by bratianu (2009), safieddine et al., (2009), ulum & novianty (2012) in this study showing the existence of a link between the implementation of intellectual capital which would improve the quality of university governance (good university governance). 5. conclusion this study conclusively that implementation of intellectual capital at the university of mercu buana (umb) directly and significantly related to the implementation of governance. good governance at the university of mercu buana accomplished through the achievement of umb's mission, strategy and goals are made 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(2005). etika dan pengembangan pengajaran akuntansi. buletin penelitian, 8, 1–12. international journal of commerce and finance, vol. 4, issue 1, 2018, 121-133 121 the effect of the corporate entrepreneurship on the company performance: a study in the service sector vahdet hüseyin günay istanbul commerce university, turkey ahu tuğba karabulut, (prof.dr.) istanbul commerce university, turkey abstract the purpose of this paper is to find out the effect of the corporate entrepreneurship on the company performance in the service sector. th e convenience sampling was used in this study which was conducted to 280 white collar employees who worked in a service sector. the questionnaire was sent to 300 employees. 280 questionnaires were collected and analyzed. the frequency distribution analyses, factor analyses, reliability analyses, correlation analysis, and multiple regression analysis were conducted to the collected data. the entrepreneurial orientation scale was used from eren (2006) whereas the company performance scale was used from zehir (2016). the findings of this research supported the theory. it is found out that the corporate entrepreneurship has a positive effect on the company performance. it is expected that this research will make contributions to studies which will be conducted in the future about the effect of the corporate entrepreneurship on the company performance. keywords: corporate entrepreneurship, company performance, service sector 1. introduction the corporate entrepreneurship can be defined as entrepreneurial activities conducted by employees in companies. it is essential for the sustainability of the growth of companies. top management of companies should motivate employees to develop new ideas by creating an entrepreneurial organizational climate, providing creativity and corporate entrepreneurship trainings; determining job descriptions, performance appraisal criterias and rewarding systems based on the corporate entrepreneurship. when an employee comes with an idea, his manager should ask for preparing a business plan for it. when the business plan is promising, the top management should allocate a budget for it, let to form a team and spend time for this project. when the project proceeds smoothly, the product should be launched into a pilot market first. when the product succeeds in the pilot market, it should be launched into the main market. if the sales increase, a new department can be established and the team members may continue to work in this department. when sales of the new product reach to a break-even level, profits should be shared with the idea champion and team members. thus, companies can increase their performances. the purpose of this paper is to find out the effect of the corporate entrepreneurship on the company performance in the service sector. the concept and dimensions of a corporate entrepreneurship and the concept of a performance will be explained first, then the methodology will be presented. finally, conclusion will wrap up the paper. 2. corporate entrepreneurship a corporate entrepreneurship helps to initiate entrepreneurial activities by employees for a sustainable growth of a company. nowadays, entrepreneurial activities of a company founders or top managers are not enough for making innovations, gaining and attaining competitive advantages. thus, a top management of a company should allow employees to develop and implement new ideas to have new products, services and processes. it should provide an entrepreneurial organizational climate to encourage employees. antoncic and hisrich (2001, p. 498) used the following four dimensions for a corporate entrepreneurship: innovativeness, proactiveness, new business venturing and self renewal (eren, 2006, p. 38). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e vahdet hüseyin günay & ahu tuğba karabulut 122 2.1 innovativeness an innovation reflects the tendency of a company to support new ideas and experiments to create a new product, a service and a technology. the most common personality trait of entrepreneurs is an innovation. an innovativeness is defined as transfering and applying a new idea into business activities in the literature (arslan, 2001, p. 25). not only creating new products and services but also making changes in the current products and services based on prospective changes in markets and customer preferences are considered as innovation activities (akdoğan ve cingöz 2006, p. 53) an innovativeness is the main focus and vital characteristic of an entrepreneurship (ağca ve kurt 2007, p. 94). an innovation is beneficial as long as it effects an organizational life, an efficiency or a performance. making innovation is a basic ability (koçel, 2005, p. 314) (çiğdem, 2011, pp. 66-67). according to antoncic and hisrich (2001, pp. 498-499), an innovativeness points out offering product, service and technology innovations by giving importance to an innovativeness and technological changes. hult et. al. (2004, p. 429) believe that an innovativeness which means offering new processes, products and ideas is a major factor which affects a company performance. chang (1998, p. 191) states that an innovativeness is searching for creative and unusual solutions for problems and needs. he (1998, p. 191) adds that a product innovation includes developing new processes and technologies to develop new markets and achieve business functions. lumpkin and dess (2001, p. 431) highlight that an innovativeness means a creativity and an experimentalism to promote new products and services, a technological leadership and a willingness for supporting r&d for developing new processes. matsua (2006, p. 244) believes that an innovativeness of a company encourages employees to develop new products and services to struggle against technological and market changes and improves a company performance (eren, 2006, pp. 39-40). according to several studies, an organizational innovation affects a company perfomance positively (damanpour et al., 1989, pp. 587601; han et al., 1998, pp. 3045, calantone et al., 2002, p. 516; matsuo, 2006, p. 244) (eren, 2006, pp. 42-43). 2.2 proactiveness according to lumpkin and dess (2001, p. 434), a proactiveness means getting an advantage of opportunities. miller and friesen believe that it is being ahead of competitors (çetin, 2012, p. 72). a proactive company is fast to launch new products and services into a market, develop new products, technologies, and management techniques; is ahead of competitors to seize and evaluate opportunities (faiz ve üner, 2015, p. 964). proactive behaviors of an entrepreneurial company is seizing opportunities, formulating appropriate strategies for market demands during and after a change process, playing a dominant role during a market change process, and launching new products and services into a market for the first time. according to studies, a proactiveness, a risk taking and an innovativeness have positive effects on a company performance. proactive organizational behaviors provide an opportunity for a company to be the first and leader in a market place with innovations (bulut et al., 2008, p. 509) (söker, 2016, pp. 3536). ağca and kurt (2007, p. 96) believe that a proactiveness is a behavior of pioneer and active companies to expect and meet future market demands to adopt to environmental changes quickly and be ahead of competitors. therefore, a proactiveness is taking initiative and making efforts for catching environmental changes to get an advantage of opportunities. akdoğan and cingöz (2006, p. 53) believe that, a proactiveness is making the first move, being a market leader and do whatever is required to reach organizational goals. it requires being persistent, adaptive and willing to succeed. morris ve kuratko (2002) state that a proactiveness includes being future oriented and flexible, creating ideas, taking responsibilities, communicating effectively, adapting new processes, persevering by launching new products into a market (çiğdem, 2011, pp. 68-69). 2.3 new business venturing according to antoncic and hisrich (2001, p. 499), a new business venturing means establishing a new venture by redefining current products and services of a company or developing new markets. they (2001, p. 499) add that it is the most attractive characteristic of a corporate entrepreneurship. they conclude (2001, p. 499) that a new busines venturing requires following new businesses related to current products and markets of a company and entering into these markets (eren, 2006, pp. 38-39). the effect of the corporate entrepreneurship on the company performance: a study in the service sector 123 according to göçmen (2007), a new business venturing includes searching for new markets, developing new product lines in the current sector, launching and marketing new products into new markets. he (2007) believes that it is defining and developing new business and market opportunities proactively by reevaluating products and resources in a current organizational structure. kaya and arkani (2005) add that establishing autonomous or semi autonomous departments can be considered as a new business venturing (uçar, 2011, pp. 53-54). antoncic and hisrich (2001, p. 498) believe that a new business venturing is an important dimension of a corporate entrepreneurship. they (2001, p. 498) add that a company redefines its products or forms new markets in its current organization to form a new business venturing which includes autonomous or semi autonomous units, a corporate venturing, corporate start-ups and new streams. they (2001, p. 498) conclude that a new business venturing is forming new businesses in an organization. ağca and kurt (2007, p. 97) add that it is the form of an incubative entrepreneurship to develop entrepreneurial ideas and make entrepreneurial efforts (söker, 2016, pp. 33-34). 2.4 self renewal antoncic and hisrich (2001, p. 498) believe that a self renewal dimension reflects a transformation based on renewing basic organizational ideas. they (2001, p. 498) add that this dimension is the connotation of strategic and organizational changes and consists of redefining the concept of a business, an organizational renewal, system wise changes for an innovation. according to zahra (1996, p. 1715), a strategic renewal is rejuvenating organizational activities by changing a competition approach and a sector of a company. antoncic and hisrich (2001, p. 499) state that this dimension focuses on reformulating strategies, redesigning an organization and an organizational change (eren, 2006, p. 43). a self renewal is the transformation of an organization by renewing basic organizational ideas. it focuses on strategic and organizational changes; is consist of redefining the concept of a business, major and comprehensive systematic organizational changes by reorganizing the company (erkocaoğlan and özgen 2009, p. 207). a self renewal dimension focuses on refomulating strategies, reorganizing the company, and an organizational change (antoncic ve hisrich 2001, p. 499) zahra defines that a corporate entrepreneurship as a new business creation process in companies to increase a profitability and a competitiveness and to renew current businesses. thus, it can be considered as a target (ağca and kurt, 2007, p. 99) (çiğdem, 2011, p. 67). according to barca (2006), a strategic renewal is an organizational transition by renewing organizational abililities that are resoources for an establishment of an organization and has to be a continous journey due to a high competition. ağca (2005) believes that a strategic renewal is creating a value with resources, improving a competitivenes of a businesses, making incremental changes in market and distribution activities, developing knowledge sharing networks, developing new products with different methods. zahra and garvis (2000) state that organizational abilities and a financial function play substantial roles for a strategic renewal since it changes a structure of a company. they (2000) add that a strategic renewal requires organizational structures supporting an entrepreneurship, changes improving organizational learning and problem solving capacities. başar (2004) acknowledges that renewal activities improve competition and risk taking abilities, help companies to be more sensitive to environmental expectations, needs and tendencies (uçar, 2011, pp. 54-55). 3. company performance main goals of companies are gaining competitive advantages, increasing sales, market share and profitability. nowadays, a company performance can be measured via financial and non financial indicators. high market and company performances lead to a company success. according to cenger (2006, p. 6), a company performance can be defined as a point reached based on plans to achieve goals. kadakal (2007, p. 43) believes that a performace is an achieved success and a success should be achieved to create a value continously. he (2007, p. 43) adds that a performance is an evaluation of all efforts to achieve organizational goals (göktaş, 2013, p. 49). a company performance can be defined as reaching organizational goals related to a market share, a profit growth and strategic goals (hult et al., 2004, pp. 430-431). a performance can be measured with an organizational efficiency, vahdet hüseyin günay & ahu tuğba karabulut 124 a productivity, a profitability, and a cost efficiency. both financial and non financial performance measures can be used to reveal relations among a company performance and other concepts (swamidass and newell, 1987, pp. 509 523; vickery et al., 1993, 1997; rosenzweig et al., 2003, pp. 437456). the main result of a corporate entrepreneurship is a company performance (antoncic and hisrich, 2001, p. 501). corporate entrepreneurship activities have positive effects on a company performance (chang, 1998, p. 202). a company growth and a profitability are the main results of a corporate entrepreneurship (covin and slevin, 1991, p. 20). a corporate entrepreneurship is found related to a company growth and a profitability (covin and slevin, 1986; zahra, 1991, 1993; zahra and covin, 1995). zahra et al. (2000, p. 970) revealed that a corporate entrepreneurship improved a company performance (eren, 2006, pp. 56-57). according to yıldız (2010, pp. 212-222), companies can use objective and subjective performance criterias: objective performance criterias are tobin q ratio, roe, roa, roi, eps, market value, etc. subjective performance criterias are profit growth, sales growth, market share growth, product quality, customer satisfaction, employee satisfaction, competitive advantage, innovativeness etc. (başar, 2017, pp. 183). financial and non-financial measures can be used for a performance appraisal. the most common performance measures can be considered as a profitability, a productivity, a quality, an efficiency and an innovation. kethüda (2010, p. 40) points out that a performance appraisal determines strengths, weaknesses, a current position and goals of a company. cenger (2006, p. 25) believes that financial performance measures are past oriented whereas nonfinancial performance measures are future oriented. thus, non financial measures can be prefered to improve a long term future performance. öztürk (2010, p. 170) shows that using only financial performance measures was popular in 1960s and 1970s, but after 1980’s nonfinancial performance measures are also prefered to measure a company performance (göktaş, 2013, pp. 49-58). zahra and covin (1995, p. 43) show that a corporate entrepreneurship has a positive effect on financial measures of a company performance. zahra and garvis (2000, p. 470) reveal that an international corporate entrepreneurship is positively associated with an overall company profitability and growth and a foreign company profitability and growth. fiş (2009, p. 1) presents that a corporate entrepreneurship is a moderator between an entrepreneurial orientation and a company performance. ağca et al. (2012, p. 15) find out that a profitability is negatively related with a self-renewal but positively related with dimensions of an innovation and a risk taking. they (2012, p. 15) add that a growth is positively related with a new business venturing. platin akkaya (2015, p. ii) reveals that an entrepreneurial orientation is positively related to sales growth and an export performance of smes. 4. methodology the purpose of this paper is to find out the effect of the corporate entrepreneurship on the company performance in the service sector. 4.1 sample and data collection the convenience sampling was used in this study which was conducted to 280 white collar employees who worked in a service sector. the questionnaire was sent to 300 employees. 280 questionnaires were collected and analyzed. the frequency distribution analyses, factor analyses, reliability analyses, correlation analysis, and multiple regression analysis were conducted to the collected data. the effect of the corporate entrepreneurship on the company performance: a study in the service sector 125 4.2. research model of the study the research model is presented in figure 1. figure 1. research model 4.3. hypotheses of the study the hypotheses of the study are presented as follows: h1: corporate entrepreneurship affects company performance h1a: innovativeness positively affects company performance h1b: proactiveness positively affects company performance h1c: new business venturing positively affects company performance h1d: self renewal positively affects company performance 4.4. scales of the study and analysis the entrepreneurial orientation scale was used from eren (2006) whereas the company performance scale was used from zehir (2016). the frequency distribution analyses showed the demographic information about participants. the cronbach alpha values of variables revealed the reliability. factor analyses showed factor loadings of variables. the multiple regression analysis pointed out the effects of the independent variables (new business venturing, innovativeness, self renewal, and proactiveness) on the dependent variable (company performance). 4.5. findings the findings of the frequency distribution analyses are presented in table 1. table 1. frequency distribution analyses n % n % age total work experience 18-30 99 35.4 0-5 years 95 33.9 31-40 85 30.4 5-10 years 80 28.6 41-50 66 23.6 10-15 years 47 16.8 50 and older 30 10.7 16 years and more 58 20.7 total 280 100.0 total 280 100.0 gender work experience in the company new business venturing self renewal proactiveness company performance entrepreneurial orientation innovativeness vahdet hüseyin günay & ahu tuğba karabulut 126 female 118 42.1 0-5 years 138 49.3 male 162 57.9 5-10 years 76 27.1 total 280 100.0 10-15 years 36 12.9 marrital status 16 years and more 30 10.7 married 169 60.4 total 280 100.0 single 111 39.6 position in the company total 280 100.0 low level manager 84 30.0 education middle level manager 82 29.3 high school 36 12.9 top level manager 48 17.1 vocational school/ undergraduate 169 60.4 other 66 23.6 graduate 75 26.8 total 280 100.0 total 280 100.0 4.6. descriptive statistics the findings of the descriptive statistics are presented in table 2 and table 3. table 2. descriptive statistics for corporate entrepreneurship mean std. deviation variance n e w b u si n e ss v e n tu ri n g 1. our company encourages a new demand via intensive advertising and marketing activities for current products in current sectors 3.636 1.0487 1.100 2. our company expands its business lines in current sectors 3.607 1.0279 1.057 3. our company follows new businesses related to the current business in new sectors 3.696 0.949 0.900 4. our company finds new marke niches for products in current markets 3.654 0.953 0.908 5. our company enters into new businesses by providing new business lines and products 3.689 0.947 0.896 in n o v at iv e n e ss 1. our company gives importance to a new product development 3.811 0.956 0.914 2. our company’s ratio to launch a new product into a market is high 3.732 0.989 0.978 3. our company does a high level of expenditures for new product development activities 3.536 1.064 1.131 4. the level of the number of added new products by our company is high 3.543 0.997 0.995 5. the level of the number of launched new products by our company is high 3.379 1.057 1.118 6. our company makes investments to develop patented technologies 3.421 1.101 1.212 7. our company gives importance to create patented technologies 3.486 1.104 1.218 8. our company applies technologies which were developed by other companies or sectors 3.679 1.086 1.179 9. our company gives importance to a technological innovation 3.675 1.187 1.410 10. our company gives importance to lead technological developments in its sector 3.629 1.073 1.152 11. our company’s revenue ratio from products which did not exist three years ago is high 3.404 1.113 1.238 s e lf r e n e w al 1. our company defines its missiom 3.761 0.898 0.806 2. our company reviews its business concept 3.846 0.830 0.690 3. our company redefines sectors inwhich it can compete 3.775 0.933 0.870 4. our company reorganizes units and departments to improve an innovation 3.793 0.935 0.875 the effect of the corporate entrepreneurship on the company performance: a study in the service sector 127 5. our company conducts a coordination for activities among units to improve an innovation level 3.800 1.007 1.014 6. independency of different units are increased toimprove their innovation levels in our company 3.696 1.125 1.266 7. flexible organizational structures are adopted to develop an innovation in our company 3.639 0.974 0.948 8. our company gives training about creativity techniques to employees 3.754 0.958 0.918 9. our company rewards employees for their contributions to a creativity and an innovation 3.593 1.084 1.174 10. our company assures motivating employees to develop new ideas about an innovation 3.600 1.083 1.173 11. our company designates idea champions officially 3.439 1.052 1.107 12. our company provides adequate resources for experimential projects 3.443 1.109 1.230 p ro ac ti v e n e ss 1. our company usually initiates activities which our competitors respond later 3.457 1.080 1.167 2. our company is the first company which promotes new product/service management techniques, process technologies into the market very frequently 3.479 1.142 1.304 3. top management has a strong tendency to be ahead of other companies to present new ideas and products 3.611 1.115 1.242 (n): 280 (1) completely disagree … (5) completely agree table 3. descriptive statistics for company performance mean std. deviation variance 1. ratio of our net profitability to our equity 3.404 0.942 0.887 2. ratio of our net profitability before taxes to all of our resources 3.321 0.910 0.828 3. net sales gathered from our basic activities 3.382 0.939 0.882 4. financial success of new products which we launched into the market 3.436 1.049 1.100 5. our general success level from a financial perspective 3.468 0.938 0.881 6. average annual increase in our sales 3.286 0.956 0.914 7. increase in the number of new products which we launched into the market 3.425 0.974 0.948 8. increase in our market share compared to our leading competitors 3.321 1.059 1.122 9. increase in the number of our employees 3.068 1.030 1.060 10. increase in the number of our customers 3.204 1.056 1.116 11. our general position in the competitive environment in the market 3.450 1.029 1.058 12. our general profitability level 3.432 1.010 1.020 (n): 280 (1) very low … (5) very high vahdet hüseyin günay & ahu tuğba karabulut 128 4.7. reliability analyses the results of the reliability tests are presented in table 4. table 4. reliability test table scales and dimensions cronbach's alpha number of statements corporate entrepreneurship scale 0.972 31 innovativeness 0.901 5 proactiveness 0.809 11 new business venturing 0.902 12 self renewal 0.899 3 company performance scale 0.967 12 total relaibility 0.98 43 4.8. factor analyses the findings of the factor analyses are presented in table 5 and table 6. table 5. factor analysis of corporate entrepreneurship f ac to rs factor loading % variance explained cronbach alpha in n o v at iv e n e ss 5. the level of the number of launched new products by our company is high 0.774 20.579 0.902 6. our company makes investments to develop patented technologies 0.754 3. our company does a high level of expenditures for new product development activities 0.732 7. our company gives importance to create patented technologies 0.717 4. the level of the number of added new products by our company is high 0.698 1. our company gives importance to a new product development 0.599 8. our company applies technologies which were developed by other companies or sectors 0.580 9. our company gives importance to a technological innovation 0.562 2. our company’s ratio to launch a new product into a market is high 0.549 10. our company gives importance to lead technological developments in its sector 0.540 p ro ac ti v e n e ss 3. top management has a strong tendency to be ahead of other companies to present new ideas and products 0.719 18.031 0.807 2. our company is the first company which promotes new product/service management techniques, process technologies into the market very frequently 0.696 1. our company usually initiates activities which our competitors 0.611 the effect of the corporate entrepreneurship on the company performance: a study in the service sector 129 respond later n e w b u si n e ss v e n tu ri n g 2. our company expands its business lines in current sectors 0.816 17.518 0.902 3. our company follows new businesses related to the current business in new sectors 0.769 1. our company encourages a new demand via intensive advertising and marketing activities for current products in current sectors 0.748 5. our company enters into new businesses by providing new business lines and products 0.621 4. our company finds new marke niches for products in current markets 0.557 s e lf r e n e w al 7. flexible organizational structures are adopted to develop an innovation in our company 0.669 12.705 0.895 6. independency of different units are increased toimprove their innovation levels in our company 0.649 2. our company reviews its business concept 0.630 5. our company conducts a coordination for activities among units to improve an innovation level 0.620 8. our company gives training about creativity techniques to employees 0.610 11. our company designates idea champions officially 0.609 12. our company provides adequate resources for experimential projects 0.609 total variance explained 68.833 kaiser-meyer-olkin measure of sampling adequacy. 0.938 approx. chi-square 8146.362 df 465 sig. 0.000 rotation method: varimax with kaiser normalization there are four dimensions of the corporate entrepreneurship scale in table 5. a kmo value which is 0.938 points out that the sample size is appropriate for the factor analysis. a high chi-square value and 0.000 sig. value show that the data has a normal distribution. the four dimensions explain 68.833% of the corporate entrepreneurship. an innovativeness explains 20.579%, a proactiveness explains 18.031%, a new business venturing explains 17.518% and a self renewal explains 12.705% of the corporate entrepreneurship. statements of 1, 3, 4, 7, 9, 10 (self renewal) and 11 (innovativeness) were excluded from the factor analysis since they had low factor loadings. table 6. factor analysis of company performance f ac to rs factor loading % variance explained cronbach alpha c o m p a n y p e rf o rm an c e 3. net sales gathered from our basic activities 0.898 74.108 0.965 7. increase in the number of new products which we launched into the market 0.898 2. ratio of our net profitability before taxes to all of our resources 0.896 4. financial success of new products which we launched into the market 0.892 8. increase in our market share compared to our leading competitors 0.884 vahdet hüseyin günay & ahu tuğba karabulut 130 5. our general success level from a financial perspective 0.875 6. average annual increase in our sales 0.870 12. our general profitability level 0.868 1. ratio of our net profitability to our equity 0.864 11. our general position in the competitive environment in the market 0.837 10. increase in the number of our customers 0.786 9. increase in the number of our employees 0.748 total variance explained 74.108 kaiser-meyer-olkin measure of sampling adequacy 0.923 approx. chi-square 3925.813 df 66 sig. 0.000 rotation method: varimax with kaiser normalization. there is one dimension of the company performance scale in table 6. a kmo value which is 0.923 points out that the sample size is appropriate for the factor analysis. a high chi-square value and 0.000 sig. value show that the data has a normal distribution. the one dimension explains 74.108% of the company performance. 4.9. correlation analysis the findings of the correlation analysis between dimensions of the corporate entrepreneurship and the company performance are presented in table 7. table 7. correlation analysis between dimensions of corporate entrepreneurship and company performance innovativene ss proactiveness new business venturing self renewal company performance corporate entrepreneurship innovativeness 1 proactiveness 0.000 1 new business venturing 0.000 0.000 1 self renewal 0.000 0.000 0.000 1 company performance 0.446** 0.510** 0.388** 0.195** 1 corporate entrepreneurship 0.499** 0.501** 0.400** 0.300** 0.769** 1 ** correlation is significant at the 0.01 level (2-tailed). there is a significant positive relationship between the corporate entrepreneurship and the company performance at the 0.01 level (0.769). also, there are significant relationships between the dimensions of the corporate entrepreneurship and the company performance at the 0.01 level. the effect of the corporate entrepreneurship on the company performance: a study in the service sector 131 4.10. multiple regression analysis the findings of the multiple regression analysis between dimensions of the corporate entrepreneurship and the company performance are presented in table 8 and table 9. table 8. multiple regressıon analysıs model summary model r r square adjusted r square std. error of the estimate durbin-watson 1 0.805 0.647 0.643 0.598 1.734 table 9. multiple regression analysis coefficients unstandardized coefficients standardized coefficients t sig. collinearity statistics b std. error beta tolerance vif 1 (constant) 3.038 0.036 0.000 1.000 innovativeness 0.446 0.036 0.446* 12.442 0.000 1.000 1.000 proactiveness 0.510 0.036 0.510* 14.243 0.000 1.000 1.000 new business venturing 0.388 0.036 0.388* 10.844 0.000 1.000 1.000 self renewal 0.195 0.036 0.195* 5.438 0.000 1.000 1.000 f: 126.204 (p: 0.000) (p<0.05) dependent variable: company performance h0a: innovativeness does not positively affect company performance h1a: innovativeness positively affects company performance p = 0.000 < 0.05 h0a is rejected. h1a is accepted at 0.05 significance level. thus, innovativeness positively affects company performance h0b: proactiveness does not positively affect company performance h1b: proactiveness positively affects company performance p = 0.000 < 0.05 h0b is rejected. h1b is accepted at 0.05 significance level. thus, proactiveness positively affects company performance h0c: new business venturing does not positively affect company performance h1c: new business venturing positively affects company performance p = 0.000 < 0.05 h0c is rejected. h1c is accepted at 0.05 significance level. thus, new business venturing positively affects company performance h0d: self renewal does not positively affect company performance h1d: self renewal positively affects company performance p = 0.000 < 0.05 h0d is rejected. h1d is accepted at 0.05 significance level. thus, self renewal positively affects company performance h1 is accepted. corporate entrepreneurship affects company performance. it has a positive effect on the company performance. vahdet hüseyin günay & ahu tuğba karabulut 132 5. conclusion nowadays, a corporate entrepreneurship affects a company performance. successful companies which conduct corporate entrepreneurship activities can have and maintain competitive advantages in national and global markets. the findings of this research supported the theory. it is found out that the corporate entrepreneurship has a positive effect on the company performance. this research was conducted on certain number of companies in the service sector. the scope of the reseach can be expanded to companies in other sectors in the future. it is expected that this research will make contributions to other studies which will be conducted in the future about the effect of the corporate entrepreneurship on the company performance. thus, 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(2016), pazar yönelimi, öğrenme yönelimi, rekabet stratejileri ve firma performansı i̇lişkisi. yayınlanmamış doktora tezi. gebze teknik üniversitesi sosyal bilimler enstitüsü i̇şletme anabilim dalı, gebze. international journal of commerce and finance, vol. 5, issue 1, 2019, 121-132 121 analysis of the impact of inflation, interest rate, and exchange rate on economic development samson ogege university of lagos phd, nigeria abstract this article seeks to empirically analyze the influence of inflation, interest and exchange rate on economic development. the sustainability of high economic development in most industrialized and developing countries has been the primary objective of macroeconomic policies. notwithstanding, there exist considerable contention on the innate feature of the inflation, interest rate, exchange rate and development association. the major purpose of this work is to assess the inflation, interest and exchange rate effect on some economic development indicators in nigeria which includes the life expectancy index, human development index, consumption per capita, physical quality of life, and health and education index. the secondary data employed were collected from the cbn statistical bulletins from 1981-2017 and were analyzed adopting descriptive, correlation as well as regression analysis. the empirical analysis revealed the existent relative effect of macroeconomic variables on nigeria economic development indicators. the impacts of the economic attributes mechanisms on performance indicators are distinct. the work infers that the diverse economic characteristics’ components influence diverse indicators of performance in various ways. it is however recommended that inflation, interest rate and exchange rate should be used to create a favorable investment climate on economic development variables, the apex bank needs to consider inflation threshold for the country in the process of targeting single digit inflation as one of its major objectives. also, government should adopt tight monetary policy measures to control inflation from time to time. keywords: inflation, interest rate, exchange rate, economic development, descriptive analysis, regression analysis, e-view software. 1. introduction the national bureau of statistics in nigeria realized a statement in the 2ndquarter of 2017 that nigeria has witnessed an increase in economic development to the tune of 0.055%, but how much of this development is felt by an average nigerian in the face of high inflation and interest rates is already a puzzle. the researcher’s motivation to study this area hinge on the fact that; one, interest rate is one of the most essential components of the nigerian economic system that affect the borrowing cost and borrowing is an imperative source of financing businesses and production which may lead to economic growth. two, interest rates affect the return on savings, if the interest on savings is encouraging; individuals would be encouraged to save more idle cash which may pave way for availability of lendable funds in the bank consequently economic development would be improved. three, interest rates are fundamental element of the total earnings of a lot of investments. four, certain rates of interest give an introspection of what the economic and financial market activity would be in the future. based on these vantage roles interest rates play in the nigerian economy, it is imperative to continuously study this area to find out how well or otherwise interest rates affect the nigerian economy aminu and anono (2012), opined inflation as an indefinitely continuous increase in the price level of wide range of goods and services in an economy over a given time frame. they attributed inflation to a popular view that it is excess money in circulation chasing the few commodities available. the structuralist argued that inflation is vital for economic growth while the monetarist postulated that it wakens economic growth (doguwa, 2012). inflation is an indicator of economy growth, but excess growth may be harmful as it can result in hyperinflation, conversely, an economy with no inflation will be stagnant. thus, having the right level of economic growth and inflation is quite plausible which can be viewed as mild inflation. creeping or mild inflation can be assessed as having favourable influences on economic growth. however, zero inflation is detrimental to other economic sectors with falling price, profit, and employment. generally, galloping inflation has influences that are unprecedented on an economy since it in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e samson ogege 122 distorts and disrupts the price mechanism, and discourages savings and investment leading to the break down on morals (hossain et al, 2012). the nigeria inflationary trend has been favourable exclusively spanning from mild to running away inflation. doguwa (2012) reveals that growth is affected negatively by inflation when it attains 10.5 to 12 percent in nigeria. based on the statistical bulletin (2005) of the cbn, it was recorded that inflation rose from 13.8percent in 1971 to 16.0percent in 1972 which was accounted for by the era of oil glut and the introduction of economic regulations following the civil war. the excess oil in the early 1980’s that resulted in increase in the prices of oil in the local market signified another era of inflationary trend in nigeria recording 23.2percent in 1983 as well as 39.6percent in 1984. this brought about the structural adjustment programme in 1986 that brought about another inflation era in the late 1980’s. in line with adelowokan (2012), the main challenge in the post sap period was the fluctuation in the rate of exchange that resulted in high instability of output, increase in price of goods, low wage rate and high unemployment rate which consequently placed heavy burden on the indigent. also, between 1992-96 the rate of inflation rose from 57 percent to 72.8 percent. high rates of inflation instability have been recorded in nigeria and as such should be of major concern and effectively monitored by the monetary authorities. the increase in overreliance on imports of nigeria economy has made it necessary to constantly assess the extent in which the instabilities in the rate of exchange brings about an inflationary pressure in nigeria adeleye et al. (2017). taguchi, (2002) defines exchange rate as the rate at which a domestic currency is traded for a foreign currency. the exchange rate instability modeling has notable ramifications for some budgetary as well as monetary issues as it evades to the vacillations in the rates of exchange over a time horizon. thorlie et al, (2014). it is viewed as the risk linked with sudden volatilities that cannot be predicted in the exchange rate level (adelowokan 2012). the major problem this study attempts to solve is to evaluate the influence of inflation, interest and exchange rates on economic development within the study duration. the inflation, interest and exchange rate influence on economic development is quite a serious challenge. the experiences of different countries on inflation is no longer the problem but the fact that inflation problem appears to have attained the crisis dimension. changes in interest rate determine the rate of inflation. the nominal rate of interest is a function of the real interest rate and inflationary anticipation. 2. empirical literature hossain et al. (2012) investigated the inflation influence on economic development in bangladesh adopting time series data from 1978to 2010. the research objective was to discover the long run association of inflation with economic development. the variables employed include gdp deflator (gdpd) to measure inflation and gdp to measure economic growth. co-integration and granger causality test were adopted. the johansen–juselius cointegration outcome reveals that inflation has no association with economic growth in bangladesh. the causality outcome at lag two (2) indicates unidirectional relationship was discovered moving from inflation to economic growth. additional test at lag four (4) upheld the first by revealing unidirectional relationship moving from inflation to economic growth. jaganath (2014) evaluated inflation effect on development in six south asian countries adopting time series data between1980 and 2012. the broad objective was to evaluate the influence of inflation on development in six south asian countries using gdp as a proxy economic growth and cpi to measure inflation. co-integrated test and error correction mechanism, causality test and unrestricted var model were adopted. correlation analysis was employed to analyze the data and the outcome reveals the existent high positive association of inflation with economic development for the countries under study. the co-integration outcomes indicate existent long run causality for malaysia. nevertheless, nonexistent long run association of inflation with economic development was revealed for the rest of the countries. the result of granger causality reveals existent unidirectional relationship move from gdp to cpi for bangladesh, bhutan, and india. it also reveals unidirectional association run from cpi to gdp in the context of nepal. nevertheless, no association of gdp with cpi for maldives and sri lanka exist. the correlation adopted does not actually expound the effect of inflation on economic development, instead a regression analysis would have been employed, the work duration is insufficient to proffer better analysis. bakare, etal (2015), assessed inflation rate impact on economic growth in nigeria between 1986 and 2014 employing gdp and inflation rate as the study variable and were tested with the aid of adf unit root test to test their stationarity. regression analysis was used to ascertain inflation influence on growth, while granger causality test was analysis of the impact of inflation, interest rate, and exchange rate on economic development 123 adopted to ascertain the association of inflation with the growth of nigeria economy. outcomes revealed the existent adverse influence of inflation on growth. the granger causality indicates that gdp cause inflation but inflation does not cause gdp. olu and idih (2015), determined the nature of the association inflation share with nigeria economic growth adopting the time series data from 1980 to 2013. the work variables are gdp being the output variable, while the input variables are: inflation rate, exchange rate, labour and capital input ordinary least square was adopted by the work to indicate the dependent variable influence on the independent variables. result reveals the existent positive influence of inflation on the growth of nigeria economy which corroborate with the finding of aminu and anono (2012). oladipo et al.(2015), ascertained inflation, lending rate impact on the growth of nigeria economy employing annual time series data spanning from 1981 to 2014 and adopted real gdp, inflation at consumer prices, lending rate, net domestic credit, transfer payment as the work variables. adf test was employed to examine the unit root properties of the series. the unit root outcome reveals the stationary of all the variables at first difference but inflation is stationary at level. the ordinary least square (ols) technique was utilized and long run association amidst the variables was examined adopting johansen co integration test and causality test was also conducted. the result of the ols indicates that both inflation as well as lending rates have adverse influence on the economic growth. johansen co integration revealed the existent long run association amidst the variables being considered. according to the granger causality test, economic growth in nigeria does not granger caused by both inflation and interest rate. the challenges of this work is that it failed to carry out post estimation test to determine the model’ s robusticity johansen co integration test adopted to test long run association is not the right model for me (0) and me (1). autoregressive distributive lag (ardl) is the appropriate model. kasidi & mwakanmela (2013) evaluated the inflation influence on the growth of tanzania economy adopting annual time series data between 1990 and 2011. the work objectives were to: assess the influence of inflation on economic growth, examine the extent of economic growth responsive to variation in general price level and establish inflation association with economic growth. the study variables are gdp as dependent and inflation as independent variable. the work adopted reduced form regression equation to analyze inflation effect on economic growth and the result revealed the existent adverse influence of inflation on economic growth johansen co-integration test and correlation coefficient adopted reveals insignificant long-run causality between inflation and economic growth. only short term adverse significant. the adverse association of inflation with economic growth corroborate with the result of inyiama (2013). finan (2016) refers to the rate of interest as a cost of credit in economy and specifically is a price which the creditors charged the borrowers per year for the loan obtained. mutinda (2014) research reveals that rising rate of interest is able to result in an adverse influence on essential variables like gdp, fdi, and inflation, that will mount pressure on firms and the economy. interest rate as a matter of fact is the variable that can influence the core operation of the economy in terms of production and consumption through the fdi and inflation transmission mechanism between other financial variables. he also opined that in the most common context, interest is the price a debtor is charged for the use of credit granted within a given time frame. idoko et al. (2014) revealed that lending rate has no significant influence on economic development. hatane & stephanie (2015) revealed the existent of adverse significant association between interest rate and economic development. faroh & shen (2015) presents a different view which indicates the nonexistent influence of high interest rate on fdi flow, while siddiqui & aumeboonsuke (2014) in their work revealed existent adverse association of interest rate with fdi. recent studies have discoursed the consequences of the trend in exchange rate on general output, export and nonexport activities of the economy. in most cases, these studies do not have a theoretical background and stated in detail a temporary association between the key variables. for instance, mamun et al (2013) investigated the effect of currency depreciation, regarding investment expenditure on the growth of labour force in the equation along with lagged gdp growth. they also failed to regard the properties of time series variables and equations was estimated with the aid of ols. in other study, uddin et al (2014) ascertained a bivariate causality of gdp with the rate of exchange without integrating other important variables that could as well impact on the growth of output. kamal (2015) adopted similar model to determine the association between the two variables in the long-run. the rate of samson ogege 124 exchange adopted in both works is specifically based on the taka value of the us dollar, unlike the normal practice of regarding a weighted average of all relevant rates of exchange in relation to other major trading partners’ currencies. 3. methodology this work adopted secondary generated from the cbn statistical bulletins from 1981-2017data due to the fact that such data cannot be gotten via primary source because of the long period of time required to obtain the data. also, the finances and the time required are beyond the reach of the researcher. the multiple regression method was employed for data analysis which is specified below; lei = β0 + β1inf + β2intr + β3exr + u . . . . . . . . . .. . . . . . . (1) edi = β0 + β1inf + β2 intr + β3exr + u . . . . . . . . . .. . . . . . . (2) cpc = β0 + β1inf + β2 intr + β3exr + u . . . . . . . . . .. . . . . . . (3) hdi = β0 + β1inf + β2 intr + β3exr + u . . . . . . . . . .. . . . . . . (4) hei = β0 + β1inf + β2 intr + β3exr + u . . . . . . . . . .. . . . . . . (5) pqli = β0 + β1inf + β2intr + β3exr+ u . . . . . . . . . .. . . . . . . (6) where, lei= life expectancy index edi = education index cpc = consumption per capita hdi = human development index hei = health index pqli = physical quality of life index inf = inflation rate inr = interest rate exr = exchange rate u= error terms, β0=constant β1, β2, β3, = are the independent variables’ coefficients analysis of the impact of inflation, interest rate, and exchange rate on economic development 125 4. data analysis 4.1. the unit root test (test for stationarity) in order for the stationarity of the data series to be assure for this work, the augmented dickey-fuller unit root test was adopted in which its estimation have revealed that employing classical estimation techniques, e.g. the error correction model (ecm) to evaluate associations with unit root variables results in inferences that are misleading. when non-stationary variables are present, there might be a spurious regression which basically has a high rsquared, and t-statistics that seem to be significant, but the outcomes do not have any economic meaning. so, the adf was used in this study as the decision rule will be to compare the adf test statistic for each variable in absolute terms with their respective critical value. when the test value is more than the critical value in (absolute term), this means that order of integration is determined and there is no unit root problem otherwise there is unit root problem or if the p-value of adf < 0.05 significant level implying t the rejection of the null hypothesis should and the alternative hypothesis should be accepted that there is stationarity in the data series. additionally, the statistic value of the series data must also be less than the critical value (cv) due to its level of significant. table 4.1 variables adf test statistics critical value s/ns cpc /-7.984241/ /-2.945842/ s edi /-3.516403/ /-2.971853/ s exch /2.527983/ /-2.945842/ ns hdi /-1.155238/ /-2.951125/ ns inf /-2.858673/ /-2.945842/ ns intr /-2.122809/ /-2.945842/ ns lif /-3.562704/ /-2.960411/ s pqli /-2.122809/ /-2.945842/ ns source: researcher’s computation 2019 ns – not significant s – significant in table 4.2 above, consumption per capita (cpc), education index (edi) and life expectancy (lei), are stationary at level while other variables, human development index (hdi), physical quality of life index (pqli), inflation index (inf), interest rate (inr) and exchange rate (exch) are not stationary at level that is 1(0). this is due to the fact that the test statistics of these variables are less than their respective critical values at 0.0.05 significant level in absolute term. hence, the study infer at level that data series hdi, pqli, inf, inr and exch are ch++++++aracterized by unit root problem. we can now proceed further to test for stationarity of these variables at first difference: samson ogege 126 4.2. analysis of the unit root test using adfat first difference table 4.2 variables adf test statistics critical value s/ns exch /-8.185578/ /-2.951125/ s hdi /-5.412356/ /-2.954021/ s inf /-5.515920/ /-2.948404/ s intr /-6.133327/ /-2.951125/ s pqli /7.859953/ /-2.951125/ s source: researcher’s computation 2019 ns – not significant s – significant from table 4.2, there is stationarity of all the variables at first difference i.e. the order of integration of these variable will now be 1(1), this is because at this order of integration the test statistics is > their corresponding cv at 0.01 significant level in absolute term. from the table above, we can now see that the cpc, edi and lei are stationary at level while hdi, pqli, inf, inr and exch are only stationary after taking their first difference. this result shows the important of undergoing a co-integration test to establish the long run equilibrium as the variables are not of the same other in term of their stationarity. 4.3. co-integration result to set up the existent of long run equilibrium amidst the selected variables for this study, co-integration test will be estimated to determine whether the errors are combined. this will be achieved by adopting johansen co-integration test, which produces the likelihood ratio and max-eigen value to assert the validity of the long run relationship at 0.05 significant level. if the probability ratio value or the max-eigen value are greater than the critical value, we can infer that there is a long run equilibrium association contrarily the residual is not co-integrated which means no long run equilibrium amidst the selected variables. table 4.3 date: 03/03/19 time: 15:46 sample (adjusted): 1983-2017 included 35 observations after adjustments linear deterministic trend assumption series: cpc edi exch infl intr lif_at_birth pqli lags interval (in first differences): 1 to 1 analysis of the impact of inflation, interest rate, and exchange rate on economic development 127 unrestricted co-integration rank test (trace) hypothesized trace 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.903632 250.2016 125.6154 0.0000 at most 1 * 0.858058 168.3162 95.75366 0.0000 at most 2 * 0.684666 99.98440 69.81889 0.0000 at most 3 * 0.528495 59.59005 47.85613 0.0027 at most 4 * 0.376893 33.27616 29.79707 0.0191 at most 5 * 0.258649 16.71987 15.49471 0.0325 at most 6 * 0.163417 6.245037 3.841466 0.0125 trace test shows 7 co-integrating eqn(s) at the 0.05 level * indicates that the hypothesis should be rejected at the 0.05 level **mackinnon-haug-michelis (1999) p-values unrestricted co-integration rank test (maximum eigenvalue) hypothesized max-eigen 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.903632 81.88546 46.23142 0.0000 at most 1 * 0.858058 68.33176 40.07757 0.0000 at most 2 * 0.684666 40.39435 33.87687 0.0073 at most 3 0.528495 26.31389 27.58434 0.0720 at most 4 0.376893 16.55629 21.13162 0.1940 at most 5 0.258649 10.47484 14.26460 0.1826 at most 6 * 0.163417 6.245037 3.841466 0.0125 max-eigenvalue test shows 3 co-integrating eqn(s) at the 0.05 level * indicates that the hypothesis should be rejected at the 0.05 level **mackinnon-haug-michelis (1999) p-values the table 4.3 shows the results for testing the long run association existent amidst the variables used for the study and revealed that long run association exists amidst the selected variables as the values of both t-test statistics and the max-eigen value are greater than seven critical values as shown above. the implication is that, it confirms the efficiency of the results that will be estimated at the next stage. table 4.4 dependent variable: lif_at_birth sample: 1981-2017 date: 03/03/19 time: 14:57 least squares method included 37 observations variable coefficient std. error t-statistic prob. c 45.96833 0.546358 84.13586 0.0000 infl -0.003041 0.012887 -0.235980 0.8149 intr -0.085292 0.087377 -0.976138 0.3361 samson ogege 128 exch 0.030369 0.003185 9.534576 0.0000 r-squared 0.806420 mean dependent var 47.90378 adjusted r-squared 0.788822 s.d. dependent var 2.662452 s.e. of regression 1.223505 akaike info criterion 3.343123 sum squared resid 49.39984 schwarz criterion 3.517276 log likelihood -57.84777 hannan-quinn criter. 3.404520 f-statistic 45.82420 durbin-watson stat 1.724614 prob(f-statistic) 0.000000 table 4.5 dependent variable: edi sample: 1981-2017 date: 03/03/19 time: 14:59 least squares method included 37 observations variable coefficient std. error t-statistic prob. c 0.446982 0.010920 40.93354 0.0000 infl 0.000212 0.000258 45.82306 0.0159 intr 0.001343 0.001746 11.76881 0.0074 exch -3.03e-05 6.37e-05 -0.476007 0.6372 r-squared 0.754659 mean dependent var 0.456946 adjusted r-squared 0.631281 s.d. dependent var 0.024080 s.e. of regression 0.024453 akaike info criterion -4.482290 sum squared resid 0.019733 schwarz criterion -4.308137 log likelihood 86.92237 hannan-quinn criter. -4.420893 f-statistic 24.63612 durbin-watson stat 1.689504 prob(f-statistic) 0.497140 table 4.6 dependent variable: cpc sample: 1981-2017 date: 03/03/19 time: 15:00 least squares method included 37 observations variable coefficient std. error t-statistic prob. c -7.347414 6.571843 -81.11804 0.0416 infl 0.028170 0.005009 54.18729 0.0069 intr 1.064603 0.051011 54.01932 0.0185 exch 0.005677 0.038312 0.148177 0.8831 analysis of the impact of inflation, interest rate, and exchange rate on economic development 129 table 4.7 dependent variable: hdi sample: 1981-2017 date: 03/03/19 time: 15:01 least squares method included 36 observations after adjustments variable coefficient std. error t-statistic prob. c 0.384290 0.023153 16.59790 0.0000 infl -0.000280 0.000533 -0.524323 0.6037 intr 0.001177 0.003634 0.323861 0.7482 exch 0.000611 0.000132 4.614499 0.0001 r-squared 0.549412 mean dependent var 0.438417 adjusted r-squared 0.507169 s.d. dependent var 0.072085 s.e. of regression 0.050605 akaike info criterion -3.025102 sum squared resid. 0.081947 schwarz criterion -2.849155 log likelihood 58.45184 hannan-quinn criter. -2.963692 f-statistic 13.00609 durbin-watson stat 1.946756 prob(f-statistic) 0.000010 table 4.8 dependent variable: hin sample: 1981-2017 date: 03/03/19 time: 15:02 least squares method included 37 observations variable coefficient std. error t-statistic prob. c 45.96833 0.546358 84.13586 0.0000 intr -0.085292 0.087377 -0.976138 0.3361 infl -0.003041 0.012887 -0.235980 0.8149 exch 0.030369 0.003185 9.534576 0.0000 r-squared 0.850660 mean dependent var 0.288205 adjusted r-squared 0.735643 s.d. dependent var 14.46140 s.e. of regression 14.71687 akaike info criterion 8.317671 sum squared resid 7147.344 schwarz criterion 8.491825 log likelihood -149.8769 hannan-quinn criter. 8.379069 f-statistic 98.58700 durbin-watson stat 2.481422 prob(f-statistic) 0.627818 samson ogege 130 r-squared 0.806420 mean dependent var 47.90378 adjusted r-squared 0.788822 s.d. dependent var 2.662452 s.e. of regression 1.223505 akaike info criterion 3.343123 sum squared resid 49.39984 schwarz criterion 3.517276 log likelihood -57.84777 hannan-quinn criter. 3.404520 f-statistic 45.82420 durbin-watson stat 2.274614 prob(f-statistic) 0.000000 table 4.9 dependent variable: pqli sample: 1981-2017 date: 03/03/19 time: 15:03 least squares method included 37 observations variable coefficient std. error t-statistic prob. c 455.0112 12.41700 36.64420 0.0000 intr -7.214399 0.263894 -27.33823 0.0000 infl -0.952311 0.235986 -4.035460 0.0003 exch 0.115340 0.037255 3.095952 0.0040 r-squared 0.894112 mean dependent var 105.7486 adjusted r-squared 0.871759 s.d. dependent var 21.38666 s.e. of regression 3.594062 akaike info criterion 5.498249 sum squared resid 426.2702 schwarz criterion 5.672402 log likelihood -97.71760 hannan-quinn criter. 5.559646 f-statistic 413.9092 durbin-watson stat 2.460797 prob(f-statistic) 0.000000 discussion of findings the estimated coefficient for inf (inflation rate) shows the existence of a negative and statistically insignificant effect on life expectancy, human development, health as well as physical quality life index. this by implication means the existent of an inverse relationship of inflation rate with the dependent variables. meaning that when inflation increases, it will bring about a decrease in life expectancy, human development, health and physical quality life index and an increase in education and consumption per capital. also, the coefficient for interest rate shows a negative and insignificant effect on life expectancy, health and physical quality of life index, while it has a positive effect on education index, consumption per capita and human development. meaning that increasing interest rate will have a decreasing effect on life expectancy, health and physical quality of life index in nigeria within the study duration. the coefficient for exchange rate (exr) shows that there exist positive effect on the dependent variable except for education index. this can be said that exchange rate will increase the life expectancy, consumption per capita, human development, health and physical quality of life index. this by implication means that increase in real exchange rate will have a positive and direct effect on all the dependent variables except for education index which is proven to give a negative relationship. analysis of the impact of inflation, interest rate, and exchange rate on economic development 131 5. conclusion and recommendation this work examined the influence of three key macroeconomic characteristics on key economic development indicators in nigeria over a period of thirty seven years 1981 to 2017. one of the primary objectives of macroeconomic factors is to gauge the sustenance of a domestic economy as a whole with regard to how a specific factor affects overall performance of such economy. for this reason, we considered it sufficiently beneficial to disaggregate the factors with the ultimate goal of exploring how inflation, interest and exchange rate has influenced the life expectancy, human development, consumption per capita, physical quality of life, health and education within the economy. the work infers from the empirical findings that there relative effect between the macroeconomic variables and economic development indicators in nigeria exist. the impact of the mechanisms of economic attributes on performance indicators differ. the work infers that the different components of economic attributes impact on the different indicators of performance in divers’ ways. as regards to the findings, the following were recommendations: 1. inflation, interest and exchange rate should be used to create a favorable investment climate on economic development variables. 2. the apex bank needs to consider inflation threshold for the country in the process of targeting single digit inflation as one of its major objectives. 3. the central bank of nigeria may also reduce interest rate to moderate the money market. 4. government should adopt tight monetary policy measures to control inflation from time to time. this is because one of the government macroeconomic challenges is maintenance of price stability. these go a long way in determining the quality of life, consumption per capita and education among others. 5. it is also recommended that political leaders should minimize unjustified public spending and promote fiscal prudence. references adeleye, n., osabuohien, e., bowale, e., matthew, o., and oduntan, e. 2017. financial reforms and credit growth in nigeria: empirical insights from ardl and ecm techniques. international review of applied economics. doi:10.1080/02692171.2017.1375466 adelowokan, o. a. 2012. exchange rate in nigeria: a dynamic evidence. european journal of humanities and social sciences, 16 (1): 785-801 aminu, u. and a.z. anono (2012). effect of inflation on the growth and development of the nigerian economy (an empirical analysis). international journal of business and social science. vol.3 no.10 [special issue-may 201 anochiwa, l.i. and maduka, a. (2015). inflation and economic growth in nigeria empirical evidence? journal of economics andsustainable development vol. 6 no.20. bakare, h, r. kareem and b. oyelekan (2015), effect of inflation rate on economic growth in nigeria (19862014). developing country study. vol.5, no8. samson ogege 132 doguwa, s. i. (2012) inflation and economic growth in nigeria: detecting threshold level cbn journal of applied statistics. faroh, a. and shen, h., (2015). impact of interest rates on foreign direct investment: case study sierra leone economy. international journal of the economic research. 6(1). [online] finan, m.,b., (2016). a basic course in the theory of interest and derivatives markets: a preparation for the actuarial exam fm/2. hossain. e, b.c. ghosh and k. islam (2012), inflation and economic growth in bangladesh. journal of arts. science and commerce. vo. -iii, issue 4(2). inyiama, o. i. (2013). does inflation weaken economic growth? evidence from nigeria. european journal of accounting auditing and finance research vol. 1, issue 4, pp. 139-150. jaganath, b. (2014). inflation and its impact on economic growth. evidence from six south asian countries journal of economic and sustainable development.19. kamal, k. m. m. (2015). an ecm approach for long run relationship between real exchange rate and output growth: evidence from bangladesh. dhaka university journal of science, 63 (2), 105–110 kasidi, f. and k. mwakanemela (2013) impact of inflation on economic growth: a case study of tanzania, asian journal of empirical research vol. 3, no. 4, pp 363-380 mamun, a., chowdhury, a. h., & basher, s. (2013). effects of exchange rate variation on price level and output growth in bangladesh. journal of social sciences ̧ 4(6), 205–212. mutinda, d. m. (2014). the effect of lauding interest rate on economic growth in kenya. a research project submitted in partial fulfilment of the requirements for the award of a degree of masters of science in finance, university of nairobi. oladapo, et al (2015), inflation, interest rate and economic growth in nigeria. european journal of business management. vol.7, no.30. 26. olu, j.f and idih, e.o. (2015), inflation and economic growth in nigeria. journal of economics and international business management. vol.3 (1), pp. 20-30. siddiqui, h., a,. a. and aumeboonsuke, v., (2014). role of interest rate in attracting the fdi: study on asean 5 economy. international journal of technical research and application. 2(3). semuel, h. and nurina, s. (2015). “analysis of the effect of inflation, interest rates, and exchange rates on gdp in indonesia.” thorlie, m. a., song, l., wang, x., and amin, m. 2014. modelling exchange rate volatility using asymmetric garch models: evidence from sierra leone). international journal of science and research, 3(11): 1206-1214. uddin, k. m. k., rahman, m. m., & quaosar, g. m. a. a. (2014). causality between exchange rate and economic growth in bangladesh. european scientificjournal, 10(3), 11–26. microsoft word 16.makale (tsung ju yang).doc international journal of commerce and finance, vol. 2, issue 1, 2016, 169-176       the influences of relationship marketing in the housing brokerage market tsung-ju ynag, (assistant professor)  yi-chen tu, (master)  ching-sung shen, (master)  institute of service industries and management, minghsin university of science and technology, taiwan abstract: many companies and salesmen try to build and maintain long-term relationship with their customer. the influences of relationship marketing activities are important issue of the housing brokerage market. the aims of study are to learn the impacts of relationship marketing on customer satisfaction and customer loyalty in the housing brokerage market. the researchers survey the customers and use the regression analysis method to test the relationships between relationship marketing, customer satisfaction and customer loyalty in taiwan. the research results show that the relationship marketing positively impacts on customer satisfaction and customer loyalty, then customer satisfaction positively impacts on customer loyalty. customer satisfaction plays a mediating role between relationship marketing and customer loyalty. besides, the study confirm that brokers’ expertise moderates the relationship of relationship marketing process. the findings suggest that the brokers’ relationship marketing and expertise empirically impact on the customers. keywords: housing brokerage market, relationship marketing, customer satisfaction, customer loyalty 1. introduction: relationship marketing is the bond of the customer and the company (berry, 1995), and create and maintain good relationship between the buyer and the supplier (gummesson, 1998). relationship marketing activities of a company including financial, social and structural bond (berry and parasuraman. 1991). relationship investment strategies would increase customers’ relationship quality and behavioral loyalty toward the firm (de wulf, odekerken-schroder and iacobucci, 2001). in the housing brokerage market or real estate agent industry, communication and results are the most important factors (dabholkar and overby, 2006), process factors are linked with service quality, and outcome factors are linked with customer satisfaction. (dabholkar and overby, 2005). tuzovic (2009) confirm that the demand of specific service attributes between renters and buyers are different in the real estate industry and real-estate firms should pay attention to the training of agents. many managers and sales realize the importance of the relationship marketing, however, how to create and maintain customer relationship is difficult in the housing brokerage market. the price of the real estate or housing are high. many consumers have few experience to buy or to rent the real estate or housing. the housing brokers are difficult to maintain long term relationship with the customers. few prior literatures study the influences of relationship marketing and brokers’ expertise on customers’ satisfaction and loyalty. therefore, the purposes of the research are to study the relationships among relationship marketing, customer satisfaction and customer loyalty in the housing brokerage market, and to explore the moderating roles of housing brokers’ expertise in the linkages between relationship marketing, customer satisfaction and customer loyalty. in te rn at io n al j o u rn al o f c o m m er ce a n d f in an ce   170 tsung-ju ynag, yi-chen tu, ching-sung shen     http://ijcf.ticaret.edu.tr   2. literature review relationship marketing activities included three bonds: (1) financial bond: encouraging consumer to buy by price inducement; (2) social bond: establishing social relationship with customers; (3) structural bond: providing the customers with values, scarce or expensive to obtain (berry and parasuraman, 1991). in the real estate industry, dabholkar and overby (2005) proposed that process factors are linked with service quality and outcome factors are linked with customer satisfaction. dabholkar and overby (2006) suggest that seven factors are important in real estate agent service: communication, effort, advertising, guidance, professionalism, representation, and results, with communication and results being the most important. tuzovic (2009) found the service attributes differences between renters and buyers in real estate industry, such as description of properties, knowledge/experience and honesty of brokers, and relationship with the brokers. the researches show that housing brokerage firms should know the importance of relationship marketing activities, brokers’ knowledge, experience, and expertise. 2.1. relationship marketing, satisfaction and loyalty the relationship marketing activities of companies influence on customers. chiu et al., (2005) confirm that the financial, social, and structural bonds improve customer values and customer loyalty for stayers; only the structural bond impacts on customer's utilitarian value and customer loyalty for dissatisfied switchers; the social bond affects customer's hedonic value, and the structural bond affects the customer's utilitarian value for satisfied switchers. chen and chiu (2009) find that: first, the financial and structural bonds impact on online shoppers' satisfaction; however, the social bond does not; second, the financial, social, and structural bonds have more positive impacts on female customers’ satisfaction; third, the financial bond is more successful for short-term customers, however, the structural bond is more important for long-term customers. dagger and o'brien (2010) indicate that the impacts of relationship benefits on customers’ satisfaction, trust, commitment, and customer loyalty are different between novice and experienced customers. mimouni-chaabane and volle (2010) point out that the five benefits, including of monetary savings, exploration, entertainment, recognition, and social benefits, have different impacts on customer satisfaction, loyalty, and perceived relationship investment of the firm. the results show that the dimensions of relationship marketing have different influences on customers. garbarino and johnson (1999) demonstrate that overall satisfaction is the primary mediator between the component attitudes and future intentions for the low relational customers, and trust and commitment are the key mediators between component attitudes and future intentions for the high relational customers. balaji (2015) suggest that relationship investments, satisfaction, and commitment play a critical role on customer loyalty, however, the effect of relationship satisfaction on loyalty decreases as the length of the relationship increases. though many relationship marketing theories emphasize the importance of trust and commitment, palmatier et al. (2009) argue that customer gratitude plays a mediating role between relationship marketing investments on purchase intentions, sales growth, and share of wallet. lee, kim and pan (2014) indicate that relationship marketing investments affect both customers’ gratitude and satisfaction, and relationship marketing investments were also more associated with gratitude than satisfaction. relationship investment affects relationship quality and behavioral loyalty (de wulf et al., 2001). liang and wang (2006) confirm a positive relationship between service quality, satisfaction and relationship investment and suggest that financial products need different service and relationship investment. han et al. (2011) argue that both core service and service encounter performances affected customer satisfaction, and customer satisfaction mediated the effects of service performances on switching intention completely. the results show the chain relationship of relationship marketing, customer satisfaction and customer loyalty. therefore, the study propose the hypotheses in the housing brokerage market: h1: relationship marketing positively impacts on customer satisfaction. h2: relationship marketing positively impacts on customer loyalty. h3: customer satisfaction positively impacts on customer loyalty. h4: customer satisfaction mediates the relationship between relationship marketing and customer loyalty the influences of relationship marketing in the housing brokerage market 171     http://ijcf.ticaret.edu.tr   2.2. the moderating roles of housing brokers’ expertise customer relationship management is an important challenge for managers. in airline industry, interpersonal relationships, domain expertise, customer orientation, and service recovery performance are the major factors of relationship quality (cheng, chen and chang, 2008). expertise is service provider’s knowledge and experience (johnson and grayson, 2005). johnson and grayson (2005) confirm that service provider’s expertise, product performance and satisfaction with previous interactions are associated with cognitive trust, then impacts on affective trust, sales effectiveness and future interactions. service provider expertise and customer sociability are important to relationship success in the healthcare settings (spake and megehee, 2010). andreassen and lindestad (1998) confirm that corporate image impacts customer loyalty directly whereas customer satisfaction does not and the finding was consistent with high and low service expertise. the results show that the service providers’ expertise would not influence on the customers. however, ou et al. (2012) suggest that salesperson expertise, ethical sales behavior, service performance, corporate reputation, and corporate performance impact on relationship quality, and relationship quality has positive effects on commitment and loyalty. the results show that salesperson expertise would influence on the customers’ perceptions. paulssen et al. (2014) argue that social bonding is the only one effective relationship marketing strategy in the high risk situations, when perceived low risk, customers’ brand satisfaction determines brand loyalty, whereas when perceived high risk, customers’ brand trust determines brand loyalty. the results show that relationship process between service providers and customers moderate by customers’ risk perceptions. echchakoui (2015) confirms that perceived risk partially mediate the relationship between salesperson expertise and customer loyalty. the study propose that salesperson expertise would moderate the relationship process between customers and the housing brokers. the researchers propose that housing brokers’ expertise moderate the relationship of relationship marketing, customer satisfaction and customer loyalty. based on the above researches, the study propose the hypotheses in the housing brokerage market: h5: the effect of relationship marketing on customer satisfaction increases with expertise. h6: the effect of relationship marketing on customer loyalty increases with expertise. h7: the effect of customer satisfaction on customer loyalty increases with expertise. 3. research method 3.1. procedures and samples the researchers use convenient sampling method to survey the housing brokers’ customers in taiwan. the study collect samples through questionnaires. in the survey, respondents were asked to choose specific one housing broker who had served them within one year and select their perceptions about the housing broker. the authors distributed 250 questionnaires and collected 210 useful samples, and response rate was 84%. the samples were composed of 110 (52.4%) males and 100 (47.6%) females. there were 33 (15.7 %) respondents who were less than 30 years of age; 80 (38.1 %) who were between 31 and 45; 81 (38.6%) who were between 46 and 60 years; 16 (7.6 %) who were over the age of 61. the respondents’ education level were: 45 (21.4 %) were high school or under; 52 (24.8 %) were college; 81 (38.6%) were university; 16 (7.6 %) were graduate level. there were 39 (18.6 %) respondents who work in public services or school; 48 (22.9 %) in manufacturing industries; 68 (32.4 %) in service industries; 26 (212.4 %) were housewife and 29(13.8%) were others. there respondents were 73 (52.4%) single and 137(65.2%) married. 3.2 measures according to the previous researches, the authors developed 8 items to measure participants’ relational marketing perceptions to the housing brokers (chiu et al., 2005), 3 items to measure customer satisfaction (de wulf et al., 2001), 5 items to measure customer loyalty (kim et al., 2009; palmatier et al., 2009), including of word-of-mouth and purchasing intentions. we developed 3 items to measure participants’ perceived the housing brokers’ expertise (johnson and grayson, 2005). for all items, the researchers use a 5-point likert scale (1=strongly disagree; 5=strongly agree). 172 tsung-ju ynag, yi-chen tu, ching-sung shen     http://ijcf.ticaret.edu.tr   4. research results 4.1. reliability and validity table 1. presents the mean, stander deviation, and correlation matrixes of the study. the researchers use cronbach’s α coefficients to evaluate the measurement reliabilities of the study. the cronbach’s α of the relationship marketing, customer satisfaction, customer loyalty and housing brokers’ expertise are .902, .809, .888, and .805. the cronbach’s αcoefficients of measurements are all higher than 0.7 and show that the internal consistency of the scales are good (nunnally, 1978). besides, the composite reliabilities of all variables are all higher than 0.7 and the correlation between any two variables are lower than cronbach’s α of the variables (table 1), the results indicate that the discriminant and convergent validities of the scales are good (fornell and larcker, 1981; gaski and nevin 1985). table 1. mean, stander deviation, and correlation matrixes relationship marketing satisfaction loyalty expertise relationship marketing (.902) satisfaction .692*** (.809) loyalty .775*** .737*** (.888) expertise .791*** .747*** .791*** (.805) mean 3.732 3.757 3.736 3.730 s.d .636 .679 .704 .703 ***p <.001, numbers in parentheses are cronbach’s α. 4.2. hypotheses testing the researchers use regression analysis method to test the hypothesis. the empirical results are showed in table 2. in the model 1 and model 2, the results show that relationship marketing significantly impacts on customer satisfaction (β=.692, t=13.816, p<.001***) and customer loyalty (β=.775, t=17.696, p<.001***). in the model 3, the results show that customer satisfaction significantly impacts on customer loyalty (β=.737, t=15.743, p<.001***) in the housing brokerage market. the empirical results show that the hypothesis 1(h1), hypothesis 2(h2) and hypothesis 3(h3) of the study are all supported. the results indicate that the housing brokers’ relationship marketing would increase their customers’ satisfaction and loyalty, and improving customer satisfaction would increase customer loyalty. the housing brokers should maintain relationship with their customers, such as financial, social and structural bonding tactics, to increase customers’ satisfaction and loyalty. in the model 4, the researchers test the mediating role of customer satisfaction between relationship marketing and customer loyalty. following the suggestions of baron and kenny(1986), the mediating role exists when the main effect of relationship marketing on customer loyalty become insignificant or reduced when another variable, customer satisfaction, is added to the regression analysis. including of two independent variables to the model 4, relationship marketing and customer satisfaction, the impacts of relationship marketing and customer satisfaction on customer loyalty are still significant but the β coefficient of relationship marketing is reduced from .692(t=13.816, p <.001***) in the model 1 to .508(t=9.314, p<.001***) in the model 4. the regression results of model 1, 3 and 4 show that customer satisfaction partially mediates the relationship between relationship marketing and customer loyalty in the housing brokerage market. therefore, the fourth hypothesis of the study (h4) is partly supported. the influences of relationship marketing in the housing brokerage market 173     http://ijcf.ticaret.edu.tr   table 2. regression analysis dependent variables satisfaction loyalty model 1 model 2 model 3 model 4 independent variables relationship marketing .692*** (13.816) .775*** (17.696) .508*** (9.314) satisfaction .737*** (15.743) .386*** (7.067) adj r² .476 .599 .541 .675 results supported supported supported partially supported *** p <.001, numbers in parentheses are t value. to test the moderating roles of housing brokers expertise, the study follow the suggestions of baron and kenny(1986). in the model 5 and 6 of table 3, the regression analysis results show positive and significant interaction effect of housing brokers expertise and relationship marketing on customer satisfaction (β=.834, t=6.246, p< .001***) and customer loyalty (β=.790, t=6.875, p<.001***). the results support the hypotheses h5 and h6 of the study. the results indicate that the effect of relationship marketing on customer satisfaction and customer loyalty is greater when customer perceived the higher level of housing brokers’ expertise. besides, the results of the model 7 show positive and significant interaction effect of housing brokers expertise and customer satisfaction on customer loyalty (β=.936, t=9.099, p<.001***). the results support the hypotheses h7 of the study. the results indicate that the effect of customer satisfaction on customer loyalty is greater when customer perceived the higher level of housing brokers’ expertise. table 3. moderating analysis of housing brokers’ expertise dependent variables satisfaction loyalty model 5 model 6 model 7 independent variables relationship marketing -.092 (-.685) .033 (.289) relationship marketing × expertise .834*** (6.246) .790*** (6.875) satisfaction -.126 (-1.228) satisfaction × expertise .936*** (9.099) adj r² .557 .672 .671 results supported supported supported *** p <.001, numbers in parentheses are t value. 5. conclusion 5.1. discussions many managers know the importance of relationship marketing activities, however, how to develop and maintain the relationship with customers is a challenge in the housing brokerage market. the price of housing and real estate is a huge amount, and most people have few chance to deal with the housing brokers. for housing brokers, learning the influences of relationship marketing activities is important issue. the research study the influences of relationship marketing and the results are as followings: first, the relationship marketing positively impacts on customer satisfaction and customer loyalty, and customer satisfaction positively 174 tsung-ju ynag, yi-chen tu, ching-sung shen     http://ijcf.ticaret.edu.tr   impacts on customer loyalty in the housing brokerage market. the results are consistent with previous researches (e.g., chen and chiu. 2009; chiu et al., 2005). the results indicate that housing brokers should invest the relationship marketing activities with their customers, including of financial, social and structural bonds, to increase customer satisfaction and loyalty would. the results also confirm that relationship between relationship marketing and customer loyalty is partially mediated through customer satisfaction in the housing brokerage market. second, the study empirically confirm the moderating roles of the housing brokers’ expertise in the relationship marketing process. the housing brokers’ expertise moderate the relationship of relationship marketing on customer satisfaction, relationship marketing on customer loyalty, and customer satisfaction on customer loyalty. the findings suggest that relationship marketing leads to higher customer satisfaction and customer loyalty as housing brokers’ expertise increases. similarly, customer satisfaction leads to higher customer loyalty as housing brokers’ expertise increases. the results show that salesperson expertise could improve the customer relationship process. the housing firms should pay attention to the staff trainings to improve the level of brokers’ expertise and then increasing the influences of the housing brokers’ relationship marketing activities. 5.2 limitations and future directions there are some limitations of the study. first, the research use a cross section method to survey the housing brokers’ customers, future researches should investigate the influences of relationship marketing using a longitudinal method by tracking and observing the same group of housing customers. second, the study explore the relationship among relationship marketing, customer satisfaction and loyalty, and the moderating roles of brokers’ expertise, future research could study the impacts of other variables, such as relational characteristics. third, the study only examine the research hypotheses in the taiwan housing brokerage market, future research could study the relationship across different service industries, areas or countries. references andreassen, t. w., & lindestad, b. 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(2010), "consumer sociability and service provider expertise influence on service relationship success", journal of services marketing, 24(4-5), 314-323. international journal of commerce and finance, vol. 4, issue 2, 2018, 128-133 128 the effects of customs union on turkey's competitiveness and foreign trade mehmet enes aşçı, (ma) istanbul medipol university,turkey abstract in this study we will look at the relations between turkey and the eu from the perspective of the custom union. first we will try to observe and understand the process of the custom union and its possible effect on the turkish economy. then we will try to understand the problems with custom union and its results on the relationships between turkey and eu countries. finally, we will make a general assessment in order to cover the whole issue. keywords: turkey, eu countries, custom union, trade relations, importation, exportation, economical integration 1. introduction there were some opposing claims when turkey signed custom union treaty in 1996. some people said that turkey signed the custom union treaty without negotiating the agreement of custom union in detail and turkish industry is not ready to compete with the other industries. also, this treaty introduces some limitations on turkey’s foreign trade. so, it can cause some problems for the turkish economy. on the other hand, some people claim that the eu countries already apply custom tariffs on turkish goods and they already make it zero the all kind of custom tariffs and duties before turkey joins the custom union. so, this behaviour will contribute to the flourishing of the turkish industry and free trade, which will also increase wealth according to them. 2. the definition of the custom union the custom union is an integration model of finance and trade between contracted countries. this model provides no need for any kind of tariffs between contracted parties. however, for third parties, which are not the members of the custom union, a common agreement is applied . at this stage, a custom union is a contract and it abolishes all kinds of tariffs among two or more countries. the main purpose of a custom union is merging the national economies and realising greater economic potential between them (demirel, 1995). forming of common custom area requires the following:  preparing and enforcing of mutual areas.  abolishing of any kind of tariffs and equivalent taxes among the member countries.  banning of any sort of restrictive legislation.  developing of a customised custom union process instead of a conventional custom process.  a requirement of cct (common custom tariff), it is mandatory to share the acquired custom taxes among member states. there are two types of custom union. the first, is a mutual custom tariff, which was determined in 1968. the second, is custom laws and custom legislation, a kind of guide which enables the application of mutual tariffs (şençalar, 2013). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the effects of custom union on turkey's competitiveness and foreign trade 129 3. turkey's entrance to the custom union since the 20th century, globalization has had a great impact on the world. globalization has some positive and some negative effects.with the emergence of globalization, countries have tried to protect themselves from its negative effects. on the other hand, it is not possible for countries to ignore the positive effects of globalization. in order to enjoy the benefits of globalisation, they developed better intergration.the countries reformed their foreign trade policies in the competitive enviroment and they eased custom tariffs and quotas.this means that these countries preferred the free trade model. after world war ii, industrilized western countries united in an economically integrated way in order to increase their foreign trade. to apply this, they established an organisation, known today as the european union, and also another organisation called the custom union (uyar, 2001). the six founders, france, germany, italy, the netherlands, belgium and luxembourg, signed the treaty of rome establishing the european economic community (eec), a common market facilitating the free movement of goods, capital, labour and services in 1957 [5]. after that, britain, denmark and ireland joined. norway voted not to join in 1973. the eu leaders approved the first major revision of the founding treaty, called the signal european act, providing for the creation of a genuine single market and laying the ground for foreign policy cooperation in 1986 . turkey has become a partner of the eu especially in the economic area. turkey was eager to take part in some of the eu agreements. in 1963, turkey initiated the process of becoming a full member of the eu. this process reached a landmark as turkey was accepted to the custom union in 1996. the process of getting a membership of turkey to the custom union based on a partnership relations in 1960. the framework of the custom union was designed with the ankara agreement and this agreement came into force in the year of 1963.the details of the custom union framework were identified with the layer protocol (uyar, 2001). turkey’s relations with the eu was interrupted by the turkish military intervention in 1980. when a civil government came to power in 1983 the relations resumed. after a while, turkey made an application to the eec (european economic community) for full membership in 1987. however, the eec did not accept the turkey’s application. on the grounds that turkey was not ready to be a part of the eec from economical and political perspectives. they declared that the eec would not accept a new member and they would give priority to the sea (single european act) (düzgit, 2011). followingly, turkey made a real the custom union with the ankara agreement. 4. the effects of the custom union on turkish economy after turkey became a partner of the custom union in 1996, the turkish foreign trade deficit increased. actually, some experts predicted that the turkish foreign trade deficit would continue to rise up when turkey made a comprehensive integration with this strong block. nonetheless, it is important to state that the custom union is not the single reason for the increase in the foreign trade deficit. rather, it was driven by several economical and political crises during 1997 in turkey and in other european countries. these events or crises effected the foreign trade deficit of turkey. 5. custom union period and exportation of turkey after becoming a member of the custom union, the total of turkey’s exports in 1996 was just 23.2 billion usd. sustaining average annual growth rates of approximately 15.3%, total exports reached 131.9 billion usd by 2008. it was observed that turkish exports became intensified from 2003 to 2008. the earthquake of 1999 and some global economical crises effected the turkish economy. that is why the rate of exportation out of turkey. in other words, it was effected negatively. in the year of 2001 turkish domestic demand narrowed. as a result, companies were redirected to foreign markets. in 1999 our total exports were valued at almost 26.6 billion dollars. however, this figure jumped to 36.1 billion dollars in 2002. the rising rate of annual exports between 2003 and 2008 provided the mehmet enes aşçı 130 turkish economy with strength and dynamism. between 2003 and 2008 due to the accelarated growth in the economy, dynamism in global trade, increaments in machine investment, an unusual increase was observed in export performance (yükseler and türkan, 2006). in the summer of 2008 insufficiently collateralized loans and overborrowing to subprime lenders by american banks caused a global financial crisis. this financial crisis effected most industrial sectors, as a result this became a very strong and devastating economic crisis in world history. consequently, growth of the countries had been negative. in 2008 the turkish economy attained a total export value of 132 billion usd (şençalar, 2013). 6. transition to the custom union and importation of turkey in 1996 the total value of importation into turkey was 43,6 billion us. in just 8 years time, turkish imports increased considerably and reached 202 billion usd in 2008. from 1996 to 2001 the average growth rate for importation per year was nearly 4.43%. however, between 2002 and 2008 this figure jumped to a range of 25% to 65%. among the total importation, consumer goods rate had been 8% before 1996. but, after joining to the custom union this rate became 12% (filiztekin, 2013). 7. turkey's foreign trade balance after custom union in 2008 turkey had a foreign trade deficit of almost 70 billion usd. this high deficit was dute to a low exchange rate since 2003. the low exchange rate policy caused some significant damage to the foreign trade balance. because of the rising importation due to low rated foreign currency against turkish lira, the foreign trade deficit increased extremely rapidly (dura, 1999). we can say that despite turkey's good exportation performance, it is clear to observe that foreign trade deficit increased gradually due to increment in the importation (uyar, 2001). 8. the effects of the custom union on the competitive power turkey tried strengthen its economy in order to make it more competitive with the other economies. turkey applied several regulations on its economy in order to harmonise with the eu competition policy. these regulations contributed to turkish goods and improved their likelihood of adoption into the eu and world markets. there were some firms producing low quality goods but selling them at inflated prices. they either improved on this or exited the market (demir and temur, 1998) . when turkey joined the custom union the legal regulations encouraged the turkish economy to be more comprehensive and institutional. especially with regards to the regulations on protection of intellectual property has been a crucial in the further development of economy in turkey (demir, 1998). turkey encouraged industrial products and their production with its comparative supremacy after the 1980s (katırcıoğlu, 1994). turkey has supremacy on 72 goods against eu and eu countries have a comparative supremacy of 188 goods against turkey. on the other hand, turkey has a comparative supremacy of 104 goods against non-eu countries and they have comparative supremacy on 156 goods against turkey (ulusoy, 1997). turkey has supremacy on agricultural products against eu countries. despite turkey’s competitive supremacy agricultural products are not included in the custom union (dura, 1999). the other problem turkey faces in the international area is the lack of democracy and lack of human rights. these factors affect turkey and its competitive power. today economics and policies move together in the world. turkey interprets the issue of democracy its domestic issue and this behaviour have become complicated relations with eu countries. free market economy and participatory democracy, stability on economical and political issues make turkey more stranged and put it in a key position, and this makes turkey indispensible to eu countries (kayhan, 1998).if we compare labor costs between turkey and the eu. turkey has cheaper labour costs than eu countries. in addition, the geographical position and natural resources of turkey are better than most eu countries. turkey gives importance to infrastructure and this enables the possibility of all kinds of investment available in turkey. firms applied technological modernisation in order to integrate to the international competition conditions. turkey has a competitive advantage in cement, textile, food, ceramic, iron and steel sectors (ocak, 1997). the effects of custom union on turkey's competitiveness and foreign trade 131 9. the effects of custom unıon on employment in turkey the biggest employment effect of the custom union has been seen especially in turkish industry. after joining to the custom union the importation from eu countries shows itself in investment and intermediate sectors. in the medium term it is projected that this process will increase the quality of production in the structure of manufacture structure (soğuk and uyanusta, 2004). furthermore, when turkey joined the custom union the sectors that gained from increased exportation opportunity, lead to a reduction or some significant effect towards reducing unemployment in turkey . on the other hand, the expectations of positive effects of the custom union on foreign investment has not been realized. the foreign investments of the custom union was very low. one reason of this is that the economical environment in turkey did not have encouraging conditions for domestic and foreign investments. when the suitable conditions are provided, effective stimulus and harmonization of competition legislation will give an opportunity for increased foreign investment in turkey. a possible effect of the foreign investmnet in turkey would improve the employment rate in turkey. 10. in the process of the custom unıon the trade between turkey and eu when we look at the trade relation between turkey and eu countries, especially with regards to joining to the custom union, it can be said that overall turkey has made progress and the trade volume increased. but both the economic and the competitive power of turkey was very low. so, this caused negative effects (nart, 2010). it is observed that the growth rate of exportation to the eu countries is much lower than importation rate from the eu countries after joining the custom union. the other crucial fact is that the tendency of importation into turkey based on interim goods and investment goods. when turkey joined the custom union importation and exportation relations developed with eu countries more than those with usa and far east countries. as a result of abolishing tariffs and custom duties the importation rate has shown a greater growth than the total importation rate. despite the rise of total importation of 22% the importation rate from eu countries jumped to 37%. this boost is a natural result of the custom union. between 1993 and 1995 the total rate of eu on turkish foreign trade was 48%. but, this ratio jumped into 54% between 1996 and 2000. turkey joined the custom union without any plan. so, importation from eu to turkey rose. but the exportation to the eu from turkey did not raise so much (kidb, 2003). after joining the custom union the importation from the eu countries and this is followed fluctuations in the internal and external economic relations (kayalar, 2003). between 1995 and 2000 the importation rate became 57.8% and the exportation rate became 30.9%. when we make an assesment from this data we can see that the trade with eu countries experienced a tremendous increase and it contributed to the total exportation. but the exportation trend is good for eu countries. in other words, turkey is dependent on the eu and it's market step by step. this is a threat, as of 2004 the exportation rate of 54,5 % and importation rate of 46,6 % belonged to the eu countries (tokatlıoğlu, 2005). for example, trade with usa and japan has been diminishing since 1996. in the year of 1990 the total imports of japan was 5% and this rate graduallly decreased and became 3.9% in 1995 and in 1996 it became 3.3% this trend continued and in 2008 and 2009 it became 1.9% (tüi̇k, 2012). 11. external terms of trade of the custom unıon external terms of trade is a rate between importation prices and exportation prices. if a country sells products at a low price and purchase another good at a high price. it means that this country has a trade deficit, and if external terms of trade began to grow in a positively way it means that the country can raise its wealth. when we look at the terms of trade in recent years, they have always caused negative results for turkey (kip, 2011). 12. the foreıgn trade developments after the custom unıon the first crucial question here. when turkey joined the custom union the possible changes of the custom union agreement on the structure of turkish foreign trade. in order to answer this question we should look at the mehmet enes aşçı 132 distribution of foreign trade according to the interim goods in turkey. if we look at the exportation distribution on interim goods, exportation of capital goods increased but interim goods exportation did not go up in turkey. if we look at the importance of the eu on turkish importation and exportation we can see that the rate of exportation is decreasing. but the rate of importation is increasing. if we look at the general trade ratio in turkey almost in every product both importation rate and exportation rate went up in the total production. we can summirize it as the custom union and its effects are very diverse especially on turkish foreign trade (filiztekin, 2013). 13. conclusıon the result of the custom union agreement is that turkey has encountered a loss of taxes and the turkish domestic market has experienced dificulty with the entrance non tariff goods. so, it increases cheap foreign goods and raises unemployment rates in turkey at the same time. so, there are two possible opportunities presented to turkey in order to improve the bad contitions of the custom union agreement. one of them is that turkey may make a new sort of free treaty with us in an independent situation. the other one is that turkey could attempt to use its ability of persuasion on eu countries in order to add his self to the game (çetingüleç, 2014) . in the framework of legislative arrangements and standards with technicial statue turkish industry run into radical change. the other good thing is that the custom union provides room turkey could use to gain momentum in liberalising in the area of world trade organisation. in the scope of the custom union legislative alignment became real and it doesn’t only require institutional structures of this country but also negotiations for full membership to the eu make the process more easier for turkey (demir, 1998). references çetingüleç, m., "ab abd ticaret anlaşması türkiye'yi gümrük birliğinden koparacak mı?" al-monitor.com, 18.11.2014. demir, o., & temur, y. (1998). gümrük birliğinin i̇lk i̇ki yılı değerlendirmesi. dış ticaret dergisi, 11. demir, i̇. (2006). gümrük birliği ve türkiye'nin rekabet gücü (doctoral dissertation, selçuk üniversitesi sosyal bilimler enstitüsü). demirel, v. ekonomik entegrasyon ve politika harmonizasyonu. maliye ve gümrük bakanlığı yayını, (265). dura, c. (1999). türkiye ve avrupa birliği i̇lişkileri : 36 yılın bilançosu (1963 1999), maliye dergisi, s.131, ankara. düzgit, a., s. (2011).''avrupa birliği genişlemesi ve komşuluk politikası'', avrupa birliğine giriş, i̇stanbul bilgi üniversitesi yayınları, i̇stanbul. filiztekin, a. (2013). ''ab ile gümrük birliğinin türkiye i̇malat sanayiine etkileri'' , kalder 12. ulusal kalite kongresi, 14 ekim 2013, i̇stanbul. katırcıoğlu, e. (1994). "türk ekonomisinde rekabet sorunu", görüş dergisi, tüsi̇ad yayını. kayalar,t. "cumhuriyetin 80. yılında i̇hracatımızda son gelişmeler ", baş.dış.tic. müstş. http:// www.dtm.gov.tr /ead/ dtdergi / ozelsayiekim// mustesar.htm. kayhan, m. (1998). "krizden ders almak", görüş dergisi, tüsi̇ad yayını , mart 1998. kip, e. (2011). türkiye dış ticaret hadleri. kurumsal i̇lişkiler dairesi başkanlığı ( ki̇db ), (2003). " avrupa birliği genel müdürlüğü,türkiye avrupa birliği dış i̇lişkilerindeki gelişmeler ve ab ile dış ticaretimiz dergisi'', özel sayı, ankara. the effects of custom union on turkey's competitiveness and foreign trade 133 nart, e., ç. (2010). gümrük bi̇rli̇ği̇’ni̇n türki̇ye’ni̇n diş ti̇careti̇ üzeri̇ne etki̇leri̇: panel veri̇ anali̇zi̇. journal of yaşar university, 5(17), 2874-2885. soğuk, h., & uyanusta, e. (2004). gümrük birliği’nin türkiye ekonomisine etkileri. i̇kv yayını, i̇stanbul, nisan, 163s. şençalar a. i̇. (2013). türkiye'nin gümrük birliği'ne geçişi ve gümrük birliği'nin türk dış ticaretindeki yansıması (1990 2009), marmara üniversitesi sosyal bilimler enstitüsü, yayımlanmamış yüksek lisans tezi. tokatlıoğlu, m., y. (2005). "türkiye'de dış ticaretin vergilendirilmesi ve avrupa birliği", akdeniz i̇i̇bf dergisi, c. 5, s.10, antalya. tui̇k, i̇statistik göstergeler 1923 2007, http:// www.tuik.gov.tr/ yillik/ ist¬_ gostergeler.pdf ( 25.08.2012); tui̇k ülkelere göre dış ticaret, http :// www.tuik.gov.tr/ veribilgi.do ? tb _ id= 12& ust _ id=4 (27.08.2012). uyar s. (2001).''gümrük birliğinin türkiye'nin dış ticaret üzerine etkisi'', dtm dış ticaret dergisi. yükseler z., türkan,e. (2006).türkiye'nin üretim ve dış ticaret yapısında dönüşüm : küresel yönelimler ve yansımalar, ekonomik araştırma forumu çalışma raporları serisi, i̇stanbul. ulusoy g.,“rekabet stratejileri ve en i̇yi uygulamalar türk çimento sektörü”, tüsiad rekabet stratejileri dizisi-2, 1997, s.45. ocak, b., s., "türk sanayii ve özel sektör rekabet olanaklarına genel bakış,i̇mkb dergisi, ocak mart 1997. international journal of commerce and finance, vol. 1, issue 1, 2015, 39-44 irrational human behaviors orhan şener, (phd) kadir has university,turkey abstract: neo classical economists used to posit that, since consumers are rational, they make decisions to maximize their pleasure (utility). opposing to neo classical understanding, behavioral economists argue that, consumers are infect not rational, but prone to all sort of biases and habits that pull them being rational. for instance, there are too many irrational choices made by the turkish cons umers like; expensive wedding parties given by low income families; although riding bicycle is healthy and cheap, but people buy expensive cars; it is cheaper staying at a hotel or a timeshare, however people buy expensive summer houses, where they stayed only few weeks a year. these type of irrational behaviors adversely affect the decisions on savings, investments and economic growth. on the consumers irrationality, tversky and daniel kahneman, winner of the 2002 nobel prize in economics, wrote prospect theory. they developed a cognitive psychological model to explain divergences from neoclassical economics. they claimed that people take decisions under psychological, social, emotional and economic factors that affect market prices and resource allocation. in order to explain the irrational behaviors of turkish consumers, i utilized some concepts such as conspicuous consumption (or keeping up with johns), veblen effect, bandwagon effect, bounded rationality, 20 to 80 law and ethical considerations developed by behavioral economists and heterodox economics. thus, i came to conclusion that why the free market economic understanding fails in turkey by giving some examples and economic reasons stated in the last section of this paper. keywords: behavioral economics; heterodox economics; conspicuous consumption; veblen effect; bandwagon effect 1. introduction: adam smith’s unseen hand doctrine dominates the classical economics thoughts, as being the foundation of the capitalism. perfect market mechanism of the capitalist system depends on the rational behaviors of the people. in real life, this understanding doesn’t hold true as claimed by the behavioral economists and heterodox economics thought. although, free market economic understanding failed during the great depression and in later economic crisis, however it is being supported by monetary economists, big business and financial capital. deregulation of public services, privatization of state economic enterprises and financial liberalization policies resulted in worldwide economic and debt crisis. for this reason, the aim of this paper is to explain why the free market understanding based on rational human behavior can not be justified. in order to support my view, i summarize the basic views of behavioral economics and heterodox economics popular after 1970’s. based on irrational human behaviors, i also employed principles of public economy in defending my thesis on why free market understanding can not solve economic problems in the conclusion section. in the first section, irrational behaviors of the consumer as explained by kahneman, tversky, veblen, akerlof, pareto and minsky are summarized (şener 2015). all these economists claim that consumers are not rational as adam smith formulated. they argue that, consumer behaviors are determined by social value judgments, social values, habits, and non economic factors. these behaviors take the different forms of showing offs such as conspicuous consumption motivations, veblen, bandwagon, and snob effects. the second section includes some concepts, against rational human behavior understanding, developed by heterodox economist such as lorenz and minsky. these concepts are : bounded rationality, the market for lemons, 20 to 80 law (power law), happiness, crash-prone, and some ethical considerations, leading to inefficiencies that the market mechanism is potentially generating. in the conclusion section of this paper, i support the above mentioned economists by giving some examples related to market imperfections, and irrational behaviors of turkish consumers. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 40 orhan şener http://ijcf.ticaret.edu.tr 2. behavioral economics contrary to adam smith’s invisible (unseen) hand theory, behavioral economists argue that people are not taking rational actions. these economists claim that, people take decisions based on social values, habits and noneconomic psychological factors. for this reasons, they argue that as proclaimed by adam smith; "people behave along with their self-interest, selfishness and rational motivations" doesn’t hold true in real life. there are many examples of irrational human behaviors, that don't fit this theory as follows. • although cigarette smoking is harmful, but many people are obese smokers. • trap prices like 99.90 liras attracts people, especially those thinking of it is less than 100 liras. • much type of competitions in business don’t rest on economic grounds, but they are related to some psychological and social factors. • especially in developing countries people are likely to behave in line with the conspicuous consumption or ‘keeping up with jones’ motivations. behavioral economics examines the irrational economic activities of people as shown by these examples. this new economic theory is based on both economics and psychological factors, rather than traditional and mainstream economics principles. in fact, these new approaches highly affect the theories on savings and economic policies both in market and public economies. it also provides insights into the explaining very complex economic behaviors of human beings. tversky and kahneman were the pioneers in establishing the basis principles of this new branch of economics in 1970s. they successfully developed and adopted theories based on brain process information. according to them, when the people face uncertainty, they tend to behave randomly related to their mental shortcuts based on experience. they state that, people are strongly influenced by a certain proposition called ‘framing’, while taking decisions (kahneman and tversky 2003). another branch of behavioral economics known as ‘neuroeconomics’ becoming popular in explaining human economic motivations. accordingly, the brain reacts to high price offers, as it reacts to abhorrent or disgusting smell. the other branch of behavioral economics is called ‘nudge economics’ that explains the decisions based on their self interest or of their own preferences are closely related to their experiences and environmental preconditions. this means that, the assumptions explaining the human behavior rationality doesn’t rest on self-interested motivation as formulated by adam smıth, because people are very complex. 3. approaches against rationality although, production was the concern of classical economist, early neoclassical economists analyzed the consumer preferences based on their behaviors. especially, institutional economists studied the subject matter and its relevance to physiology and sociology. although, mainstream economists assume that human being are rationale in making decisions; however they are not in their real life. the reason is, a rational human being logically reasons or employs the principles of reasoning consciously based on their daily life. the following cases such as conspicuous consumption motivation and veblen’s effects are the examples of irrational behaviors of consumers. 4. conspicuous consumption if you buy goods that fit your true preferences, as economists assumed, your behavior is rational. however, there are irrational human behaviors 41 http://ijcf.ticaret.edu.tr many types of consumer behaviors that can’t be accepted as rational. for instance, if you by a mercedes car because your neighbor has one, but your purchasing power is not high enough to support. then, your welfare will decrease since you are paying interest to banks, and maintenance costs such as insurance, depreciation, gas etc. on the other hand, your conspicuous consumption behavior not only reduces your welfare but it also wastes the limited sources of the society. veblen used this term to explain the behavior of the wealthy people. he argued that, rich people are likely to display their economic and social power by buying very expensive consumption goods called statue goods. some people buy goods to show off that they are “the part of the society” termed by bandwagon effect. there are also some people, exhibiting their consumption behavior to distinguish themselves from the society known as snob effect (bagwell and bernheim 2003). women enforce their husbands to buy luxury car or villa as their neighbor has, called keeping up with johns effect as in the case of usa and turkey. sometimes a consumer’s demand for a good is connected to other people’s perception. this happen to be when a consumer wants to show off his high status. thus, a status good can only be owned by him, but the others can’t. suppose that, somebody else buys this good, he should buy another good that no one could own it. for instance, some rich people urge the restaurant owners, to increase the prices as much as possible, so that nobody could access to the service easily. all these types of consumer behaviors violates traditional price setting theory based on supply and demand laws. above cases show that, demand curve becomes upward sloping, rather than downward sloping as economic theory assumed. the upward sloping demand curve displaces veblen effect. according to this effect, higher prices means better quality and thus higher demand for goods and services opposing to the demand law. this is why the expensive goods like mobile phones are even demanded by low-income families. some economists opposed to principle of utility maximization based on the rational behavior of consumers. they prefer to use satisfying characteristics of a good rather than their marginal utility. this means that, a satisfying quantity is a good criterion to be used instead of utility maximization. another group of economists argue that, consumer behavior is shaped by social forms, value judgments and advises of some friends etc. for instance, during the fasting month demand for the food increases in muslim countries. on the other hand some economists prefer to use the term of bounded rationality instead of rational consumer assumption. keynes also used this notion of propensity to consume not in the sense of rational consumer behavior, but in psychological mean. 5. heterodox economics history of economics has been dominated by orthodox economists who supported neoclassical economic theory. however, in 1970s economics thoughts was divided into two branches; orthodox and heterodox economics. heterodox economists strongly opposed to the mainstream economists, who assumed that market mechanism is the best way to optimize consumer utility and profit maximization goal of the firms. mainstream neoclassical economics thoughts are based on the following assumptions, which are rejected by the heterodox economists. • markets are perfectly competitive, • supply and demand drives the prices to equilibrium, • people behave rationally, • free markets optimize utility and profit maximization although, orthodox economists became very influential at the universities and financial institutions, but they neglected socio economics and social justice issues. thus, starting in 1970s, a number of heterodox branch of economics thoughts have been developed outside the mainstream economics. they developed many branches of heterodox issues such as, behavioral economics, asymmetric information, power law, happy economics, financial instability and complex systems of uncertainties. 6. bounded rationality using psychological principles raised by daniel kahneman and amos tversky tested the rational behavior assumption, assumed by neoclassical economists. they found that, people don’t behave rationally and they referred 42 orhan şener http://ijcf.ticaret.edu.tr to this attitude known as “bounded rationality”. they stated that, consumers have asymmetric attitude towards loss and gain. so, they often miss out on good opportunities. and, tversky says that, we also dislike change, which explains why investors often find it hard to let go of under performing shares (kahneman and tversky 2003). thus, people just couldn’t let go of the rationality. 7. the markets for lemon neoclassical economists assumed that, perfect competition conditions exist in markets. they argued that large number of firms compete to sell the identical products. however, george akerlof argued that, many people may not access to the same information about the markets. he investigated what happens when the people are unable to reach the same information. based on his studies he developed a theory known as the “markets for the lemons”. he considered a market where the good and bad used cars (or lemons) are sold. if the buyer has less information than the seller has, then the buyer would guess that car is of average quality. so, he is likely to pay the price of an average used car price. if the seller has good quality used car, he won’t get high enough price, due to buyer’s lack of information (akerlof 1970). the result will be as gresham stated for money: “the bads will drive out goods from the market”. 8. 20 to 80 law neoclassical economist didn’t make necessary investigation on the income inequality, which leads growing disparities of wealth between rich and poor. the neoclassical economists rest on the adam smith’s wealth distribution, while the heterodox economists argue that it does not hold true in industrial economies. smith argued that an unseen (invisible) hand of the markets will divide the wealth between the rich and poor. opposing to smith’s ideas about wealth distribution, vilfredo pareto formulated a law known as “20 to 80 law” or power law. accordingly, 20 per cent of the population holds 80 per cent of the total wealth. although, pareto stated this law in 19th century, however it holds true in the 21stcentury. for instance, after the 1970s too high salaries paid ceos in rich countries. while the median salaries stagnated and people around the world struggled to feed. amartya sen believed that starvation is the characteristics of some people not having enough food to eat. 9. happy economics after 1950s economists argued that there wouldn’t be strong relations between happiness and gnp level. thus, classical economists’ interpretation of happiness related to material well being is criticized by heterodox economists (luigino 2008). studies on life satisfaction revealed that, americans were much more happier during the 1950s and 1960s, even though gnp level was less than in later decades. surveys show that, once society reaches a certain level of average income, say 15 000 to 25 000 dollars per year, then happiness increases. economists argue that, based on decreasing utility of income, happiness decreases above this income level. then, any further increase in income has no significant effect on happiness levels. veblen argued that, use of advertisement and marketing techniques makes people unhappy by buying new products. conspicuous consumption behavior of people also makes them unhappy, because they by goods that actually they don’t need. 10. feminist economics a politician marilyn waring argues in her book “counting for nothing” many services performed by women and housewives are not included in gnp, because they are not paid. examples of these includes bearing children, looking after sick, aged and disabled family members etc. however, most of these services of women are paid or tax exempted in scan and in some social democratic countries in europe. feminist economists highly criticized neoclassical economic theory because, it favors for rational economic man. thus, they promote male values such as competitiveness and individualism. contrary to neoclassical economists they argue that women’s contribution to social capital needs to be taken into account. irrational human behaviors 43 http://ijcf.ticaret.edu.tr 11. crash-prone in 1990s economists claimed that, economy is not fundamentally stable as assumed by neoclassical economists. hyman minsky (1919-96) argued that the economy is prone crashes and bubbles. he stated that, “during to prosperous times, debt accumulates in the economy as success breeds increasing confidence as keynes’s “animal spirit”. according to him this process, known as the minsky moment, continues until it finally reaches a crisis point. when the debts get called in and the economy crashes. minsky’s claim that the economy is crash-prone has been evidenced through many bubbles. mortgage bubble in the usa, dutch tulip mania in 17th century and british south sea bubble are the historical evidences that supporting the minsky’s claim (minsky 1986). efficient market hypothesis assumed by neo classical economists was strongly criticized by benoit mantelbrot. he argued that since 1960 economic data on price changes didn’t follow the bell curve analysis as predicted by that hypothesis (mantelbrot 1999). this means that, efficient market hypothesis doesn’t hold true the hypothesis has foreseen. he believed that, 20-80 law distribution is a better tool to predict the crashes. he also argued that, although the price changes are small, if all prices of goods are considered, then income distribution will be adversely affected. because, power law effect becomes very important in developing crashes. 12. ethics the neoclassical understanding of the economy as stable, rational and self-regulation turned out to be highly misleading. some fund managers like soros and jean-philipe bouchaud believed that, neoclassical economics failed to predict what is going on in the markets. the big shock from the subprime crises proved that, it was resulted due to unreliable behaviors of the big traders. some of the wall street traders like goldman sachs was accused of misleading the investors in financial markets. traders and mortgage brokers pushed the investors to sign contracts, that the investors didn’t understand, leading to asymmetric information problems, in 2010 subprime crises. speculations and manipulations undertaken by traders in turkish financial markets also resulted in collapsed in many years. thus, some economists believe that, these problems are due to lacking of ethical behaviors, not considered during the formation of neoclassical theories. this is due to fact that, ethical considerations emphasized by aristotle and scholastics economics were removed by the neoclassical economists. for this reason, the invisible hand doctrine is not reliable and not satisfactory as far as ethical behaviors are concerned. thus, a new kind of economics is being emerging nowadays. because, rational man assumptions as believed by neoclassical economists is being replaced by behavior of real people motivations. thus, instead of seeing the economy as competition between disconnected people, sustainability of resources and value judgments of people is becoming important. 13. examples of irrational behaviors there are many examples of irrational behaviors of turkish consumers that fit to above mentioned cases; • boys start to smoke, thinking of they are accepted as a grown up man by the society. • trap prices attract many consumer as in western societies. • according to a survey conducted in 2000s, turkish consumers ranked number 1, all over the european countries in buying nokia mobile phones. • number of the cars is the highest in turkey as compared to european countries. • consumers buy houses with one extra room to be allocated to guests. • members of low income families buy very expensive mobile phones. • number of the summer houses owned by the middle class, in costal areas exceeds 2 millions, even though most of them are used only few weeks in a year. • number of the mercedes cars in turkey, exceeds the total number of the same brand cars in european countries. • rich families generally send their kids to universities abroad, without considering the quality of the education. • wives urge their husbands to buy luxury cars, villas, and yachts to keep up with their neighbors. 44 orhan şener http://ijcf.ticaret.edu.tr • businessmen never report their counterparts who evade taxes and conducting unofficial and illegal economic activities. • framing and false advertisements changes the true preferences of consumers in buying goods that they actually need. • although turkey is rich in grape product, however wine production is the least in eu. • many investors never deposit their savings at bank, but they prefer to receive profit shares from the i̇slamic banks, which is more or less equal to market interest rate. • workers, governmental employees, low income families support the right wing political parties. whereas intellectuals support social democratic party. • turkish workers abroad support social democratic and left wing parties, whereas they support right wing political parties at home. • many people in turkey buy medicine on the recommendation from the friends, neighbors or pharmacists. • some rich people urge luxury restaurants to charge highest prices, so that everyone wouldn’t support to eat there. 14. conclusion during the adam smith time there were no monopolistic and oligopolistic market structure. for this reason, he didn’t consider market imperfections. natural monopolies such as state economic enterprises decreases the cost of production more than the market firms, due to economics of scale. on the other hand, social allocation can only be efficient under decreasing marginal cost production by the natural monopolies. positive and negative externality generating economic activities can not be priced by the market mechanism. for instance, goods and services produced under zero marginal cost must be provided free of charge, opposing to the profit maximization motivation of market firms. asymmetric information misleads the consumers, because seller know much about the characteristics of the goods, than the buyers. for instance, consumers are not likely to read the manuals of medicines, insurance policies and mobile phones etc. waste and mismanagement in government and in market economy increase the cost of production, reducing the efficiency in public and private economies. corruption tempts the bureaucrats to behave in line with the veblen and bandwagon effects give rise to conspicuous consumption motivation to operate. existence of unfair income distribution as formulated by 20 to 80 law, result in low purchasing power in market economy leading to decrease in effective demand and inefficient market conditions. all these examples call for regulating some of consumer’s irrational behaviors and governmental intervention in order to improve market conditions references akerlof g. (1970), the market for lemons, yale university press bagwell l.s. and bernheim d. (1996), “veblen effect theory of conspicuous consumption”, the american economic review, 86(3), pp 349-373 friedman, m., (1962), capitalism and freedom, university of chicago press kahneman d. and tversky a. (2003), choices, values and frames, cambridge university press luigino, b., (2008), handbook on the economics of happiness, edward elgar publishing. libenstein h., (1950), "bandwagon, snob, and veblen effect in the theory of consumer’s demand", quarterly journal of ecoonomics, oxford university press, 64(2), pp 183-207 mantelbrot, b., (1999), “multifractal walk down wall street”, scientific american, 280(2), pp 70 minsky, h., (1986), stabilizing an unstable economy, yale university press, new haven nash, j.f. (2002), “ideal money” southern economic review, 69 (1), pp 4-11 şener, o., (2015), ünlü ekonomistler ansiklopedisi, beta, i̇stanbul tversky a, and kahneman d , “rational choice and framing of decisions”, oct 1986, p. 251 wilkinson n., and kleas m. (2012), an introduction to behavioral economics, palgrave macmillan international journal of commerce and finance, vol. 8, issue 1, 2022, 26-42 *mettu university, ethiopia, email: kibrukefay@gmail.com ** mettu university, ethiopia, email: endo_aau@yahoo.com *** mettu university, ethiopia 26 factors influencing the success of agricultural cooperatives marketing in a case of some selected woredas of ilubabor and buno bedele zones kibru kefay godo* endale alemu hora** shiferaw tamiru*** submitted: 20.08.2021 accepted: 01.04.2022 published: 24.06.2022 abstract this study aimed at assessing and identifying the factors influencing the success of agricultural marketing cooperatives in some selected woredas of ilubabor and buno bedele zones. the targets for this research were members of agricultural marketing cooperatives (amcs). for the sake of achieving the objectives of this study, responses were elicited from four hundred thirtyfive (435) respondents who were drawn from the target population using random sampling procedure. face-to-face interviews were conducted with 21 officers’ and cooperative leaders of amcs. data were analyzed using inferential analyses. the findings indicate that, there exists positive significant ranging from strong to very strong relationship was found between independent variables and dependent variable. finally, the study has suggested cooperative promoter, government, and prospective members should prioritize those factors that have greater impact on their success than do others i.e., commitment of members, managerial factor and their participation, the management of cooperatives should create awareness for farmers about what benefit the farmers as well as the country would get when they provide and sell their agricultural products by cooperatives. additionally, the responsible government bodies should identify, address and strength the relationship of foreign and domestic market linkages and cooperatives should be managed by professional personals to increase the success of cooperatives at the maximum level. key words: agricultural marketing cooperatives, success. mailto:kibrukefay@gmail.com mailto:endo_aau@yahoo.com international journal of commerce and finance k. godo & e. hora & s. tamiru 27 1. introduction agriculture plays a pivotal role in the national economy in general and main source of livelihood of rural community in particular; agricultural products should be marketed properly so as to improve the lives of the rural population. agricultural marketing is a “process that starts with a decision to produce saleable farm products, including pre and post-harvest operations, assembling, grading, storage, transportation and distribution transferring agricultural products consisting of farm, horticultural and other allied activities that, products from producer to consumer, supply of product from rural to rural and rural to urban and from rural to industrial consumers vadivelu and kiran (2013). one of the mechanisms to improve such agricultural product is therefore, through cooperative marketing. bhuyan (2007) has also indicated that disloyalty in following the cooperative principles, and unavailability of powerful managers among members as the most important obstacle affecting the success of co-operatives. there is a significant correlation between the management factors and degree of success. chambo et al. (2007) state that cooperative in many african countries are comprised of resource poor farmers, which make external assistance necessary for the group to achieve various economic gains from their successful cooperatives. furthermore, hill et al. (2007) considered assistance that act as motivation for farmers in cooperative, government policies, regulatory frameworks and market factors as essential external factors in the success of cooperative. these factors can influence the success of cooperatives, especially in developing countries, where cooperatives are still underdeveloped. 1.1 statement of the problem agricultural marketing cooperatives are set up in order to market and sell the marketable surpluses produced by its members such as cereals, vegetables, oilseeds, coffee, livestock, and fish produces when prices are better for their maximum benefit. so marketing co-operative is a beneficial system in which a group of farmers join together in order to carry out part or all of the process involved in bringing the produce from producers to consumers (woldu, 2007). the cooperatives provide a ready market for farmers’ crops but also absorb transaction costs (holloway et al., 2000), which would otherwise hinder small farmers from market and production integration. however, starting and operating with cooperatives marketing includes a possibility of success as well as failure. because of their low financial base, a simple management mistake is likely to lead to failure of a society hence there is little opportunity to learn from its past mistakes. the factors of success exist in different cooperatives and what matters is how international journal of commerce and finance k. godo & e. hora & s. tamiru 28 cooperatives recognize this on an ongoing basis. therefore, identifying the factors of success, it is indispensable to be clear about what is failed in unsuccessful cooperatives., significant progress has been made in attempt to study on the area of agricultural cooperative performance (daniel. b, 2006 & ahmedin.s, 2008), role in input output marketing (jemal.m, 2008) has been done in ethiopia, and no /little/ is done on factors for success of agricultural cooperatives marketing. however, as far as the researchers’ knowledge is concerned, in the study are there were no empirical studies has been carried out. besides, as it was understood form discussions with cooperative representatives, agricultural cooperatives marketing in the study areas are experiencing various challenges limiting their success. this study therefore aims to provide a holistic view of various factors contributing to the success of agricultural cooperative marketing through a comprehensive review of literature and empirical study available on the area. hence, the study will to some selected woreds of ilubabor and buno bedele zones agricultural cooperatives marketing 1.2 objectives of the study 1.2.1 general objectives the overall objective of the study was to assess and identify factors influencing the successof agricultural cooperatives marketing in some selected woreds of ilubabor and buno bedele zones. 1.2.2 specific objectives in an attempt to achieve the general objective of the research, it would also address the following specific objective:  to identify the level of success of agricultural cooperative marketing in some selected woredas of ilubabor and buno bedele zones.  to analyze factors influencing the success of agricultural cooperatives marketing.  to investigate the relationships between success and different factors influencing the success of agricultural cooperatives marketing in study area  to describe the extent of different factors, impact on the success of agricultural cooperatives marketing in study area international journal of commerce and finance k. godo & e. hora & s. tamiru 29 1.3. research hypothesis 1. h0: member participation factor has insignificant effect on the success of amcs 2. h0: member commitment factor has insignificant effect on the success of amcs 3. h0: structural factor has insignificant effect on the success of amcs 4. h0: communication factor has insignificant effect on the success of amcs 5. h0: managerial factor has insignificant effect on the success of amcs 6. h0: external factor has insignificant effect on the success of amcs 2. literature review 2.1. cooperatives definition and concepts the definitions of cooperatives are numerous and varied. however, the international cooperatives alliance (1995) defines a cooperative as “an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically-controlled enterprise”. this suggests that cooperatives are, first and foremost, voluntary business associations formed by people of limited means through contribution of share capital that forms the basis of sharing out the profits that accrue from the business. in addition, the income generated from the enterprise can as well be used to meet other social and cultural needs and aspirations as determined by the members (wanyama et al, 2009). 2.2 global agricultural cooperatives agricultural cooperatives are an important form of business enterprise. an agricultural cooperative, also known as farmer’s cooperatives, is a cooperative where farmers pool their resources in certain areas of activity. historically, agricultural cooperatives have played an important role all over the world in providing market access, credit and information to producers. in particular, agricultural cooperatives in the united states and western europe have played an important economic role in providing competitive returns for independent farmers (chaddad et al., 2005). 2.3 agricultural marketing cooperatives in developing countries agricultural marketing cooperatives are set up in order to market and sell the marketable surpluses produced by its members such as cereals, vegetables, oilseeds, coffee, livestock, and international journal of commerce and finance k. godo & e. hora & s. tamiru 30 fish produces when prices are better for their maximum benefit. so marketing co-operative is a beneficial system in which a group of farmers join together in order to carry out part or all of the process involved in bringing the produce from producers to consumers (woldu, 2007). in africa the first, since the start of agricultural co-operatives during the colonial days, they were linked to the co-operative marketing of agricultural exports (carlsson, 2002) in tanzania, kenya, uganda, ghana and nigeria; co-operatives were established to market coffee, cotton, cashew nuts and cocoa. the development of food marketing co-operatives was associated with post-colonial governments, when they realized the organizational importance of the cooperative enterprise for the development of the whole country. cooperative is a special group of people with mutual interest to solve their individual problems through common efforts and ultimately attaining economic and social empowerment to the group members and the community. the prime objective of cooperatives is to solve problems that individuals failed to address independently. accordingly, cooperatives are involving in inputs/outputs marketing activities, credit provision and providing other services to the members (zerihun, 1998). in ethiopia, however, the tradition of modern agricultural cooperatives was completely different from the western type of agricultural cooperatives from the initial days of imperial regime to the socialist regime. during the imperial regime (1960s-1974), a period during which modern cooperatives were started, agricultural cooperatives were setup in the form of cooperative production or agricultural collectives to jointly produce commercial and cash crops (i.e., coffee, tea, and spices). they were not in a position to operate efficiently and effectively due to unenforceability of efforts, discriminatory incentives, higher agency costs, and slow and centralized decision-making, which are inherent problems of collective production (deininger, 2005). 2.4 co-operative marketing cooperative marketing has create a lot of opportunities for smallholders both on their production and marketing systems. more over some of the opportunities and benefits are economies of scale, bargaining power, available supply of product and access to professional assistance/expertise (hire support), improved access to input and output markets, as well as a stronger voice in decision making (varghese, 2012). international journal of commerce and finance k. godo & e. hora & s. tamiru 31 2.5. empirical review success is described differently by different scholars. for instance, bruynis et al. (2007) define success in terms of longevity, business growth, profitability, and members’ satisfaction. sexton and iskow (2005) measure success based on self-evaluation. ziegenhorn (2003) understands success of networks in terms of their survival. additionally, rankin and russell (2005) defined a cooperative success as one which is “economically successful and hence able to compute with other cooperatives and private sector”. with diversity in method as well as subject matter, a growing body of literature seeks for factors influencing the success of cooperatives. according to sexton and iskow (2005) there are three significant critical factors essential for the success of agricultural marketing cooperatives, such as structural, financial and operational. the authors, after surveying 61 usa agricultural cooperatives, also identified different factors, like voluntary and open membership, accepting nonmember business and employing permanent management, correlated with self-understood success. on top of this, banaszak (2008), identified four key factors that contributed to cooperatives success, such as leadership strength; group size; business relationship amongst members and a member selection process during the group’s formation. abdelrahman and smith (2007) stated that some agricultural cooperatives in sudan have not been successful. they attributed this unsuccessful or failure to the lack of members' motivation in collective action. ozdemir (2005) compared different three types of agricultural cooperatives in turkey and argued that members' perception of democratic administration, awareness cooperative principles and frequency of visits to cooperatives by managing directors are the key determinants of success among those growing agricultural cooperatives. overall, the successes of cooperatives have been broadly classified as external and internal to the cooperatives. 3. research methodology 3.1 research design research design is the blueprint for fulfilling research objectives and answering research questions (john a.h. et al., 2007:20-84). the study would employ explanatory in that it is research which is making for discovering a problem, that has ever been studied clearly to make definitions and explanations that haven’t made before and improve final result. the relationship international journal of commerce and finance k. godo & e. hora & s. tamiru 32 between variables is correlated with an aim of estimating the integrated influence of the factors on success. 3.2 data types and sources in order to address the objectives of the research, the study would employ primary sources. therefore, primary data would gather from members of affiliated primary agricultural marketing cooperative and woredas cooperatives promotion and registration officers and cooperative leaders. 3.3 target population and sample size it is important to have a target population for selecting a sample. the population can be described as the specific group that has been relevant to the research study. so, the target population of the study were all 17,657 (zonal cpro, 2017) members of agricultural marketing cooperatives of gechi, bedele, chora, mettu, bilo nopha, yayo, alle, bure woredas. accordingly, for data collection through questionnaire, the total population for this study was 17657 (cpro, 2017). the sample size is determined based on the following simplified formula proposed by yamane (1967) where: n is desired sample size for the research n – is total number of populations e – is maximum variability or margin of error 5% (.05) 1 is the probability of the event occurring. the conventional confidence level of 95% used to ensure a more accurate result. margin of error is 5% (0.05. therefore: n = _17657____ = 435 1+n (e) ² 1 + 17657(0.05) ² thus, the required sample size to fill the questionnaires were 435 international journal of commerce and finance k. godo & e. hora & s. tamiru 33 3.4 data collection instrument and fieldwork basically, instruments would developed based on the objectives of the study and research questions. accordingly, the researchers will use well-designed questionnaire, interviews, and focus group discussions to collect primary data from members of agricultural cooperatives marketing members and leaders and extensive literature review. the questionnaire was completed by the selected members and leaders of the cooperatives who can read and write and the enumerators would assist illiterate members who may cannot read and write. besides, faceto-face interviews will also be conducted with officers of woreda cooperative promotion and registration office and cooperative leaders. 3.5 method of data processing and analysis the method of data processing in this study would manual and computerized system. in the data processing procedure editing, coding, classification and tabulation of the collected data were used. data processing has two phases namely: data clean-up and data reduction. after the data processing has been done, the next tasks would analyze the processed data. this is the further transformation of the processed data to look for patterns and relationship between and/or among data groups by using descriptive and inferential (statistical) analysis. the statistical package for social science (spss) version 22 will be used to analyze the data obtained from primary sources. 3.5.1 model specification the study would examine the level of significance for factors that affect agricultural cooperatives marketing success using multiple linear regression model. besides this, to test the influence of independent variables on the dependent variable, the model specification is as follows y = f(x1, x2, x3……. xk,; β1, β2, β3 …….. βk) + ε where; y= the value of the dependent variable β1, β2 …βn are the regression coefficients of parameters international journal of commerce and finance k. godo & e. hora & s. tamiru 34 x1, x2, x3….xn are the independent variables ε = the total error of prediction (residual) 4. results and discussion 4.1 results of inferential statistics in this final part of analysis, the results of inferential statistics are presented. accordingly, for the purpose of assessing the objectives of the study, pearson’s product moment correlation coefficient and regression analyses were performed. finally, with the aid of these inferential statistical techniques, conclusions are drawn with consider to the sample and decisions are made with respect to the research hypothesis. 4.1.1 pearson’s product moment correlation coefficient in this study pearson’s product moment correlation coefficient was used in order to examine whether there is significant relationship between commitment, participation, structural, communication managerial and external with success. the following results exhibited in table 4.10, presents the results of pearson’s product moment correlation on the relationship between independent variables (those six factors) and dependent variable (cooperatives marketing success). independent variables marketing success of cooperatives member commitment factor pearson correlation pvalue n .844** .000 429 member participation factor pearson correlation pvalue n .801** .000 429 structural factor pearson correlation pvalue n .631** .000 429 communication factors pearson correlation pvalue n .652** .000 429 managerial factor pearson correlation pvalue n .885** .000 429 external factor pearson correlation pvalue n .661** .000 429 international journal of commerce and finance k. godo & e. hora & s. tamiru 35 as it is clearly indicated in the above table 4.10, a very strong positive relationship was found between managerial skills and success (r =.885, p < .01), commitment and success (r =.844, p < .01) and participation and success (r = .801, p < 0.01), which are statistically significant at 99% confidence level. this implies that at a 1% level of significance it was discovered that the managerial skills, commitment, and participation plays a significant role in influencing the success of amcs in the selected area. furthermore, there is substantial, however statistically significant relationship between communication and cooperative success with (r =. 652, p <.01. this would imply that; good communication has significant influence on the success of amcs. additional, the result on table above further indicates that, there is a strong positive correlation between structural factors and cooperative success (r =.631, p < 0.01). whereas external factor (r =. 661, p < 0.01), found strong positive correlation with success of amcs which are statistically significant at 99% confidence level. 4.1.2 regression analysis the basic assumptions of multiple regressions were checked before going to analysis and all assumptions were meet successfully. multicollinearity was tested using correlations matrix and confirmed that there is no strong correlation exists between two or more predictors in regression model (see annex 3). collinearity tested using vif and tolerance values which confirmed the guidelines given by (myers, 1990; bowerman & o’connell, 1990 and menard, 1995). furthermore, for our current model vif values are all well below 10 and tolerance statistics all well above .2 (see annex 4). therefore, we can safely conclude that there is no collinearity within a data. table 4. 11: model summary model r r square adjusted r square std. error of the estimate 1 .916a .845 .839 .414 predictors: (constant), external factors, commitment factors, communication factors, structural factors, managerial factors, participation factors as shown in the model summary table the model is significant at 99% confidence level. and the correlation between the observed value of success and the optimal linear combination of the independent variables (member participation factor, member commitment factor, structural international journal of commerce and finance k. godo & e. hora & s. tamiru 36 factor, communication factor, managerial factor, external factor) is 0.916, as indicated by multiple r. besides, given the r square value of .845 and adjusted r square value of .839, it may be realized that 84.5% of the variation in success can be explained by the explanatory (independent) variables. the remaining 15.5 % of the variance is explained by other variables not included in this study. hence, the model can predict much of the variation in the success of agricultural marketing cooperatives. table 4.12: coefficients table of multiple regression analysis model unstandardized coefficients standardized coefficients t variables b std. error beta sig. constant .169 .095 1.809 .075 member commitment factor .311 .047 .326 7.080 .000** member participation factor .203 .042 .239 5.273 .000** structural factor .113 .042 .103 2.814 .005** communication factor .127 .043 .129 3.078 .002** managerial factor .291 .044 .310 5.697 .000** external factor .112 .030 .182 2.958 .003** as coefficients table 4.11 of the regression presents, all of six independent variables (member commitment factor, member participation factor, structural factor, communication factor, managerial factor and external factor) was found to be the best predictors of the dependent variable (cooperatives marketing success). furthermore, as the standardized beta value shows member commitment factor, managerial factor and member participation factor found as the strongest predictor of cooperative success with the β value of .326, .310 and .239 respectively. this result is consistent with the findings of (amini & ramezani, 2006; trechter et al., 1997 and osterberg & nilsson, 2009). the other variables which are tested using regression were external, communication factor and structural factors. as depicted in the above table both variables are found significant predictors in the success of cooperative business with the β value of .182, .129 and .103. this finding is also in line with results of (shabanali, fami et. al., 2006; poulton, kydd, & dorward, 2006 & noordin et al., 2011); (mutunga, 2008; bijman & verhees, 2011; didi, 2004 & renmingwang, 2010). international journal of commerce and finance k. godo & e. hora & s. tamiru 37 4.2 results of interview with cooperative leaders and officers what actors are the most important for cooperative success? market linkage was the most important factor of success since the main goal of cooperatives was to find and maintain domestic and foreign market to the product of cooperative members. next of it effective management was the most important factor, getting market access as well as enhancing the participation of members mostly depend on management and leadership style of the cooperatives. therefore, the majority of interviewee answers that the above two factors are the most important factors. but that means not others are not important. what are your overall suggestions for the successful development of agricultural marketing cooperatives? majority of interviewee suggest that strengthening market linkage would sustain the marketing success of cooperatives. in addition to that government should increase its support in different ways like providing financial access and other important infrastructures. lastly, management bodies should be professionals who have good experience in leading and managing cooperatives. but most of the time those personals were assigned to the position by their honesty for the politics of the government rather than their skill, knowledge and experience in managing cooperatives; this would hinder the success of cooperatives. 5. conclusion and recommendation 5.1 conclusion the correlation coefficients for the relationships between cooperatives marketing success and its independent variables are linear and positive which ranging from strong to very strong correlation coefficients. from six independent variables only three which are managerial factors, commitment factors and members participation had a very strong positive relationship with the success of cooperatives marketing. besides, the result of multiple regression analysis clearly illustrates that, even if all of six independent variables those are member commitment, member participation, communication, and managerial, structural and external factor found significant predictors of the cooperative marketing success; members commitment, managerial factors and members participation are the most significant and strongest predictor of cooperatives marketing success as compared to other factors. therefore the study concluded that member’s commitment, managerial factors and member’s participation are very important international journal of commerce and finance k. godo & e. hora & s. tamiru 38 significant factors for cooperatives success. since, managerial factor was among the most influential factors of cooperatives success. but, the study found that the cooperatives were not managed by professional personals rather they were assigned to the position of management by their honesty for the politics of the government rather than their skill and knowledge of managing cooperatives. one of the main challenging issues of the sector was that farmers including members were not willing to provide their products for cooperatives because of broker’s trade off them for a very small increment on the price of the product; as a result, farmers shift their face to the local buyers of the product. therefore, the study concluded that some members were not dedicated to the realization of cooperative vision. 5.2 recommendations firstly, the study suggest that the management of cooperatives should create awareness for farmers about what benefit the farmers as well as the country would get when they provide and sell their agricultural products by cooperatives. it needs the cooperation of all concerned bodies to educate farmers since there is knowledge gap among many farmers that broker’s use to trade off the farmers. in addition to that providing different incentive scheme were another way to attract farmers or group of farmers especially coffee producers to market safely and at attractive price by cooperatives since it generates high amount of foreign currency for the country. secondly, the responsible government bodies should identify, address and strength the relationship of foreign and domestic market linkages with cooperatives to overcome the challenge of market linkage. in addition to those infrastructures should be fulfilled especially financial access should be provided on the time its needed. to do that responsible government bodies should facilitate it by communicating with available banks and other financial institutions available in the woredas’. in addition, since managerial factor was among the most influential factors of cooperatives success. so, the study suggests that cooperatives should be managed by professional personals to increase the success of cooperatives at the maximum level. as overall recommendation, the study has suggested present and future cooperative promoter, government, prospective members and other stakeholders to take those identified influential success factors into consideration while they organize cooperative, making policies and strategies for cooperatives. this is expected to give cooperatives a competitive, successful and international journal of commerce and finance k. godo & e. hora & s. tamiru 39 sustainable advantage of understanding and doing business in the competitive business environment. references abdelrahman, a.h., & c. smith. 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(1990). linear statistical models: an applied approach (2nd ed.). belmont, ca:duxbury. chaddad, f.r., m.l. cook, and t. heckelei. 2005. "testing for the presence of financial constraints in us agricultural cooperatives: an investment behaviour approach." journal of agricultural economics 56:385-397. chambo, s. mwangi, mary and oloo, o. “an analysis of the socio-economic impact of cooperatives in africa and their institutional context, ica regional office for africa, nairobi, 2007 carlsson, r. h. (2002). ownership and value creation: strategic corporate governance in the new economy. new york: john wiley and sons international journal of commerce and finance k. godo & e. hora & s. tamiru 40 daniel, b. (2006). performance of primary agricultural cooperatives and determinants of members decision to use as marketing agent in adaa liben and lume districts, m.sc. thesis, agricultural economics, alemaya university, ethiopia. deininger, k. 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(2003).networking the farm. the social structure of cooperation and competition in iowa agriculture. aldershot, vermont: asgate. international journal of commerce and finance, vol. 1, issue 1, 2015, 1-10 the scope of state aid and public service obligation for airports and air carriers in the light of european law grzegorz zajac, (ph.d.) university of information technology and management, poland abstract: public aid is the kind of advantage granted directly or indirectly for private companies from state resources. the european commission prerogative to control the transfer of public resources by the public authorities (national or local) for the benefit of priv ate undertakings, as a general rule, there is an obligation of notification, as provided for in article 108 (3) of the treaty on the functioning of the european union (tfeu). it should be noted in the beginning that state aid given to undertakings conducting economic activity is, in principle, incompatible with the european union’ law, as provided for in article. 107 (1) of the tfeu. there are certain situations that the granting of public funds will not constitute “public aid” within the meaning of article 107 of the tfeu and, therefore, will not violate european rules in this field. one of them are activities related to the exercise of the prerogatives of the public authority (security, safety, customs, air traffic control). the other is related to the exercise of services in general economic interest. this could be an example of public service obligation (pso). this service can be applied in the light of the provisions of european law on two types of action on air routes, and on airport managing body. the imposition of a pso to the specified rout e is the support given by the state to the outermost regions that due to their unfavourable geographical position cannot fully develop economically, and no carrier had not been interested in performing air services to that region due to the lack of cost effectiveness. some activities at the airport may be considered as activities of general economic interest. keywords: air carriers, airports, european law 1. introduction: the european aviation market is fully liberalized. european air carriers may freely carry out air transport in each member state of the eu, or a number of other european countries. air carriers from third countries operating in europe have some limitations resulting from bilateral agreements on air transport, however, they might have a wider range of freedom for the operation, provided that they have concluded horizontal agreement with the european union . liberalization of the aviation sector in the european union in the first half of the 1990s. of the last century was a milestone in the development of this industry and contributed to the opening of the european sky. the consequence of these actions was the adoption of a variety of measures to ensure the conduct of free and fair competition between undertakings in this sector, while guaranteeing the citizens of the union a high level of service provision. opening of the market caused that many new air carriers entered the european market. this can be seen especially on the example of the emergence of low-cost-carriers. liberalization of air transport in europe was an abandonment from the principle of the "regulatory state" and adaptation to market mechanisms for the development of civil aviation. liberalization didn’t mean in many cases easy and "painless" phenomenon. many traditional carriers went bankrupt, although their position on the market for many years before remained stable . at the same time this fact had to be accompanied by a certain degree of state aid to cope with new reality and sometimes to support the vitality of the entity. the emergence of new trends, such as the appearance and rapid development of the air carriers with low-cost financial structure (low-cost airlines) caused, that airports had to focus on the new situation. airports need to meet the challenges of an increasingly dynamic growth in air traffic, which was associated with greater intensity level of operations performed and the number of passengers. favourable conditions have been opened for regional airports. new airports were being constructed and some of the existing ones were being modernized. as it may be noticed many of them showed significant activity in obtaining new air connections. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 2 grzegorz zajac http://ijcf.ticaret.edu.tr starting from the beginning of the 1990s. of the last century, we have to deal with quite quickly implemented aviation policy by the european union in accordance with the provisions of the common transport policy and increasing the prerogatives of the eu in the harmonization of aviation policy. on the basis of the case-law of the court of justice of the european union in matters of the so-called "open skies" judgements of 2002, it is necessary, that state aid in the development of airports or to keep some of the smaller airlines through the ability to perform services within the public service obligation (pso) rule, was in line with the eu law. there are some important questions to be raised. is state aid to airports possible in any case? what are the conditions of granting state aid for private undertakings, in order not to disrupt the internal market? is financing the air carrier performing services under the pso does not distort competition? in what circumstances state aid may be granted to be compatible with eu law? 2. the essence of public aid: the notification procedure public aid is the kind of funding, which might be given by the central authority (government administration) or by regional or local authority (local self-government bodies, such as municipalities) from the public sources to support the activity of private undertakings. it constitutes an advantage granted directly or indirectly for private companies from state resources. this policy applies to all the member states of the european union and those countries which have concluded relevant agreements with the eu on the application of these principles in their own national legal order, i.e. states belonging to the eea (iceland, liechtenstein, norway) and switzerland. a body, which safeguards the correct transfer of public resources to the beneficiaries is the european commission. the commission prerogative to control the transfer of public resources by the public authorities (national or local) for the benefit of private undertakings, as a general rule, there is an obligation of notification, as provided for in article 108 (3) of the treaty on the functioning of the european union (tfeu, 2007). first of all, the obvious question is who and under what conditions must make the notification to the commission. it should be clarified whether the beneficiary of the aid, which is dependent on the public authority which is its majority shareholder or owner is entitled ex lege to submit notification obtained from local government authorities or other. in accordance with article 108 (3) of the treaty the obligation of notification lies on the side of the member states. the notification means informing the european commission by the member state (central, regional or local authority) about its intention to provide financial support to a particular undertaking. this means, in practice, that notification shall be made not by the beneficiary itself, but by the authority, which intends to give a public support or to change the existing one. the commission must have time to issue its decision about the steps it shall undertake (article 108 (3): the commission shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid). the above mentioned arguments applies to the condition in which there is a doubt as to whether the aid granted from public funds is in line with article 107 tfeu. the treaty indicates the enumerative three cases in which state aid is compatible with its provisions on internal market. none of these cases does not qualify as an aid to aviation business undertakings. these cases are, in accordance with article 107 (2) of the tfeu, the following: a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned; b) aid to make good the damage caused by natural disasters or exceptional occurrences; c) aid granted to the economy of certain areas of the federal republic of germany affected by the division of germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division. five years after the entry into force of the treaty amending the treaty on european union and the treaty establishing the european community, the council, acting on a proposal from the commission, may adopt a decision. (note: currently, the council on commission’s proposal may at any time withdraw this provision). with regard to the aviation sector there may be indications resulting from article 107, paragraph 3 (a)), (a) (b), and (c). in accordance with the disposition of that provision, the following may be considered to be compatible with the internal market: a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment and of the regions referred to in article 349, in view of their structural, economic and social situation; the scope of state aid and public service obligation for airports and air carriers in the light of european law 3 http://ijcf.ticaret.edu.tr b) aid to promote the execution of an important project of common european interest or to remedy a serious disturbance in the economy of a member state; c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest. the above mentioned definition is written in the sub junctive, which means that actions taken must be validated pursuant to those provisions,. it should be presumed that the obligation to authenticate the aid received in accordance with one or more premises, as referred to above, shall rest upon the authority providing such assistance in consultation with the beneficiary of that aid. these premises do not constitute an automatic granting of public funds to a specific undertaking. before state aid is granted, the notification should occur. notification is a mandatory procedure. the notification procedure is carried out when there is a suspicion that a "public aid" to any entity may be provided, and the only body to control the legality of such an action is the european commission. the notification shall be made on the appropriate form set out in annex i of regulation 794/2004 in electronic form (commission regulation, 2004). the following information shall be included: a) the identification of the aid granter, b) the identification of the aid (description of the aid: primary objective and, if applicable, secondary objective; the information whether the notification relates to individual aid), c) the national legal basis, d) beneficiaries of the aid, e) the amount of the aid, f) form of the aid and means of funding, g) duration of the aid, h) supplementary information about a particular type of aid (part iii of annex i to regulation (ec) 794/2004), i) all necessary attachments. the notification procedure is mandatory only to the extent of any incompatibility with the eu law, and where the specific dispositions so provide. the lack of notification is a formal failure when having an intention to grant state aid, but is not an illegal action. it is worth noting at this moment to the legal structure of the provision of article 108 (2) of the tfeu, in which it was found, that: if, after giving notice to the parties concerned to submit their comments, the commission finds that aid granted by a state or through state resources is not compatible with the internal market having regard to article 107, or that such aid is being misused, it shall decide that the state concerned shall abolish or alter such aid within a period of time to be determined by the commission (…). it is clearly stated that this case is about the aid already granted, and not the intention of granting it in the future, as the commission may take one of two decisions: abolish the existing aid or change it. central authority or local self-government administration cannot grant public aid before a decision is taken by the commission in this case (the so-called standstill clause). when such aid shall be granted without notification to the commission, the authority granting the aid must reckon with the fact that the commission will call upon that authority to make an explanation whether or not there has been infringement of rules concerning state aid referred to in article 107 and article 108 of the tfeu. the commission shall make a decision whether or not the granting of public funds is legal after taking an action referred to in regulation (ec) no 659/1999. there is a specific procedure concerning the aid that need to be notified, or the procedure of aid granted illegally and provided against its purpose as well as the procedure concerning existing aid schemes. the european commission may ex officio commence the preliminary procedure, if it becomes aware of information coming from mass media or opponents about obtaining or intention to obtain aid from public. the commission has three options: a) will issue a decision stating that the aid is not “state aid” within the meaning of article 107 of the tfeu, or b) will issue a decision stating that the aid is “state aid”, but it is compatible with the internal market, i.e. with article 107 (1) or (2) a), b) or c), or c) will issue a negative decision stating that, following the procedure laid down in article 108 (2). (the main investigation), the aid is not compatible with the internal market and must not be used. 4 grzegorz zajac http://ijcf.ticaret.edu.tr to sum up this part it must be noted, that reporting, notifications, ex ante is to avoid potential risks in the future. a member state which does not apply to the commission decision in the specified term, the latter may cause the transmission of the case directly to the court of justice of the european union (cjeu). in the case when the aid was granted unlawfully, the commission may pursue compensation claims from a member state concerned. the compensation claim term is 10 years following a day, in which the aid was granted unlawfully to the beneficiary. in the case of the aviation sector, there are the conditions for application of the state aid on the basis of some of the provisions of article 107 of the tfeu. disposition referred to in article 107, paragraph 3 (a)) may be combined with the disposition of article 107, paragraph 3 (b) (c), which refer to aid to certain less developed regions to regions with significant unemployment. these are the nuts ii regions whose gross domestic product per capita is less than 75% of the eu average (european parliament and of the council, 2003). in turn, the disposition of article 107, paragraph 3 (b) refers to the important european projects, for example the expansion of the trans-european transport networks (ten-t). therefore, when analyzing whether the public aid granted in accordance with article 107, paragraph 3 (a), (b) or (c) will be legitimate, it must be explained whether this support will not “distort or threaten to distort the competition”. this compliance must be demonstrated by the authority granting appropriate assistance from public funds. 3. the case law of the court of justice of the european union on public aid for the airport it should be noted in the beginning that state aid given to undertakings conducting economic activity is, in principle, incompatible with the european union’ law, as provided for in article. 107 (1) of the tfeu. it was not clear in previous regulations of the treaty (formerly known as treaty establishing the european community) concerning state aid to entities conducting economic activity can be referred to aviation undertakings, namely to airports. the court in 1993 expressis verbis found, that airports are entities which conduct economic activity (see: case poucet et pistre versus agf and cancava) (court reports 1993). in accordance with another case-law of the court, any activity which offers goods and services on a given market i san economic activity (case c-35/96, judgement of june 18, 1998, commission versus italy and in joined cases c-180/98-184/98, judgement of september 12, 2000, p. pavlov and others). thus, a service that airport offers to its users constitute an economic activity. extremely helpful was also the judgment of the court of justice of the eu of october 24, 2002 on “aeroports de paris” (c-82/01, court reports 2002, pp.i-09297). in accordance with court’s argumentation, (…) in the field of competition law, the concept of an undertaking covers any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed. (…)in order to determine whether the activities in question are those of an undertaking within the meaning of article 106 of the tfeu, it is necessary to establish the nature of those activities. (…) the provision of airport facilities to airlines and the various service providers, in return for a fee at a rate freely fixed by airport management body, constitutes an economic activity. (…) any activity consisting in offering goods and services on a given market is an economic activity. not all, however, airport activities will be deemed as an economic activity. in accordance with the judgment of the court of justice of the eu of february 17, 1993 (case poucet et pistre against agf et cancava) an economic activity of any entity, regardless of its legal status and the way in which it is funded is not its “social function” (court reports 1993). the activities of the entity associated with the social security fall under the principle of social solidarity, and are part of a non-profit activity. therefore, these activities do not constitute the economic activity. 4. the exercise of the prerogatives of the public authority by an airport there are certain situations that the granting of public funds will not constitute “public aid” within the meaning of article 107 of the tfeu and, therefore, will not violate european rules in this field. one of them are activities related to the exercise of the prerogatives of the public authority. here, it can be provided the following types of activities related to: a) safety, b) security, the scope of state aid and public service obligation for airports and air carriers in the light of european law 5 http://ijcf.ticaret.edu.tr c) air traffic control, d) customs service, e) air navigation services. they are connected with the exercise of the prerogatives of the public authority and the article 107 of the tfeu does not apply to them. some spheres are not of an economic nature, and therefore, the above mentioned areas can be financed by public funds, without the risk of activity incompatible with european law. in this respect, there is a final judgment of the court of justice of the eu from 1997 on case cafe and figli (court reports 1997). at the same time, there is no condition to make the notification procedure. the european commission confirmed the view of the court on the case of 2001, commenting as follows: the air transport industry has itself traditionally borne the bulk of security costs. the reinforcement of certain security measures by the public authorities in the wake of attacks directed against society as a whole and not at the industry players must, in the commission's opinion, be borne by the state. it goes without saying t hat, if certain measures are imposed directly on airlines and other operators in the sector such as airports, suppliers of groundhandling services and providers of air navigation services, the financing of such measures by the public authorities must not give rise to operating aid incompatible with the treaty (european commission, 2001). it is important that any entity shall separate in its accounting the costs associated with an economic activity, which shall be borne by that entity, and the costs associated with the operation of the activities that the state will finance. regardless of whether it is a public or private entity, it is necessary to specify the costs incurred by the state as ineligible for public assistance. 5. the activities of general economic interest on the example of public service obligation public service obligation (pso) can be considered to be services of general economic interest. there is no definition of the term „public service obligation” to be found in the treaty on the functioning of the european union. this service can be applied in the light of the provisions of european law on two types of action: a) on air routes, and b) on airport managing body. 5.1. pso and air carriers pso is a restriction of the exercise of the carrier’s traffic rights. the legal basis for the imposition of public service obligations is article 16-18 of regulation 1008/2008 of 24 september 2008 on common rules for the operation of air services in the european union(oj ue, 2008). a member state may impose it having regard to the following principles: a) after consultations with other interested member states, b) after having informed the commission, the airports concerned and air carriers operating on the route, c) imposing the public service obligation on a route:  between an airport in the european union and an airport serving a peripheral or development region in its territory, or  on a thin route to any airport on its territory any such route being considered vital for the economic and social development of the region which the airport serves, d) the obligation shall be imposed only to the extent necessary to ensure on that route the minimum provision of scheduled air services satisfying fixed standards of continuity, regularity, pricing or minimum capacity, which air carriers would not assume if they were solely considering their commercial interest, e) the fixed standards imposed on the route subject to that public service obligation shall be set in a transparent and non-discriminatory way. what’s more, in such a case where other modes of transport cannot ensure an uninterrupted service with at least two daily frequencies, the member states concerned may include in the pso the requirement that any eu air carrier intending to operate the route gives a guarantee that it will operate the route for a certain period, to be specified, in accordance with other rules concerning pso. 6 grzegorz zajac http://ijcf.ticaret.edu.tr it is important that public service obligation shall be established on the route, and not on an air carrier which will actually perform it. in accordance with article 16 (4) of the regulation 1008/2008 when a member state wishes to impose a public service obligation, it shall communicate the text of the envisaged imposition of the public service obligation to the commission, to the other member states concerned, to the airports concerned and to the air carriers operating the route in question. the information notice on a public service obligation shall be published by the european commission in the official journal of the european union. however, where the number of passengers expected to use the air service is less than 10 000 per annum, the notice on pso may be published in the national official journal of the member state concerned. the date of entry into force of a pso shall be the date indicated in the publication of the information notice in official journal. the eu air carrier shall be able to offer seat-only sales provided that the air service in question meets all the requirements of the pso. consequently that air service shall be considered as a scheduled air service. warto podkreślić, że jeśli przewoźnik lotniczy operował już na tej trasie wcześniej, to od momentu wejścia w życie przepisów o nałożeniu obowiązku użyteczności publicznej na obsługiwaną przez niego trasę, może on wykonywać operacje w oparciu o tę zasadę. notwithstanding the above mentioned provisions, any eu air carrier shall at any time be allowed to commence scheduled air services on a specific route meeting all the requirements of the pso imposed on that route. this freedom is, however, limited to the situation when no eu air carrier is interested in performing scheduled air services on a specific route in accordance with the pso imposed on it. in such a situation, the member state concerned may limit access to the scheduled air services on that route to only one eu air carrier for a period of up to four years. this period may be up to five years if the public service obligation is imposed on a route to an airport serving an outermost region, referred to in article 349 (2) of the tfeu1. however, in this case, in accordance with article 16 paragraph 1 and without prejudice to article 17 of regulation 1008/2008, member states must carry out a public tendering procedure. a public service obligation shall be deemed to have expired if no scheduled air service has been operated during a period of 12 months on the route subject to such obligation, in accordance with article 16 (11) of the regulation 1008/2008. pso is very widespread in many member states. at the end of 2014, there were 225 routes in the eu, with pso imposed on them, in the following countries: norway (51 routes), france (42 routes), greece (route 28 routes), portugal (24 routes), united kingdom (22 routes), italy (20 routes), spain (18 routes), sweden (10 routes), estonia (4 routes), finland (3 routes), ireland (3 routes). in conclusion, the imposition of a pso to the specified route is the support given by the state to the outermost regions that due to their unfavourable geographical position cannot fully develop economically, and no carrier had not been interested in performing air services to that region due to the lack of cost effectiveness (low frequency of flights, a small number of passengers). 5.2. pso towards airports some activities at the airport may be considered as activities of general economic interest. although according to the european commission, certain economic activities carried out by airports can be considered by the public authority as constituting a service of general economic interest2. in this regard, the authority imposes on the airport management body a commitment to perform pso, which may receive compensation for the provision of such services. there is also the possibility to recognize the management of the airport as a whole for the service provided in the general economic interest. then, in accordance with the commission's position expressed in paragraph 34 in conjunction with point 53 (iv) of the guidelines… of 2005 the management of the airport could not cover activities not related directly to its core activities and commercial activities (e.g. use and renting of land and buildings). such action, however, is rare. 1 it's about the following regions, french guiana, martinique, réunion, saint-barthélemy, saint-martin, the azores, madeira and the canary islands. 2 see par. 34 of community guidelines on financing of airports and start-up aid to airlines departing from regional airports, oj ec, c 312, 9.12.2005. the scope of state aid and public service obligation for airports and air carriers in the light of european law 7 http://ijcf.ticaret.edu.tr helpful in explaining whether the compensation in respect of the provision of pso does not constitute state aid in the light of article 107 of the tfeu, it is the judgment of the court of justice of the eu 2003 in altmark case3. in accordance with courts position, compensation for the airport does not constitute state aid and is not covered by tfeu rules, when the following four criteria are met: a) first, the recipient undertaking must actually have public service obligations to discharge and the obligations must be clearly defined, b) second, the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner, c) third, the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations, and d) fourth, where the undertaking which is to discharge public service obligations, in a specific case, is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant revenues and a reasonable profit for discharging the obligations. returning to the altmark case-law, it should be noted that the compensation for the provision of public services by the beneficiary after the fulfillment of all four reasons as referred to above, is not state aid within the meaning of article 107 tfeu and article 108 of the tfeu. however, failure to meet at least one of these criteria, results in classification the aid as state aid within the meaning of article 107 of the tfeu. then, it should only be explained, whether the granted support (aid) will not affect the eu trade exchange and whether it does not distort or threaten to distort the competition, as referred to in the above argumentation. 6. conditions for state aid to regional airports it should be explained in the beginning, whether regional airports are in a better situation to receive state aid? well, big airports are located in metropolitan areas and large cities, which is the reason to attract well-known air carriers to perform operations from that airport (e.g. paris, london, frankfurt). regional ports are in the less favourable situation, as they do not usually have these carriers and may not offer passengers the most convenient flight route network. location in the outermost region concerned affects the reduction of attractiveness and the image of the airport. therefore, state aid in the development of regional airports should not encounter resistance from the european commission. the development of new, or the expansion of existing regional airports in economically less developed regions can be an opportunity to increase their attractiveness and increase overall investment and improving macroeconomic indicators. in 2014 the commission approved state aid to individual airports in five cases: airport altenburg-nobitz (germany), stretto airport (italy), groningen airport (netherlands), ostrava airport (czech republic), airport marseille-provence (france). in previous years, similar number of applications have been approved. in the case of the berlin-schonefeld airports, in germany, the commission considered that in general, the aid granted to that airport cannot be considered as state aid. it was recognized that, although for many years, this airport received financial support from the federal government and local self-government for development, this support was compatible with eu rules on state aid (european commission, 2014). however, in one case, in relation to the gdynia airport (poland), the commission considered that the financial contribution made by local and regional authorities was in breach of european rules. the commission argued that this aid has contributed to the increasing competitive advantage, which was contrary to european competition law and state aid 3 case c-280/00, judgement of july 24, 2003, altmark trans and regierungspresidium magdeburg, court reports 2003, p.i-7747. 8 grzegorz zajac http://ijcf.ticaret.edu.tr rules. although a year later, on 26 february 2015, the commission modified its decision while remaining on the assumption that the aid was incompatible with eu law, the resources to be returned have been diminished in relation to the costs incurred in the exercise of the prerogatives of the public authority (related to the safety), i.e.: the cost of buildings and equipment fire department, customs, airport security officers, police officers and border guards. the commission, therefore, ordered, repayment of resources in the amount of about 22 mln eur (european commission, 2014). regional airport can lead certain types of economic activity. with the exception of two, referred to above, in other cases it may apply for state aid, which will be in line with article 107 (3) of the tfeu. there are four criteria of the airport activity, in which there is possible to obtain state funding, in accordance with par.53 of guidelines… of 2005. first, construction of airport infrastructure and equipment (runways, terminals, aprons, control tower) or facilities that directly support them (fire-fighting facilities, security or safety equipment). in such a case, the commission will assess whether there was state aid in this area, and whether it is in accordance with article 107, paragraph 3 (a), (b), or (c) and article 106 (2). namely, whether a specific type of project refers to general economic interest (e.g. the development of the region), whether it is indispensable for the designated purpose, whether all potential users can freely use this project, and whether it is compatible with the general interests of the union. second, operation of the infrastructure, comprising the maintenance and management of airport infrastructure. generally, state aid in this area would be inconsistent with the provisions of the treaty, since it comes from the assumption that the airport operator, like any other operator in the market, should cover from its own resources the costs associated with the management of the infrastructure. otherwise, he would have been exempt from current expenditure, which would result in a significant way to infringe the competition rules of the european union. if a public entity acts as would a private investor in a market economy, this cannot be recognized as state aid, in accordance with the altmark case of 2003. in another case, support from public funds may be considered as state aid in the operational purpose and it will be in line with article 107, (3) (a) and (c), or article (106) (2), if the aid is to support the region in which there is high unemployment, the standard of living is lower than in the rest of the country and the provision of the service will take place in the general economic interest as well as in accordance with the interest of the union. regional airports have therefore the possibility of development, having received state aid in this subject, which will be compatible with eu law. third, provision of airport services ancillary to air transport, such as groundhandling services and the use of related infrastructure, fire-fighting services, emergency services, security services, etc. the european union has defined threshold for this kind of activity, beyond which the public aid is impossible and would be incompatible with the provisions of the treaty. in accordance with council directive 96/67/ec of 15 october 1996 on access to the groundhandling market at eu airports, the provision of this service is a commercial activity, when annual traffic is not less than 2 million passenger movements. otherwise, the airport management body, acting as a service provider, may separate the various sources of its revenue and losses between purely commercial activities, with the exception of the public funds allocated to it for the provision of the service of general economic interest. fourth, pursuit of commercial activities not directly linked to the airport's core activities, including the construction, financing, use and renting of land and buildings, not only for offices and storage but also for the hotels and industrial enterprises located within the airport, as well as shops, restaurants and car parks. however, these are not transport activities, so public financing of them is not covered by these guidelines and will be assessed on the basis of the relevant sectoral and general rules. 7. the commence of regional airport activity and public aid another important issue is the answer to the question whether state aid is allowed to commence the airport business. when taking into account large airports (hubs) it hard to imagine that such aid would be acceptable and the commission would approve it. the argumentation could be as follows, that it distort the competition, because huge aiport has more opportunities to develop than smaller airport, in peripheral regions. nevertheless, when we look at closer to the example of berlin brandenburg airport (bbi), we may notice some incoherency and split in argumentation (gerlach, 2015). in the case of regional airports in certain situations such a possibility exists. the commission is well aware of the fact that regional airports have a small number of passengers, which can often not be sufficient to overcome the profitability of the airport. large airports (hubs) do not have a problem with it because the scope of state aid and public service obligation for airports and air carriers in the light of european law 9 http://ijcf.ticaret.edu.tr of the support of a significant number of passengers and the geographical location in the big cities or metropolitan areas which makes them more attractive. there is no uniform interpretation about the number of passengers to be the threshold of profitability. it is estimated it at 500,000, 1 million, or even 1.5 million. it depends on many factors, i.e. the location of the state, the region, the choice of specialisation and organisation of the airport. as a general rule air carriers do have anxiety about opening new air routes from unknown airports. therefore, the european union allows the state funding for a specific route by imposing by a member state concerned a public service obligation to that route. those carriers who wish to perform operations to and from such regional airport can benefit from that pso. thanks to this, the airport will be able to better promote and achieve or exceed the threshold of profitability, and the region a chance to social and economic development. therefore, state aid for the launch of the new routes will be in line with article 107 (3) (a) or (c) with reservation, that there will be no high-speed rail connection on this route. in fact, the union supports the transport intermodality solutions as referred to in the white paper of 2011. however, connections performed between regional airports located in outermost areas and overseas of some of the member states (e.g. french guiana, reunion, the azores) to neighbouring third countries in africa or americas can receive state support in accordance with article 107 (3) (a) of the tfeu. the idea is to promote integration in that specific region and counter the isolation of such a place. similarly, public aid for air carriers starting operations from airports located in sparsely populated regions could be considered as compatible with eu law. 8. conclusion: public aid in aviation is acceptable only under the conditions laid down in the treaty on the functioning of the european union. granting funds to a specific airport shouldn’t distort the competition in that area, i.e. other surrounding airports. air carriers may also have co-financed activity if they perform flights covered by the public service obligation. member states may decide, whether a specific route is important to the whole country and impose a pso to that route, so air carriers may start performing operations to be partially or substantially financed by the public authorities. it must be noted, that such pso on a specific route may be imposed when no air carrier is interested in performing flights on that route in market economy. the activity of undertakings in market economy is undisturbed with reservation that the state performs to each one of them a harmonized policy and they have equal treatment and none of them has more favourable position by these authorities. providing special help or treatment for a specific undertaker or group of undertakings on the domestic market would constitute discrimination against the other, and as a consequence even to limit the number of similar undertakings in this market. such action could lead to a monopoly on a particular sector, and that as a consequence could threaten to disturb the functioning of the market. it happens sometimes, that states in various forms promote national entrepreneurs, not only in granting direct money but also by carrying out policy in favour of the development of the company. in the sense of free-trade rules it is the disruption of business activities, and in terms of national interest, it means defending their own entrepreneurs and their protection on the market before foreign competitors. the combination of these two ideas have been materialized in the rules laid down in the european union. the european union is taken as a whole, all member states have an obligation to apply to the adopted rules, which excludes any national derogations. in this case, the union sets a uniform rule for all of its members. therefore, on the one hand it creates a right to protect each trader from any member state and the principle of equality and non-discrimination on grounds of nationality are applied throughout its area, on the other hand, acts as a single entity (one state) to protect its market from external competition from non-member countries and promotes european undertakings. references community guidelines on financing of airports and start-up aid to airlines departing from regional airports, oj ec, c 312, 9.12.2005. case c-280/00, judgement of july 24, 2003, altmark trans and regierungspresidium magdeburg, court reports 2003, p.i-7747. 10 grzegorz zajac http://ijcf.ticaret.edu.tr commission regulation (ec) no 794/2004 of 21 april 2004 implementing council regulation (ec)no 659/1999 laying down detailed rules for the application of article 113 of the tfeu, oj ue, l 140, 30.04.2004, p.1-134. case c-343/95, judgement of march 18, 1997, calě & figli versus servizi ecologici porto di genova (court reports 1997, pp. i-1547). european commission, communication from the commission to the european parliament and the council the repercussions of the terrorist attacks in the united states on the air transport industry, com 574 (2001) final, 10.10.2001, par.27. european commission, press release, state aid: commission finds that public interventions at berlin schönefeld airport did not involve state aid, ip/14/173, brussels, 20.02.2014. european commission, press release, ip/14/138, brussels, 11.02.2014. joined cases c-159/91 and c-160/91, court reports 1993, p.i-637). oj ue, l 293, 31.10.2008, pp. 3—20. the treaty on the functioning of the european union (tfeu) was signed on december 13, 2007 in lisbon (hence the name of the treaty of lisbon), and came into force on december 1, 2009 (oj eu, c 306, 17.12.2007, p.1271). the system of europe’s classification into regions is existing since the 1970s. of the 20th century. the legal basis for this division is in accordance with commission regulation no 1059/2003 of the european parliament and of the council of 26 may 2003 on the establishment of a common classification of territorial units for statistics (nuts) (oj l 154, 21.06.2003, p.1-41). u. zawatka-gerlach, berlin und brandenburg fordern einsicht in antragspapiere, der tagesspiegel, 1.06.2015, web edition: http://www.tagesspiegel.de/berlin/eu-pruefverfahren-zum-ber-berlin-und-brandenburg-forderneinsicht-in-antragspapiere/11849842.html, access 20.09.2015. international journal of commerce and finance, vol. 2, issue 1, 2016, 125-136 managers’ personality traits over management styles and decision-making styles beliz ülgen , (assoc. prof. dr.) istanbul commerce university, turkey mehmet sağlam, (phd candidate) istanbul commerce university, turkey türker tuğsal, (phd candidate) beykent university, turkey abstract: the paper seeks to offer a contribution to the extent literature on the role of managers’ personality characteristics over management styles and decision-making styles. we have prepared a questionnaire which consists of girgin’s (2007) personality scale adaptation from goldberg (1992), kurban’s (2015) decision-making scale adopted from scott and bruce (1995), and yıldızhan’s (2012) management style scale. the questionnaire is conducted among managers and employees in various sectors in istanbul via the single random sampling method. frequency analysis is applied to descriptive findings. in order to determine reliability and validity of the scales, reliability and factor analysis are performed. we have focused on investigating the impact of managers’ personality traits on management styles and decision-making styles by applying the multivariate regression model and correlation analysis. the result of the factor analysis revealed that the three dimensions (extraversion, neuroticism, conscientiousness) of big-five personality traits have a significant effect on some dimensions of managers’ decision making and management styles. keywords: personality traits, management styles, decision-making styles, multivariate regression model 1. introduction although there are many factors exist that are essential for organizations to alive, the crucial effect of managers should not be omitted. decision making and management styles are main sources to create this effect. undoubtedly, excluding the independent variables such as the size of organizations and the sector where they operate, also personality traits of the managers who implement these sources have considerable influence. in this context, the main purpose of the study is to investigate the relationship between personality traits of managers and their management styles, besides their decision making styles. the first section of the study includes the definition of aforementioned concepts. afterwards in the second section, the application that managers in various organizations participated is explained. to that end, in order to measure big five personality traits which has five dimensions extraversion, neuroticism, agreeableness, conscientiousness, and openness to experience. furthermore, the management classification which contains authoritarian, supporter, protective, unionist and laissez-faire management styles was applied. finally; the relations among rational, intuitive, avoidant and spontaneous decision making styles were investigated. in the third section of the study, the findings and results were presented. 2. literature review under this section, the general knowlege is presented related with the big five personality traits, decision making styles and management styles by examining various studies in the literature. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 126 beliz ülgen, mehmet sağlam,türker tuğsal http://ijcf.ticaret.edu.tr 2.1. the big five personality traits in many academic studies human personality in organizations is an attractive topic especially to build the relationship between the personality characteristics and job related behaviors (yakasai and jan, 2015). there are different models of personality traits in field of psychology. but the five factor model often labeled big five (e.g., digman, 1990; john, 1990; mccrae, 1992; mccrae and costa, 1984 as cited in bakker et al., 2006) is widely accepted and popular model for embodying individual differences in personality (berglund et al., 2015, p.59). based on the general researches about personality traits, starting from the initial studies by cattell (1943) and fishke (1949), to more recent studies by goldberg (1981), digman and takemoto-chock (1983), costa and mccrae (1985), mccrae and costa (1987), have concurred on (mishra and vaithianathan, 2015) big five is a useful typology or taxonomy for classifying the multitude of personality characteristics (digman,1990; goldberg, 1992, 1993; mccrae and costa, 1987, 1989; mccrae and john, 1992 as cited in caligiuri, 2006, p.222). the big five model consists of five personality traits which are extraversion, neuroticism, agreeableness, conscientiousness, and openness to experience. extraversion represents assertiveness, sociability, energy and positive emotions (band, et al., 2014). extraverted people are talkative, warm, cheerful, active, and enthusiastic (paramanandam and radhamani, 2014), self-confident, dominant and excitement seeking (bakker et al., 2006) and capable in developing interpersonal relationship with others and externalizing their emotions (therasa and vijayabanu, 2015). according to soldz and vaillant (1999), extraversion is related to social success, preminence and self-promotion (syed et al., 2015). neuroticism contrasts emotional stability and captures one’s tendency to experience a variety of disruptive emotions and thoughts (camps et al., 2016). another definition of neuroticism states the degree some negative personality traits such as touchiness, unhappiness, impulsiveness, aggressiveness and anxiousness (berglund et al., 2015). neurotic people tend to be unhappy and feel uncertainty about their life circumstances (mccrae and costa, 2008 as cited in syed et al., 2015, p.184). fear, anger, depression, easily inclined to stress, not able to control impulses, irritability, low self-esteem are significant indicators of neuroticism (therasa and vijayabanu, 2015). highly neurotic individuals are insecure, anxious and more susceptible to stress than less neurotics (costa and mccrae, 1992). their moods tend to be capricious and their behaviors are impulsive. they are more susceptible to psychological stress, as they ‘‘are likely to interpret ordinary situations as threatening, and can experience minor frustrations as hopelessly overwhelming’’ (widiger, 2009, p. 129 as cited in giluk and postlethwaite, 2015). agreeableness includes traits such as altruism, mild-mannered, trust and humble (john and srivastava, 1999 as cited in quintelier, 2014). according to barrick and mount (1991), people who have high agreeableness traits are adaptable, kind, collaborative, kind, helpful, patient, thoughtful and affectionate (syed et al., 2015). they extremely like to have close interrelationships, interiorise positive approach and they have high life satisfaction (mccrae and costa, 1991 as cited in therasa and vijayabanu, 2015). in the assessment of costa and mc-crae (1995) agreeable people are more trustworthy than nonagreeable people who are manipulative, pessimistic and self-serving (yakasai and jan, 2015, p.16). they have also effort to build and keep harmony and prefer to use compromising strategies in dealing with any conflict (camps et al., 2016). conscientiousness identifies task and goal directed, planful and organized behavior, such as thinking before acting, following norms and rules, delaying gratification, prioritizing tasks (oliver and srivastava, 1999, p.30). highly conscientious people are self-disciplined, reliable, ambitious, thorough and efficient (berglund et al., 2015). mccrae and costa (1986); costa et al. (1991) associated conscientiousness with self-discipline, achievement striving, dutifulness, and competence. especially their persistency and self-discipline characteristics cause them to accomplish tasks or goal in a successful manner. this was demonstrated by some researches which are leaded by piedmont (1993), deary et al. (1996), and deary et al. (2003). openness to experience defines the “openness” to new ideas and flexibility (costa and mccrae, 1985) as cited in mishra and vaithianathan, 2015, p.16). this trait indicates the degree of intellectual curiosity, creativity (gender) and individual’s tendency to learn, try new things, consider new ideas and change (osatuyi, 2015). individuals who have high traits in openness are imaginative, impulsive, open-minded, unprejudiced, curious and indulgent (berglund et al., managers’ personality traits over management styles and decision-making styles 127 http://ijcf.ticaret.edu.tr 2015). they are not insistent on their own ideas or views, nor in their expectations toward others (mondak, 2010 as cited in quintelier, 2014, p.344). according to mccrae and john (1992), people who have openness traits tend to have more "need of variety, aesthetic sensitivity, and unconventional values than others (syed et al., 2015, p.184). big five personality traits has a significant effect especially on the decision making styles of managers and employees and the management styles of managers likewise the other management processess in organization. in this context decision making styles and the management styles are stated in the following sections. 2.2. decision making styles rowe et al. (1984) has defined decision as “an answer to some question or a choice between two or more alternatives” (p. 3). therefore, decision making ability is in relation with choosing an alternative from the pool (hammond, 1999). as for decision making process krumboltz and hamel (1977) expresses that defining, creating, examining and acting upon collected information. decision making is a function according to weiss (1983) that includes one’s personal interests, information and ideology. rowe and mason (1987) put decision making process in an order as; 1) stimuli; 2) the response; 3) the reflection; 4) the implementation; and 5) the evaluation. driver et al. (1993) classified decision styles with their model five basic decision styles of information use. decisive, flexible, integrative, hierarchic and systematic were the five decision styles. rowe and mason (1987) developed the cognitive to complexity model and classified decision styles. these four basic styles are 1) directive, 2) analytical, 3) conceptual and 4) behavioral. directive decision making style is having low tolerance for ambiguity and low cognitive complexity. the analytical decision making style is having high tolerance for ambiguity. the conceptual decision making style is having high level tolerance for ambiguity and high level cognitive complexity. the behavioral decision making style is having low level tolerance for ambiguity and low level cognitive complexity (rowe and mason, 1987; rowe and davis, 1996; boulgarides and cohen, 2001; connor and becker; 2003). decision making style was defined by scott and bruce (1995) as “the learned habitual response pattern exhibited by an individual when confronted with a decision situation … it is not a personality trait … but a habit-based propensity to react in a certain way” (scott and bruce, 1995, p. 820). they classified decision making styles in five dimensions —rational, intuitive, dependent, avoidant and spontaneous. rational style depends on logical evaluation choices. inutiative style prioritize feelings and the others’ thoughts in decision making process. the managers who have avoidant style are tended to avoid to make decisions. spontaneous style defines instant and prompt behaviors in decision making process (scott and bruce, 1995 as cited in bavol’ar and orosova, 2015, p.115). this decision making style which was developed by scott and bruce (1995) and adopted by kurban (2015) was preferred in this study. 2.3. management styles management style is simply defined as “a recurring set of characterisitics that are associated with the decisional process of the firm” (albaum and herche, 1999, p. 8). the characterisitics may change due to the environment and culture where the organizations operate. despite the fact that there are differences, an organization might be viewed as having a management style which is the sum of its managers, therefore management style becomes part of organization’s culture. poon et al. (2005) examined management decision making styles and compared national culture and management styles of australia and china. more recently, chia et al. (2007) observed hong kong, china, taiwan, south korea and singapore. as a conclusion within these countries political and socioeconomic factors affect the values of managers. according to lewin et al. (1939; cited in tomaskova and kopfova, 2011) authocratic, participative and democratic management styles are the most common cited and used management styles. when a manager dictates orders to organization members and without any consultation makes decisions by him or herself this type of management style is called authocratic management style. authocratic managers generally ignore their subordinates’ advices (knott, 2001). disadvantege of authocratic management style is in longer term motivation will tend to decrease and employee turnover will increase. as for participative or often called also consultative management style, before a 128 beliz ülgen, mehmet sağlam,türker tuğsal http://ijcf.ticaret.edu.tr manager implements a decision he/she consults partners, staff or employees their opinion. after taking their opinions, he/she modifies them into his/her decision and make a final decision (tomaskova and kopfova, 2011). in contrast to authocratic managers, democratic managers seek to consult and take advice from their subordinates and try to arrive at a consensus. democratic management style is characterized by empowerment. anyone has the decision making responsibility within a given framework. therefore, individuals feel a sense of commitment and belonging to their organization and their motivation tends to increase (kocher et al., 2013; rotemberg and saloner, 1993). another classification about management styles was made by likert. likert’s system 4 management style has four types. system 1 is exploitative authoritative and managers of this style tend to motivate individuals by threats and punishment, and decisions are imposed to employees. system 2 is benevolent authoritative. managers of this style tend to control less than system 1. in system 2 decisions are made by lower-level employees within the given limited framework, however majör decisions are made at the top. top managers feel more responsibility. system 3 is consultative system. this type of management style is related to human relations theory. managers of this style tend to motivate subordinates through rewards; moreover, lower-level employees are free to make decisions related with their work. top managers still have control over decisions, however they count their subordinates in action plans before setting goals. the last type is system 4 which is named participative system. system 4 is the most effective style of management. whereas system 3 is related to human relations theory, system 4 is related to human resources theory. system 4 type of management style includes high level of participation, responsibility, motivation, communication and satisfaction (likert, 1967, p. 48; cited in hall and leidecker, 1981). the management style classification in this application bases on authoritarian, protective, supporter, unionist and laissez-faire management styles. authoritarian management style is similar to mcgregor’s x theory (cem, 1971). this type of managers are close to communication and they tend to distrust to subordinates (öztekin, 2002). protective management style advocates human relations approach which barnard, mayo and follett pioneered (cem, 1971). protective managers believe that in order to reach the targets they should guide subordinates. supporter management style’s power source is organizational leadership. besides, leader’s power source is subordinates. unionist management style assures self-control, self-management, self-realization and teamwork (başaran, 1992). laissez-faire management style is also mentioned liberal management style. employees do their duty or work as they know, however managers do not control or interfere them (cem, 1971). 3. methodology and the application we have prepared a survey in order to measure the role of managers’ personality characteristics over management styles and decision-making styles. managers and employess who worked in various companies in istanbul form the population of this study. the questionnaire is conducted among managers and employees. participants are from various sectors in istanbul. as for sampling method, the single random sampling method is chosen. the questionnaire starts with 4 demographic questions and involves in four separate categories the instruments of managers’ personality traits, decision-making styles and management styles in this research. the questionnaire packs took about 15-20 minutes to complete. all of the variables used in the second, third and fourth sections of the questionnaire were measured with a likert-type scale. responses were elicited on a 5-point likert scale ranging from totally disagree (1) to totally agree (5). the questionnaire consists of girgin’s (2007) personality scale adaptation from goldberg (1992), kurban’s (2015) decision-making scale adopted from scott and bruce (1995), and yıldızhan’s (2012) management style scale. questionnaires were sent to all participants via e-mail. the numbers of returning questionnaires were 282 and 12 of them which were not valid questionnaire, were not included in the analysis. 270 questionnaires were included in the study. factor analysis and reliability tests managers’ personality traits over management styles and decision-making styles 129 http://ijcf.ticaret.edu.tr in order to determine reliability and validity of the scales, cronbach alpha reliability values and factor analysis are performed. after correlation analysis and multivariate regression model is used to explain the relaitonships among managers’ personality traits, decision-making styles and management styles. spss for windows 21.0 program is used to analyze the data. the results of the factor analys were seen that the structure of decision making and management styles factors were formed as expectedly. but in spite of the fact that personality traits’ two dimensions (agreeableness and openness to experience) were excluded from the model due to the results of factor and reliability analysis. the final model of the study includes 3 personality traits, 5 decision making styles and 5 management styes factors. the other dimensions of the cronbach alpha values were more than 0.70 which indicate that the dimensions used for each variable are accepted as reliable according to these results. it was decided to be done factor analysis because questions of all factors have kaiser-meyer-olkin measure of sampling adequacy higher than 0,60 and bartlett's test of sphericity, value of sig.; 0.000. since value of significance is lower than 0,05, it means there is a strong relationship among the variables. three items with a factor load under 0.50 were excluded from the management styles scale. these all factors with their names, their factor loadings, explained variance are presented in table 1, table 2, table 3. table 1. results of factor and reliability analysis of personality traits factor name number of items cronbach alpha variance explained kmo test and bartlett p value extraversion 6 ,742 14,766 conscientiousness 6 ,702 13,486 neurotic 8 ,751 12,277 total 56,42 0,804 and 0,00 table 2. results of factor and reliability analysis of management styles factor name number of items cronbach alpha variance explained kmo test and bartlett p value authoritarian 7 ,747 30,245 protective 9 ,827 7,685 supporter 9 ,924 7,131 unionist 8 ,817 6,270 laissez-faire 6 ,730 4,958 total 56,288 0,929 and 0,00 table 3. results of factor and reliability analysis of decision making styles 130 beliz ülgen, mehmet sağlam,türker tuğsal http://ijcf.ticaret.edu.tr factor name number of items cronbach alpha variance explained kmo test and bartlett p value rational 5 ,703 12,948 intuitive 5 ,852 11,915 dependent 5 ,794 11,543 avoidant 5 ,772 10,024 spontaneous 4 ,727 9,995 total 56,427 0,796 4. research findings and results 4.1. demographic characteristics of samples demographic characteristics of samples are displayed in table 4. there were 46 (17%) female and 224 (83%) male participants. majority of the participants were between the age of 35 and 44 years (52,6%), followed by 31,1% with 45-54 years. 55,9% of employees are university graduated. the highest percentage of employees (73%) had between 1-5 years in this workplace. table 4. demographic characteristics of samples variables frequency valid percent gender female 46 17,0 male 224 83,0 age 18-24 1 ,4 25-34 34 12,6 35-44 142 52,6 45-54 84 31,1 55 and over 9 3,3 education high school 21 7,8 university 158 58,5 master 83 30,7 doctorate 8 3,0 total working time in this workplace 1-5 197 73,0 6-10 52 19,6 11 years and over 21 7,5 managers’ personality traits over management styles and decision-making styles 131 http://ijcf.ticaret.edu.tr 4.2. correlation analysis correlation analysis conducted to examine the relationships among all dimensions of personality traits, decision making and management styles show the p<.01 and p<.05 level of significance. table 5 presents the correlation matrix for all dimensions. table 5. correlation analysis results factors r at io n al in tu it iv e d e p e n d e n t a v o id an t s p o n ta n e o u s a u th or it ar ia n p ro te ct iv e s u pp or te r u n io n is t l ai ss ez -f ai re extraversion ,005 ,012 ,153* ,197** ,173** -,005 -,130* -,144* -,058 ,113 conscientiousness ,467** ,079 -,053 -,261** -,045 ,055 ,163** ,240** ,085 -,148* neurotic -,323** ,217** ,120* ,414** ,216** ,204** -,115 -,173** -,101 ,357* **. correlation is significant at the 0.01 level (2-tailed). *. correlation is significant at the 0.05 level (2-tailed). it is seen in table 5 that there is a positive relationship between the extraversion managers and dependent, avoidant, spontaneous decision making styles (r= ,153, r= ,197, r= ,173). there is a negative relationship between the extraversion managers and protective, supporter management styles (r= -,130, r= -,144). there is a positive relationship between the conscientiousness managers and rational decision making styles (r= ,467). in contrast there is a negative relationship between the conscientiousness managers and avoidant decision making styles (r= -,261). there is a positive relationship between the conscientiousness managers and protective, supporter management styles (r= ,163, r= ,240) and there is a negative relationship between the conscientiousness managers and laissez-faire management style (r= -,148). there is a positive relationship between the neurotic managers and intuitive, dependent, avoidant, spontaneous decision making styles (r= ,217, r= ,120, r= ,414, r= ,216). there is a negative relationship between the neurotic managers and rational decision making style (r= -,323). in contrast there is a positive relationship between the neurotic managers and authoritarian, laissez-faire management style (r= ,204, r= ,357). there is a negative relationship between the neurotic managers and supporter management style (r= -,173). 4.3. regression analysis multiple regression models were applied to examine effect of three dimensions of personality traits on decision making and management styles. table 6 indicates regression results for three dimensions personaity traits’ on decision making styles. table 7 regression results for three dimensions personaity traits’ on management styles. table 6. regression results for three dimensions personaity traits’ on decision making styles decision making styles rational intuitive dependent avoidant spontaneous personality traits β β β β β extraversion 0,13* 0,12* conscientiousness 0,40* 0,16* -0,16* neurotic -0,22* 0,28* 0,34* 0,19* f 31,46 6,97 2,78 22,3 5,74 132 beliz ülgen, mehmet sağlam,türker tuğsal http://ijcf.ticaret.edu.tr sig. (p) f change 0,00 0,00 0,04 0,00 0,01 r2 0,26 0,07 0,03 0,21 0,06 *p<0,05 *β coefficient is significant at the 0.05 level the f-statistics indicates the overall significance of the models at the 0.05 level implying that the regression model is reliable for prediction. r2 values show that; three dimensions of personality traits’ explains 26% of the change of rational decision making style, 7% of the change of ıntuitive decision making style, 3% of the change of dependent decision making style, 21% of the change of avoidant decision making style, 6% of the change of spontaneous decision making style. the results suggest that extraversion personality has a positive effect on dependent (β = 0,13) and spontaneous (β = 0,12) decision making style. conscientiousness personality has a positive effect on rational (β = 0,40) and ıntuitive (β = 0,16)decision making style. also it has a negative effect on avoidant (β = -0,16) decision making style. neurotic personality has a negative effect on rational (β = -0,22)decision making style and it has a positive effect on intuitive, (β = 0,28) avoidant (β = 0,34) and spontaneous (β = 0,19) decision making style. table 7. regression results for three dimensions personaity traits’ on management styles management styles authoritarian protective supporter unionist laissez-faire personality traits β β β β β extraversion conscientiousness ,129* ,145* ,210* 0,34* neurotic ,262* f 5,75 3,96 7,75 1,31 13,2 sig f 0,01 0,00 0,00 0,27 0,01 r2 0,06 0,04 0,08 0,01 0,13 *p<0,05 *β coefficient is significant at the 0.05 level depending on thetable 7 results of regression analysis, unionist management style does not fit with model due to ftest p value. the other f-statistics indicates the overall significance of the models at the 0.05 level implying that the regression model is reliable for prediction. also extraversion has not any effect on authoritarian, protective, supporter and laissez-faire management styles. r2 values show that; two dimensions of personality traits’ explains 6% of the change of authoritarian management style, 4% of the change of protective management style, 8% of the change of supporter management style and 13 % of the change of laissez-faire management styles. the results suggest that conscientiousness personality has a positive effect on authoritarian (β = ,129), protective (β = ,145), supporter (β = ,210) and laissez-faire management styles (β = 0,34). neurotic personalityonly has a positive effect on authoritarian (β = ,262) management style. 5. conclusion managers’ personality traits over management styles and decision-making styles 133 http://ijcf.ticaret.edu.tr in this study the main purpose is to investigate the effects of managers’ personality traits on their decision making and management styles due to the limited studies including these three concepts together. this study is one of the very few that reveals the link among personality traits, decision making and management styles. in this context the literature is reviewed and the research model is developed. the research has some limitations such as the limited number of female participiants, time and location constraint. the results highlight that although conscientiousness has a positive effect on rational and inutiative decision making styles, it has a negative effect on avoidant decision making style. neuroticism has a positive effect on three dimenssions of decision making styles including inutiative, avoidant and spontaneous styles. on the contrary, it has a negative effect on rational style. finally extraversion has positive effect on both dependent and spontaneous decision making styles. with regard to management styles, the results illustrate that conscientiousness has positive effect on authoritarian, protective, supporter and laissez-faire management styles. besides, only neuroticism has positive effect on authoritarian management style. depending on the results of regression analysis, unionist management style does not fit with model due to f-test p value. extraversion has not any effect on authoritarian, protective, supporter and laissez-faire management styles. further studies may aim to investigate unionist management style and extraversion personality trait. additionaly, these studies may consider the constraints related with sample size, gender distribution and location. references albaum, g., & herche, j. 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(2012). spor genel müdürlüğü merkez örgütünde uygulanan yönetim biçimlerinin belirlenmesi. gazi university doctoral dissertation. international journal of commerce and finance, vol. 3, issue 2, 2017, 25-36 25 determining influencing factors of unemployment in turkey with mars method serhat yüksel (asst. prof.) i̇stanbul medipol university zafer adalı (res. asst) artvin çoruh university abstract higher unemployment rate is the problem of most of the countries in the world. because of this situation, these countries try to make many actions in order to decrease unemployment rate. however, to make such a recommendation, first of all, the reasons of the unemployment should be analyzed. within this framework, the aim of this study is to identify the factors which influence unemployment in turkey. for this purpose, quarterly data for the periods between 2003 and 2016 is evaluated with mars method. it is concluded that economic growth negatively affects unemployment in turkey. another result of this study is that higher inflation rates negatively affect unemployment rate. the last conclusion of this analysis is that interest rate has a positive influence on the unemployment rate. while considering these results, it is recommended that economic performance of the country should be improved and interest rates should be declined to decrease unemployment rate in turkey. another recommendation is that implementations, which are aimed to decrease inflation rate, should be controlled carefully because any implementation which aims to decrease inflation rate causes unemployment rate to increase. keywords: unemployment, mars method, turkey jel codes: f31, g21, g32, 1. introduction unemployment refers to the difference between the level of labor force and employment level. in other words, it explains the situation that the supply of the labor is higher than the demand of the labor. owing to this aspect, many people in the country cannot find a job although they want to work. therefore, it can be said that unemployment is one of the most important problems in the economy. because of this condition, all governments try to implement a policy to decrease unemployment rate (kingdon and knight, 2007: 198). there are different types of unemployment. structural unemployment is occurred due to the structural problems in the economy. moreover, frictional unemployment shows condition that people become unemployed for a temporary period because they change their jobs. additionally, cyclical unemployment is another type of unemployment that which happens when there are downturns in the economy. furthermore, technological unemployment occurs when there is a decrease in labor demand mainly because of technological improvement in the country. it is accepted that unemployment leads to many different problems for the countries which may be social or economical. first of all, when there are many people who do not have a job, it increases social chaos in the country. in addition to this problem, due to the people who do not have permanent income, there will be decrease in the demand of the goods in this country. owing to the decline in production and investment levels, this situation reduces economic growth. there may be many different reasons of unemployment. for example, if there is an economic recession in the country, many companies will go bankruptcy and lay off lots of employees. parallel to this aspect, it can be said that anything which affects economic growth negatively such as volatility in exchange rate or higher interest rate, will also in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e serhat yüksel & zafer adalı 26 have an increasing influence on unemployment rate. additionally, in case of high uncertainty, companies will be reluctant to make investment. in this condition, they prefer to employ less people. turkey is also a country which suffers from unemployment problem. for instance, in 2001, there was a damaging economic crisis which caused many companies to go bankruptcy. according to world bank data, in this period, unemployment rate in turkey exceeded 10%. after 2008 mortgage crisis, there was a decrease in the production and investment levels, so this ratio increased to 12%. at the end of 2016, unemployment rate in turkey was 10.32%. turkish government tries to take some actions in order to decrease this unemployment rate (world bank dataset). it can be said that decreasing unemployment rate is the focus of many different countries. in order to minimize unemployment, first of all, the factors that cause this problem should be analyzed. the main purpose of this study is to define the indicators of unemployment in turkey. to achieve this objective, quarterly data of the variables between 2003 and 2016 is evaluated with mars method. as a result, it will be possible to make some recommendation to minimize this problem in turkey. 2. literature review unemployment is a very popular subject which attracted the attention of many researchers in the literature. table 1 gives information about some of these studies. table 1 featured studies related to unemployment authors scope method result yashiv (2000) israel simulation analysis interest rate and economic growth play an important role in the unemployment. naudé and serumaga-zake (2001) south africa regression education level and gender are important determinants of unemployment. ollikainen (2003) finland duration analysis education is a factor that reduces the duration of unemployment. zagler (2003) france, germany, italy, and the uk vecm economic growth negatively affects unemployment rate. valadkhani (2003) iran regression inflation rate influences unemployment rate in iran. tansel and tasci (2004) turkey duration analysis education has a negative effect on unemployment. kingdon and knight (2004) south africa probit model education is an important factor of unemployment. tasci and tansel turkey descriptive higher level of education decreases unemployment rate. determining influencing factors of unemployment in turkey with mars method 27 (2005) statistic chang (2005) taiwan var economic growth is important determinant of unemployment, but fdi has no impact. tasci and ozdemir (2006) turkey probit model the level of education has an important effect on unemployment. frenkel and ros (2006) 4 latin american countries regression volatility of real exchange rate increases unemployment. baccaro and rei (2007) oecd countries regression higher interest rate is a factor that increases unemployment. sahin and kızılırmak (2007) turkey descriptive statistic age, sex and marital status play an important role on unemployment. filiztekin (2009) turkey regression human capital is the main source of unemployment level. aydıner avşar and onaran (2010) turkey regression higher economic growth reduces unemployment rate. eita and ashipala (2010) namibia regression the level of investment negatively influences unemployment rate. nunez and livanos (2010) 15 eu countries survey education level is an effective tool to reduce unemployment. tunah (2010) turkey granger causality analysis economic growth and inflation rate have a significant effect on unemployment. doğrul and soytas (2010) emerging markets var oil price and interest rate affect unemployment level. kyei and gyekye (2011) south africa regression economic growth has no impact on unemployment rate. tirkayi and özkan (2011) turkey var economic growth is an important factor of unemployment. yerdelen (2011) eu regression economic growth plays a major role in order to decrease unemployment. kreishan (2011) jordan regression there is not a relationship between inflation rate and serhat yüksel & zafer adalı 28 unemployment. maqbool et. al. (2013) pakistan ardl economic growth, the number of population, inflation and fdi are significant determinants of unemployment. altuntepe and güner (2013) turkey regression economic growth has an important influence on employment level. turco and maggioni (2013) turkey regression high export amount decreases unemployment rate in a country. chowdhury and hossain (2014) bangladesh regression inflation rate has a positive impact on unemployment whereas economic growth negatively influences it. şentürk and akbaş (2014) turkey toda yamamoto causality analysis economic growth is a factor that reduces unemployment rate in turkey. shahid (2014) pakistan ardl there is not a significant relationship between unemployment and inflation rate. arslan and zaman (2014) pakistan regression fdi and economic growth have a negative influence on unemployment. altunöz (2015) turkey granger causality analysis inflation rate does not affect unemployment rate. alhdiy et. al. (2015) egypt granger causality analysis gdp growth does not affect unemployment. bakhshi and ebrahimi (2016) iran ardl exchange rate is an important issue which influences unemployment. ogbeide et. al. (2016) nigeria regression fdi, economic growth and exchange rate affect unemployment. ibragimov and ibragimov (2016) cis countries regression economic growth decreases unemployment rate. wang (2016) china regression export has a positive influence on employment. irpan et. al. (2016) malaysia regression economic growth is a significant factor to reduce unemployment. ayşe (2016) turkey hatemi-j causality economic growth has no influence on unemployment. determining influencing factors of unemployment in turkey with mars method 29 analysis saraç and yildirim (2016) turkey markov change technique inflation rate does not have any effect on unemployment. bayrak and tatli (2016) turkey ardl higher education level decreases unemployment rate. mucuk et. al. (2017) turkey vecm economic growth is inversely related with unemployment rate. table 1 shows that most of the studies tried to examine the relationship between unemployment and economic growth. for example, zagler (2003) conducted a study to analyze this relationship in france, germany, italy, and the uk by using vecm. thus, it was concluded that economic growth plays a major role to decrease unemployment. additionally, yashiv (2000), chang (2005), tunah (2010), aydıner-avşar and onaran (2010), yerdelen (2011), maqbool et. al. (2013), altuntepe and güner (2013), arslan and zaman (2014), chowdhury and hossain (2014), ogbeide et. al. (2016), ibragimov and ibragimov (2016), irpan et. al. (2016) also found similar results by using different methodology. in spite of these studies, there are some other studies which underlined the opposite results. for instance, kyei and gyekye (2011) identified that economic growth is not an important determinant of unemployment in south africa with the help of regression analysis. also, alhdiy et. al. (2015) achieved similar results with different methods. additionally, ayşe (2016) and mucuk et. al. (2017) tried to determine the relationship between these variables in turkey. they concluded that economic growth has no influence on unemployment. moreover, it can be understood from table 1 that inflation rate is also another indicator of unemployment. valadkhani (2003) tried to define the determinants of unemployment in iran by using regression analysis and identified that inflation rate influences unemployment rate. kreishan (2011) and chowdhury and hossain (2014) reached similar results by using the same method. tunah (2010), maqbool et. al. (2013), shahid (2014), altunöz (2015) and saraç and yildirim (2016) emphasized the same issues with the help of different methods. on the other side, some other studies concluded that interest rate affects unemployment rate (yashiv, 2000: 1297), (baccaro and rei, 2007: 527), (doğrul and soytas, 2010: 1523). in addition to these studies, some studies were conducted to evaluate the relationship between exchange rate volatility and unemployment. for instance, bakhshi and ebrahimi (2016) made a study to analyze this relationship in iran by using ardl. it was concluded that exchange rate volatility affects unemployment rate. also, chowdhury and hossain (2014), frenkel and ros (2006) and ogbeide et. al. (2016) underlined the same conclusion by using regression analysis. on the other hand, tunah (2010) underlined that exchange rate volatility does not influence unemployment. another important indicator of unemployment is foreign direct investment. ogbeide et. al. (2016) identified that foreign direct investment has a negative effect on unemployment in nigeria by using regression analysis. however, chang (2005) found that foreign direct investment has no impact on unemployment in taiwan by using a different method. in addition to foreign direct investment, wang (2016), turco and maggioni (2013) and ogbeide et. al. (2016) emphasized the importance of international trade on unemployment. besides macroeconomic determinants of unemployment, there are some other studies that focus on the level of education to explain unemployment. for example, bayrak and tatli (2016) tried to understand the influencing factors of unemployment in turkey by using ardl analysis. they concluded that higher education level decreases unemployment rate. naudé and serumaga-zake (2001), ollikainen (2003), kingdon and knight (2004), tansel and serhat yüksel & zafer adalı 30 tasci (2004), tasci and tansel (2005), tasci and ozdemir (2006), filiztekin (2009), kyei and gyekye (2011) and nunez and livanos (2010) reached this result by using different methods. while taking into the consideration of table 1, it was understood that there is a need for a new study that analyzes influencing factors of unemployment by using a new and original method. 3. an application for turkey 3.1. data and variables in the analysis process, the data for the periods between 2003:1 and 2016:4 is taken into the consideration. this data is provided from the websites of turkish statistical institution and oecd. unemployment rate is the dependent variable whereas 5 different independent variables are also considered in the analysis. the details of them are shown on table 2. table 2 details of independent variables variable references interest rate yashiv (2000), baccaro and rei (2007), doğrul and soytas (2010) inflation rate valadkhani (2003), kreishan (2011), maqbool et. al. (2013), chowdhury and hossain (2014), shahid (2014), altunöz (2015), saraç and yildirim (2016) economic growth yashiv (2000), zagler (2003), chang (2005), aydıner avşar and onaran (2010), kyei and gyekye (2011), yerdelen (2011), maqbool et. al. (2013) current account deficit turco and maggioni (2013), wang (2016) exchange rate volatility frenkel and ros (2006), bakhshi and ebrahimi (2016), ogbeide et. al. (2016) 3.2. mars model multivariate adaptive regression splines (mars) was created by jerome friedman in 1991. the aim of this method is to investigate the impacts of independent variables on dependent variable. there are many advantages of this method. for example, there is no multicollinearity problem in mars method, so it can be possible to use many different independent variables in the analysis. furthermore, although independent variables take only one method in other analysis, they may take different values for different conditions in mars method. due to this aspect, it is very helpful to reach more accurate results (friedman, 1991). the details of this method are given below. (1) y refers to the dependent variable and x explains independent variables in the equation. additionally, b0 is the constant term and ε shows error term. it can be understood that the number of total basis functions are k. the analysis process in mars method is occurred in two different stages. firstly, all possible basis functions are created. in the second stage, the basis functions, which affect the model negatively, are eliminated from the model by the system (friedman, 1991: 60), (dinçer et. al., 2017 261). 3.3. analysis results determining influencing factors of unemployment in turkey with mars method 31 in the first step of the analysis, unit root tests are performed to see whether the independent variables are stationary or not. for this purpose, augmented dickey fuller (adf) and phillips peron (pp) unit root tests are considered and the details are shown in table 3. table 3 unit root test results variable augmented dickey fuller (adf) test phillips peron (pp)test level value (probability) first difference value (probability) level value (probability) first difference value (probability) real interest rate 0.0361 0.0446 inflation 0.0000 0.0000 economic growth 0.0000 0.0000 current account deficit 0.1807 0.0000 0.3289 0.0000 usd/tl currency exchange rate 0.9822 0.0000 0.9995 0.0000 table 3 shows that 3 independent variables (real interest rate, inflation and economic growth) are stationary on their level values because their probability values are less than 0.05. nonetheless, two independent variables (current account deficit and usd/tl currency ex-change rate) are not stationary. hence, the first differences of them are used in the analysis. after stationary analysis, mars method is used to identify the influencing factors of unemployment in turkey. mars method provided us 8 different models which are detailed on table 4. table 4 all models in the analysis total basis functions total variables gcv gcv r2 10 5 1.436 0.036 9 5 1.239 0.168 8 4 1.128 0.243 7 4 1.037 0.303 6 4 0.993 0.333 **5 3 0.984 0.339 serhat yüksel & zafer adalı 32 4 3 1.181 0.207 3 2 1.320 0.114 table 4 demonstrates that the model, which is at the top of the table, is named as the most complex model. it has 10 different basis functions and 5 different variables. after that, mars method eliminated some basis functions from this model and reached to the best model which has 5 different basis functions and 3 different variables. it can also be seen that this model has the lowest gcv and highest gcv r2 values. table 5 gives information about the details of the best model. table 5 the best model of the analysis variable coefficient p value constant 6.763 0.00 basis function 2 0.417 0.00 basis function 7 -3.144 0.00 basis function 10 0.532 0.00 basis function 11 0.194 0.00 basis function 13 3.034 0.00 f test: 17. 531 [0.000] gcv: 0.339 r2:0.637 adj r2: 0.600 table 5 shows that there are 5 different basis functions in the best model. also, all of them are statistically significant because p values are less than 0.01. additionally, f test demonstrates that the model is appropriate as a whole. table 6 explains the details of these 5 basis functions stated in the model. table 6 the basis functions in the best model basis functions details coefficient basis function 2 max (0, 0.200 economic growth) 0.417 basis function 7 max (0, interest rate – 7.970) -3.143 basis function 10 max (0, 10.338 – inflation rate) 0.532 determining influencing factors of unemployment in turkey with mars method 33 basis function 11 max (0, interest rate – 16.680) 0.194 basis function 13 max (0, interest rate – 7.130) 3.034 table 6 shows that economic growth is a significant variable that affects unemployment rate in turkey. it is stated in basis function 2 as “0.200 economic growth” and the coefficient is 0.417. it can be said that there is a negative relationship between these variables in turkey. this explains that when there is an economic recession in turkey, it will be an important indicator of high unemployment rates. therefore, economic performance of the country should be improved to decrease unemployment rate. zagler (2003), yashiv (2000), chang (2005), chowdhury and hossain (2014) and ogbeide et. al. (2016) also reached this result in the literature. in addition to the economic growth, inflation rate is another variable that influences unemployment rate in turkey. in basis function 10, this variable is stated as “10.338 – inflation rate” and the coefficient is positive (0.532). this result gives information that when inflation rate is more than 10.338, it does not affect unemployment rate in turkey. moreover, when it is less than 10.338, there is a negative relationship between inflation rate and unemployment rate. the main reason is that any implementation which aims to decrease inflation rate causes unemployment rate to increase. this result was also emphasized in many studies in the literature (kreishan, 2011: 228), (chowdhury and hossain, 2014: 16). furthermore, it is also identified that interest rate affects unemployment rate in turkey significantly. this variable is stated in basis function 7, 11 and 13. additionally, the coefficients of these variables are “-3.143”, “0.194” and “3.034”. while considering the total of these three coefficients, it can be understood that interest rate positively affects unemployment rates. this means that when interest rate is high, there will be decrease in the investment levels. this situation also leads to decline in the profitability of the companies. because of this aspect, these companies will prefer to fire employees. as a result, the model related to the unemployment level in turkey is the following. y = 6.763 + 0.417 * bf2 3.143 * bf7 + 0.532 * bf10 + 0.194 * bf11 + 3.034 * bf13 4. conclusion in this study, it is aimed to determine the macroeconomic indicators of unemployment rate in turkey. for this purpose, quarterly data for the periods between 2003 and 2016 is taken into the consideration. by analyzing similar studies in the literature, 5 different macroeconomic variables are selected that may affect unemployment rate. additionally, multivariate adaptive regression splines (mars) method is used to achieve this objective. in the analysis process, firstly, unit root tests are performed to understand whether independent variables are stationary or not. it is defined that 3 independent variables (real interest rate, inflation and economic growth) are stationary on their level values whereas two independent variables (current account deficit and usd/tl currency exchange rate) are not stationary. hence, the first differences of these two variables are used in the analysis. after stationary analysis, mars method is used to identify influencing factors of unemployment rate in turkey. it is concluded that economic growth affects unemployment negatively in turkey. this shows that economic performance of the country should be improved to decrease unemployment rate. furthermore, interest rate positively influences unemployment rates. in other words, in case of high interest rates, investment levels are decreased which causes higher unemployment rate. in addition to economic growth and interest rate, inflation rate is also an independent variable which affects unemployment rate in turkey. it is understood that when inflation rate is more than 10.338, it does not affect unemployment rate in turkey. however, there is a negative relationship between inflation rate and unemployment rate when it is less than 10.338. the main reason is that any implementation which aims to decrease inflation rate causes unemployment rate to increase. serhat yüksel & zafer adalı 34 while considering these results, it can be said that economic performance of the country should be improved and interest rates should be reduced to decrease unemployment rate in turkey. additionally, it is also recommended that implementations aimed to decrease inflation rate, should be controlled carefully. by analyzing a very important subject, this study aims to make a significant contribution to the literature. nevertheless, a new study, which focuses on many different countries for this issue, will also be beneficial. references alhdiy, f. m., johari, f., daud, s. n. m., & rahman, a. a. 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(2003). “the dynamics of economic growth and unemployment in major european countries: analysis of okun´ s law”, applied econometrics and international development, 3(3). international journal of commerce and finance, vol. 3, issue 2, 2017, 1-10 1 islamic banking capital challenges to increase business expansion (indonesia cases) lucky nugroho mercu buana university, jakarta, indonesia wiwik utami mercu buana university, jakarta, indonesia caturida meiwanto doktorlina mercu buana university, jakarta, indonesia soeharjoto trisakti university, jakarta, indonesia tengku chandra husnadi perbanas institute, jakarta, indonesia abstract in the case of indonesia regarding capital sources in islamic banks, all islamic banks are subsidiaries of conventional banks (except bank muamalat). bank syariah mandiri which is the only islamic bank that meets capital ownership with business category bank level iii (buku iii) is also a subsidiary of bank mandiri (conventional bank). in the same way, conventional banks become essential to meet the capital requirement to improve the business of islamic bank. this article aims to determine the role of capital and operating profit for business expansion (financing) in bank syariah mandiri. the method used is the quantitative method by using statistical tool stata version 13. the result of regression test is known that capital and profit have a significant influence in increasing financing expansion in islamic bank. also, the price of the number of bad debts causes the lack of public confidence in the islamic bank. the alternative to increasing the capital and public trust is government policies to support islamic bank become independent. keywords: capital, profit, business expansion, non-performing financing, government policies 1. introduction islamic banks in indonesia should be the locomotive of development and national economic growth because of indonesia as a country with the largest population in the world and as the muslim majority country. the existence of islamic banking as a solution of the existing economic system is expected to contribute positively to the maslahat ummah (sukmadilaga & nugroho, 2017; shidiq, 2017; arafat and nugroho, 2016; nugroho, 2014). the welfare of the ummah is the implementation of the maqhasid shariah (prastowo, 2015) that consists of several elements namely keeping the religion, keeping the soul, keeping the mind, keeping the descendants, keeping the property, and keeping the environment. therefore maqhasid sharia has similarity regarding the purpose with the sustainability principles triple bottom line (profit, people, and the planet) but beyond of it because the maqhasid sharia laws are also ensuring all activity achieve not only the world objectives but also achieve hereafter objectives. moreover, islam is a way of life (bilal, 1999) including business transactions activities that require the muslims use islamic bank. furthermore, according to (febianto & kasri, 2007) the general principles of islamic banking is anti maghrib (maysir, gharar, and riba) which is considered to be the limitation of greedy human nature (masyita, 2015). based on these matters, the primary role of islamic banking in the economy is to prevent the occurrence of injustice, in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e lucky nugroho & wiwik utami & caturida meiwanto doktorlina & soeharjoto & tengku chandra husnadi 2 equal distribution of income, and gender equality (permana & purba, 2008). moreover, according to dhumale and sapcanin (1998) islamic banking has the goal not only to achieve the goal in the world but also to reach the purpose of the hereafter. furthermore, the islamic banking system is one of the implementation aspects of the islamic life view that aims not only to achieve profit but also achieve social performance. according to setiawan (2006), the objectives and critical functions of the islamic banking system are as follows:  socio-economic justice and equitable distribution of income and wealth;  create a stability of the value of money (means of exchange) aimed at making it a reliable unit of accounting, as a fair standard of payment and as a stable store value (stability in the value of money);  mobilize savings funds in the form of economic development investments by using specific means to ensure that interested parties get a fair share of returns (mobilization of savings);  providing adequate services for all financial services contained in the banking system (sufficient other financial services). in the opinion of some shariah banking experts, some of the main issues of islamic banking in expanding financing are insufficient capital, transaction complexity and unavailability of adequate reserve losses (vogel 1997; iqbal & mirakhor 1999). the same thing was also expressed by abdul-gafoor (2003), alam (2000) and haron (1995) that the operation of islamic banking is very dependent on the capital paid by shareholders and also from third-party funds collected from savers. the phenomenon of islamic banking business expansion in indonesia in the last 5 (five) years has decreased growth. the primary indicator of the decline in an expansion of islamic banking business is shown by the drop in asset growth from 2011 to 2016 with the following data: table 1. asset growth analysis with compound annual growth rate (cagr) method cagr cagr 2006-2011 2011-2016 islamic bank asset growth 40,34% 16,20% source: indonesian islamic banking statistics data that have been processed the current bus number is 13 which consists of: 1. bank muamalat; 2. bank syariah mandiri (bsm); 3. bank rakyat indonesia syariah (bris); 4. bank negara indonesia syariah (bnis); 5. mega syariah; 6. panin syariah; 7. bca syariah; 8. victoria syariah; 9. bukopin syariah; 10. maybank syariah; islamic banking capital challenges to increase business expansion (indonesia cases) 3 11. bjb syariah; 12. btpn syariah; 13. bpd aceh. based on the above list of banks only bank muamalat stand-alone, while the 12 (twelve) other banks owned by the holding company's parent bank which is also a conventional bank. therefore, the 12 (twelve) banks will be highly dependent on their capital stock from shareholders. bank syariah mandiri as an islamic bank with the most extensive financing portfolio in islamic banking industry or 22.41% of total financing portfolio has a significant impact on islamic banking sector. based on this, the object of this research is the expansion of financing from bank syariah mandiri. regarding nugroho et al. (2017), the existence of islamic bank in indonesia not yet got full support from the government than the presence of conventional bank because of until now there isn't islamic bank that directly owned by the government (state own islamic bank) therefore government intervention in public policy crucial. 2. literature review the islamic banking system has proven itself to be a terrible system through the monetary and banking crisis in indonesia. the excellence of islamic banks is to channel their financing to the real sector. the background of the establishment of islamic banks in indonesia by antonio (2001) is inseparable from the influence of the development of islamic banks in islamic countries. in the early 1980s, discussions on islamic banks as pillars of islamic economics began. the figures involved in the study were karnaen a. perwataatmadja, m. dawam rahardjo, a.m. saefudin, m. amien rais and others. several trials on a limited scale have been realized. among them is baitut tamwil-salman, bandung which had grown impressive. in jakarta also established similar institutions in the form of cooperatives, namely cooperative ridho gusti. however, more individual initiatives to establish islamic banks in indonesia were only made in 1990. the indonesian ulema council (mui) on 18-20 august 1990 held workshops related to bank interest in cisarua, bogor, west java. the results of the workshop were discussed more deeply in the national conference (munas) iv majelis ulama indonesia which took place at sahid jaya hotel jakarta, 22-25 august 1990. based on the mandate of national assembly iv of the majelis ulama indonesia, a working group was formed to study the establishment of an islamic bank in indonesia. the established working group is called the mui banking team in charge of approaching and consulting with all related parties in developing an islamic bank. the result, in november 1991 signed the establishment of pt. bank muamalat indonesia (bmi) which began operation in may 1992 whose activities are based on law no. 7 year1992 and pp no.72 year 1992. antonio (2001) said that bank syariah mandiri (bsm) is the first government-owned bank to base its operations on sharia principles. structurally bsm is derived from bank susila bakti (bsb), as one of the subsidiaries in the scope of bank mandiri (ex.bdn) which is then converted into a full islamic bank. to launch the conversion process into an islamic bank, bsm cooperates with tazkia institute, especially in the field of training and conversion assistance. as one bank owned by bank mandiri which has hundreds of trillions of assets and networking so broad that bsm has some comparative advantage compared to its predecessor bmi. cihak and hesse (2010) in his research on all shariah banks across the country concluded that:  islamic banks that have a small business scale financially will be stronger than conventional banks with small business sizes;  conventional banks with large enterprise scale will be economically stronger than islamic banks with large business scale. the concluded in line with previous research of shaban et al. (2014), and aysan et al. (2016) that founded islamic bank focuses in the retail segment in another word tends to serve micro and small clients segments. related to the lucky nugroho & wiwik utami & caturida meiwanto doktorlina & soeharjoto & tengku chandra husnadi 4 regulation of the financial services authority no. 6/pojk.03/2016, concerning business activities and office networks based on the bank's core capital:  buku i is a bank with a core capital up to less than rp1,000,000,000,000, (one trillion rupiah);  buku ii is a bank with a core capital of at least rp1,000,000,000,000, (one trillion rupiah) up to less than rp5,000,000,000,000,(five trillion rupiahs);  buku iii is a bank with a core capital of at least rp 5,000,000,000,000, (five trillion rupiahs) up to less than rp30,000,000,000,000,(thirty trillion rupiahs); and  buku iv is a bank with a core capital of at least rp 30,000,000,000,000,(thirty trillion rupiah). based on the regulation and classification of core capital, there are some limitation bank business activities, higher the classification such as buku iv. therefore the bank permitted to conduct all banking activities both in rupiah and in foreign currency and capital participation in financial institutions in indonesia and/or all regions abroad with more significant amount than buku iii such as fundraising, fund disbursement, trade finance, treasury activities, foreign exchange activities, agency activities and cooperation, payment system and electronic banking activities, equity participation activities, temporary equity participation activities in the context of rescue credit, other services and other activities commonly performed by the bank as long as it is not incompatible with regulations and legislation. therefore the expansion business of islamic bank has not been able to compete with conventional banks that have the capital category in buku iv because of the biggest islamic bank in indonesia only appropriate in buku iii classification. several previous studies have suggested that bank capital has a significant relationship with the distribution of financing (voutsinas and werner, 2011; becker and ivashina, 2014), the capital requirement is primarily determined by the volume of financing distribution and the segment focus of the bank's financing portfolio. several previous studies have stated that bank capital has a significant relationship with the distribution of loans to banks (voutsinas and werner, 2011; becker and ivashina, 2014). each bank has different internal policies over capital requirements determined by the volume of financing disbursement and the focus of the bank's financing segment. moreover, according to ashraf & cheng (2015) increased profits of the bank's lending business, the larger the size of the company the more likely it is for a company to generate profits to improve the company's ability to grow its business (fama & french 2001) 3. methodology the research method used is a quantitative method with multiple regression test techniques and using statistical tools stata version 13. the equation formula used is: y = b0 + b1 x1 + b2 x2 + e where: y = bank syariah mandiri financing expansion (bsm) bo = coefficient x1 = equity or capital x2 = net profit e = error the sample used in this research is the distribution of financing, equity and net profit of bank syariah mandiri in 12 (twelve) years since 2005 until 2016. islamic banking capital challenges to increase business expansion (indonesia cases) 5 table 2. distribution of financing, equity and net profit of bsm 2005-2016 billion rp year equity profit financing 2005 632 17 5.847 2006 697 65 7.412 2007 811 115 10.297 2008 1.208 196 13.241 2009 1.600 290 15.979 2010 2.020 418 23.968 2011 3.073 551 36.727 2012 4.180 805 44.755 2013 4.861 651 50.460 2014 4.937 (45) 49.133 2015 5.613 290 51.089 2016 7.221 325 55.580 source: annual report of bank syariah mandiri further discussion of this research will be limited by some research questions consisting of:  what is the role of capital and profit on financing expansion?  what are the challenges of islamic banks to increase business expansion? 4. discussion and findings 4.1. role of capital and profit on financing expansion capital in islamic banking is sourced from equity participation and undistributed profits. according to holmstrom and tirole (1997), capital increase will affect the growth in financing volume that similar with research results from practitioners and experts who argue that increased capital will create financial stability at the bank and become agile in its expansion (oliveira-santos, andre & elliott, 2012; hanson et al. 2011). furthermore, to know the role of capital and profit to financing expansion in bsm, then used multiple regression statistical tests with tool statistic stata version 13 with the result as follows: the explanation of the results of multiple regression statistics test above is as follows:  number of obs = 12, which means the sample used in this observation amounts to 12 samples;  f (2, 9), shows the f test on df 2 and 9, df 2 means the number of tested variables is reduced by 1, i.e., 31 = 2. whereas 9 is the number of observations, i.e., the total number of samples is reduced by all 12-3 = 9;  r-squared is the coefficient of multiple determinations, which means how much simultaneously all independent variables can explain the dependent variable. above the value of 0.9673 which means all the independent variables can explain the dependent variable of 96.63%. therefore the remaining 100% 96.73% = 3.27% influenced by other variables outside the regression model; lucky nugroho & wiwik utami & caturida meiwanto doktorlina & soeharjoto & tengku chandra husnadi 6 table 3. statistical test results of stata multiple regression version 13 _cons 2231.645 2147.497 1.04 0.326 . profit 13.19692 5.165285 2.55 0.031 .1697572 equity 7.804682 .5763414 13.54 0.000 .8997575 financing coef. std. err. t p>|t| beta total 4.1407e+09 11 376425505 root mse = 3875.8 adj r-squared = 0.9601 residual 135194972 9 15021663.6 r-squared = 0.9673 model 4.0055e+09 2 2.0027e+09 prob > f = 0.0000 f( 2, 9) = 133.32 source ss df ms number of obs = 12 . regress financing equity profit, beta  in the column, t is a partial t-test value. it is said to be significant at 5% level if in the right column is p> [t] or also called p-value / significance <0,05. so that variable of capital has positive and significant effect to the expansion of financing, as well as profit variable, have the positive and significant effect on financing;  in the coef column is the unstandardized coefficient beta value. the value of this beta coefficient is used as the value in the regression equation. based on the above results, then the regression equation made is: y = 2231,645 + 7,805 x1 + 13,197 x2 + e. where y is the dependent variable, 2231,645 are constants, x1 equity variables, x2 profit variables, and e are errors. based on the results of data processing above, the value of regression coefficients on the independent variables describes if the estimated independent variables rise by one unit, and the value of other independent variables is determined to be constant or equal to zero, then the value of the dependent variable is expected to rise or may fall in accordance with the sign regression coefficient of independent variables. base multiple linear regression equations above obtained constant value equal to 2231,645. that is if the variable of financing expansion (y) is not influenced by the two independent variables that are equity (x1) and profit (x2) is zero, then the amount of financing expansion is rp2,231,645 billion. the sign of the independent variable regression coefficient shows the direction of the relationship of the variables concerned with the equity. the regression coefficient for the independent variable x1 is positive, indicating a direct correlation between equity and expansion (y). the regression coefficient of variable x1 of 7,805 means that every increase of equity (x1) of one unit will cause the growth of financing expansion (y) of rp7,805 billion. the regression coefficient for the independent variable x2 is positive, indicating a direct relationship between profit (x2) and expansion financing (y). the regression coefficient of x2 variable of 13,197 means for each increase of profit (x2) of one unit will cause the growth of financing expansion (y) of rp13,197 billion. 4.2. challenges of islamic banks to increase financing expansion the effort to increase the current islamic bank capital depends heavily on the shareholder policy which is also as a conventional bank with the same core business and services as its subsidiary, the islamic bank. while competition between conventional banking with islamic banking in expanding financing is still in the same market, so it is somewhat tricky for islamic banking with the current condition as a subsidiary of the conventional bank to get the flexibility of capital. besides, the higher the capital owned, it also affects the increased ability of the bank in absorbing the potential risks that occur, as known today npf islamic banking financing is higher than the npf in conventional banks as shown in table 4: islamic banking capital challenges to increase business expansion (indonesia cases) 7 table 4. npf comparison islamic bank financing with conventional bank financing npf 2012 2013 2014 2015 2016 npf/npl of islamic bank 2,22% 2,62% 4,33% 4,34% 4,16% npf/npl of conventional bank 1,85% 1,72% 2,04% 2,38% 2,85% source: indonesian islamic banking statistics data that have been processed the increasing number of islamic banking npf caused profit generated by islamic banking to fall. the declining profit from islamic banking has resulted in reduced ability to expand. even with the increasing number of npf or non-performing financing has resulted in lower public trust (owner of funds) to place their funds in islamic banks. currently, from 13 bus, only 1 (one) shariah bank is included in the category of buku iii (three), namely bsm. therefore, if islamic banking industry competes with conventional banking that already has 5 (five) banks included in the category buku iv (four) will give impact islamic banking will be far behind. banks with buku iv category can conduct their business activities more freely, either from network expansion, financing expansion, collecting third-party funds, innovating products and services such as digital banking. to be able to compete with conventional banking, shariah banking should stand alone, not as a subsidiary to increase the flexibility to get capital. currently, the financial services authority (ojk) recommends that islamic banks can perform corporate actions to seek money, either through initial public offering (ipo), seeking strategic partners or investors and issuing sukuk. some of these alternatives can be pursued by islamic banking that is tailored to the internal capabilities and business prospects to come. also, the planned merger of islamic banks can also be used as an alternative to increasing islamic banking capital. according to gupitasari, et al. (2016) in his study related to the incorporation of islamic banking from the juridical aspect is permission so that the current or not the merger is dependent on government policy. also, according to yudistira (2004) said the merger of islamic banks could also increase efficiency. nevertheless, according to nugroho, et al. (a2017) the merger action become establish state own islamic bank is going to provide maslahah to the community and as the implementation of islamic law in totality (kaffah). 5. conclusion and recommendation 5.1. conclusion the strength of capital and profit generated by islamic banking significantly influences the expansion of financing. therefore, the islamic bank structure which under supervised from the conventional bank as the parent's company should be separated. the objectives of segregated islamic bank from the parent's company that also as conventional bank are:  eliminating dependency of islamic bank capital from conventional;  avoid violations of shari'ah compliance because the source of capital comes from a conventional bank which can not be guaranteed halal;  providing flexibility of sharia banks in running their business to accelerate the expansion of its business. nevertheless, the policy intervention from government very urgent to implement this corporate action because of the status of the conventional bank is state own company. determine of public policy should be base on the need of lucky nugroho & wiwik utami & caturida meiwanto doktorlina & soeharjoto & tengku chandra husnadi 8 the muslim community in term doing their thought in totality (kaffah) and the islamic bank existence not only for giving beneficiaries to the moslem but also for all community because of the sharia principles presence to provide the advantage to all people (rahmatanlilalamin). nevertheless, the high level of problem financing also resulted in lower public trust on islamic bank because of the impact is decreasing the profit. the profit for the company has a role in empowering the islamic bank to increase the business thus the islamic bank needs the professional team to manage the operation also the consciousness of the community either that debts must be pay off. there are 3 (three) aspects that must be improved by islamic banks to be able to compete are the quality of human capital, a simple organization and a qualified information technology (it). besides, the tight banking competition in indonesia requires all banks to be able to run their activities efficiently. this condition causes banks to apply the principle of prudentiality and carefully in channeling their financing to segments that have good prospects for the future. the selection of prospect segment main is to avoid rising problematic financing that will lead to high capital needs of a bank to cover the bad debt, if the bad debt in bank increases will undoubtedly be coupled with policies to reduce the supply of financing. there is an alternative for islamic banks to improve competitiveness by increasing the scale of their business through mergers so that competitiveness and profitability ability can enhance (nugroho et al., b2017). results give us confidence that it is socially beneficial to change legislation and attract non-residents to establish private foundations in a country to address their business and wealth succession issues. 5.2. recommendation the dependence of islamic banks is related to the increase of capital to the parent company; namely conventional banks become a challenge for the government to be able to take decisions related to the planned merger of islamic banks under state-owned banks. the policy should also consider that the contribution of islamic banking with its sharia principles can provide benefits to the community. references abdul-gafoor, a. 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(2003). efficiency in islamic banking: an empirical analysis of 18 banks. journal of economic literature. regulation of the financial services authority no.6 /pojk.03/2016 about business activities and office networks based on core bank capital. international journal of commerce and finance, vol. 4, issue 2, 2018, 60-93 60 business-it alignment effects on business agility lorin koçu, (phd) istanbul commerce university, istanbul abstract: the purpose of this study is to examine the effect of business-it alignment effects on business agility. the questionnaire of this study was given to 504 people via online survey who work as a manager in 3 public, 9 private and 16 foreign capital banks in turkey. 334 valid questionnaires were collected back and analyzed. corellastion, regresion and multiple regretion analysis were used. according to the findings business-it alignment has a positive effect on the business agility. as sub dimensions intellectual alignment and business alignment have a positive effect on the business agility. when we look at business –it alignment effect on business agility dimensions. it has positive effects on all six dimension of business agility (agile values, technology workforce, change management, collaboration & coordination and flexible infrastructure.). keywords: business-it alignment, business agility, banking sector 1. introduction since many years according to global institue for it management and society for information management surveys business it alignment and business agility are the top concers of companies. since henderson &venkatraman (1993) first strategic alignment publication,, alignment is still in progress. because after many years itbusiness relationship, the role of it was transformed from support function to strategic partnership or business enabler role. agility was also discribed in the 90s firstly by goldman as agile manufacturing. nowadays any effective system must be as agile as its environment forces it to be (dove, 2005). agility is the ability to rapidly and thoughtfully respond to changing conditions, moving seamlessly from one position to another. todays volatile envoirement pushed business become agile not just in manufaturing all part of businesses. business agility has holistic view different agility perspectives like agile production, agile leadership, agile workforce etc. these two subjects are closely related but there are limited researches in literature. one of the main question is alignment needs planning, time and effort, agility is required quick decision making. how companies could face these both need in fast changing environmental conditions in this research we would like to define relationship of businessit alignment effects on business agility in different dimensions. we select finance sector for this research as one of most competitive sector so need agility competence. 2. literature review 2.1 business – it alignment according to broadbent and weill (1993), strategic business it alignment represents the extent to which business strategies are enabled, supported, and stimulated by information strategies. (amaralli, 2014) strategic alignment is the degree to which a company’s mission, goals, and business plans are shared and supported by it strategy (chan and reich, 2007). according to huang and hu (2007), it-business strategic alignment involves active design, management, and execution of the it functions in accordance with the enterprise’s vision, objectives, goals, and the strategies needed to achieve them; it is a basic principle of interaction between it and business. alignment between it and business strategy enhances business success and enhances the corporate performance (chan, sabherwal, & thatcher, 2006). moreover, it-business strategic alignment contributes to higher levels of organizational performance and perceived business value from it (chan et al., 1997,luftman & brier, 1999; luftman & kempaiah, 2007; silvius et al., 2009, gerow et al 2014;; kearns and sabherwal, 2007; reich and in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e business-it alignment effects on business agility 61 http://ijcf.ticaret.edu.tr benbasat, 1996, 2000, sabherwal and chan, 2001). bergeron, raymond, and rivard (2004) found that the organization that had no conflict in the alignment among business strategies, it strategies, business operations and it operations achieved a better performance.( charoensuk,2014) tallon and kreamer (2003) found a significant and positive correlation between it-business alignment and increased organization performance.there are generally accepted frameworks (cmm, cobit, itil, and others) as a powerful tool for better it effectiveness and efficiency because they provide a framework for aligning it and business requirements and strategies. these frameworks are mostly used in organizations and arrange policies and rules for better it management and it –business alignment. one of the main question of this research is that how effects agility needs of these strict rules of effective business – it alignment. the first alignment model is leavitt`s diamond that recognizes four mutually interrelated domains: structure, task, people and technology. another model on organizational harmonization and alignment is the 7-s model created by peters and waterman consultants of the mckinsey & company consulting firm (peters & waterman, 1982). the model builds on the premise that there are seven internally interacting domains that need to be aligned in order to increase organizational performance. the elements; the strategy, structure and systems, shared values, the skills, the style and the staff. the mit90s model developed at mit by scott morton is one of the first business/it alignment models addressing the fit between business and it which served as an inspiration for many future model including henderson and venkatramans strategic alignment model (scott morton, 1991) as well as the macdonald model (1991). the strategic alignment model (sam) proposed by henderson and venkatraman (1992) and based on the mit90 investigates four key domains of alignment: business strategy, it strategy, is infrastructure and processes, organizational infrastructure and processes. in this model classify the domains into external (business strategy and it strategy) and internal (is infrastructure and processes, organizational infrastructure and processes), and analyses several alignment combinations. they conclude that strategic alignment is achieved when strategic and internal domains are aligned, while functional integration is achieved when there is fit between business and it. they defined four perspectives; strategy execution; technology transformation; competitive potential; service level. papp (1995) extend the model and add four perspectives; organization it infrastructure, it infrastructure strategy, it organization infrastructure, organization infrastructure strategy. he also add four cross domain perspectives as fusion perspectives; organization strategy fusion; organization infrastructure fusion; information technology strategy fusion, information technology infrastructure fusion. the authors argue that there isn’t a superior alignment perspective but rather they are equally useful so executives should consider all of them when making decisions and be ready to adapt. avison et al. (2004) adopt sam framework and use it to empirically test business strategy alignment at the it project level, by mapping the projects to the framework and then applying the sam alignment perspectives. in his model, maes (1999) replace internal domain with a structural level and an operational level and add third dimension on the vertical axis which takes into account the information and communication aspects internally and externally. chan & huff (1993) examined the relationships among it strategic alignment, it effectiveness and business performance and arrange strategic orientation of information systems (strois) instrument. chan & huff proposed combining venkatraman's strategic orientation of business enterprise (strobe) instrument and chan's strategic orientation of information systems (strois) instrument to assess strategic alignment.luftman (luftman, 1996, 2007) tried to transform the model into a management tool through the introduction of governing alignment perspectives and identifying enablers and inhibitors to alignment. tallon and kraemer’s conceptual model of strategic alignment describes a process of management practices determining a business strategy and an it strategy. the outcome of the deployment of the business and is strategies and the resulting strategic alignment has a direct impact on it business value in the organization. 2.2 business agility “agility is a way to cope with external and internal changes, which are highly uncertain.” (oosterhaut et al. 2007, p.53) most recently research accept agility as a mindset. the term "agility" was used for agile manufacturing, the first time by iaccoca agency in a report titled as "the strategy of the industrialized specialist agencies" in 1991 to describe the necessary capability for modern production. (nagel &dove, 1991). business agility is a firm-wide capability to deal with changes that often arise unexpectedly in business environments via rapid and innovative responses that exploit changes as opportunities to grow and prosper (goldman et al. 1995) after agile manufacturing the concept 62 lorin koçu http://ijcf.ticaret.edu.tr was extended to organizational strategic agility, supply chain agility, information systems agility etc. business agility is the most extended definition of agility cover different agility dimensions. yusuf, sarhadi, and gunasekaran (1999 p.40) define agility as “the successful exploration of competitive bases (speed, flexibility, innovation proactivity, quality and profitability) through the integration of reconfigurable resources and best practices in a knowledge-rich environment to provide customer-driven products and services in a fast changing market environment”. business agility has been defined as a dynamic capability, a higher-order capability, which can enhance the performance over a relatively long time frame by effectively responding to customers’ demands. specifically, as a dynamic capability, organizational agility facilitates integrating and assembling resources, such as assets, knowledge, and relationships (sambamurthy et al. 2003). there are many models tried to define agility. goldman et al (1995) proposed four strategic dimensions of agile competition; enriching the customer, cooperating to enhance competitiveness, mastering change and uncertainty, leveraging the impact of people and information. agile organizations support it workforce by hiring ‘knowledge workers’, giving ‘top management support and employee empowerment’ and continuing ‘training and education’ development (gunasekaran, 1999). sharifi and zhang (2001 p.498) provided a conceptual model to help production organizations to make strategic decisions for agile production. this model consists agility drivers (change in market, change in competition need,change in customer requirements, change in technology, change in social factors), agility capabilities (responsiveness,competency, flexibility, quickness), agility providers (organization, technology, people, innovation) zhang in 2011, which has added three more dimensions; involve proactive, customer focus and participation. kidd (2000) defined two dimension of agility as internal and external agility and firms need to find a balance between internal and external agility. sensing, responding and learning capabilities can be sourced internally within the organization or externally via partner organizations or customers. for lui and piccol (2006) the agility is defined by: technology, process, people, and structure. hence, they argue that the agility is not a simple summing of the agility of the four components, but it depends on their nonlinear relationship. tsourveloudis et al., (2002) proposed four aspects: production infrastructure, market infrastructure, people infrastructure and information infrastructure. imache et al (2008) proposed four dimensions: process, organization, information, resource and environment. van oosterhaut et al. (2006), grouped agility enablers into the following six categories: business network governance, business network architecture, information technology, organization governance, organization architecture (processes & products), and organizational culture & personnel. according to tseng and lin (2011) are the most important agility drivers that change the competition in business environments are market, competition, customer requirementi technological innovations and social factors. dove defined (2001) agile organizations possess three groups of dynamic capabilities for mastering change and uncertainty: sensing, responding, and knowledge management. sensing is the ability of organizations to actively seek out and gather useable data, assimilate this into information, interpret and analyze the urgency, causes and impact of the derived information and as such, anticipate or detect opportunities and threats in the business environment responding is the ability of an organization in collaboration with its customers and partners in the business network, to quickly and seamlessly (re)configure combinations of capabilities to shape innovative moves with relative ease (dove, 2001). ren et al. (2003) revealed that such competitive bases as speed, proactivity, and flexibility had the largest impact on overall enterprise competitiveness. the study showed that relationships between agility attributes and competitive dimensions had the largest values for following pairs: (1) strategic relationship with customers and speed, (2) quality over product life and costs, (3) product with value addition and quality, (4) firsttime right decision and innovation, (5) enterprise integration and flexibility, and (6) rapid partnership formation and proactivity. overby et al. (2006, p.121) have also defined enterprise agility in its broadest sense as the firm’s ability to sense environmental change and respond rapidly. sensing represents the knowledge component of agility. responding describes the firm’s ability to act quickly and accurately on opportunities and/or threats (dove 2001; overby et al. 2006). sense and response explain how firms respond to opportunities and threats with speed, ease and dexterity (overby et al. 2006). roberts and grover (2012)identified that capabilities of sensing and responding themselves do business-it alignment effects on business agility 63 http://ijcf.ticaret.edu.tr not lead to competitive advantage, they should be aligned. galliers (2007) studied the agility in the strategy point of view by suggesting a framework for strategizing agility: (1) the exploitation strategy: concerns the environmental and organizational analysis, the enterprise information and knowledge systems, the standardized procedures and rules, and the information services; (2) the exploration strategy: it is related on the alternative futures of information systems, the existing communities of practice, the flexibility of project teams, the existence of knowledge brokers, and the possibility of cross-project learning; and (3) the change management strategy: it depends on the ability to incorporate the ongoing learning and review. doz and kosonen (2008) suggested an organizational model called fast strategy to provide an organizational framework that enables the company to maintain momentum while continuously redirecting and/or reinventing the core business. according to doz and kosonen in order to become agile in today’s economic markets enterprises must develop three key dimensions within their organizations. strategic sensitivity; leadership unity; resource fluidity. lu & ramamurthy(2011) identify two types of organizational agility: market capitalizing agility and operational adjustment agility. market capitalizing agility refers to a firm’s ability to quickly respond to and capitalize on changes through continuously monitoring and quickly improving product/service to address customers’ needs. operational adjustment agility refers to a firm’s ability in its internal business processes to physically and rapidly cope with market or demand changes. park (2011) define the dimensions of the business agility are in three main types. they are sensing agility, decision-making agility and acting agility. nold &michel (2015) defined models primary elements are: systems, leadership and culture. people is the center of this model. people throughout the organization are responsible and want to contribute to making the firm successful. agile organizations facilitate self-determination, self-control, self-initiative, and responsibility rather than traditional command and control techniques that are rigid, inflexible, and slow reacting. alberts (2011) has concluded that one way of strengthening agility of an organisation is to establish or improve one or several of the following six components; responsiveness, versatility, flexibility, resilience, innovativeness and adaptability. williams et al (2013) notice that agility is not just the ability to change. it is a cultivated capability that enables an organization to respond in a timely, effective, and sustainable way when changing circumstances require it. there is not an accepted measurement model for agility. dove (1994) presented one of the first discussions on the measurement of business agility and developed a set of metrics comprising cost, time, quality, and scope to measure the overall agility of an enterprise. kumar and motwani (1995) developed a strategic framework to systematically evaluate an organization’s effectiveness within the dimensions of agility. sharifi and zhang (2001) presented a scoring model also enabled the identification of strengths and weaknesses of agile dimensions practiced by the organization. yang and li (2002) proposed a procedure to assess agility using a multi-grade fuzzy approach. tsourveloudis and valavanis (2002) performed an agility assessment by focusing on the agility perspectives, namely direct, knowledge-based and holistic. the agility focuses on all the levels of the firm as well as the various driving factors of agility, such as infrastructure, production, market, people and information. arteta and giachetti (2004) proposed a different and novel approach to use complexity as a surrogate measure for agility. this is a newer approach for assessing complexity. vinodh et al. (2008) designed a tool for scoring approach for measuring agility and quantifying agility in organizations. vinodh et al. (2010) did their agility assessment using combined scoring and multi-grade fuzzy approaches for the agility assessment. lin and tseng (2006) stated, “the fuzzy agility evaluation (fae) frameworks composed of two major parts” the parts are ‘agility capabilities’ and ‘agility drivers’. ganguly et al. (2009) used three metrics to measure agility. the metrics are ‘market share’, ‘responsiveness’ and ‘cost effectiveness’. another evaluation framework is defined by worley & lawler (2009). this framework centers on four features robust strategy’, ‘an adaptable organization design’, ‘shared leadership’, and ‘change capability’. izza et al. (2008) proposed poire methodology for the measurement of the agility and durability of enterprise information systems. poire refers to the five aspects of an enterprise information system: process, organization, information, resources and environment. lui and picolli (2007) studied the it agility in a socio technical perspective. the social sub-system encompasses the people who are directly involved in the it and reporting the structure in which, these people are embedded. to measure the it agility using the socio-technical perspective; the authors use the agility of the four components: (i) technology agility, (ii) process agility, (iii) people agility and (iv) structure agility. because of dimensions dont have linear relationships they purpose, associate weights for each dimension in order to evaluate the overall agility of the it. sidky’s agility measurement index (or sami) is a tool developed by sidky (2007). this framework is a mix between qualitative and quantitative research, where the researcher transforms qualitative 64 lorin koçu http://ijcf.ticaret.edu.tr answers into quantitative. he used according to the agile principles: “embrace change to deliver customer value”, “plan and deliver software frequently”, “human-centric”, “technical excellence”, and “customer collaboration” of the agile manifesto. overby et al. (2006) suggested that the enterprise agility should be measured as a function of its sensing and responding capabilities. these two capabilities of sensing and responding should be measured individually and separately and then combined to get the actual agility assessment. pahlke et al (2011) arrange an measurement model and merge different agility dimensions. in his measurement model sensing and responding capabilities of enterprises should be measured in three different layers; market agility,network agility and operational agility. shaarabh (2014 p.3) review existing measurement models and state that a problem related with all these model is lack of sufficient data from different organization to set a reference. although models have covered various aspects varying from organization structure to performance outcome to measure agility need for a universal index is needed in order to set a reference point and to check the validity of models in varied field of applications. thus due to this shortcoming it is very difficult to choose the most appropriate model for agility evaluation. 2.3 alignment and agility according to luftman ( 2003, 2006) an important moderating factor in the relationship between it capabilities and business agility is business-it alignment (van oosterhout, 2010, p.7). luftman and ben-zvi(2011, p.212) noticed that business executives are rethinking the role of it, and are expecting it and business leaders to work closely together to improve business productivity, reduce business expenses via business process re-engineering, and increase business agility and speed-to-market. haes & grembergen (2008) notice that business – it alignment requires the firm to utilize organizational knowledge and expertise inherent in the employees from both it and business department to manage the dynamic environment (bi et al, 2014, p.4). the objective of planning it strategically is to align it with overarching corporate goals and business requirements and make it agile enough to deal with constant change in the company and its environment (hanschke 2010, p. 7) tallon (2008) points at the managerial it capabilities that lead to the development of technical it capabilities associated with agile it infrastructure, which in turn drives business agility or a firm’s ability to react to change in its products and markets.(van oosterhout, 2010, p.7) srinivasan (2009) identified stake alignment as one of the four key organizational enablers for enterprise agility. tallon and pinsonneault (2011) explain, organizations are building business-it alignment in a way to become more agile in anticipation of unforeseen market changes. this finding indicates that the value of business-it alignment is in preparing organizations for change. tallon and pinsonneault (2011) was summarize two competing perspective of business-it alignment and agility. alignment facilitates agility or impedes agility. strategic business-it alignment as facilitates by improving shared understanding, knowledge sharing and shared language for describing it. in resource based perspective alignment accept it as key business enabler and this allows resource allocation in urgent change needs, innovation and adaptation. the resulting alignment between it and business strategy can enable agility since essential changes in business strategy can be easily communicated to it executives while the potential for it-led capabilities to redirect business strategy can be shared with business executives. in this way, the path dependencies and routines provided by alignment can enable increased adaptiveness and innovation (he and wong 2004; lavie and rosenkopf 2006; zahra and george 2002). motadel (2014 p.895) tested luftmans’s samm model dimensions on agility and defined that regarding the communications axis, workplace flexibility to increase interaction, sharing knowledge and close relation with customers and suppliers (by having enough information) have higher priorities in assessing the strategic alignment for agility. from competencies axis, connecting the processes, services, supplier, users continuous controlling and monitoring the services/ products and processes quality (by using controlling information systems and managerial dashboards) and changing the training basis and continuous learning have higher priorities in assessing the strategic alignment for agility. from architecture axis, flexibility in the organizational business strategies, shorter time to meet the information needs (by using network infrastructures and web based programs), production and development of business-it alignment effects on business agility 65 http://ijcf.ticaret.edu.tr modular flexible information systems, have higher priorities in assessing the strategic alignment for agility. from partnership axis, applying it in promoting knowledge, skill and business field activities (e.g. knowledge manageme nt systems and electronic and virtual systems), flexibility in rapid forming the it field partnership with business for changing, have higher priorities in assessing the strategic alignment for agility. from governance axis, network architecture and inter and intra organizational information systems integrity, correct decision making by using information sources (content information systems, knowledge management systems, decision making management systems), have higher priorities in assessing the strategic alignment for agility. from the ability to identify the business goals in proportion to the needed changes (by using monitoring systems and managerial dashboards) have higher priorities in assessing the strategic alignment for agility. tallon(2011) also summarize opposite opinion that alignment impedes agility in two ways. matured shared understand and knowledge sharing can foster behavioral initeria, tunnel vission etc. and it may obstruct take actions against change needs. in meanwhile alignment calls long term resource commitment that is opposite of basics of agility. alignment-induced exploitation and exploration of key organizational resources encounter competency traps that slow the rate of innovation and responsiveness to change ((andriopoulos and lewis 2009; gupta et al. 2006; he and wong 2004; attaran (2004) found that it to be the biggest barrier to rapid and radical change, because radical change required it redesign. hard-wired it architectures where business rules are embedded into the information systems are a major impediment to rapid movement. such architectures are expensive to maintain and have difficulties to support smaller, incremental modifications to business practices (hagel and brown, 2003). chen et al.(2010) alignment can lead to stagnation, strategic inflexibility, and competitive disadvantage.(gerow 2014 (pp.1160) consequently, some argue alignment may result in too rigid a firm, where tight links between business and it restrict the firm’s ability to recognize change, reduces its strategic flexibility, and inhibits its ability to respond to environmental change (e.g., benbya and mckelvey 2006). this view suggests some firms find themselves in a “rigidity trap” because the alignment process is too time-consuming, costly, and formal to enable quick responses to changing market conditions (chen et al. 2010). this problem becomes most apparent in firms that too narrowly customize it systems to meet current strategic needs, resulting in an inflexible infrastructure that does not reflec t standards and is costly to update oosterhout (2010) has added the third perspective claims that it capabilities on tribute to higher levels of business agility, but only under certain conditions for certain events. the effects of it capabilities on business agility and business performance are mainly indirect and mediated by sensing, responding and learning (overby et al., 2006). at kearney consulting firm survey (2005) showed that it departments within larger organizations are perceived as not being very agile and being unresponsive. the benefits of it infrastructure agility are lagged, because new applications that leverage new infrastructure take time to deploy, and important organizational factors such as time for learning and decision-making governance mediate their implementation and use (aral and weill, 2007). main obstacles found are legacy it, too much complexity in the it architecture, a lack of integration between business and it (i.e. insufficient business-it alignment) and differences in views between business and it leaders on the importance of it and the timing of new technology adoption. the complexity of heterogeneous it infrastructure and applications prevents it organizations from developing and deploying new systems quickly to support business agility requirements (reddy and reddy, 2002). gerow (2014 p.1162) notice that some researchers have found environmental turbulence does not always influence alignment (e.g., kearns and lederer 2004; teo and king 1997), while others revealed environmental uncertainty resulted in different levels of alignment (e.g., choe 2003; kearns and lederer 2004; wang et al. 2011). literature also agrees that the firm’s agility is influenced by the extent of fit between it and business processes (lee 2004). this indicates that the foundation of the firm’s agility is to make use of it alignment to develop a unique operational capability. business-it alignment provides direction and organizational flexibility to allow business to respond to environmental threats and opportunities (avison et al. 2004). lee (2013) notice that consistent with dynamic capability thinking and environmental dynamism, posited that an alternative and more applicable perspective on alignment study could be based on the notion of strategic ambidexterity. ambidexterity suggests that strategy planning should result in the organization being simultaneously able to explore new capabilities and to exploit cur66 lorin koçu http://ijcf.ticaret.edu.tr rent capabilities (lee, 2013). sambamurthy, bharadwaj, and grover (2003) characterized this strategic positioning as agility. the researchers stated, “both strategic processes and agility are dynamic capabilities that impact the ability of firms to launch many and varied competitive actions and that, in turn, these competitive actions are a significant antecedent of firm performance” (p. 238)(ness, 2016,p.49). talloon et al (2011) notice that alignment has no direct effect on firm performance. it is significant as indicated when they consider agility the madiation effects. this means that alignment is positively associated with performance but only insofar as alignment helps agility and agility, in turn, contributes to higher firm performance. as a result of analysis reveals that alignment has a positive and significant effect on agility. chung et al. (2003) find a strong correlation between it infrastructure agility and strategic it-business alignment. they conclude that the it strategy must be tightly aligned with the organizational strategy in order for it infrastructures to be able to facilitate business agility. this close alignment means that it infrastructures need to be agile, because agility of the it infrastructure allows the company to develop new processes and applications quickly, which enables business agility. bergeron et al. (2004) propose that conflicting co-alignment patterns of business strategy, business structure, it strategy and it structure will exhibit lower levels of business performance. research of tallon and kraemer (2004) demonstrates that firms in high clock speed industries, such as electronics, financial services, or telecommunications have a significantly harder time in achieving alignment between it and the business strategy than firms in a low clock speed industry, such as construction and chemicals. from flexibility perspective, duncan (1995) has identified three core elements to be worked with to improve it infrastructure flexibility. these are 1) the alignment of it plans to business objectives, 2) information technology plans or architecture, and 3) the skills of all personnel involved in it resource management. as seen he defined business –it alignment is one of element of it flexility. tapanainen et al. (2008) identify close relationship between it and business management is key function of it agility. it-business alignment can be key for organisational agility as it can quickly mobilise resources enabling distributed, virtual and ad-hoc work environments (seo and la paz, 2008). the continuous knowledge sharing that takes place in it-business aligned organizations between it and business leaders is seen as an important factor in sensing changes, threats and opportunities in the business environment before deciding on a joint response (preston and karahanna, 2009). queiroz (2013) has found that in strategic business unit (sbu) level that multi-level it alignment is a key enabler of sbu agility. he also found that multi-level it alignment facilitates sbu business-it alignment, which in turn also enhances sbu agility. yousif (2015) suggest that a business aligned it organization contributing positively to business agility should have the following properties and characteristics. 1. the it leadership actively participates in business strategy and planning with senior business leaders (rockart et al., 1996; glaser, 2008; melarkode et al., 2004) 2. business and it executives collaborate on setting strategic goals for it (tallon, 2008) 3. the it function has dedicated teams/individuals proactively and regularly engaging with business (melarkode et al., 2004; prager, 1996) 4. the it function maintains an up-to-date picture of business priorities and how it can contribute to them (melarkode et al., 2004) 5. the it function proactively works across the business to identify and drive new opportunities for value creation through it (melarkode et al., 2004; rockart et al., 1996) 6. the business units own and drive is/it enabled business cases in close collaboration with the it function (melarkode et al., 2004) 7. the business units own and drive is/it enabled improvement projects in close collaboration with the it function (melarkode et al., 2004) 8. the it leadership is concerned and cares about the same things as the leadership of business (prager, 1996) 9. the it leadership does well in demonstrating the strategic role of it in meeting the business-it alignment effects on business agility 67 http://ijcf.ticaret.edu.tr organization’s overall objectives (melarkode et al., 2004) 10. the leadership of business fully understands the strategic role of it and how it can add business value (prager, 1996) specifically, a firm with better it alignment is good at sensing market changes and making flexible decisions through collaboration between it and business department. it alignment can enable organizational agility since essential changes in business operations demand can be easily communicated to it professionals while the potential for itled capabilities to redirect business operations can be shared with people working in business department (tallon & pinsonneault 2011). this kind of collaboration can help catch new it and market opportunities thus achieving rapid speed of responsiveness (sambamurthy et al. 2003). (bi et al, 2014, p.5) oosterhaut (2010) mentioned that agility is related with sense-response-learning capabilities. in enterprise artictecture perspective he defined that two types of alignment that explain business agility performance. srl alignment refers to the maturity, balance and relationship between sensing, responding and learning (it) capabilities. business-it alignment refers to the alignment between business and it and the alignment between the different layers of the enterprise architecture. as a result a lack of integration may hinder information flows within a firm and with business partners, harming its overall business agility performance. major conflicts can be caused by the existence of legacy systems and the integration of information systems or components as part of a heterogeneous it landscape, common to many firms. this leads to low levels of connectivity and standardization, limited data transparency and many connections between components and applications, yielding high levels of complexity. as a result, it can have various conflicting effects on an organization’s level of business agility, depending on the it agility level of specific information systems or components of the it infrastructure. galliers(2006) defined it systems should somehow align with an organization’s business strategy and addressed number of problems. one such relates to the dynamic nature of an organization’s business environment and the consequent need for flexible or agile it. a second issue relates to our inability to foresee the future and the changing business information requirements that will come with it. a third issue relates to the role that information can play in informing agile responses to changing circumstances and imperatives a proactive, rather than reactive, role for it. 3. measures and sampling the questionnaire of this study was given to 504 people via online survey who work as a manager in 3 public, 9 private and 16 foreign capital banks in turkey. 334 valid questionnaires were collected back and analyzed. first of all, demographic questions were asked to the participants to collect information about their ages, genders, marital statuses, educational levels, work experiences in the company and in their careers, working part of company business unit or it. additionally agile project management maturity of company was checked by four questions to understand agile project management and business agility maturity. the business-it alignment scale used in this study was developed by henderson & venkatram sam (strategic alignment model) and re-interpreted by gerow (2015). this model consisted of 38 items and measure six alignment of company that define alignment between four dimensions of company (business strategy, it strategy, organizational infrastructure and process and it infrastructure and process to measure). six type of the scale are as follows: intellectual alignment, operational alignment, business alignment, it alignment and two cross domains: business strategy vs it infrastructure and it strategy vs business infrastructure and process. the business agility scale which consists of 45 items and 3 dimensions and 6 sub dimensions to measure maturity levels of business agility (wendler, 2014). three main and six sub dimensions of the scale are as follows: agility prerequisites (agile values, technology), agility of people (workforce, management of change), structure enhancing agility ( collaboration and coordination, flexible structure). the both scale were translated into turkish. both scales are designed as 5-point likert scales and items are sconot supported as follows: 1: strongly disagree, 2: disagree, 3: undecided, 4: agree, 5: strongly agree. most of the employees were between the ages of 31-40, males, had associate or bachelor degrees, total work experiences of 16+years in their careers and 05 years in the company. 4. hypotheses and conceptual model 68 lorin koçu http://ijcf.ticaret.edu.tr the conceptual model of the study is shown in figure 1. table 2 shows the hypotheses of the study. table 2. hypotheses h1 it-business alignment affects business agility positively. h1a it-business alignment intellectual alignment affects business agility positively. h1b it-business alignment operational alignment affects business agility positively. h1c it-business alignment business strategy vs it infra alignment affects business agility positively. h1d it-business alignment it strategy vs business infra alignment affects business agility positively. h1e it-business alignment it alignment affects business agility positively. h1f it-business alignment business alignment affects business agility positively. h2 it-business alignment affects agile values positively. h3 it-business alignment affects technology positively. h4 it-business alignment affects workforce positively. h5 it-business alignment affects change management positively. h6 it-business alignment affects cooperation & coordination positively. h7 it-business alignment affects flexible infrastructure positively. h8 intellectual alignment affects agile values positively. h9 operational alignment affects agile values positively. h10 business strategy vs it infra alignment affects agile values positively. h11 it strategy vs business infra alignment affects agile values positively. h12 it alignment affects agile values positively. h13 business alignment affects agile values positively. h14 intellectual alignment affects technology positively. h15 operational alignment affects technology positively. h16 business strategy vs it infra alignment affects technology positively. h17 it strategy vs business infra alignment affects technology positively. h18 it alignment affects technology positively. h19 business alignment affects technology positively. h20 intellectual alignment affects workforce agility positively. h21 operational alignment affects workforce agility positively. h22 business strategy vs it infra alignment affects workforce agility positively. h23 it strategy vs business infra alignment affects workforce agility positively. h24 it alignment affects workforce agility positively. h25 business alignment affects workforce agility positively. h26 intellectual alignment affects change management positively. h27 operational alignment affects change management positively. h28 business strategy vs it infra alignment affects change management positively. h29 it strategy vs business infra alignment affects change management positively. h30 it alignment affects change management positively. h31 business alignment affects change management positively. h32 intellectual alignment affects cooperation & coordination positively. h33 operational alignment affects cooperation & coordination positively. h34 business strategy vs it infra alignment affects cooperation & coordination positively. h35 it strategy vs business infra alignment affects cooperation & coordination positively. h36 it alignment affects cooperation & coordination positively. h37 business alignment affects cooperation & coordination positively. h38 intellectual alignment affects flexible infrastructure positively. h39 operational alignment affects flexible infrastructure positively. business-it alignment effects on business agility 69 http://ijcf.ticaret.edu.tr h40 business strategy vs it infra alignment affects flexible infrastructure positively. h41 it strategy vs business infra alignment affects flexible infrastructure positively. h42 it alignment affects flexible infrastructure positively. h43 business alignment affects flexible infrastructure positively. figure 1. conceptual model 4.1. descriptive statistics the findings of the descriptive statistics are presented in table table 2. descriptive statistics for business –it alignment mean std. deviation variance skewness (std. error: 0,133) kurtosis (std. error: 0,266) 1. our it strategies support our business strategies (ia1) 3,728 0,770 0,594 -0,439 -0,009 1. our it strategies and business strategy match each other (ia2) 3,627 0,767 0,588 -0,253 -0,240 1. we adapt our it strategy to business strategic change (ia3) 3,654 0,808 0,652 -0,559 0,563 1. our it strategies align with our business’ strategic plan (ia4) 3,651 0,808 0,653 -0,583 0,572 1. we assess the strategic important of emerging technologies (ia5) 3,701 0,896 0,803 -0,632 0,358 1. we adapt our it goals and objectives to our business goals and objectives (ia6) 3,624 0,790 0,625 -0,395 -0,036 70 lorin koçu http://ijcf.ticaret.edu.tr 1. we identify the fit between our it-related strategic opportunities and our business’s strategic directions (ia7) 3,603 0,830 0,689 -0,536 0,305 1. our it strategies and business strategies correspond to each other (ia8) 3,513 0,931 0,867 -0,655 0,154 2. our it processes support our business processes (oa1) 3,636 0,777 0,604 -0,499 0,310 2. we adapt our it processes to our business processes (oa2) 3,627 0,775 0,600 -0,333 0,196 2. our it processes and business processes match each other (oa3) 3,576 0,815 0,664 -0,548 0,354 2. we identify the fit between our it infrastructure and our business infrastructure (oa4) 3,528 0,803 0,645 -0,546 0,317 2. our it infrastructure and business infrastructure correspond to each other (oa5) 3,490 0,854 0,730 -0,663 0,448 2. our it infrastructure aligns with our business infrastructure (oa6) 3,543 0,803 0,644 -0,596 0,369 3. our it processes support our business strategies (caa1) 3,636 0,753 0,568 -0,766 1,088 3. we adapt our internal it processes to our business strategies (caa2) 3,576 0,700 0,490 -0,247 -0,127 3. our business strategies and internal it processes match each other (caa3) 3,582 0,753 0,567 -0,366 -0,183 3. we identify the fit between our business-related strategic opportunities and our it infrastructure (caa4) 3,582 0,769 0,591 -0,556 -0,146 3. our it infrastructure and business strategies correspond to each other (caa5) 3,499 0,781 0,610 -0,754 0,775 3. our it infrastructure aligns with our business strategies (caa6) 3,594 0,771 0,595 -0,534 0,277 4. our it strategies support our business processes (cab1) 3,639 0,737 0,543 -0,217 -0,173 4. we adapt our it strategies to our internal business processes (cab2) 3,624 0,751 0,565 -0,365 -0,122 business-it alignment effects on business agility 71 http://ijcf.ticaret.edu.tr 4. our externally-focused it strategies and internal business processes match each other (cab3) 3,552 0,775 0,601 -0,582 0,172 4. we identify the fit between our it-related strategic opportunities and our business infrastructure (cab4) 3,525 0,788 0,621 -0,638 0,420 4. our business infrastructure and it strategies correspond to each other (cab5) 3,487 0,829 0,688 -0,638 0,345 4. our business infrastructure aligns with our externallyfocused it strategies (cab6) 3,522 0,796 0,633 -0,540 -0,016 5. our it processes support our it strategies (ita1) 3,681 0,772 0,595 -0,522 0,432 5. we adapt our it strategies to our internal it processes (ita2) 3,663 0,760 0,577 -0,624 0,558 5. our it strategies and internal it processes match each other (ita3) 3,675 0,757 0,573 -0,753 0,721 5. we identify the fit between our it-related strategic opportunities and our it infrastructure (ita4) 3,606 0,782 0,611 -0,545 0,256 5. our it infrastructure and it strategies correspond to each other (ita5) 3,546 0,799 0,638 -0,702 0,428 5. our it infrastructure aligns with our it strategies (ita6) 3,633 0,758 0,574 -0,603 0,482 6. our business processes support our business strategies (ba1) 3,618 0,768 0,590 -0,461 0,301 6. we adapt our business strategies to our internal business processes (ba2) 3,660 0,776 0,602 -0,602 0,438 6. our business strategies and internal business processes match each other (ba3) 3,591 0,772 0,596 -0,720 0,770 6. we identify the fit between our business-related strategic opportunities and our business infrastructure (ba4) 3,561 0,763 0,582 -0,533 0,243 6. our business infrastructure and business strategies correspond to each other (ba5) 3,519 0,833 0,693 -0,750 0,735 6. our business infrastructure aligns with our business strategies (ba6) 3,552 0,817 0,667 -0,600 -0,028 (n):334 (1) completely disagree … (5) completely agree mean std. deviation variance skewness (std. error: 0,133) kurtosis (std. error: 0,266) 72 lorin koçu http://ijcf.ticaret.edu.tr 1.our organization values a culture that harnesses change for competitive advantages. 3,851 0,805 0,648 -0,830 1,070 1.our organization values a culture that considers team work as integral part. 3,931 0,814 0,663 -0,878 1,339 1.our organization values a culture that accepts and supports decisions and proposals of employees. 3,570 0,844 0,713 -0,432 0,261 1.our organization values a culture that is supportive of experimentation and the use of innovative ideas. 3,764 0,913 0,833 -0,585 0,254 1.our organization values a culture that considers changing customer-related requirements as opportunities. 3,893 0,816 0,665 -0,566 0,355 1.our organization prefers a proactive continuous improvement rather than reacting to crisis or “firefighting”. 3,594 0,887 0,787 -0,585 0,444 1.our organization prefers market-related changes (e. g. new competitors, preferences) to generate news opportunities. 3,675 0,931 0,867 -0,675 0,323 2.our organization has it that make organizational information easily accessible to all employees. 3,487 0,858 0,736 -0,116 -0,636 2.our organization has it that provide information helping our employees to quickly respond to changes. 3,484 0,818 0,670 -0,409 -0,215 2.our organization has itthat are appropriate to our needs and allow us to be competitive in the marketplace. 3,579 0,871 0,759 -0,627 0,297 2.our organization has itenable decentralization in decision making. 2,949 0,922 0,851 -0,152 -0,312 2.our organization has it are integrated amongst different departments and/or business units. 3,472 0,814 0,663 -0,460 0,103 2.our organization has itare standardized or comparable amongst different departments and/or business units. 3,251 0,839 0,703 -0,225 -0,475 3.our employees are able to act with a view to continuous improvement of our products, services, processes, and/or 3,648 0,743 0,552 -0,737 0,712 business-it alignment effects on business agility 73 http://ijcf.ticaret.edu.tr working methods. 3.our employeesare able to sense, perceive, or anticipate the best opportunities which come up in our environment. 3,403 0,751 0,565 -0,433 -0,115 3.our employees are able to meet the levels of product and/or service quality demanded by our customers. 3,707 0,708 0,501 -0,839 1,249 3.our employees use a broad range of skills and can be applied to other tasks when needed. 3,558 0,805 0,649 -0,692 0,767 3.our employees communicate with each other with trust, goodwill, and esteem. 3,821 0,772 0,597 -0,700 0,867 3.our employees are ready to learn and are prepanot supported to constantly access, apply and update knowledge. 3,725 0,828 0,685 -0,598 0,566 3.our employeesare in general always willing to continuously learn from one another and to pass their knowledge to others. 3,528 0,911 0,831 -0,693 0,561 3.our employees obtain and develop appropriate technological capabilities purposeful. 3,576 0,800 0,640 -0,780 0,899 3.our employees can re-organize continuously in different team configurations to meet changing requirements and the newly arising challenges. 3,442 0,767 0,589 -0,263 -0,030 3.our employees are self-motivated. 3,272 0,852 0,725 -0,464 0,086 3.our employees take responsibility and think in a business-like manner. 3,543 0,814 0,662 -0,593 0,630 4.our managers maintain an informal management style with focus on coaching and inspiring people. 3,239 0,980 0,961 -0,494 -0,119 4.our managers understand the value of it investments from a company-wide perspective. 3,496 0,935 0,873 -0,717 0,462 4.our managers have the knowledge and skills necessary to manage change. 3,570 0,919 0,845 -0,720 0,514 4.our managers are able to quickly implement changes in products and/or services. 3,579 0,840 0,706 -0,816 1,185 74 lorin koçu http://ijcf.ticaret.edu.tr 4.our managers are able to recognize future competitive advantages that may result from innovations in products, services, and/or processes. 3,567 0,896 0,803 -0,668 0,345 4.our managers are able to flexibly deploy their resources (material, financial, human, . . . ) to make use of opportunities and minimize threats. 3,427 0,899 0,808 -0,874 0,727 4.our managers manage the sharing of information, know-how, and knowledge among employees appropriately.a32 3,278 0,971 0,944 -0,561 -0,033 5.in our organization, we jointly and intensively operate throughout different functions and/or departments for strategic decision making. 3,588 0,821 0,674 -0,513 0,325 5.in our organization, we encourage early involvement of several departments and/or functions in new product and/or service development. 3,496 0,840 0,706 -0,656 0,146 5.in our organization, we inform ourselves systematically about information technology innovations. 3,510 0,844 0,712 -0,500 0,018 5.in our organization, we strategically invest in appropriate technologies and have a clear vision how it contributes to business value. 3,558 0,887 0,786 -0,592 0,136 5.in our organization, wemonitor the performance of our partners and subcontractors very closely. 3,493 0,931 0,867 -0,683 0,094 5.in our organization, weselect our partners and subcontractors by quality criteria (rather than pure costbased decisions). 3,570 0,951 0,904 -0,665 0,160 5.in our organization, we align all our activities to customer requirements and needs. 3,642 0,846 0,716 -0,855 0,773 5.in our organization, we encourage compilation and internal dissemination of information on customers needs. 3,558 0,816 0,667 -0,786 0,702 5.in our organization, we closely collaborate with and encourage fast feedback from our customers. 3,660 0,832 0,692 -0,830 0,616 business-it alignment effects on business agility 75 http://ijcf.ticaret.edu.tr 6.in our organization, we scan and examine our environment systematically to anticipate change. 3,555 0,802 0,643 -0,532 0,034 6.in our organization, we react to approaching changes by immediately updating our business strategy. 3,600 0,797 0,636 -0,438 -0,075 6.in our organization, we react to approaching changes by immediately updating our processes. 3,496 0,854 0,730 -0,450 0,059 6.in our organization, we are quick to make appropriate decisions in the face of marketand/or customerrelated changes. 3,493 0,875 0,766 -0,517 0,173 6.in our organization, we change authorities when tasks change. 3,546 0,930 0,865 -0,259 -0,418 (n):334 (1) completely disagree … (5) completely agree 4.2.reliability analyses table :reliability test table scales and dimensions cronbach's alpha number of statements model reliability 0,990 83 business –it alignment 0,989 38 intellectual alignment(ia) 0,927 8 operational alignment(oa) 0,911 6 cross domain(caa) 0,977 6 cross domain(cab) 0,981 6 it alignment(ita) 0,916 6 business alignment(ba) 0,921 6 business agility 0,980 45 agile values 0,921 7 technology 0,933 6 workforce 0,911 11 change management 0,983 7 collobration&coordination 0,936 9 flexible infrasturcture 0,923 5 factor analyses 76 lorin koçu http://ijcf.ticaret.edu.tr the findings of the factor analyses are presented in table 5 and table 6 factors statements factor loading cron bach alpha % variance explained intellectual alignment 1. our it strategies align with our business’ strategic plan (ia4) 0.780802965 0.912 21.788 1. our it strategies support our business strategies (ia1) 0.780091658 1. we adapt our it strategy to business strategic change (ia3) 0.77557602 1. our it strategies and business strategy match each other (ia2) 0.770932396 1. our it strategies and business strategies correspond to each other (ia8) 0.644623572 1. we adapt our it goals and objectives to our business goals and objectives (ia6) 0.636185092 1. we identify the fit between our it-related strategic opportunities and our business’s strategic directions (ia7) 0.632466183 business alignment 6. our business strategies and internal business processes match each other (ba3) 0.734 0.913 20.631 6. we identify the fit between our businessrelated strategic opportunities and our business infrastructure (ba4) 0.730 6. our business infrastructure and business strategies correspond to each other (ba5) 0.710 business-it alignment effects on business agility 77 http://ijcf.ticaret.edu.tr 6. our business processes support our business strategies (ba1) 0.674 6. we adapt our business strategies to our internal business processes (ba2) 0.672 6. our business infrastructure aligns with our business strategies (ba6) 0.657 it alignment 5. our it strategies and internal it processes match each other (ita3) 0.686 0.919 16.612 5. we identify the fit between our it-related strategic opportunities and our it infrastructure (ita4) 0.655 5. we adapt our it strategies to our internal it processes (ita2) 0.645 4. our it processes support our it strategies (ita1) 0.636 5. our it infrastructure and it strategies correspond to each other (ita5) 0.632 5. our it infrastructure aligns with our it strategies (ita6) 0.608 operational alignment 2. we identify the fit between our it infrastructure and our business infrastructure (oa4) 0.673 0.916 14.835 2. our it processes and business processes match each other (oa3) 0.671 2. our it infrastructure aligns with our business infrastructure (oa6) 0.669 2. we adapt our it processes to our business processes (oa2) 0.637 78 lorin koçu http://ijcf.ticaret.edu.tr 2. our it processes support our business processes (oa1) 0.634 2. our it infrastructure and business infrastructure correspond to each other (oa5) 0.599 cross domain it infrastructure& business strategy 3. our it infrastructure aligns with our business strategies (caa6) 0.658 0.908 8.646 3. we identify the fit between our businessrelated strategic opportunities and our it infrastructure (caa4) 0.559 3. our it processes support our business strategies (caa1) 0.540 cross domain it strategy & business infrastructure 4. we adapt our it strategies to our internal business processes (cab2) 0.589 0.921 3.055 4. our externally-focused it strategies and internal business processes match each other (cab3) 0.546 4. our business infrastructure aligns with our externally-focused it strategies (cab6) 0.515 total variance explained 85.567 kaiser-meyer-olkinmeasure of samplingadequacy. 0.963 approx. chi-square 15527.768 df 496 sig. 0.000 rotationmethod: varimaxwithkaisernormalization. there are six dimensions of business-it alignment scale in table 5. a kmo value which is 0.963 points out that the sample size is appropriate for the factor analysis. a high chi-square value and 0.000 sig. value show that the data has a normal distribution. the six dimensions explain 85.567% of the business-it alignment. intellectual alignment 21.788%, business alignment %20,631, it alignment %16,612, operational alignment %14,835, cross domain it infrastructure& business strategy %14,835 and cross domain it strategy & business infrastructure %3,055. business-it alignment effects on business agility 79 http://ijcf.ticaret.edu.tr factors statements factor loading cronbach alpha % variance explained change management 4.our managers have the knowledge and skills necessary to manage change. 0.737 0.934 16.078 4.our managers manage the sharing of information, knowhow, and knowledge among employees appropriately. 0.707 4.our managers are able to recognize future competitive advantages that may result from innovations in products, services, and/or processes. 0.702 4.our managers understand the value of it investments from a company-wide perspective. 0.699 4.our managers are able to flexibly deploy their resources (material, financial, human, . . . ) to make use of opportunities and minimize threats. 0.694 4.our managers are able to quickly implement changes in products and/or services. 0.669 4.our managers maintain an informal management style with focus on coaching and inspiring people. 0.667 technology 2.our organization has it are integrated amongst different departments and/or business units. 0.686 0.913 13.931 2.our organization has itthat are appropriate to our needs and allow us to be competitive in the marketplace. 0.656 2.our organization has itare standardized or comparable amongst different departments and/or business units. 0.626 2.our organization has it that make organizational information easily accessible to all employees. 0.610 2.our organization has it that provide information helping our employees to quickly respond to changes. 0.606 agile values 1.our organization values a culture that harnesses change for competitive advantages. 0.714 0.909 13.083 1.our organization values a culture that considers team work as integral part. 0.707 1.our organization values a culture that considers changing customer-related requirements as opportunities. 0.679 1.our organization values a culture that is supportive of experimentation and the use of innovative ideas. 0.652 1.our organization values a culture that accepts and supports decisions and proposals of employees. 0.616 1.our organization prefers market-related changes (e. g. new competitors, preferences) to generate news opportunities. 0.605 1.our organization prefers a proactive continuous improvement rather than reacting to crisis or “fire0.588 80 lorin koçu http://ijcf.ticaret.edu.tr fighting”. collobration&coope ration 5.in our organization, we monitor the performance of our partners and subcontractors very closely. 0.675 0.912 11.430 5.in our organization, we align all our activities to customer requirements and needs. 0.670 5.in our organization, we closely collaborate with and encourage fast feedback from our customers. 0.637 5.in our organization, we select our partners and subcontractors by quality criteria (rather than pure costbased decisions). 0.626 5.in our organization, we strategically invest in appropriate technologies and have a clear vision how it contributes to business value. 0.565 5.in our organization, we encourage compilation and internal dissemination of information on customers needs. 0.549 workforce 3.our employees are ready to learn and are prepanot supported to constantly access, apply and update knowledge. 0.692 0.923 10.296 3.our employeesare in general always willing to continuously learn from one another and to pass their knowledge to others. 0.677 3.our employees communicate with each other with trust, goodwill, and esteem. 0.676 3.our employees can re-organize continuously in different team configurations to meet changing requirements and the newly arising challenges. 0.662 3.our employees use a broad range of skills and can be applied to other tasks when needed. 0.637 flexible infrastructure 6.in our organization, we react to approaching changes by immediately updating our business strategy. 0.646 0.906 6.643 6.in our organization, we react to approaching changes by immediately updating our processes. 0.615 6.in our organization, we are quick to make appropriate decisions in the face of marketand/or customer-related changes. 0.553 total variance explained 71.461 kaiser-meyer-olkinmeasure of samplingadequacy. 0.953 approx. chi-square 11168.48 df 666 business-it alignment effects on business agility 81 http://ijcf.ticaret.edu.tr sig. 0.000 there are six dimensions of business agility scale in table . a kmo value which is 0.953 points out that the sample size is appropriate for the factor analysis. a high chi-square value and 0.000 sig. value show that the data has a normal distribution. the six dimensions explain 71.461% of the business agility. change management 16.078%, technology %13,931, agile values %13.083, collobration&coordination %11,430, workforce %10,296 and flexible infrastructure %6,643 4.3 correlation analysis intellectua l alignment (ia) operatio nal alignmen t(oa) cross domain( caa cross domain (cab it alignmen t(ita) business alignmen t(ba) alignme nt agile vakues techno logy workfo rce change manage ment collobratio n&coordin ation flexible infrasturc ture busin ess agilit y intellectual alignment(ia) 1 operational alignment(oa 0,826** 1 cross domain(caa 0,854** 0,872** 1 cross domain(cab 0,809** 0,834** 0,865** 1 it alignment(ita 0,789** 0,847** 0,879** 0,869** 1 business alignment(ba) 0,769** 0,842** 0,847** 0,874** 0,890** 1 alignment 0,901 ** 0,933** 0,949** 0,938** 0,942** 0,933** 1 agile values 0,679 ** 0,579** 0,623** 0,549** 0,582** 0,600** 0,645** 1 technology 0,653 ** 0,660** 0,659** 0,644** 0,655** 0,657** 0,702** 0,690** 1 workforce 0,618 ** 0,620** 0,603** 0,632** 0,637** 0,632** 0,669** 0,669** 0,733** 1 change management 0,674** 0,615** 0,614** 0,633** 0,626** 0,654** 0,682** 0,735** 0,703** 0,753** 1 collobration&co ordination 0,722** 0,701** 0,656** 0,662** 0,668** 0,677** 0,730** 0,758** 0,713** 0,730** 0,741** 1 flexible infrasturcture 0,654** 0,591** 0,644** 0,619** 0,611** 0,687** 0,680** 0,707** 0,719** 0,661** 0,686** 0,691** 1 business agility 0,765** 0,719** 0,726** 0,715** 0,722** 0,747** 0,785** 0,870** 0,868** 0,867** 0,887** 0,886** 0,854** 1 **. correlation is significant at the 0.01 level (2-tailed). there is a significant positive relationship between the between the dimensions of the business-it alignment and the business agility at the 0.01 level 4.4 regression analysis model summaryb model r r square adjusted r square std. error of the estimate change statistics durbinwatson r square change f change df1 df2 sig. f change 1 0,785a 0.616 0.615 0.39070 0.616 535.297 1 333 0.000 1.999 82 lorin koçu http://ijcf.ticaret.edu.tr dependent variable:business agility, independent variable: alignment anovaa model sum of squares df mean square f sig. 1 regression 81.710 1 81.710 535.297 ,000b residual 50.830 333 .153 total 132.540 334 a. dependent variable: business agility b. predictors: (constant), alignment h1: it-business alignment affects business agility positively. alignment coefficient of variable is 0,785. h1 is accepted at less than 0.05 significance level 4.5 multiple regression analysis model ((aligment subdimesions effects on business agility) model r r square adjusted r square std. error of the estimate change statistics durbinwatson r square change f change df1 df2 sig. f change 1 0,805 0,648 0,642 0,37706 0,648 100,703 6 328 0,000 2,037 a.predictors: aligment sub dimensions b. dependent variable: agility alignment subdimensions explain business agility at %64.80. f is 100.703 and significance is 0.000 multiple regression analysis table model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 0,862 0,113 70,597 0,000 intellectual alignment(ia) 0,404 0,059 0,462 6,837 0,000 operational alignment(oa) 0,029 0,066 0,034 0,446 0,656 business-it alignment effects on business agility 83 http://ijcf.ticaret.edu.tr cross domain(caa) -0,035 0,080 -0,039 -0,442 0,658 cross domain(cab) -0,019 0,070 -0,022 -0,268 0,789 it alignment(ita) 0,051 0,077 0,058 0,669 0,504 business alignment(ba) 0,318 0,072 0,364 4,402 0,000 dependent variable: business agility intellectual and business alignment have less than 0.05 significance level. so h1a and h1f is supported. model (aligment subdimesions effects on agile value) model r r square adjusted r square std. error of the estimate change statistics r square change f change df1 df2 sig. f change 1 0,702 0,492 0,483 0,50126 0,492 52,996 6 328 0,000 alignment subdimensions explain agile values at %49.20. multiple regression analysis table dependent variable: agile values model (aligme nt subdimesio ns effects on technology) model r r square adjusted r square std. error of the estimate change statistics r square change f change df1 df2 sig. f change 1 0,705 0,497 0,488 0,49419 0,497 54,095 6 328 0,000 alignment subdimensions explain techmology at %49.70. model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1,231 0,151 8,169 0,000 intellectual alignment(ia) 0,568 0,079 0,588 7,234 0,000 operational alignment(oa) -0,098 0,087 -0,104 -1,127 0,261 cross domain(caa) 0,162 0,106 0,163 1,525 0,128 cross domain(cab) -0,272 0,093 -0,282 -2,914 0,004 it alignment(ita) 0,012 0,102 0,012 0,119 0,905 business alignment(ba) 0,322 0,096 0,333 3,357 0,001 84 lorin koçu http://ijcf.ticaret.edu.tr multiple regression analysis table model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 0,840 0,149 5,655 0,000 intellectual alignment(ia) 0,227 0,077 0,237 2,929 0,004 operational alignment(oa) 0,137 0,086 0,146 1,594 0,112 cross domain(caa) 0,047 0,104 0,048 0,454 0,650 cross domain(cab) 0,028 0,092 0,030 ,307 0,759 it alignment(ita) 0,105 0,100 0,108 1,046 0,296 business alignment(ba) 0,181 0,095 0,189 1,913 0,057 dependent variable: technology model ( aligment subdimesions effects on workforce) model r r square adjusted r square std. error of the estimate change statistics r square change f change df1 df2 sig. f change 1 0,678 0,459 0,449 0,51165 0,459 46,411 6 328 0,000 alignment subdimensions explain workforce at %45.90. multiple regression analysis table model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1,133 0,154 7,360 0,000 intellectual alignment(ia) 0,238 0,080 0,249 2,968 0,003 operational alignment(oa) 0,107 0,089 0,114 1,201 0,231 cross domain(caa) -0,162 0,108 -0,165 -1,498 0,135 cross domain(cab) 0,144 0,095 0,151 1,509 0,132 business-it alignment effects on business agility 85 http://ijcf.ticaret.edu.tr it alignment(ita) 0,204 0,104 0,211 1,966 0,040 business alignment(ba) 0,158 0,098 0,165 1,609 0,109 dependent variable: workforce model ( alignment subdimensions on change management) model r r square adjusted r square std. error of the estimate change statistics r square change f change df1 df2 sig. f change 1 0,710 0,505 0,496 0,56094 0,505 55,681 6 328 0,000 alignment subdimensions explain change management at %50.50. multiple regression analysis table model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 0,499 0,169 2,958 0,003 intellectual alignment(ia) 0,523 0,088 0,477 5,943 0,000 operational alignment(oa) -0,018 0,098 -0,017 -0,189 0,850 cross domain(caa) -0,193 0,118 -0,172 -1,631 0,104 cross domain(cab) 0,067 0,105 0,062 0,644 0,520 it alignment(ita) 0,061 0,114 0,055 0,536 0,592 business alignment(ba) 0,378 0,107 0,345 3,520 0,000 dependent variable: change management model ( alignment subdimensions on collabration&coordination) model r r square adjusted r square std. error of the estimate change statistics r square change f change df1 df2 sig. f change 1 0,758 0,574 0,566 0,47775 0,574 73,642 6 328 0,000 alignment subdimensions explain change management at %55.40. 86 lorin koçu http://ijcf.ticaret.edu.tr multiple regression analysis table model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 0,709 0,144 4,938 0,000 intellectual alignment(ia) 0,474 0,075 0,471 6,326 0,000 operational alignment(oa) 0,250 0,083 0,254 3,005 0,003 cross domain(caa) -0,240 0,101 -0,233 -2,381 0,018 cross domain(cab) 0,005 0,089 0,005 0,057 0,954 it alignment(ita) 0,096 0,097 0,095 0,993 0,322 business alignment(ba) 0,212 0,092 0,210 2,313 0,021 dependent variable: collabration&coordination model ( alignment subdimensions on flexible infrastructure) model r r square adjusted r square std. error of the estimate change statistics r square change f change df1 df2 sig. f change 1 0,726 0,527 0,518 0,51458 0,527 60,808 6 328 0,000 alignment subdimensions explain flexible infrastructure at %52.70. multiple regression analysis table model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 0,756 0,155 4,886 0,000 intellectual alignment(ia) 0,395 0,081 0,384 4,899 0,000 operational alignment(oa) -0,202 0,090 -0,201 -2,252 0,025 cross domain(caa) 0,175 0,109 0,166 1,612 0,108 cross domain(cab) -0,085 0,096 -0,083 -0,889 0,375 it alignment(ita) -0,171 0,105 -0,165 -1,639 0,102 business alignment(ba) 0,657 0,099 0,639 6,663 0,000 business-it alignment effects on business agility 87 http://ijcf.ticaret.edu.tr dependent variable: flexible infrastructure 4.6 results h1 it-business alignment affects business agility positively. supported h1a it-business alignment intellectual alignment affects business agility positively. supported h1b it-business alignment operational alignment affects business agility positively. not supported h1c it-business alignment business strategy vs it infra alignment affects business agility positively. not supported h1d it-business alignment it strategy vs business infra alignment affects business agility positively. not supported h1e it-business alignment it alignment affects business agility positively. not supported h1f it-business alignment business alignment affects business agility positively. supported h2 it-business alignment affects agile values positively. supported h3 it-business alignment affects technology positively. supported h4 it-business alignment affects workforce positively. supported h5 it-business alignment affects change management positively. supported h6 it-business alignment affects cooperation & coordination positively. supported h7 it-business alignment affects flexible infrastructure positively. supported h8 intellectual alignment affects agile values positively. supported h9 operational alignment affects agile values positively. not supported h10 business strategy vs it infra alignment affects agile values positively. not supported h11 it strategy vs business infra alignment affects agile values positively. supported h12 it alignment affects agile values positively. not supported h13 business alignment affects agile values positively. supported h14 intellectual alignment affects technology positively. supported h15 operational alignment affects technology positively. not supported h16 business strategy vs it infra alignment affects technology positively. not supported h17 it strategy vs business infra alignment affects technology positively. not supported h18 it alignment affects technology positively. not supported h19 business alignment affects technology positively. not supported h20 intellectual alignment affects workforce agility positively. supported h21 operational alignment affects workforce agility positively. not supported h22 business strategy vs it infra alignment affects workforce agility positively. not supported h23 it strategy vs business infra alignment affects workforce agility positively. not supported h24 it alignment affects workforce agility positively. supported h25 business alignment affects workforce agility positively. not supported h26 intellectual alignment affects change management positively. supported h27 operational alignment affects change management positively. not supported h28 business strategy vs it infra alignment affects change management positively. not supported h29 it strategy vs business infra alignment affects change management positively. not supported h30 it alignment affects change management positively. not supported h31 business alignment affects change management positively. supported h32 intellectual alignment affects cooperation & coordination positively. supported h33 operational alignment affects cooperation & coordination positively. supported h34 business strategy vs it infra alignment affects cooperation & coordination positively. supported h35 it strategy vs business infra alignment affects cooperation & coordination positively. not supported h36 it alignment affects cooperation & coordination positively. not supported h37 business alignment affects cooperation & coordination positively. supported 88 lorin koçu http://ijcf.ticaret.edu.tr h38 intellectual alignment affects flexible infrastructure positively. supported h39 operational alignment affects flexible infrastructure positively. supported h40 business strategy vs it infra alignment affects flexible infrastructure positively. not supported h41 it strategy vs business infra alignment affects flexible infrastructure positively. not supported h42 it alignment affects flexible infrastructure positively. not supported h43 business alignment affects flexible infrastructure positively. supported 5. conclusion and discussion this study found out that the business-it alignment has a positive effect on the business agility. as sub dimensions intellectual alignment and business alignment have a positive effect on the business agility. when we look at business –it alignment effect on business agility dimensions. it has positive effects on all six dimension of business agility ( agile values, technology workforce, change management, collaboration & coordination and flexible infrastructure.). intellectual alignment and business alignment has a positive effect on agile value. cross domain it strategy business infrastructure has a negative impact on agile values. it infrastructure has not effect on agile values. inte llectual alignment has positive effect on technology. technology effected by strategy, infrastructure is a result. intellectual alignment and it alignment has a positive effect on workforce. these results confirm that it alignment is a enabler for business agility. interesting point is that business alignment has not an effect on workforce. intellectual alignment and business alignment has a positive effect on change management. intellectual alignment, operational and cross domain business strategy-it infrastructure has a positive effect on collaboration & coordination. aligned strategies and aligned infrastructure has a positive impact. on the other hand business strategy supported by it infrastructure has an positive impact on collaboration. . intellectual alignment, operational and business alignment have a positive effect on flexible infrastructure. this result show that it infrastruce has not an effect on flexible infrastructure. business infrastructure has more effect than it infrastructure. the results show that strategic level alignment (intellectual alignment) has positive effect on business agility, especially business strategy. business or it infrastructure has limited effect. one interesting point is that there is no significant difference in business agility scores between companies that use agile project management or not using. this mean reason could be companies perception of their business agility and be aware of the needs of agility. on the other hand if agile project management is used just in it departments, business agility is higher than both it and business usage and just business departments usage. this may related with agile project management maturity in business departments. highest business agility scores difference seen 3-6 years agile project period. in next years business agility score changes are limited. in specific to the banking sector, results show that strategical alignment needed for business agility. the main question is that how they will become dynamic and stabile in highly competitive, tightly regulative sector that push quality, security and cost efficiency. references alberts, d. s. 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(2011). towards theory building in agile manufacturing strategies—case studies of an agility taxonomy. international journal of production economics, 131(1), 303-312. international journal of commerce and finance, vol. 5, issue 2, 2019, 120-127 120 corporate governance, share ownership structure and tax avoidance yenny dwi handayani, i mercu buana university, indonesia ewing yuvisa ibrani sultan ageng tirtayasa university, indonesia abstract this study aims to examine the effect of corporate governance and share ownership structure on tax avoidance. the share ownership structure uses controlling shareholders who have the largest shareholding in the company with ownership of between 20-50%. this study used manufacturing companies listed on the indonesia stock exchange (idx) during 2015-2017, with 99 observation data and the analytical used multiple linear regression. the results of the study show that both corporate governance and the share ownership structure proxied using controlling shareholders have an effect on tax avoidance. keywords: corporate governance, share ownership structure, controlling shareholders, tax avoidance 1. introduction one job of the management of the company is to minimize the amount of tax that has to be paid in which some companies consider that tax is a burden for the company and will reduce the profits earned by the company. there are several ways taken by company management to minimize the tax burden, legally and illegally (frank, lynch, & rego, 2009). the legal way taken by the company to minimize the tax burden is by utilizing the weaknesses in tax legislation called tax avoidance, while the illegal way is to violate the regulations in the tax law or tax evasion. utilizing transactions not classified as objects of tax (natural granting) is one of the ways companies can minimize the tax burden by utilizing loopholes in the taxation law (tax avoidance). tax evasion actions carried out by the company will cause losses for the income of a country, where taxes are a source of state revenue which will later be allocated to finance the government's general expenditure. if many companies carry out small tax activities that will have to be paid then it will affect state revenue from the tax sector. in addition, tax avoidance measures will also provide a bad reputation for the company. the phenomenon of tax evasion in recent years has been horrified by the emergence of the document "panama papers". this document presents information about various state leaders, officials and political leaders, business people, sportsmen, and professionals who use the services of the law firm mossack fonseca in panama for various purposes, business, ownership disguises, and tax avoidance. the disclosure of the panama papers document revealed the biggest alleged tax evasion in history. the indonesian government was not silent about the findings. the indonesian finance minister said that the government already has data on thousands of offshore companies and shell companies belonging to indonesian people abroad. the tax amnesty policy is one of the government's efforts to withdraw all the funds. the disclosure of the panama case certainly has an impact on the state revenue from the tax sector. from year to year the government tries various ways to increase income from the tax sector. however, from the target set by the government, the target for tax revenue has not been fully achieved. to minimize tax avoidance actions carried out by company management, there is a need for a mechanism for implementing corporate governance within the company. such supervision is very necessary to suppress opportunistic actions that will be carried out by management. corporate governance in this study uses corporate governance indices developed by iicd. the main objectives of corporate governance generally relate to accountability especially the implementation of guidelines and mechanisms to ensure good behavior and protect the interests of shareholders, including the in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e corporate governance, share ownership structure and tax avoidance 121 governance of company compliance in tax payment activities. the application of corporate governance in a company will determine the direction of the company's performance. if the company implements corporate governance, it will create effective company performance which will have an impact on determining policies related to the effective tax rate in a company (hanum & zulaikha, 2013; kesit, 2014). to minimize tax avoidance activities, one of the tools used is implementing corporate governance (sari & martani, 2013; schön, 2008). one principle of corporate governance that can influence tax decisions is the principle of transparency, if the company is transparent to the information it has, the company tends to take taxation policies that are not risky (sari & martani, 2013). the audit committee is a committee formed by the board of commissioners with the aim of helping conduct checks or controls on the company's financial management activities. with the existence of audit committee members who have competence in the field of accounting or finance, they can support the creation of corporate governance in a company. corporate governance can overcome agency problems so as to prevent management from doing unexpected tax avoidance. supervision of the audit committee can help detect the practice of tax avoidance within the company. the practice of tax avoidance is done by redesigning transactions by taking advantage of loopholes in the tax law so as to minimize the amount of the tax burden paid. the existence of an audit committee can also suppress tax avoidance measures, when the level of tax avoidance is high, it encourages low risk tax planning activities, because tax avoidance practices can increase costs, namely the existence of fines and decreasing the company's reputation in the public (sari & martani, 2013). dewi & i ketut jati (2014) states that audit committees have a significant effect on tax avoidance. the quality of corporate governance will increase when the number of audit committee members increases, the supervision will reduce the practice of tax avoidance in the company. the results of the above studies are not in line with the results of the research conducted by hsu, pathak, srivastava, tschida, & bjorklund (2015) saying that audit committees do not have a significant effect on tax avoidance. the existence of audit committee members who have competence in the field of accounting or finance can be associated with an effective tax rate that shows the effectiveness of tax management within the company. tax management is used as a means to fulfill tax obligations by utilizing loopholes in the law so that companies can benefit in the form of schemes/figures in their tax calculations. the role of the audit committee only monitors corporate tax planning activities specifically in the company's business strategy. supervision of audit committee members is to ensure the quality of financial statements. according to mahendra, luh, & widhiyani (2016) the audit committee has no significant effect on tax avoidance, the role of the audit committee is limited in carrying out its duties and responsibilities. the audit committee cannot access company documents, but it also cannot communicate with internal auditors regarding the results of the company's internal audit. so, it is said that the audit committee is only to meet regulations while its roles and responsibilities are limited. in indonesia, the structure of share ownership tends to be concentrated in a group of shareholders whose majority of shares are owned by a group or majority shareholders (masripah, diyanti, & fitriasari, 2015; rebecca & siregar, 2012). the ownership structure of a corporation will determine the characteristics of agency problems so that it will map the division between power and supervision in a corporate entity (lukviarman, 2016). the existence of majority owners is expected to act as an alternative governance mechanism in reducing the negative impacts caused by agency problems. the research conducted by afni & hermawan (2016) states that controlling shareholders have a significant positive relationship to corporate tax avoidance, the weak corporate governance system in the company benefits the controlling shareholders in obtaining benefits from the controls they have. the percentage of shares owned provides an opportunity to determine policies within the company. management that has control rights over cash flow rights will reduce tax avoidance measures by trying to maximize the benefits received to regulate transactions in companies that can harm minority shareholders (masripah et al., 2015; mcguire, omer, & wang, 2012). the research conducted by masripah et al., 2014 states that the control rights possessed by management can be used to reduce corporate tax avoidance activities though tax avoidance measures are allowed or legal according to the law but controlling shareholders tend to take policies to avoid relatively large expenditures as the impact of tax avoidance activities this study intends to integrate the pre-existing research on the effect of corporate governance and the shareholding structure on tax avoidance activities by using a research sample of manufacturing companies listed on the indonesia stock exchange (idx) during the period of 2015 to 2017. the manufacturing sector is a fairly complex corporate yenny dwi handayani̇ & ewing yuvisa ibrani 122 sector and the large number of issuers makes manufacturing companies have a significant influence on the dynamics of trade in the indonesian capital market. 2. literature review and hypotheses development agency problems arise when there is a separation of ownership and control functions within the company (jensen & meckling, 1976). principal as the owner of the company gives authority to the agent to make decisions related to the company's operations. there is a conflict of interest between the agent and the principal and this is compounded when one party has more information than the other party. information about the company is more owned by the agent than the principal, this will lead to information asymmetry. information asymmetry according to jensen & meckling (1976) includes: 1. moral hazard, i.e. activities carried out by agents are not fully known by shareholders, of course it violates contracts that have been mutually agreed upon and violates applicable ethics or norms 2. adverse selection is information owned by an agent (manager) about the condition and prospects of a company's business, not all of which are reported to shareholders the capital structure consisting of majority ownership called ownership of controlling shares and minority ownership which is called non-controlling share ownership can cause agency problems. so far, agency problems tend to only involve principals (shareholders) and agents (management). apparently, the potential for conflict does not only involve the principal agent but can also involve shareholders. the controlling shareholders have the authority to make a policy that can provide benefits to the majority shareholders which of course will indirectly harm minority shareholders. with the majority and minority shareholder conflicts, it will reduce conflicts between agents and principals (masripah et al., 2015) 2.1. tax avoidance tax avoidance is an effort to reduce or even eliminate the tax debt that the company must pay by not violating existing laws (lauger, wisniewski, & mckenna, 2014). another definition of tax avoidance is an action that aims to reduce taxable income through tax planning using either methods classified or not classified as tax evasion (sari & martani, 2013). according to alfiyani nur hidayanti (2013), there are several components to measure tax avoidance, namely effective tax rate (etr), cash effective tax rate (cetr), current etr (cetr), book-tax difference manzon-plesko (btd-mp), book-tax difference desai-dharmapala (btd-dd), and tax planning (taxplan). from the various types of tax avoidance measurements above, it is concluded that the measurements used in tax avoidance studies use the current etr (current effective rate), a formula that accommodates the taxes paid by the company at this time. the value obtained from this measurement is if it is low, it will have an impact on increasing tax avoidance. given that tax is a burden (which will reduce the company's net profit), the company will make every effort to pay taxes as little as possible and try to avoid taxes, but the efforts carried out are still in a positive context or in the legal sense by utilizing existing loopholes and rules taxation law (harnovinsah & mubarakah, 2016). the way companies conduct tax avoidance is usually by utilizing transactions that are not classified as tax objects. the tax law regulation cannot yet regulate financial instruments so that companies can easily interpret the recognition of profits or losses and capital debt in accordance with the considerations of the management of the company. this is what is used by companies to exploit the shortcomings in the tax law so that the practice of tax avoidance is inevitable (alfiyani nur hidayanti, 2013). 2.2. corporate governance the organization for economic cooperation and development (oecd, 1999) states that corporate governance is a system that brings together various elements of the organization (board of commissioners, managers, shareholders, and stakeholders) with rules and procedures for decision making designed to achieve organizational goals. along with the concept, there are several insights to clarify corporate governance, one of which is acccording to lukviarman (2016), the role of corporate governance becomes very critical in empowering companies to be more competitive in their competition environment. the good implementation of cg will increase the ability of companies to access international capital markets, besides, it will also produce governance outcomes that are corporate governance, share ownership structure and tax avoidance 123 expected to increase competitiveness and company access to funding sources at the global level. realization of governance outcomes is an increase in the performance of the company, so that it cannot be denied that with the optimal governance system in the company surely the company will avoid the risk of bankruptcy the measurement of the practice of corporate governance (cg) in this study refers to the effectiveness measurement of the board of commissioners conducted by the indonesian institute for corporate directorship (iicd). 2.3. controlling shareholders controlling shareholders are shareholders who have the largest shareholding in the company (afni & hermawan, 2016). the percentage of share ownership shows a strong concentration of ownership in the company. the percentage of controlling shareholding in this study uses a percentage of ownership between 20-50% the corporate governance structure in indonesia is characterized by the many found companies, both private and public, regulated and owned by the founding family. this phenomenon indicates the lack of separation between ownership and control in the company as commonly found in modern companies. in fact, the majority owner can maintain control of their company, even though some ownership of the company has been sold to the public through the mechanism of listing in the capital market. this is done by only selling a small portion of their shares, usually 20% according to the provisions of the minimum number of shares to be sold. thus, it means that ownership rights and management control which, if combined, are still owned by a circle of family members and (trusted business associates). 2.4. corporate governance and tax avoidance board of commissioners is a party that has an important role in overseeing the performance of directors. independent commissioners are considered to have better supervision of management because they are free from various internal interests of the company. through the role of the board of commissioners in carrying out the supervisory function of the company's operations, it is expected to provide an effective contribution to prevent aggressive tax behaviour carried out by management. research conducted by nasution & setiawan (2008) states that a large proportion of board of commissioners will make it difficult for board members to carry out coordination activities so that it will hamper their duty to conduct supervision, this will be used by management to conduct aggressive tax actions. the worse the level of corporate governance in a company is, the higher the tax avoidance action is taken by the company (desai & dharmapala, 2006). minnick & noga (2010) study found that corporate tax management will increase when the corporate governance mechanism has gone well, this can be seen from the existence of audit committee members within the company. the existence of an audit committee helps the board of commissioners carry out their duties to ensure that internal and external audits run well so that the quality of financial statements can increase. the task of the audit committee is to control and supervise the preparation of financial statements so as to minimize fraudulent activities carried out by management. the effectiveness of the function of the audit committee can improve the company's control activities and the quality of financial reporting, and support the implementation of corporate governance (andriyani, 2008).section. h1: corporate governance has an effect on tax avoidance 2.5. controlling shareholders and tax avoidance concentrated share ownership will cause agency problems, no longer a conflict between the principal and the agent but has developed into a conflict between the controlling shareholders and non-controlling shareholders. weak corporate governance in a company causes controlling shareholders to influence company policy to control management decisions in accordance with their interests which of course can later harm minority shareholders (masripah et al., 2015). the higher the percentage of majority shareholders is, the greater the influence in determining company policy will be (timothy, 2010). thus, controlling shareholders can influence company policies which surely can be used to achieve personal goals (la porta, lopez-de-silanes, shleifer, & vishny, 2000). h2: controlling shareholders has an effect on tax avoidance yenny dwi handayani̇ & ewing yuvisa ibrani 124 3. research method the sample used in this study is manufacturing companies listed on the indonesia stock exchange in the period 2015-2017. purposive sampling method is used in sample selection which is first done by determining criteria by the researcher. samples that do not meet the established criteria will be issued. the criteria for the company that will be used as samples in this study are as follows: 1. manufacturing companies listed on the indonesia stock exchange from 2015-2017 2. consistently publish audited financial statements from 2015-2017. 3. financial statements are expressed in rupiah. 4. the company does not experience losses in the commercial financial statements and fiscal financial statements during the year of observation. 3.1. dependent variable (y) in this study, the dependent variable used is tax avoidance. tax avoidance is the avoidance of tax legally and safely done for taxpayers. this is because tax avoidance does not violate the applicable tax laws, therefore tax avoidance measures can be used by utilizing the weakness (grey areas) contained in the applicable laws and tax regulations so that taxpayers can reduce the amount of tax which he owed (pohan, 2013). 3.2. corporate governance the organization for economic cooperation and development (oecd, 1999) states that corporate governance is a system that brings together various elements of the organization (board of commissioners, managers, shareholders, and stakeholders) with rules and procedures for decision making designed to achieve organizational goals. the measurement of corporate governance (cg) in this study refers to the measurement of the effectiveness of the board of commissioners conducted by the indonesian institute for corporate directorship (iicd). the characteristics of the board of commissioners are based on information available in the annual report of each company. to measure the effectiveness of the board of commissioners consists of 21 questions which are grouped into 2 categories, namely: board qualification and composition, board activities. each question will consist of 3 ratings: good = value 3 is given if each existing criterion is fulfilled fair = value 2 is given if only a number of criteria are met poor = value 1 is given if no existing criteria are met after obtaining scores for each question, the score for the board of commissioners is obtained by summing the total score for each characteristic then divided by the maximum score. 3.3. controlling shareholders controlling shareholder is the shareholder who has the largest shareholding in the company (afni & hermawan, 2016). the status as controlling shareholder is obtained through a 20% -50% share ownership. 4. results and discussion t-test is used to determine whether or not there is influence of each independent variable on the dependent variable that supports by comparing the count with t table. the results of the trial can be seen in the table below. corporate governance, share ownership structure and tax avoidance 125 table 1. regression result model unstandardized coefficients standardized coefficients t sig. b std. error beta (constant) -.264 .009 -28.902 .000 indekscg .400 .011 .506 35.352 .000 kp .653 .009 1.044 72.977 .000 a. dependent variable: currentetr 4.1. corporate governance and tax avoidance in this study in which corporate governance has an effect on tax avoidance, the principle of corporate governance which includes transparency, accountability, responsibility, independency and fairness can be used as one of the company's controllers to not to carry out tax avoidance activities that pose risks. the role of the audit committee is very helpful in providing objective reviews of corporate financial reporting. there are many gaps in the tax law that can be utilized by management to reduce tax payment activities rather than choosing full of risk actions that can lead to penalties and damage to the company's reputation. the results of this study are in line with the research of dewi & i ketut jati (2014) which states that the existence of competent audit committee members in accounting and finance has an effect on tax avoidance. the existence of audit committees that is increasingly high within the company shows the high level of quality of good governance within the company so that it can further reduce the possibility of a company going to practice tax avoidance. the audit committee can be more responsible and open in presenting financial statements because the audit committee will immediately see all activities carried out by the company. the results of this study are also in line with the research conducted by waluyo (2017) which states that audit committee and audit quality have positively affected tax avoidance at banking enterprises registered on the indonesia stock exchange. it has figured out the roles of audit committee and audit quality have been involved in a decision making to execute taxavoidance. on the other hand, this study is not in line with the research conducted by hsu et al. 2015) and g. dewi & sari, (2015) which state that audit committees do not affect tax avoidance. the existence of an audit committee within the company lacks an active role and responsibility in a company's policy regarding tax rates. the duties and authority of the audit committee within the company are only neutral. this is due to the limitations of the audit committee to be able to access the company's data and information. this study is also not in line with the research of sari & martani (2013) which state that corporate governance index does not affect aggressive tax actions, the application of good governance in public companies tends to be limited to meeting existing regulations. the effects of implementing corporate governance have not had a significant impact on companies in indonesia. 4.2. stock ownership structure and tax avoidance the shareholding structure in this study uses controlling shareholders, namely the largest shareholders in the company whose shareholdings are between 20-50%. the controlling shareholder has an effect on tax avoidance. the greater the share owned by the controlling shareholder, the greater the control rights held to determine company policy. the control rights held by the largest shareholders in the company are used to suppress tax avoidance activities carried out by management. tax avoidance is a risky issue and incurs high costs, not to mention the threat of fines and damage to the company's reputation is one factor that must be considered. this research is in line with the research conducted by masripah et al, 2015 where the controlling shareholders have limited cash flow rights so yenny dwi handayani̇ & ewing yuvisa ibrani 126 that the effect is very small on tax avoidance activities. unlike the research conducted by afni & hermawan (2016) the largest shareholders in the company have the right to be involved in making company policy. the policies taken must be chosen which are most beneficial to shareholders, and aggressive tax policies that will be chosen to achieve their goals. 4.3. suggestion 1. for further researchers, it is recommended to be able to further expand the scope of the research by adding to the number of other variables in the observation that have not been used in this study and with better measurements so that the results obtained become even better. further researchers are advised to add other variables to measure corporate governance such as the characteristics of audit committee members seen from the expertise of audit and industry committee members, expertise of audit committee members in the field of industry and financial supervision, expertise of audit committee members in certain industries so that they obtain maximum results. 2. for companies, they should understand more about the practice of tax avoidance that tax avoidance practices are permitted to be carried out to reduce the tax burden if it is still within good business limits and does not violate applicable tax rules. references afni, z., & hermawan, a. a. 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(2017). the effect of good corporate governance on tax avoidance: empirical study of the indonesian banking company. the accounting journal of binaniaga, 2(02), 1–10. https://doi.org/10.33062/ajb.v2i02.92 international journal of commerce and finance, vol. 4, issue 2, 2018, 46-56 46 the effects of credit collection policy on portfolio microfinance performance danstun b. ngonyani st johns university of tanzania, tanzania harun j. mapesa school of business, mzumbe university, p.o. box 63, mzumbe, tanzania abstract this paper presents the results of the study on the effect of credit collection policy on portfolio risk management among microfinance institutions in tanzania. the study used cross-sectional survey data of microfinance institutions in three regions of dar es salaam, morogoro and dodoma. random sampling was employed to obtain a sample of 219 microfinance institutions in all three regions. multiple linear regression analysis was used to determine the effect of credit collection policy on portfolio at risk of microfinance institutions. results show that, there is a positive relationship between interest rates charged and portfolio at risk of microfinance institutions. on the other hand, the variable for grace period on loans and loan sizes to borrowers had a negative relationship with portfolio at risk of microfinance institutions. these results suggest that, microfinance institutions can focus on explanatory variables used in the study for enhanced quality of financial performance of the microfinance industry. jel classifications: d23, g21, g23, g32 keywords: credit collection, portfolio at risk, microfinance institutions 1. introduction microfinance institutions are proven to have significant contribution in reducing poverty among the low-income earners and disadvantaged individuals in society. these institutions have been helpful in facilitating entrepreneurship skills and provision of knowledge on capital, risks and empowerment in economic activities (colquitt, 2007). microfinance institutions intended to simplify provision of micro financial services to low income households and self-employed individuals (brown and moles, 2011). in order to continue serving their clients with microcredit facilities. the lending institutes need to effectively manage their loan portfolios. microfinance portfolio management is the driving force to enable sustainable financial performance. microfinance institutions that experience high risk of its loan portfolio, is an indication of high delinquency from customers. this may lead to underperformance of its loan portfolio thus threatening the ability to continue in operation in the long-term (ledgerwood, 1999). microfinance institution need to manage portfolio quality against delinquency and defaults, by establishing effective strategies in the lending and collection processes. efficient credit collection policy within the institutional framework, helps credit management process be effective and hence timely collection of funds from clients. however, there have been controversy from the microfinance institutions concerning high rate of default/delinquency by their clients. increase of default rates in loan portfolios indicates that microfinance institutions are not attaining the internationally accepted standard portfolio at risk of 3%. in addition, (mix, 2010) reported that mfis in sub saharan africa had increased portfolio at risk with region records greater than 5%. this is a cause of concern since it erodes effort put forth of establishing microfinance institution and ensure financial inclusion of poor people. (schmittlen, 2010); (colquitt, 2007) pointed out that, weak credit collection policy has been the main cause of business failures including microfinance institutions. the essence of microfinance credit collection policy is to facilitate effective credit administration of disbursed funds. also, ensure that microfinance institutions rate of returns outweigh the cost incurred to delivering credit. existence of efficient credit collection policy within institutional framework, helps loan officers be effective and timely in collection of funds from clients. emphasis need to be put in appraising and credit supervision of borrowers. microfinance institution that invests into borrowers’ ability to self-response to loan repayment have a better chance to maintain quality loan portfolios in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the effects of credit collection policy on portfolio microfinance performance 47 (edwards, 2004). thus, institutions need to establish strategies that would enable efficient loan recovery from clients before getting overdue. several studies have been conducted on factors for effective credit collection in mfis; but, the level of significance of factors varies with studies. some of the determinants are found to be significant while others not. at the same time, some determinants are significant to only set of mfis. empirical evidences from the findings by (kar and swain, 2014); (adongo and stork, 2000); (nyamsogoro, 2010) and (zohair, 2013) reported that interest rates, loan sizes and loan duration influence financial sustainability and portfolio performance of microfinance institutions. this is contrary to the findings by (tundui and tundui, 2013); (folefack and teguia, 2016); (onyeagocha, et al., 2012) and (shu-teng, et al. 2015) which indicated that, the factors were positively associated to repayment problems and against quality loan portfolio performance. despite of essential contributions made on previous empirical studies, much of past research suffers from mixed findings leading to inadequate conclusions. in addition, some past studies have dwelt on member-based microfinance institutions while other studies focused on only one microfinance programme. consequently, they have been inefficient in establishing the factors contributing to effective credit collection policy on portfolio at risk of microfinance institutions in tanzania. this study is comprehensive in coverage and focused on non-member-based microfinance institutions. therefore, it intends to fill that gap by providing further insight and information on the role of microfinance credit collection policy on portfolio risk management in tanzania. 2. related literature microfinance institutions need to have credit collection strategies that would make clients attracted to find it easy to repay their loans without enforcement. institutions that constantly compels its clients to service their debt reflects weak credit collection policy employed that ensure timely collection of funds from clients. (palladini and golgberg, 2010) considers credit collection policy as guidelines that establish set of procedures used to collect accounts receivable getting overdue. it aims at maximizing rate of return from microfinance loan portfolio in order to increase firms’ assets value. the rationale of establishing a set of policy is that, not all clients meet their obligations timely and without enforcement. there are clients who simply forget and the rest don’t have tendency of paying their dues until persuaded to do so. lending institutes that experience gradual repayment of loans from clients, increase bad debts of their loan portfolios. therefore, credit collection efforts are directed at accelerating loan recovery from clients. microfinance management efforts for making sure strict collection procedures are adhered; helps to keep debtors alert and reduction of portfolio at risk (warue, 2012). as such loan portfolio is the microfinance institutions most important asset, that needs to be managed conscientiously against default risk. survival of any lending institution depends on successful loan portfolio performance which results into increasing rate of return on various loan investment products. previous studies indicate that, portfolio performance of microfinance institution is influenced by various factors. existence of attractive and customer-oriented credit collection strategies contributes to sound financial performance in microfinance institutions. (papias, and ganesan, 2009) in their study observed that, microfinance institutions that charges high interest rates are likely to affect quality of loan portfolio due to increasing default rates. consequently, impact negatively on overall financial performance of mfis. however, studies by (ayayi and sene, 2010) added that individual-based microfinance lenders charging higher interest rates are likely to be more profitable up to a certain level. beyond which the profitability of microfinance institution tends to be worse due to an increase in rates of delinquency from their clients. as such, microfinance need to learn that, charging high interest rates beyond a certain threshold is said to be unfavorable for the mfis financial sustainability. on the other hand, (hooman, and kohansa, 2009), revealed that interest rate has the most significant effects on repayment performances. in the same vein, (ledgerwood, 2013) suggested that microfinance institutions should be concerned about loan pricing of its products since it is an important aspect of loan product design. it is argued that a balance has to be reached between what clients can afford and what the lending organization needs to earn, to cover all costs involved in lending for sustainable microfinance operation. danstun ngonyani 48 the study by (swain and varghese, 2013); (nyamsogoro, 2010) and (kar, and swain, 2014) advised that, financial institutions should charge higher interest rates only to credit facilities identified to have higher probability of default. as such businesses with high risk of success should attract higher interest rates. however, microfinance institutions should note that by introducing higher interest rates to borrowers, that may contribute to loan defaults and positively impact on loan portfolio at risk. it was further argued that even if microfinance institutions may have effective appraisal and assessment strategies of their loan applicants. increased interest rates charged to borrowers may lead to default payment and high rate of portfolio at risk of the microfinance institutions. at the other hand, a study by (tundui and tundui, 2013) showed that interest rates charged to microfinance borrowers did not affect repayment performance of microfinance institutions. hence, this study needs to determine the influence of interest rates on portfolio performance of microfinance institutions in tanzania. moreover, (lidgerwood, 2009) argued that, loan duration as designed by microfinance institution can greatly affect borrowers’ repayment schedule, financing costs to the client and the extent of loan use by respective clients. (roslan and mohdzaini 2009); (godquin, 2004) added that, microfinance borrower who prefers longer period to complete loan repayment indicates commitment to repay the loan. that may contribute to improved financial performance and reduced risk of gross loan portfolio. these findings were in line with (onyeagocha, et al., 2012) and (shu-teng, et al., 2015) who pointed out that, increase of loan duration to borrowers negatively associated to institutional financial performance. therefore, lending institutes need to devise various institutional mechanisms intended to reduce the risk of loan default for sustainable microfinance portfolio growth. in addition, grace period to borrowers in microfinance institutions is said to influence repayment behavior of the borrowers. according to (barboni 2012), grace period as a technique of encouraging borrowers’ regular loan repayment and improve microfinance collection process is practiced in two scenarios. firstly, involves a situation where respective microfinance institution provides a borrower specific number of days before start of making regular loan repayment until completion of his loan amount. as such, there is no penalty for late payment after the given days expiry. the second technique of grace period involves the situation where a microfinance institution provides a borrower with a period of time where an interest rate is not charged on new loan offered. (abreham 2002) added that, provision of grace period to microfinance borrowers influence positively repayment performance and reduction of risk embedded in the microfinance loan portfolio. similarly, microfinance institutions which provide a graceperiod to their clients are said to enhance borrowers’ entrepreneurship capability and attract borrowers into investment options of their business. (field et al., 2011) observed that, grace period increase microfinance institutions’ financial performance thereby controlling for defaults rates to borrowers. these findings were in line with (pande et al., 2010) who found that microfinance borrowers who were offered grace period were encouraged to invest more in their business and were capable to finance their loan more regularly than clients without a grace period. according to (nawai, and shariff, 2013), microfinance loan size offered to borrower influenced repayment performance of microfinance institution. the loan sizes to borrowers can be designed into small, medium or big loan sizes. most microfinance institutions design small and medium loan products to carter demands for low-income and poor household customers. efficient loan size that fit capability of borrowers to repay reduces portfolio at risk of the gross loan portfolios (crabb and keller, 2006). on the other hand, (nyamsogoro 2010) observed that, profitability of microfinance institution lending business is associated with larger average loan sizes offered to their clients. however, (cull et al., 2007) argued that, microfinance institutions that provide smaller loans do accumulate higher profits in transacting with their clients. it is also an indication that, such small loan products are demanded by their clients. at the other hand, (feroze, et al., 2011); (kiliswa, & bayat, 2014), had contradictory observation who argued that, loan size of microfinance institutions does not influence microfinance financial performance. the aim of this study was therefore to test how credit collection policy influence portfolio at risk of microfinance institutions. the hypothesis tested in this relationship are stated below: the effects of credit collection policy on portfolio microfinance performance 49 h1. 1: there is no significant relationship between microfinance institution interest rates charged and portfolio microfinance performance. h1. 2: there is no significant relationship between microfinance institutions loan size offered and portfolio microfinance performance. h1. 3: there is no significant relationship between microfinance institutions grace period of loans and portfolio microfinance performance. h1. 4: there is no significant relationship between microfinance institutions loan duration and portfolio microfinance performance. 3. research methods this study was a cross-sectional research design which used a large number of subjects that were not geographically bound. the use of a cross sectional design enabled undertaking of both quantitative and qualitative data. a comprehensive sampling frame of microfinance institutions that do not require its clients be registered members in order to access credits facilities (non-member-based microfinance institutions) was generated by combining data set from the bank of tanzania (microfinance section) (2010); the ministry of industry and trade via the licensing department (2014); tanzania association of microfinance institution (tamfi) (2015) and the self microfinance fund (2015). the database provided information regarding the registration, operation and their outreach services. a total of 219 microfinance institutions of non-member-based microfinance institutions in kinondoni, ilala and temeke districts in dar es salaam region, morogoro urban district in morogoro region and dodoma urban district in dodoma region were involved. both primary and secondary data were collected through interviews and semistructured questionnaires. 3.1 explanation of independent and control variables the independent variables involved in this study were interest rates, grace period of loans, loan sizes and loan duration. on the other hand, four control variables were involved in analyzing the relationship between the hypothesized independent and dependent variable. the purpose was to minimize the contribution of the variables of interest after controlling for the other re-known factors. the control variables were mfis age, mfis size, owner/manager education qualifications and owner/manager experiences. table 1: explanation of independent and control variables independent variables explanation (measure) interest rates average rate of interest charged on loan products to borrowers per year. loan size average amount of money in tanzania shillings (tsh) given to borrower in a year loan duration average number of days for which borrowed funds are fully repaid grace period of loans average number of days given to borrowers before first installments to microfinance institutions control variables danstun ngonyani 50 mfi size total assets of microfinance institution in tsh. mfi age number of years since the establishment owner/manager experiences. number of years of working in microfinance industry owner/manager education qualifications education qualification attained by the mfi manager. 1=secondary education; 2=technical education; 3=university education the dependent variables in this study was portfolio at risk of microfinance institutions. the dependent variable was measured as; portfolio at risk (par) 90 days = outstanding principal balance of all loans past due more than 90 days outstanding principal balance of all loans 3.2 model specification the study employed multiple linear regression model as analytical model technique. the multiple regression examined the relationship between a single outcome measure and several predictor variables. the linear regression model was of the following form: y = o + 1x1 + 2x2 + 3x3 + 4x4 +controls + where: y = predicted dependent variable (portfolio at risk), o= constant, 1 – 4= regression coefficients, x1– x4= value of the predictor variables –interest rates, grace period of loans, loan sizes and loan duration. controls = control variables (mfi size, mfi age, manager experience and manager education. = error term 4. results and discussion 4.1. correlations analysis the table below provides correlation matrix of the variables related to credit collection policy on portfolio at risk of microfinance institutions. the pearson correlation results presented, indicates variable grace period of loans and loan size are negatively and significantly related to portfolio at risk of mfis. in addition, variable interest rate is significant and positively related to portfolio at risk. the variable loan duration denotes insignificant relationship to dependent variable. on the other hand, the correlation table aids to verify for the collinearity between variables employed in a study. the ‘rule of thumb’ considers the existence of collinearity between predictor variables at a correlation value of 0.5 and above. basing on this observation, the correlation analysis presented confirms to have no multicollinearity problems that exist between the variables in this study (hair, 2010). the effects of credit collection policy on portfolio microfinance performance 51 table 2: correlation matrix of credit collection policy variables on portfolio at risk (n =219) variables 1 2 3 4 5 6 7 8 9 10 1.portfolio at risk 1 2.loan duration -.090 1 3.interest rates .168 * .056 1 4.grace period -.140 * .082 .033 1 5.loan size -.171 * .115 -.058 -.078 1 6.manager experience .088 .023 .045 -.007 -.015 1 7.mfi age -.063 .012 -.046 -.080 -.036 .026 1 8.mfis size .157 * -.001 .013 -.043 .012 .048 -.133 * 1 9.manager sec education -.019 .085 -.096 .040 -.003 -.024 -.033 .073 1 10.manager university .021 .137 * .087 -.068 .106 -.090 .127 -.077 -.246 ** 1 *. correlation is significant at the 0.05 level (2-tailed). **. correlation is significant at the 0.01 level (2-tailed). 4.2. econometric results this study aimed to determine the effect of credit collection policy on portfolio at risk of microfinance institutions in tanzania. the multiple linear regression model was used in order to examine the combined effect of credit collection policy on portfolio at risk. the level of significance (p-values) was used to test the influence of each variable on portfolio at risk of microfinance institutions. an overall model fit was used to test the combined effect of all variables on the portfolio at risk of microfinance institutions. the overall model was significant at f(9, 209) = 16.275; p = .002 < 0.05. this means that, in general the concepts selected for this study did indeed explain a significant proportion of the variance in portfolio at risk of microfinance institution. similarly, the study found that the estimated result of multiple regression analysis is also at a quite satisfactory level. the adjusted r² is 0.384 and observed r² value is 0.412, respectively. this means that independent variables can explain about 41.2% of the portfolio at risk of microfinance institution. danstun ngonyani 52 table 3: model results for credit collection policy variables on portfolio at risk variables coefficients standard t value p value error (constant) 5.254 7.836 .670 .503 log loan duration -.974 .858 -1.135 .258 interest rates .061 .026 2.350 .020 grace period -.068 .030 -2.239 .026 log loan size -1.487 .570 -2.611 .010 manager experience .072 .059 1.209 .228 mfi age -.086 .091 -.948 .344 log mfi size 1.661 .775 2.143 .033 manager sec education .069 .438 .158 .874 manager univ education .504 .641 .786 .433 rsquare 0.412; adjusted rsquare 0.384; fstatistic 16.275 prob. (f-stat) .002; number of observations 219; significant at 5% par 90 days = o 1(lod) + 2(intr) 3(grp) 4(ls) + 5controls + ………….. where: par = portfolio at risk more than 90 days of mfis ld = loan duration, intr = interest rates, grp = grace period of loans, ls = loan size controls = control variables (mfi size, mfi age, manager experience and manager education. from table 2 above, the variable interest rate was positively related and statistically significant at level of 5% (p = 0.020). as such it contradicts the hypothesis that no relationship exists between microfinance institutions interest rates charged and portfolio performance. this means that, interest rates charged by mfis is a determinant of portfolio at risk of microfinance institution. that is any unit increase of the rate of interest charged to microfinance borrowers results in increased portfolio at risk of the lending institution by 0.061. the cost of the loan is likely to be not manageable by the borrowers leading to higher default rate and increase risk of loan portfolio of microfinance institution. in order for the microfinance institutions experience lower portfolio at risk. they have to charge low interest rates to their clients to enable manage regular loan repayments. these findings are in line with (wenner et al. 2007; (swain and varghese 2013) and (papias and ganesan 2009) who shared that, high interest rates charged by most microfinance institutions on credit facilities contributed to loan default and low-quality portfolio performance the effects of credit collection policy on portfolio microfinance performance 53 of the company. despite of strong appraisal and assessment strategies, high interest rates to borrowers results to default payments and high portfolio at risk of the mfis. in addition, (mwangi, 2016) added that, when lending rates rise, financial institutions attract its borrowers to invest into riskier projects for higher return on investment. in so doing, if such projects are going to fail, even the creditworthy borrowers are likely to shy off from borrowing. ultimately, portfolio at risk of the microfinance institution rises which threatens long term operation of the company. the variable loan size in the regression table above is negatively related and statistically significant at level of 5% (p = 0.01). these findings imply that, if other variables are held constant, any unit increase of loan size to microfinance borrowers result in decrease risk of portfolio of microfinance institution by 1.487. this further means that, microfinance institutions which provide reasonably big loan sizes to their borrowers, makes them more committed to their respective lending institutes. in addition, enables widen their investments and become negatively associated to repayment problems. (crabb and keller, 2006) and (adongo and stork, 2006) argued that, efficient loan size that fits capability of the borrower to repay stimulate client’s enterprise performance. portfolio at risk of microfinance institution is reduced if borrowers appreciate for the loan amount offered and honor their obligation of repayments. that, improves portfolio at risk and strengthen financial performance of the microfinance institution. on the other hand, microfinance institutions that provides bigger loan size to their clients implies that, one has proven experience in managing his business and proven committed in servicing given loan effectively. moreover, the findings of the variable grace period records negatively related and statistically significant at level of 5% (p = 0.026). this means the variable is determinant of portfolio at risk of microfinance institutions. the findings further imply that a unit increase of grace period of loans leads to 0.068-unit reduction in loan portfolio at risk of microfinance institutions. the findings are against the hypothesis which stipulated that grace period is not related to portfolio performance of microfinance institutions. in this regard, provision of grace period to borrowers makes them utilize funds effectively into planned investment projects. (abreham, 2002) added that, the provision of grace period to microfinance borrowers influence positively repayment performance and therefore reduction of risk embedded in the microfinance loan portfolio. in addition, (ngahu and wagoki 2014) added that, microfinance institutions which provides a grace-period to their clients enhance borrowers’ entrepreneurship capability. more importantly, enable them reorganize accordingly to undertake their obligation of regular loan repayments. 4.3 conclusion and recommendations this paper has presented the results of a study on the effects of credit collection policy on portfolio at risk of microfinance institutions in tanzania. the study used a sample from three regions namely dar es salaam, morogoro and dodoma. using multiple linear regression model analysis, results revealed that, loan size to borrowers, grace period of loans and interest rates charged to borrowers determines portfolio at risk of microfinance institutions. these findings further show that, loan size to borrowers and grace period of loans decreases portfolio at risk of microfinance institutions. this means that, high loan repayment from microfinance borrowers are associated with grace period and large loan sizes. moreover, results show that, the variable interest rates charged to borrowers is evidenced to increase portfolio at risk of the microfinance institutions. therefore, in the light of these findings, it is recommended that microfinance institutions need to reconsider the rate of interest charged to their clients. this would enable borrowers manage repayments and ensure sustainable portfolio of microfinance institution. similarly, it is recommended that borrowers be given sufficient grace period to enable manage cost of loan offered. also, microfinance institutions need to design loan products that suit customers to enable carry the loan to maturity and enhance quality of microfinance loan portfolio. references danstun ngonyani 54 abreham g. 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(2013). “factors affecting repayment of loans by micro-borrowers in tunisia: an empirical study”. journal of management & public policy, vol. 4, no. 2, pp, 4 16 international journal of commerce and finance, vol. 5, issue 2, 2019, 106-119 106 financial inclusion and its determinants among households in jimma zone of oromia regional state, ethiopia mekuanint abera timbula, jimma university, ethiopia tadele mengesha, jimma university, ethiopia yonas mekonnen, jimma university, ethiopia dr. matiwose kebede jimma university, ethiopia abstract the majority of the developing countries, access to finance is demanded more for the middle and lowincome community and considered as a public good, which is as important as access to safe water, primary education, etc. the researcher used a hybrid of qualitative and quantitative approach. the exploratory research design used in exploring and developing financial literacy framework to study in the ethiopian context as there is no financial literacy framework developed previously. the descriptive research design used in describing the level of financial literacy, financial inclusion, saving behavior, the relationships between financial literacy and saving habit, the demographic and socio-economic characteristics of the study area. the sample size taken for the study was 173 households. descriptive statistics and inferential statisticswere used to attain the objective of the research. the probit regression model produced similar results as those obtained using the logit model showed that age, education, financial literacy, and income are positively related to financial inclusion and distance to the nearest provider of financial services negatively impact financial inclusion. it is possible to reduce determinates of financial inclusion with regulating well the financial system, creating healthy competition and building better enabling environment. identifying and segregating the root causes and addressing it appears to be removing the distance, services charge, and credit barriers. on the other hand, the market for financial services failures and behavioral problems related to customer tend to be addressed through designing of appropriate financial products. removing those challenges and expanding financial inclusion tend to be possible with the promise of the latest technologies. keywords: financial literacy, financial inclusion, household saving, demand side 1. introduction most developing countries have given their attention to the concept of financial inclusion as it is believed in bringing inclusive and equitable growth to the country.[1] declared the fact that sustainable development of a nationis closely related to the extent of inclusion of the population into the financial net. to understand to word financial inclusion, it is better to define financial exclusion first. the european commission has defined financial exclusion as, a process whereby people encounter difficulties accessing of using financial services and products in the mainstream market that are appropriate to their needs and enable them to lead a formal social life in the society in which they belong. many developing nations particularly in ethiopia, many of who work as an agriculturalist, low salaried workers, and others are widely excluded from the formal financial system.in contrast, [2]defined financial inclusion as expanding the outreach of financial services at an affordable cost and on a timely basis to many economical week section of society which may provide them a financial cushion for their sustenance as well as social empowerment. thus timely availability of financial services to the lower income and disadvantaged group will help them to save money safely and prevent the concentration of economic power with few individuals and mitigates the risk that the poor could face as a result of economic shocks. [3] supported the idea in stating that access to finance by the poor is a in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e financial inclusion and its determinants among households in jimma zone of oromia regional state, ethiopia 107 prerequisite for poverty reduction and sustainable economic growth. through financial inclusion, the saving to be mobilized so that it will become a source of finance for mega projects rather than looking for foreign loan and aid. the most important financial product requirement of rural poor is credit, which has almost been the topic of discussion right from the time of independence in india. seasonality and uncertainty in agricultural productivity have always forced the farmersto borrow from different sources of finance. credit to the rural area, basically, theagricultural sector has always been a debatable topic, in terms of issues including lesseraccessibility to institutional credit by farmers, mounting non-performing loan to thelender on account of non-repayment of the debt owing to different reasons including failure of the crop. horn of africa, access to finance is demanded more for the middle and low income community and considered as a public amenity, which is basic as access to clean water, free education, etc. equitable growth promotes economic growth, increase the standard of living, reduce poverty, promotes agricultural growth rate, and provides new work opportunities. there are a number of previous studies that have focused on the determinants of financial inclusion in africa (uddin et al., 2017; zins and weill, 2016; olaniyi and adeoye, 2016; musa et al., 2015; akudugu, 2013) they did at either country level or regional level with difference in the results. ethiopia financial sector has not diversified in terms of the type institutional delivering the service and the type of bank product has been being delivered. after going through various books, articles, journals, magazine, project report and annual reports related to financial inclusion based on literature review and past studies no systematic study has been done in this particular area as far as ethiopia is concerned. financial sector policies which provide the right incentives to individuals, help them to overcome access barriers, are crucial not only to stability but also to growth, poverty reduction and equitable distribution of economic resources and capacities. therefore, there is a desire need to study the nature, extent,prevalence,and impact of financial inclusion tohave effectivepolicies to achieve inclusive growth. 2. theoretical framework and hypotheses the extent and level of financial inclusion are varied, and so many factors are responsible for it. the nature and extent of financial inclusion are influenced by several factors which can be classified broadly into supply and demand side factors. the number of bank branches in the study area has increased whereas the population has increased at an alarming rate leading to high demand for bank services in the region. the poor people do have strongdemand for financial services; in fact, they often bear the high costs charged by the informal financial institution for various types of services, apart from the risk involved in such products [4]. the fact that the poor are capable of weekly repayments shows that the poor are capable of savings, even if it is only in small amounts. however, one of the reasons why the poor might not save in financial form might be the lack of appropriate products. financial literacy and awareness are important factors which determine the extent of access and usage of available financial products/services. exclusion occurs when clients are not aware of the products and services available, their use/relevance in meeting needs,and their contribution to risk management strategies. the high percentage of illiteracy and social exclusion play an important role in keeping the level of awareness regarding newer and better service plans and facilities low. the framework specifies the vital process, with is valuable to display the path of the study. mekuanint abera timbula & tadele mengesha & yonas mekonnen & dr. matiwose kebede 108 financial inclusion figure: 1 conceptual framework of determinates of financial inclusion, adopted from abel &mutandwa,2018), with modification 3. research method the study was an employed hybrid of qualitative and quantitative approach, which made researches successful rather than sticking to one dimension only. the exploratory research design was used in exploring and developing financial inclusion frameworkto study in the ethiopian context as there is no financial inclusion framework developed previously.the descriptive research designused in describing the existing level of financial inclusion, demographic and socio-economic characteristics of the study area. finally, diagnostic research was used in explaining the determinants of financial inclusion. according to kothari (2004), primary data are data that are collected for the first time and happened to be original. primary data of the study was information collected from sample households of the study area involved in the study. the questionnaire that has closedended question was prepared and delivered to family head to collect the primary data. use of sampling can save time and money (economic) and enable the researcher to obtain detailed information and allows in making the study intensively and elaborately as the number of a sample unit is fairly small. a sample size determined as follow. n = (z) 2 * (p) (q) (d) 2 where p = sample proportion, q = 1p z = the value of the standard normal variate at a given confidence level n = sample size d = acceptable margin of error for proportion estimated the exact value of p = 0.5 (q = 1-p) in which case the sample size was the maximum and the sample yield at least the desired precision. it was the most conservative sample size (kothari, 2004). by allowing an error margin of 5% with 95% confidence interval, the sample size required was 384. but for prudence, 10% of the calculated sample was added. therefore the sample size for this study was 423. model specification the study either the logistic model or the probit model were used to achieve research objectives. the basic objective of using discrete choice models in this study was to make the research more effective in analyzing impacts of  age of head of household  sex of head of household  literacy level  occupation  income  distance  trust  religious view  bank charge financial inclusion and its determinants among households in jimma zone of oromia regional state, ethiopia 109 independent variables (age, sex , education ,distances and income ) on the dependent variable (financial inclusion). according to gujarati (2006), logit and probit models are similar in most research applications. however, the similarities among the models, the estimated coefficients are not directly comparable. the previous studies employed the logit model to investigate the determinants of financial inclusion supported by the work of akudugu (2013),potrich et al. (2015), and abel.et al., (2018).to analyze the relationship between financial inclusion and socioeconomic and demographic variables, the empirical model estimated is: p(fininc=1/x)=β0+β1age+β2hsex+β3heduc+β4dis +β5income +μi where the dependent variable p(fininc=1/x) is the probability that household head will seek formal financial services given the vector of observable socio-demographic and economic characteristics. financial inclusion,according to the survey, was defined that household who have or use financial products and or services. table 1 demanddriven determinates of financial inclusion variable description age the age of the household head in years hex the sex of the household head male=0 and 1 female hedu the level of education attained by the household head dist the distance to the nearest bank, , atm, point of sale or mobile money agent income the level of income of the household head source: finscope survey, 2014 4. data analysis and discussion this section presents the results and discussions of the responses gathered from the respondents through questionnaire and interview, and the data collected from respondents were analyzed and interpreted using quantitative analysis which involves analysis of the demographical information of respondents and the descriptive and inferential statistics employed to test and investigate the influence of independent variables on dependent variable. to achieve the overall objective of the research undertaking, statistical procedures were carried out using spss version (20). a total of 173 questionnaires were distributed to head of ahousehold of the selected woreds to all the questionnaires were returned back with completely filled and significant responses. the returned questionnaires have 100 response rates and sufficient to analyze the data with it. this indicates that; the head of the household under study were committed to give relevant information to the researcher. demographic information of the respondent the results obtained from demographic information of the structured questionnaires were presented through frequency and valid percentage as shown on the table below. mekuanint abera timbula & tadele mengesha & yonas mekonnen & dr. matiwose kebede 110 gender of the respondent frequency percent valid percent cumulative percent male 108 62.4 62.4 62.4 female 65 37.6 37.6 100.0 total 173 100.0 100.0 figure 2 gender of the respondent source: compiled from aquestionnaire, 2018 the above table indicated that 62.4% of the respondents were males and 37.6 % were females. women were more financially excluded as they lacked routine income, very few had bank accounts and they tended to concentrate on business that required less capital. the results are supported by apreviousstudy(demirgüç-kunt et al., 2014). table 3 age group of the respondent age group of the respondent frequency percent valid percent cumulative percent 20 – 24 5 2.9 2.9 2.9 25 – 29 6 3.5 3.5 6.4 30 – 34 40 23.1 23.1 29.5 35 – 39 78 45.1 45.1 74.6 40 – 44 33 19.1 19.1 93.6 45 – 49 9 5.2 5.2 98.8 above 50 2 1.2 1.2 100.0 total 173 100.0 100.0 source: compiled from a questionnaire, 2018 the above table indicated that majority of the head of household (about 45.1 percent range between 35-39 years of age , while 23.1 percent fall between the age of 30-34, 19.1 percent are placed between 40-44 years, 3.5 percent are placed between 25-29 years and 2.9 percent fall between 20-24 years. the majority of the household were from 35 to about 39 years of age which they were economically active category. the results are supported by a previous study ( mago, 2013). financial inclusion and its determinants among households in jimma zone of oromia regional state, ethiopia 111 table 4 educational background of the respondent educational background of the respondent frequency percent valid percent cumulative percent no formal education 13 7.5 7.5 7.5 some primary school 8 4.6 4.6 12.1 complete primary school 9 5.2 5.2 17.3 some secondary school 22 12.7 12.7 30.1 complete secondary school 51 29.5 29.5 59.5 technical/vocational education 4 2.3 2.3 61.8 diploma 36 20.8 20.8 82.7 bachelor degree 29 16.8 16.8 99.4 masters and above 1 .6 .6 100.0 total 173 100.0 100.0 source: compiled from questionnaire, 2018 table 4.3: indicated that in terms of their education 29.1 percent of the respondents were above secondary school, while 20.8 percent of the respondents have diploma, 16.8 percent of the respondents have bachelor degree, 12.7 percent of the respondents were completed secondary school , 7.5 percent of the respondents were new attended formal education, 5.2 percent of the respondent were completed primary school, 4.6 percent were some primary school, 2.3 percent of respondents were graduated in vocational education and 0.6 percent have masters and above. it was known that higher levels of education have been more likely to be financially included as compared to their financially illiterate group. the results are also supported by a previous study (ghosh , 2013). mekuanint abera timbula & tadele mengesha & yonas mekonnen & dr. matiwose kebede 112 table 5 occupation of the respondents occupation of the respondents frequency percent valid percent cumulative percent government employee 27 15.6 15.6 15.6 working in my own small business 56 32.4 32.4 48.0 petty trade/guilit/ or home based jobs 23 13.3 13.3 61.3 employed in private business 39 22.5 22.5 83.8 working on my medium size business 25 14.5 14.5 98.3 unemployed 2 1.2 1.2 99.4 retired 1 .6 .6 100.0 total 173 100.0 100.0 source: compiled from a questionnaire, 2018 as stated in the above table that, 32.4 of the respondents were working in their own small business, 22.5 percent of the respondents were employed in private business, 15.6 percent of the respondent were government employees, 14.5 of the respondent were working on my medium size business, 13.3 percent of the respondent were petty trade/ guilty /or home based jobs, 1.2 percent of the respondent were unemployed and 0.6 percent of the respondent were retired. table 6 monthly income of the respondents frequency percent valid percent cumulative percent < br 500 8 4.6 4.6 4.6 br. 501-1000 9 5.2 5.2 9.8 br. 1001-1500 13 7.5 7.5 17.3 br. 1501-2000 3 1.7 1.7 19.1 financial inclusion and its determinants among households in jimma zone of oromia regional state, ethiopia 113 br. 2001-2500 7 4.0 4.0 23.1 br. 2501-3000 18 10.4 10.4 33.5 br. 3001-3500 23 13.3 13.3 46.8 br. 3501-4000 22 12.3 13.3 60.1 br. 4001-4500 10 5.8 5.8 65.9 br. 4501-5000 14 8.1 8.1 74.0 br. 5001-5500 24 15.3 13.3 87.3 br. 5501-6000 12 6.9 6.9 94.2 > br. 6000 10 5.8 5.8 100.0 total 173 100.0 100.0 source: compiled from a questionnaire, 2018 as stated in the above table that, 15.3% of the respondent were having monthly income between 5001-5500, 13.3% respondent were having monthly income of 3001-3500.respondent with 3501-4000 income per month are 12.3%, 10.4 of the respondent were having monthly income between 2501-3000, 8.1% respondent were having monthly income of 4501-5000,respondent with 5501-6000 income per month are 6.9%, 5.8% of the respondent were having monthly income up to 5001-5500 and 5.2% of the respondent were having monthly income between 501-1000. levels of income and occupation deference observed among head of household have been residing in jimma zone. demand driven determinants of financial inclusion table 7 determinants of financial inclusion using both logitmodel&probit model variable probit model logit model constant −2.216027 −3.993134 age 0.045229 0.079177 agesq −0.000420 −0.001714 hsex −0.160043 −0.324323 mekuanint abera timbula & tadele mengesha & yonas mekonnen & dr. matiwose kebede 114 hedu 0.379118 0.789263 dist −0.212917 −0.399315 finlit 0.224945 0.389210 trust 0.186553 0.352152 income 0.001380 0.003527 r2 0.2453 0.2137 source: own calculation the above logit model results show that there is a positive relationship between age and financial inclusion. the model also indicated that financial inclusion increases with age until it reaches a certain age limit, which it started to decrease. this is revealed by the negative coefficient of the age straight direct way. this result also supported by previous studies (peña et al., 2014; hoyos et al., 2013). as peopleaged they become aware about the various financial products offered by financial institution and start using them till they reach a certain age maybe towards retirement where they stop having interest to wards financial product. thelogit model also resulted as there is a positive and significant relationship between financial inclusion and financial literacy. the results reveal that financial literacy is keen predictor of the demand for financial products to consider as a whole. financial literacy shows the awareness and skillsets in reading the financial products on the market provided by financial institution hence it means those people who are financially literate are able to comprehend the advantages and disadvantages of the various financial products. the study also linked that education is a significant factor in explaining financial inclusion in jimma zone. educated people are able to understand the various financial products on the market and make informed decisions hence improving on their access to these. peña et al. (2014) argued that education is a way of measuring awareness, skillsets and ability to make decisions in formal financial markets hence the positive relationship between financial inclusion and formal education. the study results also show that distance has a negative significant impact on financial inclusion. the result means that the greater the distance away from centers that provides financial services and product the less the people will be financially included. distance reduces the chances of people to access financial products. financial products should be easily accessible to the people enable them to be able to derive any utility from them. this implies that access to financial product is a function of the distance between the financial product service provider and the end user of financial product. trust on financial services provider has a positive and significant relationship with financial inclusion. this means that as people increase their trust in the financial services provider there increase also their uptake of the same services. shankar (2013) founded that negative experiences and perceptions of financial institutions makes people to gain no faith of financial institutions leading to self-exclusion. the global findex (2012) also reported that lack of trust in the banking industry has caused difference in some respect in financial inclusion. lack of customer trust in the financial product could be a result of improper supervisory mechanisms. the study showed that a positive relationship between financial inclusion and income. as income increases financial inclusion also increases. in the jimma zone context this results makes sense because the majority of the people who earn an income from civil services get paid through a bank account. of late because of cash shortages even those employed in the informal sector are now receiving their income through bank accounts or mobile money technology. the determinants of financial inclusion model were also estimated using the probit model. the probit regression model produced similar results as of obtained using the logit model. table shows that age , education, financial literacy, and income are positively related to financial inclusion and distance to the nearest provider of financial services negatively impact financial inclusion.the results are supported by prior study (abel.et al ., (2018). financial inclusion and its determinants among households in jimma zone of oromia regional state, ethiopia 115 measurement of financial inclusion distance from branch of financial institution rate the distance of your nearest financial bank from your place of residence? table 9 distance from branch of financial institution distance from branch of financial institution frequency percent very far away 10 5 far away 21 12 average 38 22 near 53 30 very near 51 29 total 173 100 sources: compiled from questionnaire, 2018 the above table reveled how distance of the banks from the general public was a factor to be considered while predicting financial exclusion but due to the incremental of using technological means of banking and expansion of bank branches in the rural part of the country , this was no longer seen as a common factor. it interpreted the above table; many of the respondents demonstrate that the finance institutions are actually near for them to access. accessibility of products or services is there any financial institution branch in your worda? table 10 accessibility of products or services branch of financial institution frequency percent yes 173 100 no 0 0 total 173 100 sources: compiled from questionnaire, 2018 the interpretation of the above revealed that the ethiopian financial system has significantly developed and grown sufficiently that all respondents have a bank‘s branches in their home town. regarding financial access this is primarily requirement.all respondents noted that there were automated teller machines or branches or agents in the study area. mekuanint abera timbula & tadele mengesha & yonas mekonnen & dr. matiwose kebede 116 extent of financial inclusion the researcher used a set of parameter which helper to determine the extent andprevalenceof financial inclusion by their level of awareness about banking services. the results of the following are indicated below: which of these services can you state that you can identify/aware with? a. a bank loan secured on a property table 11 a bank loan secured on a property level of awareness frequency percent not aware 0 0 poorly aware 2 .5 fairly aware 46 26 a ware 78 45 very aware 47 27 total 173 100 sources: compiled from questionnaire, 2018 the table above showed in general the public‘s perceived awareness of loan and advances services granted by banks. the respondents indicated a higher value for general awareness about the bank loans. it means the respondents in jimma zone were very much aware about the loan and the bank has generally attracted the knowledge of the public in the access and the benefits of the given service. type of account with financial institution do you have table 12 type of bank account type of bank account frequency percent current account 19 11 saving account 122 70 fixed account 17 9 loan account 12 6 total 173 100 sources: compiled from questionnaire, 2018 financial inclusion and its determinants among households in jimma zone of oromia regional state, ethiopia 117 the above table indicated that,70% respondents were having saving account with the bank, 11% respondents were having current account, 9% respondents were having fixed account and 6% respondent were having loan account with a bank. most of the villagers from the survey having saving bank account which showed that rural people are very much aware of importance of savings in the real life. but on the other hand the loan account had very low percentage it means rural people were not borrowing from the banks or other financial institution; they were still looking from other sources of finance. insurance table 13 coverage from insurance company sources: compiled from questionnaire, 2018 the above table indicated that, 83.2 % respondents have no awareness about coverage from insurance company and 16.2% respondents have ample information about coverage from insurance company. majority of the respondents in jimma zone they lacked knowledge about coverage from insurance company, because most of the respondents of rural area didn`t have regular income due to that they didn`t bother about coverage from insurance company. 5. conclusion, implication, suggestion and limitations conclusion during the investigation, the researcher used both descriptive and inferential statistics and based on the findings make the research project to an end by outlining the following classic conclusion. the researcher used both descriptive and explanatory research design. the descriptive research design was more suitable to detail description of the findings showed in tables and charts as well as, explanatory research design help to develop insinuations on the relation between dependent and independent variable. more specifically, the study used closed ended questionnaire survey of the head of household. the main objective of this study was to investigate the determinants of financial literacy, household saving and demand drove financial inclusion based on the analysis and interpretations made at the a pervious chapter the following summaries, conclusions and recommendation made. the data obtained from the respondents analyzedusing various statistical tools. after analyzing the information gathered through questionnaires, the following findings were presented. the descriptive results of demographic characteristics of respondents indicated 62.4% of the respondents were males and 37.6 % were females. women were financially excluded as they lacked regular income, very few had accounts with a financial institution,and they intended to do business that required less initial capital. the majority of the head of household were from 35 to about 39 years of age which they considered as the economically active category, while in terms of their education 29.1 percent of the respondents were above secondary school, it indicated that who have higher educational level were more likely to be financially included as likened to their financialilliterate group. 32.4 of frequency percent yes 28 16.2 no 144 83.2 total 173 100.0 mekuanint abera timbula & tadele mengesha & yonas mekonnen & dr. matiwose kebede 118 the respondents were working in their own small business: 22.5 percent of the respondents employed in private business activity. most of the respondents having the monthly income were between 50015500. the result of demand driven determinates of financial inclusion logit and probit model in stated that, there is a linear relationship between age and financial inclusion. the model also indicated that financial inclusion increases with age until they reaches a certain age limit, which it started to decrease. the study revealed by the negative coefficient of the age straight direct way. the results show a positive and significant relationship between financial inclusion and financial literacy. the results reveal that financial literacy is a keen predictor of the demand for financial products to consider as a whole. the study also linked that education is a significant factor in explaining financial inclusion in jimma zone. the result means that the greater the distance away from centers that provide financial services and product ,the less the people financially included. distance reduces the chances of people to access financial products. the probit regression model produced similar results as obtained using the logit model. the result shows that age, education, financial literacy, and income are positively related to financial inclusion and distance to the nearest provider of financial services negatively impact financial inclusion. with regarding measurements of financial inclusion, the result shows that the national bank of ethiopia directive about financial inclusion has at least reaches its first stage that all respondents owned an account with financial institutions in their home town, many of the respondents demonstrate that the finance institutions are near for them to access. all respondents stated that there were atms` (automated teller machines) or branches or agents in the study area. finally, the researcher used a set of a parameter which helper to determine the extent and prevalence of financial inclusion by their level of awareness about banking services. majority respondents indicated in general, the public‘s perceived awareness of loan and advances services granted by banks. the respondents indicated a higher value for general awareness about bank loans. it means the respondents in jimma zone were very much aware of the loan and the bank has generally attracted the knowledge of the public in the access and the benefits of the given service and most of the villagers from the survey having a saving bank account which showed that rural people are very much aware of importance of savings in the real life. but on the other hand, the loan account had a very low percentage; it means the rural people were not borrowing from the banks or other financial institution; they were still looking from other sources of finance. results showed that the respondents in jimma zone they lacked knowledge about how coverage from insurance company obtaining, because most of the respondents of rural area they didn`t have regular income to get coverage from insurance. recommendation based on the findings and conclusions of the study, the researcher forwards the following recommendations to the concerned body and suggestion for other researchers. parallel with theobjective; the study has established that financial inclusion determined by age, education, financial literacy, distance,and income. based on these results,age, education, financial literacy,and income are directly related to financial inclusion. the study revealed that an increase in any of these variables significantly increases the extent and prevalence of financial inclusion in the study area. on the other corner,the longer the interval to the nearest financial access point increase the chances of people financial excluded. this implies that the national bank of ethiopia should support expansion of delivery channels by financial institution that reaches out to rural part,and unbanked areas, without the increasing expansion costs this would encourage innovations such as agency banking (hello cash, mbirr, ebirr and the like), mobile banking and set atm to be adopted as a way of increasing access to financial products by the general public. it is possible to reduce determinates of financial inclusion with regulating well the financial system, creating healthy competition and building a better enabling environment. identifying and segregating the root causes and addressing it properly appear to be removing the distance, services charge,and credit barriers. on the other hand, market for financial services failures and behavioral problems related to customer tendto be addressed through designing of appropriate financial products. removing those challenges and expanding financial inclusion tend to be possible with the promise of latest technologies. for instance, mobile payment, mobile banking, agency banking and use of biometric devices can lessen cost, speed up transfers and increase household transaction security. financial inclusion and its determinants among households in jimma zone of oromia regional state, ethiopia 119 references gupta, p. & singh, b. 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(2013), the determinants of financial inclusion in western africa: insights from ghana. research journal of finance and accounting, 4(8), 1-10. potrich, a.c.g.r., vieira, k.m., kirch, g.g. (2015), determinants of financial literacy: analysis of the influence of socioeconomic and demographic variables. revistacontabilidade and finanças, 26(29), 362-377. finscopeconsumersurvey.(2014),http://www.zimstat.co.zw/sites/default/files/img/publications/finance/finscop e.pdf. [last accessed on 2016 may 23]. demirguc-kunt, a., klapper, l., singer, d., & van oudheusden, p. (2014). the global findex database. policy research working paper, no.7255. washington, dc: world bank. international journal of commerce and finance, vol. 4, issue 2, 2018, 134-146 134 the moderator role of psychological capital between perceived organizational support and work-family balance: a service sector research mahmut köle, (phd) yildiz technical university ali kurt, (phd) istanbul aydin university abstract studies on work-family conflict and balance are carried out in management/organization literature and these studies mostly focus on work-family conflict. it is thought that studying work-family relationship with a view of positive psychology and focusing the balance concept rather than conflict will result more positively. in studies conducted so far, it has been shown that there are meaningful effects of organizational support on work-family balance. however, although they are working in the same organization, taking the presence of people at odds with balancing between work and family into account, it is apparent that there are some personal factors inside. the studies in the literature tries to explain this problem with mostly general discrepancies in personalities such as age and gender and they seldom focus on psychological and cognitive background. the aim of this study is to search how the psychological capital of people p lay a role between perceived organizational support and work-family balance and to emphasize the psychological and cognitive background which was overlooked by other studies. research hypotheses have been tested by spss and amos with the data gathered by field research a nd thus, it has been observed that psychological capital of people play a moderator role in the relationship between work and family balance with the support of organization and manager. keywords: psychological capital, work-family balance, perceived organizational support 1. introduction when we think about the sources necessary for the enterprises, although financial and monetary sources seem in the foreground, existence of human is the most important source. however, as it has been at all types of sources, human source also should be managed within a scale and should be disposed economically as expressed in the past. this situation is valid both within the hr policies and individual level. in individual means, employees to “economically use” themselves and develop their areas of effect are extremely important. formation of balance is extremely important for the employees to achieve sustainable success and forward without problem at their business life and private life. there have been studies on work – family conflict and balance at management / organization literature and these studies mostly focus on work – family conflict. it is thought that studying work-family relationship with a view of positive psychology and focusing the balance concept rather than conflict will result more positively. again, at the studies performed, it is showed that organizational support has significant effects on work – family conflict and balance. however, when it is taken the existence of the people that have differences in establishing work – family balance into consideration although they have been in activity at the same organization, it is apparent that there are some personal factors in this matter. at this point, the problem of the research is formed on the following question; “for the employees that are in activity at the same organization, why do we observe different results of the effect of organizational support on work – family balance?” without doubt, this circumstance is because of the different character traits. however, studies in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the moderator role of psychological capital between perceived organizational support and workfamily balance: a service sector research 135 that are performed are looking for answer to this question from general personality differences such as age and sex and they rarely focus on psychological and mental background of this question. together with the positive psychological point of view, it is thought that with different psychological capital underground may have effects on this circumstance. in order to solve such a problem academically and scientifically, it has been necessary to perform a research in scope of social science methods. the research proposal1 that was developed for this research and concerning studies are given at the proceeding pages. purpose; purpose of this study is to make a research on what type of role psychological capitals of the individuals plays between the perceived organizational behavior and work – family balance. importance of the study; when we have examined the studies performed on the work – family interaction, it is seen that they generally focus on the work – family conflict. moreover, there are studies that have examined the relationship between the organizational support and work – family balance and how these relationships have been effected by the individual factors and the probable individual effects have been more general individual differences that have not focused on the mental underground such as age and sex. the aim of this study is to search how the psychological capital of people play a role between perceived organizational support and work-family balance and to emphasize the psychological and cognitive background which is overlooked by other studies. besides, it is handling the research problematic within positive psychology and has the allegation of being one of the important studies that moves with the view of focusing on positive at the work – family literature. hypothesis; since perception and manners of the participants will be used together with the questionnaire method at the measurement of the variables, it is confusing whether such measurement results will show the real circumstance or not. in this study, it is assumed that the perceptive evaluations on research variable will reflect the truth as much as possible. since study is based on sectional research method, perception and manners of the participants on specific variables on specific periods are being examined. this situation may cause other variables that may have effects on the dependent variable to be undervalued or psychological and mental position of the participants at that moment to have unfair effects on the results. to start with this point and positivist science approach, it is assumed that the study is performed under normal conditions. 2. literature review 2.1 perceived organizational support organizational support expresses the situation in which the organizational values care the well – being of the employees and have the functions and features that increase their happiness (eisenberger et al 1990). since it contents the organization to accept its employees as a value and make people feel this, it effects employees’ feelings towards organization positively and it meets employees’ needs of belonging, respect and approval (armeli et al 1998: 299, eisenberger et al. 2002). one of the important points about the perceived organizational support concept is that members of the organization see the various activities, attitudes and behaviors performed by the representatives of the organization as indicators of the intentions of its upper mind not as their individual choices, that is to say, they attribute the behaviors of the members of the organization to the general of the organization. (hochwarter et al, 2003). this situation also displays the dimensions of the quantity and quality of the organizational and individual factors effected by the climate of organizational support. in the studies performed, it is seen that the organizational support that is perceived has effected many concepts such as emotional dependence, continuity dependence, leader member interaction, political behavior, procedural justice mahmut kole & ali kurt 136 and work satisfaction (rhoades and eisenberger 2002). rhoades and eisenberger (2002), in their comprehensive literature study, they displayed that premises of the organizational support that was perceived were fair organizational procedures, supervisor support, reasonable rewards and working conditions and the results were emotional dependence to the organization, increase at the personal and organizational performance and reduce at the negative behaviors. 2.2 work – family balance work – family balance is a concept concerning to the relationships between roles of the employees between their work life and family life. although work – family balance takes place too much at the literature, it doesn’t have a definition that is agreed on. as mentioned at these definitions, when work – family balance was defined by voydanoff (2005) as work sources to meet the demands of the family and family sources to meet the demands of the work mutually and efficiently, grzywacz & carlson (2007) objected to the generalization of this definition and asserted that definition of work and family balance can be done by starting from the personal experiences of the individuals related to their social context. erben & ötken (2014), by adding the individuals into the definition; attested that the targets and demands on one of the family and individual fields have not been taking the time that is allocated for others, enough time has been allocated for each of them and there is a balance. in the circumstances in which there is work – family imbalance, there is work – family conflict. work – family conflict appears because of the individuals to have more than one role such as mother – father and wife – husband (turunç & çelik, 2010). when we take into consideration to the common points of the different approaches on work – family balance, we can make the definition of this concept as allocating suitable time and show interest to the each of the roles by giving the required sacrifice to both their works and families. although work – family balance has been tried to be explained in different ways, according to erben & ötken (2014), understanding of the individuals on balance is subjective. so, this balance differs from person to person and the circumstance of balance perceived for any person may be seen as imbalance for another person. individuals that care about work and family in different degrees to allocate more time and show interest to the fields that they care about doesn’t mean that they have been away from the balance and besides, kapız (2002) mentions that individuals don’t see this situation as imbalance. today it is difficult for the individuals to provide work – family balance but this is necessary for the individuals to be satisfied of both work and family life. according to the findings obtained from the studies on this subject, it was attested that work – family balance effects the life quality and happiness of the individuals (greenhaus, collins, & shaw, 2003). another concept that may be thought at the same direction with the work – family balance is the work satisfaction. according to a study performed by özdevecioğlu & doruk (2009), the result of non – existence of the work – family balance has effected negatively to the work satisfaction has been found. likewise, to establish work – family balance is a matter that the companies should face and challenge. for this purpose, grzywacz, & zivnuska (2009) attested that companies in fortune 100 have encouraged their employees on establishing work – family balance in many ways. together with this type of encouragements, companies both will take the talented employees within their organization and hope these employees to continue their work life efficiently. 2.3 psychological capital the psychological capital concept is defined as whole of the features that are positive and can be developed and owned by the individual and formed from the positive psychological behavior concept (luthans et al. 2007). it focuses on, not to the weak parts of the people, it focuses on the strong parts of the people and it has been characterized by the self – efficiency, psychological resistance, optimism and hope (luthans and youssef 2004). since the psychological capital is concerned about who the person is and what it can be through positive development in general (luthans et al 2007), it is separated from the economical capital that is interested on what the people have, the human capital that is interested on how much the intellectual level the person has and the social capital interested in the social network of the people (luthans and youssef 2004). the moderator role of psychological capital between perceived organizational support and workfamily balance: a service sector research 137 luthans, youssef and avolio (2007) have examined the psychological capital in four sub dimensions. these are briefly explained below (luthans et al 2008); self-efficiency; to be able to complete the forcing missions. optimism; generalized belief on being successful in the future. hope; to be able to find alternative exit ways for reaching the aims in the direction of the goals and to be able to revise these ways when it is necessary. resistance; when faced with the problems and negative things, able to recover and continue to the success. 3. theoretical prediction and hypothesis when the work – family conflicts are examined within organizational support, it is observed that most of the researchers have carried on their studies from the work – family conflicts (dixon and sagas 2007; gürbüz et al 2013; selvarajan et al 2013). carlson et al (2009) have exhibited that the work – family balance has more meaning than the work – family conflict and work – family enrichment concepts that are mostly used at the work – family conflicts. according to this, work – family balance is different from the work – family interaction concepts and has a key role at the work – family interaction compared with the other concepts (carlson et al 2009). the studies performed has exhibited that the organizational support has positive effect on work – family balance directly or through some variables (lyness ve kropf 2005; greenhaus et al. 2012). moreover, effect of the organizational support on work – family balance also differs according to some features such as age, sex (lyness and kropf 2005), proactivity and optimism (aryee et al 2005). most of the researchers recommend the work – family interaction studies to be performed through different character features (zaman et al 2014; blanch and aluja 2009). studying work – family interaction with a point of view focusing on positive psychology and focusing on the balance concept more than the conflict concept will cause more positive results. at this point, in what rate the organizational support is important in the formation of work – family balance by the individuals is also emphasized above. however, when we take into consideration that there are people that have differences on establishing work – family balance even though they are in activity at the same organization, it is obvious that some personal factors are also getting involved to the matter. together with the psychological point of view, it is thought that people having different psychological background may have effects on this matter. at this study, together with literature mentioned above, what type of a role the psychological capital of people have between the perceived organizational support and work – family balance is being researched. the perceived organizational support is examined in two different dimensions as supervisor support and organizational support (eisenberger et al 2002). the research hypotheses formed to test the research problem are as follows; h1; the psychological capital has moderator effect between the organizational support and work – family balance. accordingly, as soon as the psychological capital increases, the positive effect of the perceived organizational support on the work – family support relationship will also increase. h2; the psychological capital has moderator effect between the perceived supervisor support and work – family support relationship. accordingly, as soon as the psychological capital increases, the positive effect of the perceived supervisor support on the work – family support relationship will also increase. the model shown by the research hypothesis is as follows; mahmut kole & ali kurt 138 figure 1 research model 4. method and applications research plan is formed as follows; determination of the research model according to the theoretical frame, research of the scales that contents the questionnaire questions for measurement of the research model variables, formation of the best scale components from the alternatives, determination of the research samples, collection of data fr om the samples, formation of measurement models from the data obtained and testing of the research hypotheses. 4.1. measurement instruments demographic features have been measured through nominal scales. about the participants, elements such as size of the company, age, sex, education and title / status were researched. each of the scales that will be used for testing the research hypotheses have previously been used at the international studies and they have high validity. from the scaled that were used, the organizational support (8 articles) and supervisor support (4 articles) scales originate rhodes et al (2001), work – family balance scale (6 articles) originates carlson et al (2009) and the psychological capital scale (24 articles) originates luthans, youssef and avolio (2007). 4.2. data collection process and sampling data were collected with questionnaire method and realized with cross – sectional study. questionnaires have been designed in likert scale of 5 and scale dial is as “5; i definitely agree, 4; i agree; 3; i am not sure / i don’t have idea, 2; i don’t agree, 1; i definitely don’t agree. as sample, employees of the service sector that are in activity in istanbul were taken as base. reason for selection of such sample is because the service sector to be an area of activity that is busy, tiring and in which individual differences may be effective on establishing the work – family balance. aimed research data was determined as at least 210 by taking into consideration to the number of articles on the scale (42*5=210) (hair et al 2010). random sampling method was used. demographic data belong to the participants are as follows; table 1. demographic data of participants category frequency valid percentage category frequency valid percentage number of workers 01-49 81 31,5% age 29 ages and under 96 41,9% 50-249 46 18,5% between 30-39 ages 76 33,2% the moderator role of psychological capital between perceived organizational support and workfamily balance: a service sector research 139 250-499 37 14,9% 40 ages and over 57 24,9% 500 and over 85 35,1% title/ status company partner / owner 37 14,8% sex female 95 38,3% senior manager 8 3,2% male 153 61,7% mid – level manager 45 18,0% education first – mid. primary 32 12,8% low level manager 38 15,2% license 137 54,8% white collar worker 122 48,8% high license 81 32,4% total 252 100% according to the above table, total 252 service sector workers have participated to the research and these are weighted working at the companies with 250 and more workers. in general, male participants are mostly at least license degree graduate, under 29 ages and white collar workers. 4.3 validity and reliability of measurement instruments in order to examine the validity and reliability of the measurement instruments, exploratory and confirmatory factor analyzes were performed. spss and amos programs were used in these analyzes. an exploratory factor analysis by using principal component analysis estimation method and promax rotation was conducted to find out how many different sub-scales were understood by participants. in order to test the suitability of data set to factor analysis, kaiser-meyer-olkin (kmo) sample adequacy test and bartlett sphericity test was applied. kmo value is above the desired level of 0.50 (field 2009) with the results for scales is 0.906. bartlett test is meaningful with the result above 0.001 level. in addition, the diagonal values in the anti-image correlation matrix were examined and it was found that these values were above 0.5. according to this, the sample data were found to be suitable for factor analysis. in the exploratory factor analysis, the lower bound of the factor loadings was accepted as 0.5 considering the sample size. an item from the self-efficacy, two items from resilience dimension of psychological capital were excluded from the scale due to the fact that they did not load into the predicted factor structure. the factor structure is shown in table 2. cronbach's alpha value was used to measure the internal consistency of the factors and cronbach's alpha values of each factor was over 0.7. accordingly, it was understood that factor structures have internal consistency. (field, 2009). confirmatory factor analysis was performed by using maximum likelihood estimation method to validate kfa results and to analyze the validity and reliability of research scales. modification indices were examined and error values with high modification value of the same factor were covariate. some substances with low factor load were excluded from the scale. in this case, the fit index values were x2/df = 1,458, gfi=0,864, tli=0,953, cfi=0,959, pnfi=0,777, rmsea=0,043. overall, fit indexes were found to be good level. (hu and bentler,1999, schumacker and lomax, 2012) tablo 2. exploratory and confirmatory factor analyses construct items factor loading validity and reliability efa cfa psycap hope pc_hope_1 ,547 deleted cronbach’s α; 0,844 pc_hope_2 ,917 ,742 scr; 0,854 mahmut kole & ali kurt 140 pc_hope_3 ,820 ,724 ave; 0,540 pc_hope_4 ,914 ,788 pc_hope_5 ,605 ,666 pc_hope_6 ,598 ,749 psycap optimism pc_opt_1 ,585 ,723 cronbach’s α; 0,875 pc_opt_2 ,789 ,714 scr; 0,851 pc_opt_3 ,713 ,690 ave; 0,535 pc_opt_4 ,877 ,686 pc_opt_5 ,633 ,835 pc_opt_6 ,818 deleted psycap self efficacy pc_selfeff_2 ,686 ,784 cronbach’s α; 0,852 pc_selfeff_3 ,844 ,623 scr; 0,857 pc_selfeff_4 ,821 ,668 ave; 0,548 pc_selfeff_5 ,857 ,824 pc_selfeff_6 ,674 ,781 psycap resilience pc_res_1 ,636 ,709 cronbach’s α; 0,792 pc_ res_3 ,907 ,749 scr; 0,805 pc_ res_4 ,778 ,802 ave; 0,511 pc_ res_6 ,751 ,581 organizational support orgsup_1 ,764 ,823 cronbach’s α; 0,915 orgsup_2 ,815 ,851 scr; 0,909 orgsup_3 ,670 deleted ave; 0,626 orgsup_4 ,771 ,764 orgsup_5 ,886 ,801 orgsup_6 ,950 ,828 orgsup_7 ,723 ,723 orgsup_8 ,534 deleted supervisor support supersup_1 ,752 ,896 cronbach’s α; 0,897 supersup_2 ,660 ,905 scr; 0,927 supersup_3 ,728 ,919 ave; 0,810 supersup_4 ,808 deleted work–family balance wfb_1 ,694 deleted cronbach’s α; 0,916 wfb_2 ,822 ,795 scr; 0,905 wfb_3 ,883 ,818 ave; 0,657 wfb_4 ,823 ,859 wfb_5 ,888 ,778 the moderator role of psychological capital between perceived organizational support and workfamily balance: a service sector research 141 wfb_6 ,865 ,863 (i) principal component analysis with promax rotation (efa) (ii) kmo= 0,906, bartlett test; p<0,001 (iii) total variance explained(%); 66,810 (iv) all items were statistically significant at p <0.001 in cfa. (v) goodness of fit indices; x 2 /df = 1,458, gfi=0,864, tli=0,953, cfi=0,959, pnfi=0,777, rmsea=0,043 in the analysis of factor validity and reliability, convergent and discriminant validities proposed by hair, black, babin, & anderson, (2010) were used. convergent validity is defined as the ability of a factor structure to measure exactly what can be defined, while the discriminant validity can be defined as the complete separation of factor structure from other structures (hair et al., 2010). because of the fact that the factor loadings are statistically significant and its averages are higher than 0.7 (bagozzi, yi, lynn, 1991) and also ave (average variance extracted) values are above 0.5 (fornell and larcker 1981) and scr (scale composite relability) values are above 0.7 (bagozzi and yi 1988), there is convergent validity (hair et al., 2010). within the scope of discriminatory validity, the square root values of the ave in the diagonal and the correlation coefficients in the horizontal and vertical axes were examined. since the square roots of the ave values for each factor are higher than the correlations of the other factor in the horizontal-vertical axis, it can be said that the discriminant validity exists. (hair et al. 2010). due to the existence of convergent and discriminatory validity, it has been observed that research measurement models have validity and reliability. table 3. correlations and discriminant validity construct 1 2 3 4 5 6 7 1 psycap resilience 0,715 2 perceived organizational support 0,582 0,799 3 work–family balance 0,353 0,527 0,823 4 psycap hope 0,289 0,196 0,413 0,735 5 psycap optimism 0,484 0,376 0,426 0,702 0,732 6 psycap self efficacy 0,430 0,346 0,358 0,630 0,576 0,740 7 perceived supervisor support 0,442 0,732 0,531 0,251 0,276 0,304 0,907 all correlation values were statistically significant at least p <0.01 significance level. the square root of the value of the ave is in diagonal. 4.4 hypotheses testing mahmut kole & ali kurt 142 to hypotheses testing, based on hierarchical regression analysis method, moderation analysis recommended by baron and kenny (1996), aiken and west (1991) and dawson (2014) was performed. the hierarchical regression analysis conducted to investigate the moderation variable role of psychological capital in the relationship between perceived organizational support and work family balance is given below. table 4. moderation role of psycap in the relationship between pos and wlb variables model 1 model 2 st. beta st. err st. beta st. err pos 0,365*** 0,042 0,353*** 0,041 psycap 0,278*** 0,042 0,296*** 0,041 pos*psycap 0,194*** 0,038 r 2 0,299 0,336 adj. r 2 0,293 0,328 δr 2 0,037*** f 2 0,056 ***, p<0.001 according to the results of the first model, perceived organizational support and psychological capital make a significant contribution to the model. it is seen that these two variables explain the work family balance by 29%. interaction variable (pos*psycap) positively affects wlb when included in the model (b = 0.194 p <0.001). in addition, the explanation ratio of the model was increased to 33% and the change in r2 between the two models was statistically significant at p <0.001. the significant effect of the interaction term shows that psychological capital has a moderation effect between perceived organizational support and work family balance. since the effect (f2) value generated by aiken and west (1991) is below 0.15, this effect is low degree. in this case, h1 is supported. in other words, the effect of perceived organizational support on individuals with high psychological capital was higher on work-family balance. this finding is better understood in the slope chart given below (dawson, 2014). figure 2. pos, wlb, psycap simle slope chart the hierarchical regression analyses to investigate the moderation variable role of psychological capital in the relationship between perceived supervisor support and work family balance are listed below. the moderator role of psychological capital between perceived organizational support and workfamily balance: a service sector research 143 table 5. moderation role of psycap in the relationship between pss and wlb variables model 1 model 2 st. beta st. err st. beta st. err pss 0,397*** 0,04 0,394*** 0,039 psycap 0,289*** 0,04 0,319*** 0,04 pss*psycap 0,180*** 0,037 r 2 0,326 0,357 adj. r 2 0,320 0,350 δr 2 0,032*** f 2 0,048 according to the results of the first model, perceived supervisor support and psychological capital make a significant contribution to the model. it is seen that these two variables explain the work family balance by 32%. interaction variable (pss*psycap) positively affects wlb when included in the model (b = 0.180 p <0.001). in addition, the explanation ratio of the model was increased to 35% and the change in r2 between the two models was statistically significant at p <0.001. the significant effect of the interaction term shows that psychological capital has a moderation effect between perceived supervisor support and work family balance. since the effect (f2) value generated by aiken and west (1991) is below 0.15, this effect is low degree. h2 is supported. in other words, the effect of perceived supervisor support on individuals with high psychological capital was higher on work-family balance. this finding is better understood in the slope test chart given below (dawson, 2014). figure 3. pos, wlb, psycap simple slope chart 5. discussions and results the tiring effects of working life constantly getting difficult day by day and increasing customer expectations are forcing service sector employees to give working life more importance than family life. for most of the people, the concept of working for living is replacing living for working. in order not for this situation to cause conflicts in the family, it is important for the employees to balance work and family. in redressing the work-family balance, mahmut kole & ali kurt 144 employees sharing their problems and ideas in the organization and supporting each other in difficult times will be one step ahead. however, the management and organization literature shows that the work-family balance of the people under the same manager can be different. from this point, there is a need to study what kind of an effect personal factors, especially psychological structure has on organizational support and work-family balance relationship. as a result of this field study conducted to understand the role of the positive psychological capital of individuals between organizational support and work-family balance, it is found out that, as expected, psychological capital has moderation effect between supervisor support, supervisor support and work-family balance. according to the result of the research, the positive effect of organizational support and supervisor support on work-family balance has been found out to be higher than the individuals with lower psychological capital level. this result is parallel with the result of the studies by lyness and kropf (2005), aryee et al. (2005), zaman et al. (2014), blanch and aluja (2009) who call attention to the importance of individual factors in creating work-family balance. as a result of this study, it is shown that the individuals who have positive views for life, act with hope and optimism, have confidence in themselves and show endurance in difficult times can create a more adaptable workfamily balance with getting organizational support. it is suggested that professional managers should focus on psychological capital more and should give priority to the employees who have more psychological capital in new recruitments and promotions. besides, it will be useful for the employees at hand to give necessary education and other supports to improve them with the idea that psychological capital can be increased at a certain level (luthans et al. 2007). as this study is a cross-sectional field study, if the time and sources are developed, it is obvious that longitudinal studies will be more suitable in the future studies. this study can be implemented in different regions and cultures by enlarging the scope of the research. thus, it contributes in terms of generalization. besides, this study focuses on psychological capital among other personality factors and the contribution rate may be increased by conducting studies on other personality characteristics. finally, it is focused, in this study, on work-family balance effecting the performance rather than ultimate performance factors. it is suggested that the contribution of research variables to personal performance in the future studies. bibliography aiken, l. s., west, s. g., & reno, r. r. 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(2014). work–family interface and its relationship with job performance: the moderating role of conscientiousness and agreeableness. south african journal of psychology, 44(4), 528-538. international journal of commerce and finance, vol. 5, issue 2, 2019, 211-218 211 islamic insurance system: tekaful insurance sabri öz istanbul commerce university, turkey mehmet ali işik istanbul commerce university, turkey abstract the insurance issue, which is one of the convention means of finance, is based on old times. the issue of insurance, which is highly criticized in the islamic sense, is to be integrated into a holistic system by a methodology that will remain within the scope of islamic finance. while the compansation of possible risks for a certain premium is defined as insurance; the aid system, which provides relief from the troublesome situations caused by undesirable situations, is expressed as islamic insurance. the purpose of this study, the islamic insurance concept, basic features and by reviewing the literature on the model, the financial system is one of the global players and islamic finance interest known by the muslim population of the legislation and its applications in turkey. by this paper, it is clearified the difference between conventional insurance as its well known structure and islamic insurance. keywords: tekaful, islamic finance, islamic insurance, participation insurance system 1. introduction the insurance system, which is one of the important structures of traditional finance, is a commercial activity that allows individuals or institutions to compensate for their financial losses related to possible risks. possible risks are shared by insurance companies in exchange for premiums paid. collected premiums are collected in a pool and evaluated in various alternative investment instruments. the insurance system that emerged at the beginning of the 14th century, such as defined as “uncertainty, gambling, interest” in the islam, was a system in which muslims were avoided but needed in the current order due to reasons that are not in accordance with islamic law, it led people to seek a different system suitable for the the islam. evolutionary insurance has emerged as a product of the islamic finance system for the purpose of responding to this need. it is an aid system developed for the compensation of the problems for which the undesirable situation of any member will encounter in the structure formed by the system: which is also called an arabic term “tekaful” or by its word by word meanin as participation insurance. the system, which is in its initial phase, has a serious potential in the short and medium term. the aim of this research, under the islamic insurance concept, basic features and by reviewing the literature on the model, the financial system is one of the global players and islamic finance interest known by the muslim population of the legislation and its applications in turkey. by this paper, it is clarified the difference between conventional insurance as its well-known structure and islamic insurance. 2. islamic insurance system: tekaful insurance 2.1 traditional (convention) insurance in order to remedy the damage caused by the possible danger in the future, the insurance refers to being guaranteed and paid in advance for the payments called as premiums (tdk, 2018) . according to the definition of the american risk and insurance association, the insurance is the collection of the incidental losses in a single pool by transferring the defined losses, meeting the other material damages that may arise related to the losses and transferring them to the agreed insurance institutions for the fulfilment of the risk related services (saka, 2010). the law of turkish commerce, considers the insurance as a contract, in the case of a person who may damage the in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e sabri öz & mehmet ali işik 212 measurable interest of a person in return for a premium, to give compensation or to pay a money due to a number of events in a person's life or life, to compensate in other ways expressed as receiving (ttk, 2011). there are some other definitions on insurance in different literature. insurance can also be defined as the fact that people joining under the same roof face possible damages within certain contracts (şenel, 2006). according to karabulut, insurance is, a contract between the insurance company and the insurer is a trust and good faith (karabulut, 2004). on the other hand, according to hacak, the insurer shall be responsible for the contract; insured, acquiring contractual rights; risk, the potential of creating damage and the future event; the cost of insurance (compensation), the amount that the insurer is obliged to pay if the risk occurs; premium, insurance fee; time is the period covered by the contract (hacak, 2006). reinsurance is a kind of vertically upside foundation for the insurance sector. reassurance, means a partial or total insurance of the insured risk. the possibility of major damage or risk of several risks when used simultaneously the probability (turkey insurance association, 2018). the terms, “ette’mîn, et-tekâfülülictimî” and “et-tadâmun” are used in the meaning of assurance for insurance in arabic and in terms of assurance (turkish-arabic translation, 2018; gürbüz, 2017). it is not used in terms of absolute safety and has been used to mitigate the effect of danger (avcı, 1987). according to genç, insurance contracts have indispensable elements: damage and damage to be coincidental, to be insured to the same degree of danger, the damage can be measured with the money, the risks can be calculated (genç, 2002). there are insurance types depending on what you want to be insured. under the headings of property insurance and life insurance, insurance is provided under many sub-headings such as fire insurance, theft insurance, animal insurance, accident insurance, social insurance, voluntary insurance, life insurance and health insurance (akmut, 1980). the date of insurance goes back approximately 4000 years. it was used to compensate for the damages of those who were attacked by the bandits as it was included in the hammurabi laws. the known insurance system is the barcelona directive 1435, which is known as maritime insurance in italy. the first accident and life insurance also emerged in the uk after the great london fire (beşer, 2006). at the beginning of the 20th century, insurance companies were organized to meet every need. while the level of insurance is currently high in developed countries, it is lower in other countries. the insurance sector is sensitive to global risks and is highly affected by natural disasters, legal risks, geopolitical and macroeconomic shocks (sigorta.com.tr, 2018). turkey has now quite literally fuse in the west. however, the traditional structure of the turks based on solidarity is not far from the concept of insurance. the researchers base the insurance-like structure on the turks until the huns. afterwards, it is known that the turks who control the silk road are compensated by the state in return for taxes similar to the protection of taxpayers and caravans (kuşçu and revanoğlu, 2011). derbent organization in seljuks is a structure that can be accepted as insurance and it is a transportation insurance that the caravans suffered by the state. derbent organization, the ottomans continued until 300 years (genç, 2002). the maritime law of 1864 is a threshold in the ottoman empire. the first insurance activities in turkey after 1872 in the western sense pere fire began with the british insurance company (kamilçeleb of 2012). the first turkish company was the ottoman umum (general) insurance company in 1893 (gözen, 2008). the first turkish-owned company of the republican era was the anadolu anonim turkish insurance company, founded in 1925, under the order of atatürk. "milli reasürans türk anonim şirketi (t.a.ş.)" was established in 1929 (çelik & erdoğan, 2009). in 1942, doğan sigorta was established as the first private company with domestic capital (çalık, 2011). it is possible to say that the turkish insurance sector has improved since the 2000s. the product range of the sector has expanded and the collected premium has increased (tunay and tunay, 2013). on the other hand, the number of firms operating in the sector increased. although the turkish insurance sector has made significant progress in recent years, the share of the sector in the national income is still low as compared to the developed countries (çekici and inel, 2013). 2.2. islamic (tekaful) insurance interest is strictly prohibited in three celestial religions. however, the prohibition of judaism and christianity has been stretched over time due to the necessity of sea trade for futures and for other reasons. it is protected by prohibition in islam. world trade has almost turned into a system based on interest. the search for alternative islamic insurance system: tekaful insurance 213 alternatives of muslims in this system has increased. both islamic countries and western financial institutions have worked to develop islamic finance products (ustaoğlu, 2014). the insurance that emerged at the beginning of 14th century was accepted as haram for reasons such as uncertainty, gambling and interest. in the end, muslims have to stay away from the insurance system and insurance has become a necessity nowadays. 2.2.1 the meaning of tekaful as a word anthology evolution from arabic "kfl" is the same as the words "guarantor, bail". supporting, guaranteeing, mutual assurance, being a guarantor for one job, undertaking responsibility for that business, means common responsibility. the meaning of the dictionary is solidarity. while bail represents the unilateral guarantee of a person to another person, it has the nature of solidarity and mutuality on the basis of bail, which is based on bail, and therefore the surety is mutual (katılım sigortası: participation insurance, 2018). 2.2.2 the definition of tekaful insurance tekaful insurance is mentioned with many different names such as islamic insurance, non-interest insurance, participation insurance, mutual insurance, mutual insurance. it is an aid made by individuals in a simple sense to compensate for the catastrophe of the disaster to be exposed. (neova, 2018). participation banks association of turkey (tkbb) in the islamic dictionary islamic finance is referred to as the alias of the insurance system. at the same source, tekaful insurance is stated to be based on cooperation, solidarity, donation and partnership. the premiums paid are for the insurance of the company and not for the participants. funds generate profits, by premiums and premium could be obtained in ”interest-free investment areas“ (tkbb, 2018). according to the legislation of turkish laws, whih is, participation insurance according to the definition of the working procedures and principles; tekaful insurance is a type of insurance based on the principles of common risk sharing and solidarity, whereby the participants contribute to the risk fund established to ensure that the participants and other participants meet their demands for compensation and / or savings payments. (official gazette, 2017). in 1984, according to the malevolence law of malaysia, it is “a business method that does not involve any activities and objectives that are not approved by the islamic law (ahmed, 2009). wahab and friends, describe the islamic versions of traditional insurance products (wahab, lewis & hassan, 2007). it is also considered as an islamic version of the transitional (mutual) insurance that has been used for a few centuries in the west. co-operative insurance is a dual structure that is created by the desire of people to reduce risk and increase their social trust and is compatible with the mutual insurance. the basis of solidarity and bail and mutuality overlap with each other (üstün, 2014). there is limited debate about the islamic thought on tekafur insurance systems. garar (which means uncertainty), gambling and interest are issues that the majority alliance, which separates traditional insurance from tekafül insurance. according to some islamic jurists, and economists, insurance contracts are garared. the conventional insurance contract does not have any certainty for both parties. the realization of the contract is contingent and the compensation to be paid if the risk is realized is not definite and unclear (yanpar, 2015). in tekafül insurance, although the risk itself is uncertain, the contract made is not about whether the risk is realized or not. the contract is about sharing the loss. garar is not an essential element of this contract. in addition, one of the parties to the other against the prosperity of the other and there is no unfair gain. the resulting damage is eliminated by hand to hand, co-operatively (dalgin, 2003). it is considered as a gamble that if the risk is not fulfilled at the end of some islamic insurance insurance contract, the premium is left to be returned to the insurance company and if the risk is realized, the insurance holders receive more and more losses from the insurance company. there is a refund in the tekafül insurance, the company does not suffer from damages due to compensation (beşer, 2006). there is an alliance that muslims are not eligible to use this system because it is an insurance-based system (zerka and neccar, 2003). the price deposited by the participants in tekafül insurance is not a debt. there is no requirement that more income will be generated than it invests. if the exhibitor's property is not damaged, he / she cannot take more than he / she paid. receiving more than the premium paid is not an interest but an aid to the loss within the framework of the contract of aid (dalgin, 2003). sabri öz & mehmet ali işik 214 some other economists have examined the basic characteristics of the tekaful insurance in three areas: jointly sharing risks by using donations made for garar and rib-free aid; the open financial distinction of the shares of participant and monopoly insurance managers; insurance policies and investment strategy in compliance with islamic law (ahmed, 2009). teberru means to donate, to grant, to volunteer. the monopoly insurance provides the participants with a donation and the joint assistance meets the requirements for joint participation. although the teberru approach is specific to the islamic insurance system, it is a controversial issue that the contributions given in takaful insurance can be considered as donations (ahmed, 2009). the emergence of the tekaful insurance breaks the monopoly of the traditional insurance system. the history of the evolutionary system that emerged in sudan in 1979 was actually as old as the history of islamic banking. after 1984, especially in malaysia and far east countries. the first re-assurance system of tekaful insurance, which will call retekaful was established in 1985. at present, there are different managers and products in 85 countries. with a population of more than 15 million muslims, a great interest has begun in the european market (act. al-salih, 2014). 2.2.3 principles of tekaful insurance the basic principles of the tekaful insurance system are as follows (neova, 2018): the presence / purpose of voluntarily assistance, evaluation of premiums collected from shareholders and insured by primary market instruments as with non-interest, insurance coverage is not considered unethical or legitimate on issues given. selective action for economic assets. at tekafül insurance, there are three parties, namely the company owner, managers and insurance holders. the owner of the fund receives a fee during the life of the fund, and also receives a share in the event of a profit. however, the real purpose is not profit. funds of the funds of the company capitalist are kept separate from the funds generated by the participants. if the money in the background is insufficient to cover the damage, additional money can be received from the participants, and in case of excess money, they are returned. due to the logic of the study, the insurance is similar to the cooperative insurance (yanpar, 2015). the rules of the takafur insurance as follows: interest is prohibited. excessive risk (maisir) is not taken. financing should be based on a concrete asset. profit and loss should be shared. it is forbidden to speculate. investments in non-interest (interest-bearing) vehicles, which are considered to be inconsistent with islamic law, should not be invested. all activities must comply with islamic law and its rules. in order to achieve this, it is necessary to avoid absolute haram in both policies and investments. all kinds of alcohol and drug production and trade, selling alcoholic beverages etc. workplaces; prostitution; prohibited foods, production, trade (eg pigs and products, pornography); any kind of action involving fraud, interest, excessive risk, fraud is prohibited (ahmed, 2009). according to gürbüz, the differences between convention (traditional) insurance and the tekafur insurance of the malevolence are shown in the table. islamic insurance system: tekaful insurance 215 table 1: the difference between tekaful insurance and convention insurance tekaful insurance vr convention insurance tekaful insurance, based on mutual solidarity conventional insurance, based solely on commercial factors non-interest, no gambling and no dubt interest gambling and doubt some or all of the premiums paid by the participant are transferred to the tekaful fund to protect other participants against potential risks premiums paid to convention insurance companies are at their own risk. applies just the islamic rules applies the governmental legislations there is a complete distinction between the participants and the accounts of the shareholders. all surpluses and profits belong to the shareholders. has its own supervisory board governmental auditing is on board source: (gürbüz, 2017) there are three types of productions in different conditions: general tekaful insurance: firefighting insurance, employee insurance, real estate insurance etc. risks. family tekaful: for the long-term protection of individuals or companies, such as health plans, education, accident, marriage, pilgrimage and umrah etc. the maturity date ranges from 10 years to 40 years. re-tekafül: there is no widespread application for the protection of the companies of the companies, against the risk of the claims of the companies. (oz, 2012) 2.3 tekaful insurance models the world's first tekaful insurance company was founded in 1979 as “the islamic insurance co.“ in sudan. after this leadership, monopoly insurance funds were established in different parts of the world (çalık, 2011). companies that differ according to who is used by the region, where and how the funds are used have emerged. it is possible to encounter different modes of operation from country to country and from company to company. based on the common points of different applications, it is possible to reach three basic groups (ustaoğlu, 2014): co-operative insurance, where the insured come together without profit, the insurance that companies collect in the interest-free investment instruments, social insurance in which the share of loss / responsibility is shared in proportion. sabri öz & mehmet ali işik 216 in the implementation of the system, different incentives can be made to the system according to local needs and thus, the models can be varied in time. in practice, there are five main models: mudarebe, power of attorney, power of attorney-foundation, mixed and non-profit models. in every country a different model can come forward. for example, in malaysia, the mudarebe model comes to the fore. in pakistan and south africa, the power of attorney model stands out. the mixed model is the most common model and is practiced in almost every country (al-salih, 2014). 2.3.1 mudarebe models according to tkbb (2018); as a term; stated as, one side capital and the other side labor-capital partnership. participation accounts in participation banks are based on such a partnership. it is based on the agreement between the partners in the mudarebe contracts about how much share they will receive from the profit. the loss is in fact entirely owned by the shareholders as capitalists. the operator lost his labor. however, the operator may be held liable for indemnity if the act is in violation of the terms and conditions of the contract. participation banks' participation in the loss accounts (up to half of the minimum profit rate) is based on the assumption that there is always a defect in the loss. the mudarebe model was first applied in malaysia in 1984. in turkey it is known as "profit-loss sharing". as a result of the initial account, the dividend is determined and the investor decides how to evaluate the invested deposits and puts forth their labor. the gain is everyone's gain. it is a normal trading activity. in case of loss, the capital owner assumes the risk. since the investor has already spent his labor, no harm is incurred. the most debated issue in the model is that the company which is a partner in profit is not a shareholder (dalkılıç and ada, 2013). mudarebe is the basic operating principles of the current system in turkey accession partnership. on the one hand, banks collect funds from entrepreneurs and transfer these funds to those in need. the bank itself is capitalizing on the capital. in the mudarebe model, everyone's profit share is evident. if the total profit is obtained, the parties receive profit at the rate of profit share. it is not possible for the participants to fall in despair as the profit share is certain from the beginning. in mudarebe model, when the participant wants to leave the system, operational expenses are deducted and profit sharing is made so that the member system is separated (çalık, 2011). 2.3.2 power of attorney model also known as the proxy-agent model. it was introduced in the 1990s. the liaison tekaful insurance company works as an agent and receives a fee from the savings before starting the evaluation of funds. this fee, which gives the system its name, is a power of attorney. it is possible to accept this model as a work contract based on the power of attorney in the legal systems. in case of loss due to the identified risks, it is covered from the proxy assigned. if the agent makes a profit from the fund that is evaluated other than the power of attorney allocated, the share also receives a share. with respect to the mudarebe model, the party collecting the funds is more advantageous (çalık, 2011). the system guarantees itself from the beginning. the suitability of this system, which is operated with reference to the values specific to islam, is somewhat controversial. there is a company who wants to feel safe in the middle and sells it with 25-30% commission in cash (çalık, 2011). 2.3.3 power of attorney-foundation model it works with the understanding of conventional foundations. the company invests its initial investment by establishing a foundation and then adds the funds it collects from the participants. operating fees are taken from investors. it is widely applied in sudan, south africa, indonesia and malaysia. the center of motion of the model is the capital that the foundation shows. participates in the savings received from the participants to operate and share the profit share (çalık, 2011). according to the proxy model, the participant is more prominent in this model. conducting activities on the basis of philanthropy from the established foundation, collecting donations (contributions) and participation shares from the participants, the same risks of the shareholders and the participants are important differences. it can be said that it is the most suitable model for islamic concerns. furthermore, if the resources are not sufficient to cover the loss, the company tries to maintain the system by using interest-free credit (çalık, 2011). islamic insurance system: tekaful insurance 217 2.3.4 mixed model in the model, which is the mix of the proxy and the mudarebe model, the strengths of both are combined. again, the company manages the funds of the participants by taking a proxy fee. this model is widespread in the gulf cooperation council countries. there are different local formats in pakistan and south africa. the models in these countries emphasize more philanthropy (dalkılıç and ada, 2013). 2.3.5 non-profit model it is a model based on philanthropy and practiced in sudan. first of all, a fund is created with interest-free credit and participants participate in this fund through donations. participants are both operator and participant. funds collected on a voluntary basis are used in charitable work and the members are eliminated. it is almost similar to the proxy, power of attorney foundation model (dalkılıç & ada, 2013). 3. conclusion tekaful insuranceconvention is a system established to create a new market, not as a competitor in the conventional sense of insurance. it is an extension of the market. a method which is not in the market because of the adoption of a method appropriate to the islami market has made it possible to participate in the market. a more detailed study on this issue can be finalized by survey studies to be carried out on existing insurance customers. in this study, a literature review was made to reveal the differences between the tekaful insurance classical one, on the basis of varieties, models, system formation and legislations. the philosophy is certainly different. the biggest difference is the evaluation form of the fund which consists of premiums. on different models of tekaful, it is stated that, system is working non-interest model. as a market, there are some regional countries which has been founded as different tekaful insurance company. however, uk, which has the most interest on the participating finance and islamic models should be evaluated deeply. this would make sense to be able to clearify the market sharing and the system transformation for the future. references ahmed, a. 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(2013). marka sloganları türkiye sigorta pazarına ilişkin içerik analizi. i̇stanbul: beta yayınları. zerka, m.a. ve neccar, a.m. (2003). terc. hayreddin karaman, i̇slam düşüncesinde ekonomi banka ve sigorta, i̇stanbul: i̇z yayıncılık. international journal of commerce and finance, vol. 5, issue 1, 2019, 79-91 79 internal branding and brand commitment: the role of years of experience & monthly income dr. najwan adileh istanbul okan university, phd. turkey prof. dr. özgür çengel istanbul commerce university, turkey abstract employee brand commitment has a vital role in their brand supporting behaviors. therefore, this study is investigated the effect of internal branding mechanisms on employee brand commitment from the employees’ perspective. this study also is examined the differences in employees’ perspectives on internal branding mechanisms, and employee brand commitment depends on their years of experience & monthly income. this study is targeted the banking industry using a convenience sample that includes ten banks in palestine. this study is explored the employees’ perspective, thus, the unit of analysis in this study is the banks’ employees. this study is employed a quantitative empirical causal research design, through a self-administered structured questionnaire. this study is used descriptive statistics tests, one-way analysis of variance (anova), post-hoc multiple comparisons, two-step sem process, and the confirmatory factor analysis (cfa). moreover, the data is analyzed using the “analysis of moment structure” amos 20 program. the findings are shown a strong effect of internal branding mechanisms on employee brand commitment. also, the study found differences in employees’ perspectives on internal branding mechanisms and employee brand commitment depend on their years of experience & monthly income. therefore, this research study may provide some benefits to the banking sector and the researcher in order to understand better the factors that will increase employee understanding of internal branding activities and enhancing employee brand commitment. keywords: internal branding, brand commitment, length of experience, income 1. introduction customers experience the brand value through their interaction with employees (devasagayam et al., 2010). also, brand values delivered to employees through various internal branding activities (terglav, konečnik ruzzier and kaše, 2016). while branding for goods and services aims to create brand equity and maintain the long relationship between the company and customers (grace and o’cass, 2002), service brands faced with different challenges. in contrast with goods, the risk of delivering inconsistent value increases in service brands because of the non-tangible nature of the service (king and grace, 2005). employees are the presenters of the brand to the other stakeholder. the alignment between their attitude and the brand values is crucial for a firm to have a successful brand in the market (punjaisri, evanschitzky and wilson, 2009). employee brand commitment and brand supporting behaviors are the keys for building brand equity (burmann, jost-benz and riley, 2009). on the other hand, for supporting the employees to deliver the brand value, they need to live the same values (preez, bendixen and abratt, 2017). thus, firms enhancing employees supporting behaviors by adopting effective internal branding activities, which increase employees brand knowledge and awareness (king and grace, 2010). as a result, internal branding activities will develop employees psychological attachment and commitment with the brand (terglav, konečnik ruzzier and kaše, 2016). 2. internal branding mechanisms internal branding defined as “a means to create powerful corporate brands. it assists the organization in aligning its internal process and corporate culture with those of the brand, and its objective is to ensure that employees transform espoused brand messages into brand reality for customers and other stakeholders” (punjaisri & wilson, in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e najwan adileh & prof. dr. özgür çengel 80 2007, p. 59-60). also, various internal branding models have proposed in the literature. in the study of punjaisri et al. (2008), they suggested that internal communication and training programs are the two principal mechanisms of internal branding. moreover, an essential holistic model for internal brand management had presented by burmann & zeplin (2005). the theoretical framework of this research depends on its model. they stated that brand centered human resources activities, internal brand communication activities, and brand centered transformational leadership are the main three internal branding mechanisms. these mechanisms affect employee brand commitment and support the alignment between employees’ values and brand values. the brand centered human resources activities have a significant role in developing, promoting, and enhancing the internal branding activities in the organization (alshuaibia and shamsudinb, 2016). these activities support the process of hiring brand fit employees based on brand identity and brand values (preez and bendixen, 2015). internal communication activities are critical to providing employees with brand knowledge (punjaisri and wilson, 2011; shaari, salleh and hussin, 2012). besides, according to previous studies, transformational leadership enhance the alignment of brand values with employees' values and develop employees’ supporting behaviors. transformational leadership is the ideal leadership style for enhancing employees adopt the brand's values and to increase their brand commitment (morhart, herzog and tomczak, 2009). figure 1: burmann & zeplin (2005) holistic model for internal brand management 3. employee brand commitment employees brand commitment is essential for enhancing the brand strength and for developing brand citizenship behaviors (burmann, zeplin and riley, 2009). when employees identify themselves with the brand, this will enhance their organizational citizenship behaviors and increase their organizational commitment (o’reilly and chatman, 1986). also, employee brand commitment defined as “the extent of psychological attachment of employees to the brand, which influences their willingness to exert extra effort towards reaching the brand’s goals, that is, to exert brand citizenship behavior and hence generate a new quality of brand strength” (burmann et al., 2009, p. 266). moreover, employees brand knowledge and brand rewards have a positive relationship with brand commitment and brand citizenship behavior. also, internal branding activities enhance employees brand commitment and brand engagement and supporting behaviors (shaari, salleh and hussin, 2012). 4. personal variables personal variables play a moderating role between internal branding process and employee commitment. personal variables include employees’ gender, age, marital status, educational level, income and length of service. in the study of punjaisri & wilson (2011), they found that employees whose age over 30 years old, expressed an intention to stay in the job more than those who were less than 30 years old. also, punjaisri et al. (2008) stated that the longer an internal branding and brand commitment: the role of years of experience & monthly income 81 employee stayed in an organization, the higher the influence of internal branding activities on their brand citizenship behavior. according to joiner & bakalis (2006), while employee stays a more extended period in the firm, this will enhance the sense of belonging. nevertheless, king, murillo, & lee (2017) argued that all employees regardless of their age or loyalty to the organization have to be fit with the brand values. based on the studies above, the following hypotheses represented: h1: brand-centered human resource activities positively affect employee brand commitment h2: internal brand communication activities positively affect employee brand commitment h3: brand-centered transformational leadership positively affect employee brand commitment h4: there is a significant difference in employees’ perspective on internal branding among employees according to years of experience in the bank. h5: there is a significant difference in employees’ perspective on brand commitment among employees according to years of experience in the bank. h6: there is a significant difference in employees’ perspective on internal branding among employees according to monthly income h7: there is a significant difference in employees’ perspective on brand commitment among employees according to monthly income about the literature presented above, the following is the prepared conceptual model: figure 2: the conceptual model najwan adileh & prof. dr. özgür çengel 82 5. the significance of the study this study aims to contribute useful information for brand services as well as for the researcher. this study intends to understand the employees’ perspective on the effect of internal branding mechanisms on employee brand commitment. moreover, this research will be significant in addressing the gap of the role of employee years of experience in the bank, and the monthly income, and these two variables effect on employees’ perspective on internal branding mechanisms and employee brand commitment. therefore, this research study may provide some benefits to the banking sector and the researcher in order to understand better the factors that will increase employee understanding of internal branding activities and enhancing employee brand commitment. 6. research design this study targeted the banking industry in palestine. according to the palestine monetary authority (pma), the palestinian system as the end of june 2017, includes (15) regulated banks. however, 10 out of 15 banks accepted to be part of this research. this study explores the employees’ perspective on internal branding mechanisms and brand commitment. thus, the unit of analysis in this study is the banks’ employees. this study targets employees from different departments and various job levels except for the vps employees. furthermore, some employees will have direct contacts with customers, while others will be from backline positions. employees expressed their perspective through a self-administered structured questionnaire. also, (627) surveys collected from employees and (614) surveys were identified as usable, as some of the questionnaires discarded due to response bias and non-response issues. 7. measurements respondents asked to assess their perceptions concerning the brand-centered human resources activities using a measure that adopted from the study of aurand et al. (2005). this scale aims to have a better understanding of the different human resource branding activities effects and role in the working environment. for internal brand communication, the measure adopted from punjaisri & wilson (2011). moreover, three main broad categories of internal brand communication tools identified; 1) mass method; like newsletter 2) written memo; like logbooks 3) face to face communication; which includes two main categories; the daily briefing and group meetings. the measure of brand-centered transformational leadership adopted by morhart et al. (2011) and derived initially from the multifactor leadership questionnaire from 5x of rowold (2005). besides, this study measured employee brand commitment using the scale of kimpakorn & tocquer (2010) that was adopted previously by cook & wall (1980) and also used by several previous organizational commitment studies. lastly, this study will investigate the difference between respondents from various personal variables including income and years of service in their jobs. in order to investigate these differences between employees, some demographic questions included in the questionnaire. 8. data analysis the univariate analysis performed for all the variables in the study. furthermore, frequencies of demographic characteristic examined to investigate the demographic profile of respondents. for investigating the differences for demographic characteristics of respondents one-way analysis of variance (anova) used in this study. additionally, post-hoc multiple comparisons performed by using tukey’s hsd test to analyze which groups are responsible for the differences. the data analyzed using the “analysis of moment structure” amos 20 program. this study used the two-step sem process. the confirmatory factor analysis (cfa) used to assess the measurement model fit and construct validity (hair et al., 2014). moreover, to assess the overall model goodness of fit, the study used stand-alone fit indices table 1 shows the cut-off values for the fit indices that were used in this study as suggested by hu & bentler (1999). internal branding and brand commitment: the role of years of experience & monthly income 83 table 1: fit index and cut-off values fit fit index cut-off criteria χ2(chi-square goodness of fit) p>0.05 rmsea (root mean square error of approximation) rmsea < 0.06 srmr (standardized root mean residual incremental) srmr<0.08 cfi (comparative fit index) cfi > 0.95 tli (tucker-lewis fit index) tli>0.95 source: hu & bentler (1999) then, convergent validity examined followed by assessing reliability through measuring the internal consistency and evaluating the discriminant validity. then, the structural model and evaluating the significance of the relationships examined (hair et al., 2014). after analyzing the structural model fit, the hypotheses tested and the path diagram used for estimation of the relationships. primary analysis conducted for the demographic characteristics of employees show the following results in table 2 below: table2: demographic characteristics of respondents research demographic characteristic number % years of experience in the bank less than one year 56 9.1 from 1-4 years 192 31.3 from 5-8 years 121 19.7 from 9-12 years 146 23.8 more than 12 years 99 16.1 total 614 100 monthly income less or equal $1000 300 48.8 $1001-$2000 196 31.9 $2001-$3000 78 12.7 $3001$4000 29 4.7 more than $4000 11 1.8 total 614 100 the next step is to deliver data description for the study’s dimensions; the collected data are presented using descriptive statistical tools as shown below in table 3. najwan adileh & prof. dr. özgür çengel 84 table 3: findings of the descriptive analysis of the study’s dimensions dimensions n mean std. skewness kurtosis ci 95% for mean lower bound upper bound human resources 614 3.84 0.654 -0.954 2.007 3.791 3.895 internal communication 614 3.90 0.661 -0.993 1.393 3.853 3.958 transformational leadership 614 3.95 0.734 -0.967 1.656 3.893 4.010 employee brand commitment 614 4.11 0.723 -0.828 1.775 4.058 4.173 as an interval scale used for collecting the data from the respondents, the parametric techniques specially t-test and anova test used for analysis to compare the differences between the different demographic characteristics between respondents’ groups. following are the study’s null hypotheses findings related to demographic differences between employees using t-test and anova: table 4: anova-test results for employees according to their years of experience in the bank for the study dimensions dimensions descriptive analysis anova mean std. g1 g2 g3 g4 g5 g1 g2 g3 g4 g5 pvalue posthoc human resources 3.98 3.81 3.75 3.77 4.05 0.53 0.71 0.74 0.61 0.50 0.002 ** g5>g2 * g5>g3 ** g5>g4 * internal communication 4.01 3.84 3.87 3.86 4.08 0.60 0.70 0.76 0.62 0.51 0.026 * g5>g2 * transformational leadership 4.13 3.91 3.85 3.90 4.14 0.69 0.78 0.89 0.64 0.52 0.009 ** g5>g3 * ib 4.04 3.85 3.82 3.84 4.08 0.53 0.64 0.72 0.53 0.44 0.002 ** g5>g2 * internal branding and brand commitment: the role of years of experience & monthly income 85 g5>g3 * g5>g4 * employee brand commitment 4.09 4.01 4.08 4.13 4.38 0.73 0.75 0.75 0.71 0.58 0.001 ** g5>g2 ** g5>g3 * years of experience groups: g1= less than one years, g2= 1-4 years, g3= 5-7 years, g4= 8-14 years, g5= 15 or more years. *significance level at 5%, **significance level at 1%. the above table 4 indicates that at 1% and 5% level there is a significant difference between employees according to years of experience in the bank for all the variables. therefore, a further investigation conducted by using a post hoc test (tukey hsd comparison) to understand which groups differ from each other. mainly, the respondents of the fifth group (15 years or more) rated higher than the other four groups. thus, the fourth and the fifth null hypothesis, both will be rejected. table 5: anova-test results for employees according to the monthly income groups for the study dimensions dimensions descriptive analysis anova mean std. g1 g2 g3 g4 g5 g1 g2 g3 g4 g5 p-value posthoc human resources 3.75 3.87 4.01 4.15 3.85 0.69 0.62 0.54 0.48 0.82 0.001** g4>g1* g3>g1* internal communication 3.84 3.92 4.05 4.07 3.98 0.68 0.66 0.63 0.43 0.72 0.066 transformational leadership 3.86 4.01 4.11 4.17 3.87 0.81 0.65 0.57 0.55 1.13 0.013* g3>g1* ib 3.81 3.93 4.05 4.13 3.90 0.65 0.55 0.52 0.41 0.85 0.003* g3>g1* employee brand commitment 4.00 4.20 4.27 4.18 4.55 0.79 0.63 0.69 0.64 0.42 0.001** g2>g1* g3>g1* monthly income: g1= less than or equal 1000, g2= 1001-2000, g3=2001-3000, g4= 30014000, g5= 4001 and more. *significance level at 5%, **significance level at 1%. najwan adileh & prof. dr. özgür çengel 86 according to the table 5. at 1% and 5% level, there is a significant difference between employees according to monthly income for internal branding (ib), and employee brand commitment (ebc). therefore, a post hoc test (tukey hsd comparison) conducted to understand which groups differ from each other. for internal branding (ib), the third group had a significant difference comparing to the first group. also, the fourth group had the highest mean. besides, for employee brand commitment, there was a significant difference between the second and third group comparing to the first group. also, the fifth group had the highest mean comparing to all the other groups. therefore, the sixth and the seventh null hypothesis, both will be rejected. according to table 6, the results of the hypothesized model are relatively well fitting. hence, when the sample size is more than 200, it is more appropriate to take the model fit decision based on other indices of fit, rather than the chisquare test (boomsma, 1985; boomsma and hoogland, 2001). therefore, the cfi and the rmsea are considered more reasonable and applicable to assess the goodness of fit for this model (hooper, coughlan and mullen, 2008). table 6: results of measurement model fit fit index measurement model (cfa) cut-off criteria χ2 1426.264(0.000) p > 0.05 df 591 cfi 0.952 cfi>0.95 tli 0.967 tli>0.95 rmsea 0.051 rmsea<0.06 srmr 0.062 srmr<0.08 note. χ2 = chi-square; df = degree of freedom; cfi = comparative fit index; tli = tucker-lewis fit index; rmsea = root mean square error of approximation; srmr = standardized root mean residual 9. reliability & validity the next step after consent the overall model goodness of fit was to analyze the variables for their reliability and validity. thus, convergent validity was examined to ensure that the items of the study’s structure are converging a high proportion of variance in common. in order to examine the relative amount of convergent validity among item measures, the factor loading for each variable checked. the factor loading for each variable was statically significant and exceeding the critical t-value of (2.576) at (p<.01). moreover, (0.5) or higher value of standardized loading estimates, and ideally (.7) or a higher value, refers to a high value of convergent validity (hair et al., 2014). furthermore, reliability also assessed including the composite reliability (cr) and the average variance extracted (ave) (hair et al., 2014). according to fornell & larcker (2018), an ave of (.5) or higher and a cr of 0.7 or higher has recommended. according to table 7, the standardized loading estimates for each indicator are higher than 0.5 and exceeding 0.7 for most of them. also, the composite reliability (cr) result exceeds (0.7), and average variance extracted (ave) result exceeds (0.5). table 7: construct validity assessment latent indicator std. loadings smc cr ave α human resources 0.923 0.709 0.805 hr1 0.580 0.704 hr2 0.684 0.416 hr3 0.728 0.639 internal branding and brand commitment: the role of years of experience & monthly income 87 hr4 0.783 0.614 hr5 0.800 0.530 internal communication 0.890 0.671 0.882 ic1 0.645 0.468 ic2 0.839 0.722 ic3 0.775 0.778 ic4 0.795 0.712 leadership behaviors 0.961 0.834 0.921 lb1 0.681 0.770 lb2 0.835 0.719 lb3 0.822 0.694 lb4 0.867 0.540 lb5 0.808 0.750 0.937 0.717 0.909 employee brand commitment ebc1 0.674 0.752 ebc2 0.829 0.675 ebc3 0.910 0.698 ebc4 0.901 0.464 ebc5 0.872 0.633 ebc6 0.641 0.600 note. smc: squared multiple correlation, ave: average variance extracted; cr: composite reliability; α: cronbach alpha after analyzing the convergent validity, the discriminant validity also assessed. the table 8 below, shows that for each pair of constructs the average of (ave) value exceeds (0.5), and for all items, it exceeds the value of the squared multiple correlation; which supports good evidence of discriminant validity in the model. table 8: the results of discriminant validity pairs of constructs average of ave φ φ2 human resources – internal com. 0.690 0.697 0.486 human resources – leadership 0.772 0.641 0.411 human resources – employee brand commitment 0.713 0.543 0.295 internal communication – leadership 0.753 0.722 0.521 internal communication – employee brand commitment 0.694 0.579 0.335 najwan adileh & prof. dr. özgür çengel 88 leadership– employee brand commitment 0.776 0.585 0.342 note. ave: average variance extracted; ф 2: squared multiple correlation ave computed as (ave of the first construct+ ave of the second construct)/2 the next step is testing the structural model and assessing the significance of relationships. table 9 below presents the results of the structural model fit. all fit indices meet the cut-off criteria and show a robust structural model fit. table 9: results of structural model fit fit index measurement model (cfa) cut-off criteria χ2 29.695 (0.055) p>0.05 df 14 cfi 0.966 cfi>0.95 tli 0.954 tli>0.95 rmsea 0.048 rmsea <0.06 srmr 0.022 srmr <0.08 note. χ2 = chi-square; df = degree of freedom; cfi = comparative fit index; tli = tucker-lewis fit index; rmsea = root mean square error of approximation; srmr = standardized root mean residual following table 10 that shows the results of path analysis: table 10: results of path analysis path to path from h0 std. coeff. t-value direct effects employee brand commitment human resources h1: supported 0.55 10.240** internal communication h2: supported 0.88 16.691** transformational leadership h3: supported 0.83 15.828** internal branding h total: supported 0.67 11.320** 10. discussion and conclusion the findings show a significant positive relationship between internal branding mechanisms and employee brand commitment. many previous studies in the literature support the results of this study (punjaisri, evanschitzky and wilson, 2009; preez and bendixen, 2015; yang, wan and wu, 2015; javid et al., 2016). conversely, kimpakorn & tocquer (2009) demonstrated contradicted result. there are several possible explanations for the significant relationship found in this study between internal brand management and employees brand commitment. according to punjaisri et al. (2008), internal branding mechanisms affect employees attitudinally; through brand identification, brand commitment, and brand loyalty. besides, two of the most important objectives of this study was to explore if internal branding and brand commitment: the role of years of experience & monthly income 89 there are some effects for the monthly income and years of experience among employees on their perspective on internal branding and employee brand commitment. an exciting finding appeared in this study. employees with 15 years of experience or more in the bank, showed a more favorable perception for internal branding activities and brand commitment. these results are also consistent with the findings of previous studies (salami, 2008; amangala, 2013; abdul-nasiru et al., 2014). the results may be for the reason that as employees spent an extended period spent in the organization, might develop a sense of belonging by time (joiner and bakalis, 2006). according to employees’ income, employees with good to high income between $2000 and $4000 showed better perspective for all the variables. in this study, insight has gained about the internal branding mechanisms and process in order to create employees brand supporting behaviors. furthermore, the study provides more knowledge for the role of brand-centered human resource activities, internal brand communication activities and brand-centered transformational leadership on enhancing employee brand commitment. therefore, the present findings might suggest several courses of action. the organization has to hire the right applicant by select, recruit, and promote employees who have a high personal identity-brand identity fit (preez and bendixen, 2015). moreover, managers have to discover the employees’ favorite channel of communication in order to ensure the effectiveness of the internal branding activity in their organization. besides, managers need to attend specialized training and courses that enable them to empower their leading transformational skills, motivate employees, deliver a clear vision, build a brand-oriented culture, and enhance trustbased relationships between employees, managers, and organization. the empirical findings in this study provide a new addition to the literature for the effect of demographic differences among employees on their varying perspectives about internal branding mechanisms in the service brands specifically in the banking industry. besides, this study assesses the demographic differences among employees’ brand commitment and supporting brand citizenship behavior. however, this study stated that employees with 15 years of experience or more in the bank, had more brand commitment comparing to the other employees. therefore, this study encouraging organizations to take into consideration the employee years of experience while structuring specialized training programs for enhancing employee brand commitment. moreover, the findings showed a favorable perspective for internal branding and a high level of employee brand commitment for employees with good to high income. therefore, it is essential to review the income scale for the organization and its relationship with employee brand commitment and employee performance. references abdul-nasiru, i. et al. 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(2015) ‘effect of internal branding on employee brand commitment and behavior in hospitality’, tourism and hospitality research, 15(4), pp. 267–280. doi: 10.1177/1467358415580358. international journal of commerce and finance, vol. 7, issue 2, 2021, 71-100 71 reverse culture shock among international business administration exchange students ola m.a. agha istanbul commerce university, olahagha@gmail.com nurgül keleş tayşi̇r istanbul commerce university, nktaysir@ticaret.edu.tr submitted: 19.07.2021 accepted: 09.09.2021 published: 02.12.2021 abstract reverse culture shock (rcs) is concerned with the readaptation process to the home country the expatriates go through upon their return after leaving the host country. this research aims to understand whether the respondents faced reverse culture shock upon reentry and establish the relationship between rcs and demographic factors of the respondents. a cross-sectional survey design is used to fulfill the objectives of the study. primary data were collected from 136 respondents by completing an online questionnaire adapted from seiter and waddell (1989). the data is analyzed by the use of spss 25 using independent t-test and one-way anova. the results indicate that the business administration/ mba international students who participated in exchange programs and went back home do not differ significantly in their rcs regarding gender, age, education degree level, length of trip, and time since returning home. finally, the results related to the cq and rcs show that there is a medium significant positive relationship between rcs and total cq, motivational, behavioral, and cognitive cq, while there is a weak non-significant positive relationship between rcs and metacognitive cq. keywords: reverse culture shock, business administration/mba, exchange programs, cultural intelligence, and demographic factors. reverse culture shock among international business administration exchange students 72 1. introduction exchange programs have become more frequent nowadays. simmons (2014) argues that the changing marketplace is one factor that encourages people to join such programs to gain new skills to adapt to globalization. many exchange students experience difficulties during the reentry period when they go back home. however, they are not aware of the reentry period they are going through and how to discuss and share their experience with their friends and family without affecting their relationships. adler (1981) refers to the reverse culture adaptation as at any stage an expatriate goes through some changes, transformations when leaving the host country. thomas’s (2009) argument goes in line with adler’s as he mentioned that some people think going back home is an easy process as the person is going back to the most intimate place to him/her. however, it is a challenging period full of adaptation stages to get familiar with the home country again. raschio (1987) mentioned that when some students who returned home were asked about the readaptation period, they answered that their home seemed to be a weird world. in this study, the researcher is interested in measuring whether some business administration/mba international students faced reverse culture shock after returning home after finishing their studies abroad. —also testing whether there is a relationship between the reverse culture shock and the demographic factors of those students. 2. literature review 2.1. cross-cultural adaptation according to oxford learner’s dictionaries, cross-cultural means “involving or containing ideas from two or more different countries or cultures”. black (1992) states, adjustment refers to a person’s comfort, adaptation, and acceptance of a new culture, environment, or place. cross-cultural adjustment can be explained as a process of a person trying to adapt to living in a new country with a different culture and varied environment from their own country. thus, the exchange students may face the cross-cultural adjustment process when moving to another country as it is a point when they find themselves in a new school, new friendships, new ola m.a. agha & nurgül keleş tayşi̇r 73 languages, and a new way of thinking. then, they start to push themselves, trying to cope with the changes and adaptation challenges they would face. several researchers were interested in this area, and they defined and mentioned this concept in the same general way. kim (2001, p.31) defines cross-cultural adaptation as a “dynamic process by which individuals, upon relocating to an unfamiliar cultural environment, establish (or reestablish) and maintain relatively stable, reciprocal and functional relationships with those environments”. the time of moving to a new country and trying to adapt is considered as a continuous period. it takes some time, but this does not necessarily mean that it may reach an endpoint, but rather than that, it changes its shape by experience and the passage of time to make it easy for the person to come to a stage that he/she can endure the challenges (kim, 2001). moreover, li, sano, and ahn (2013) define it in the same manner as the other researchers as “the process of adaptation to living and working in a foreign culture” (p. 156). 2.1.1 u-curve model of cultural adaptation several studies are conducted to clarify and understand the stages of cross-cultural adjustment in which an expatriate or employee who moves from his/her country to a country with a different culture and environment goes through. it was identified that the u-curve model that lysgaard (1955) presented is one of the models used to explain the stages of cross-cultural adjustment that people go through in the host country. lysgaard (1955) came up with this model by conducting a study on norwegian students who got accepted to study under the american fulbright program to spend time studying in the u.s. in which he assumed that the process of intercultural adaptation and its stages has the form of “u”. as lysgaard (1955) points out, this model consists of several stages that a person who is in the host country goes through. the first phase, “honeymoon”, begins with a high level of happiness, adventures, and enthusiasm at the beginning of their existence when getting to know a new culture. then gradually, the person begins to go through the next stage, “culture shock”, which includes reverse culture shock among international business administration exchange students 74 trauma from the environment, people, food, and language. they may feel lonely and find it challenging to have the opportunity to make new friendships; as a result, they may face some challenges and struggles regarding communicating with national people or misunderstanding because of the differences of some of the verbal or non-verbal communication ways. also, they may begin to make comparisons between their country and the host country at this stage. there may be a possibility for them to experience the feeling that the national people are superior to them, such as the norwegian people in america, which causes tension, anxiety, and anger. moving to the third period, “recovery”, when they try to get to know people and try to be more open to learning more about this new culture and environment and try to know more about the methods of dealing with and understanding the national people, so this stage is entirely different and a turning point after the stage of culture shock. the fourth and final stage is very comfortable for the sojourners as they reach a high level of harmony and integration into the host country's culture. figure 1 the u-curve model of cross-cultural adaptation (lysgaard, 1955) ola m.a. agha & nurgül keleş tayşi̇r 75 some researchers support the ucurve model and its gradual stages; however, other researchers do not support the idea of this model. church (1982) mentioned that he considers this model "weak, inconclusive and overgeneralized” (p.542). therefore, it cannot be applied to all students staying in the host country; for example, there may be some students going through the honeymoon phase with the enthusiasm and adventures at the beginning of their movement abroad while they may not go through the other stages, or there could be other students who do not go through the first phase in the first place at all. on the other hand, black and mindenhall (1991) have a neutral view about the u-curve model. the authors state that lysgaard referred to the means and the percentages in his model but did not refer to statistically testing the data and did not refer to samples that are used continuously. they consider it as this model has no “consistent methodological rigors” (p.231) in which the results can’t be generalized. both black and mindenhall (1991) believe that future researchers are suggested to have a theoretical plan to focus on the details and description of cross-cultural adjustment and learning nature. 2.2 cross-cultural readaptation researchers are interested in studying culture shock and cross-cultural adaptation when moving abroad. also, there is an apparent interest in the reverse culture shock and the challenges and difficulties the returnees face during the re-entry period. thus, this readjustment process that these people go through is very similar or considered thoroughly the same as the process of cross-cultural adaptation (shibuya, 2003). mooradian (2004) indicated two types of adaptation upon entry into a new country with a new culture other than the home country, including psychological and socio-cultural adaptation. the psychological one is concerned with the extent of personal satisfaction and satisfaction with the surrounding environment. it has to do with the personality when trying to be accustomed to a different culture. for socio-cultural adaptation, it is all about identifying and adapting the people reverse culture shock among international business administration exchange students 76 moving to a new place with the host country's culture and its people. thus, as these two types represent cross cultural adaptation, researchers also used these two types to describe and express the expatriates' adaptation. when expatriates return to their home countries, they start to seem unfamiliar to them after being accustomed to the host country. researchers have defined reverse culture adaptation in several ways. adler (1981) considered cross-cultural adjustment as any process of shift that people go through and reverse culture adaptation as any phase where expatriates go through a change or transition, but when leaving a host country and returning to the home country (p. 343). thomas (2009) illustrated that the reverse culture adaptation might appear to some people as an immediate return to the intimate domestic culture. however, reverse culture adjustment is a stage of adaptation and getting familiar with the home country’s culture again. it is quite similar to the cross-cultural adjustment the expatriates go through when they leave their country. additionally, butcher (2002) describes that this period is considered "grieving" because it not only requires the expatriates to be concerned with getting used to their home country and culture but also focusing on the process of getting used to losing their friendships which took them time to make in the host country after some time of getting used to this culture with its all differences. also, they are supposed to get used to the loss of their memories, culture, routines, and experiences, as they know that it has completely ended. thus, it would take time to get used to their previous home culture. 2.2.1 w-curve model of cultural adaptation as we mentioned earlier, lysgaard (1955) represented the process of cultural adaptation that expatriates go through in the host country with a u-curve model; moving to gullahorn & gullahorn’s (1963) studies, they added a new u to this model by surveying students from america who received scholarships to study in france. gullahorn & gullahorn (1963) analyzed the stages the students went through when they returned to the u.s. it was evident ola m.a. agha & nurgül keleş tayşi̇r 77 that the american students went through stages similar to the ones faced in france. this also confirms what the researcher martin (1984) referred to, that the phases of cultural adjustment during the presence in the host country are very similar to the periods of re-adaptation upon return to the home country. thus, they came with a w-curve theory to describe the period of cultural readjustment that expatriates are going through after returning to their home country. tohyama (2008) mentioned that the w shape consists of two parts. the first part is the same as the u represented in lysgaard’s model, which shows the cross-cultural adaptation process, while the second part shows the reverse cultural readjustment process. in addition, the researchers modified these stages, as it was previously mentioned that the stages of the ucurve model consisted of four stages; later on, gullahorn & gullahorn (1963) modified the stages of that model from four to three stages and added two more stages to make the stages five stages as shown below: “honeymoon, culture shock, initial adjustment, and mental isolation and integration” (gullahorn & gullahorn, 1963). figure 2 the w-curve model of cultural re-adaptation (gullahorn & gullahorn, 1963) reverse culture shock among international business administration exchange students 78 2.2.2 reverse culture shock gaw (2000) refers to it as “the process of readjusting, re-acculturating, and re-assimilating into one's own home culture after living in a different culture for a significant period of time.” (p. 83) mooradian (2004) indicates that the reverse culture shock affects the returnees negatively and may cause tension, pressure, and anxiety. this is because the returnees are not aware of the changes in their personality, behaviors, and beliefs during their stay in the host country. thus, if they insist on sticking to these changes, this will negatively affect them and their interaction with others. additionally, the returnees’ relatives, friends, and family are also not aware of the changes they went through. they think that no change has occurred, and the returnees are entirely the same as before. thus, a preparation period is needed for this stage for the returnees and their families and other relatives. adler (1975) illustrates that there are not many differences between culture shock and reverse culture shock that the expatriates face while some of the differences between them may have to do with what the expatriates who return to the homeland expect, and whether they are aware of the change they went through or not. there are several studies on the reverse culture shock and the difficulties that expatriates face; for example, the researchers gullahorn & gullahorn (1963) indicate that these people do not expect to face difficulty upon their return to their home country. also, they are not aware that there may be a tangible change in their relations with family, friends, and others. martin (1984) adds they do not feel the extent of the change that this experience has on them during their time being away from their countries, such as changes in their behaviors, way of thinking, lifestyle, and personality, but upon their arrival to their country, they begin to feel this difference and they feel that it is not their country anymore or there was a significant change occurred during their absence from it; as a result, this affects the way they communicate and their interaction with people in their country (black, 1992). ola m.a. agha & nurgül keleş tayşi̇r 79 2.3 cultural intelligence ang and van dyne (2008) refer to cultural intelligence as the ability of an individual in a multi-cultural context with different ethnic and national identities to function effectively. earley and ang (2003) go in line with van dyne’s (2008) definition by confirming that it refers to the person’s ability to function well in different situations with cultural diversity. earley and ang (2003) define cultural intelligence as a multidimensional construct which is divided into four dimensions: cognitive, metacognitive, motivational, and behavioral. 2.3.1 motivational cultural intelligence it refers to the extent to which an individual is interested, motivated, and confident to experience and to acquire new cultural behaviors in diverse situations. it also refers to how much they are into the different cultural interactions (ang & van dyne, 2008). 2.3.2 behavioral cultural intelligence it refers to the individual ability to appropriately interact with people from different cultures, either verbally and non-verbally (ang & van dyne, 2008). 2.3.3 cognitive cultural intelligence it refers to the individual’s knowledge he/she has about the norms and values of two different cultures. it is also about knowing and being aware of the similarities and differences between the systems of different cultures such as the legal, economic, educational, and sociocultural systems (ng, van dyne, ang & ryan, 2012; earley & ang, 2003). 2.3.4 meta-cognitive cultural intelligence ang and van dyne (2008) refer to it as the awareness and the executive mental processes an individual has for successful interactions in cross-cultural situations. reverse culture shock among international business administration exchange students 80 3. research methodology 3.1 the purpose and research design the main objective of the study is to investigate the reverse culture shock (rcs) of business administration/mba international exchange students who went back home and to also establish the relationship between rcs and the demographic characteristics of the respondents. therefore, a cross-sectional survey design is used. one questionnaire is used which is divided into three sections to measure the reverse culture shock (dependent variable) and the demographic factors (independent variable). additionally, a correlational research design is used to test the five hypotheses (i.e., to measure if the rcs and demographic factors are related or not). 3.2 data collection process in the present study, primary data is collected. the data were collected by an online questionnaire method from business administration international students who participated in an exchange program and already returned home. 3.3 sampling technique after finding suitable participants to participate in the online survey in this research, snowball sampling was used. it is one of the sampling techniques in which the survey respondents are asked to forward the study to other potential respondents who may be part of their networks, and they have to meet the exact requirements (sedgwick, 2013). in this study, the snowball sampling technique was used by reaching other ba or mba students who shared the same experience with those participants or traveled and went back home later. as a result, 136 participants were contacted online. ola m.a. agha & nurgül keleş tayşi̇r 81 3.4 instrument for data collection the instrument used for primary data collection is a structured self-administered questionnaire. the questionnaire is in english. it’s divided into three sections. the first section consists of questions related to personal and demographic variables such as (gender, age, degree level while in the host country, length of trip, and time since returning home). the data in this section were analyzed using descriptive statistics. section two consists of a 16-item reentry scale to measure reverse culture shock adapted from the research of seiter and waddell (1989). the questions in this section were close-ended questions designed with 5 points likert-type scale ranging from strongly disagree “1” to strongly agree “5”. section three consists of a 20-item cultural intelligence scale which was adapted from van dyne, l., ang, s., & koh, c. (2009). 3.5 research questions and hypotheses after reviewing the literature in the previous chapter and fulfilling the present study's objectives, the following hypotheses have been outlined. ● research question 1: is there any relationship between rcs and demographic variables such as gender, age, degree level, trip length, and time since returning to the home country of business administration/ mba international students who studied abroad & went back home. to answer the research question, the following hypotheses have been drawn: h1: there is a significant difference between the men and women regarding their rcs. h1: μw ≠ μm where: μw is the rcs faced by women and μm is the rcs faced by men. h2: there is a significant difference between the students with different levels of degree with respect to their rcs. reverse culture shock among international business administration exchange students 82 h2: μu ≠ μg where: μu, μg represent the rcs of students on the different levels of education: undergraduate and graduate. h3: there is a significant difference between students’ rcs based on their trip length. h3: μs≠ μy where: μs, μy present the rcs of students on the different trip lengths: one semester, one year & above. h4: there is a significant difference between the students’ rcs based on the different periods of time the students have since returning home. h4: μt1≠ μt2 where: μt1, μt2 present the rcs of students on the different periods of time the students have since returning home: one year or less, over a year. h5: there is a significant difference between the students in different age categories with regard to their rcs. μa1 ≠ μa2 ≠ μa3 where: μa1, μa2, μa3 represent the rcs of students in different age categories: 18-24 years, 25-35 years, and 36-45 years. ● research question 2: is there any relationship between rcs and each dimension of cultural intelligence and the total cultural intelligence of business administration/ mba international students who studied abroad & went back home. to answer the research question, five hypotheses were highlighted: ola m.a. agha & nurgül keleş tayşi̇r 83 h6: there is a significant relationship between the rcs and the total cultural intelligence of the participants. h6a: there is a significant relationship between the rcs and the motivational cultural intelligence of the participants. h6b: there is a significant relationship between the rcs and the behavioral cultural intelligence of the participants. h6c: there is a significant difference between the rcs and the metacognitive cultural intelligence of the participants. h6d: there is a significant relationship between the rcs and the cognitive cultural intelligence of the participants. 3.6 validity and reliability analysis bhattacherjee (2012) mentioned that asking a panel of experts can be one of the ways to test the content validity. in the present study, this has been done when the rcs scale was developed and validated by seiter and waddell (1989). furthermore, the researcher sought professors’ points of view and the research participants before conducting the questionnaire. as a result, it can be clearly shown that the instrument is valid in terms of content validity. it was also done when the cqs scale was developed and validated by van dyne, l., ang, s., & koh, c. (2009). bhattacherjee (2012) argues that criterion-related validity is sometimes not assessed in social sciences research. thus, in the present study, the criterion-related validity is ignored. in addition, the instrument is valid in terms of construct validity because the current research used the same method which is factor analysis during its development by seiter and waddell (1989). the same method was used in the cqs by van dyne, l., ang, s., & koh, c. (2009). moreover, in the present study alpha coefficient was obtained by the researcher by using spss 25. as shown below in the reverse culture shock among international business administration exchange students 84 table, the alpha coefficient for the rcs is 0.830, indicating a high level of reliability. also, alpha coefficient for the cqs is 0.877, which shows a high level of reliability. table 1: reliability statistics for rcs scale and cultural intelligence scale reliability statistics cronbach's alpha cronbach's alpha based on standardized items n of items rcs scale 0.830 0.827 16 cq scale 0.877 0.881 20 4. data analysis and results the data will be analyzed with the help of spss 25 using descriptive statistics, independent ttest, and one-way anova. the demographic factors will be assessed using descriptive statistics. first, in the 1st research question, hypotheses 1 to 4 will be tested using an independent t-test because it tests whether the means of two groups are statically different or not (bhattacherjee, 2012). anova test will be used for the remaining hypothesis (5) because the age has more than two groups and rcs is measured on an interval scale. in hypothesis 5, if the result shows a significant difference, a post-hoc test should be used to show in which groups the exact difference lies by using the “hochberg’s gt2 procedures''. however, if the result in hypothesis 5 shows no significant difference, there is no need to do the post-hoc test. ola m.a. agha & nurgül keleş tayşi̇r 85 in the second research question, h6 to h6d will be tested using pearson’s coefficient correlation. to find the strength of the correlation between the variables, the pearson correlation states that 0.8 or above= very strong, 0.5 or above = strong, 0.3 or above = medium, less than 0.3 = weak. it can be shown in the correlations table whether the correlations are significant or not. if the significance level is less than 0.05, this means the correlation is significant (p>0.05) 4.1 demographic characteristics of respondents the demographic profiles of the respondents include gender, age, degree level, trip length, and time since return. in total, 136 participants responded to the questionnaire. additionally, there are no missing values for the demographic variables. most respondents 104 (76.5%) are females, while 32 (23.5 %) are males. additionally, the majority of respondents, 107 (78.7%) have a bachelor's degree, while 29 (21.3%) have a master’s degree or higher. among the respondents, 86 (63.2%) are aged between 18-24 years, 47 (34.6%) are between 25-35 years, and 3 (2.2%) are aged between 36-45 years. thus, it can be concluded that most of the participants' age range is youth age. in addition, 111 (81.6%) of the respondents stayed for one semester in the host country while 25 (18.4%) stayed for one year & above. moreover, most respondents, 80 (58.8%) have returned to their home countries over a year while it’s been one year or less for 56 (41.2%) of the respondents who went back home. 4.2 relationship between rcs and demographic factors is there any relationship between rcs of business administration/ mba international students who studied abroad and returned home and their demographic variables? in order to answer the research question, five different hypotheses were highlighted: 4.2.1 h1: there is a significant difference between men and women with regard to their rcs. reverse culture shock among international business administration exchange students 86 an independent t-test is conducted to test this hypothesis. the results of the t-test reveal that on average, females (m = 3.5841, sd =0.64910) faced more rcs than their male counterparts (m = 3.5664, sd = 0.60657). however, this difference, -0.01773, at 95% confidence interval (-0.27342, 0.23796), is not statistically significant, t (134) = -0.137, p = 0.891. thus, we can conclude that there is no significant difference between genders based on rcs. as a result, hypothesis one is not supported. the present study replicates the findings of akhtar, kamal, abdul hayee & imtiaz (2018) whose results also indicate no significant mean difference in rcs between males and females who are holders of foreign degrees in pakistan. additionally, sussman (2001) highlighted no significant connection between males and females regarding rcs and difficulties upon reentry. (cited in szkudlarek, 2009, p. 5). in contrast, brabant et al. (1990) mentioned a significant connection between gender differences and rcs as the authors highlighted women are more sensitive and get more affected differently by reentry difficulties than men. 4.2.2 h2: there is a significant difference between the students with different levels of degree with respect to their rcs. an independent t-test is conducted to test this hypothesis, and the results are shown in tables 8.1,8.2. the results of the t-test as shown in table 8.1, reveals that, on average, participants who were doing bachelor’s degree (m = 3.6203, sd =0.59029) faced rcs more than the students who were doing their master’s (m = 3.4310, sd = 0.78051). moreover, this difference, 0.18929, at 95% confidence interval (-.12629, .50487), is statistically non significant, t(37.119) = 1.215, p = .232. thus, we can say that there is no significant difference between bachelor’s degree holders and master’s degree holders with respect to their rcs. thus, hypothesis two is not supported. this present research does not replicate the findings of paige (2001) whose research indicates a significant mean difference between different degree holders with regard to the rcs and reentry challenges. paige (2001) confirms that the more ola m.a. agha & nurgül keleş tayşi̇r 87 mature the person is and the higher education degree he holds, the easier his staying abroad will be, and the fewer reentry challenges will be faced. 4.2.3 h3: there is a significant difference between students’ rcs based on their trip length an independent t-test is conducted to test this hypothesis. the results of the t-test revealed that, on average, the participants whose trip length was one semester (m = 3.5991, sd =0.64273) faced more rcs than the ones whose trip length was one year or above (m = 3.4950, sd = 0.61738). however, this difference, 0.10410, at 95% confidence interval (-0.17537, 0.38356), is not statistically significant, t (134) = 0.737, p = 0.463. thus, we can say that there is no significant trip length difference with regard to rcs. as a result, hypothesis three is not supported. the present study confirms what suutari and välimaa (2002) mentioned that there is no relationship between the length of the trip in the host country and the readjustment challenges. (as cited in szkudlarek, 2009, p. 7) while it is not in line with the findings of paige (2001), who found that there is a significant difference between returnees’ trip length with respect to their rcs. he illustrates that the more the expatriate stays abroad, the more possibility for them to face challenges and unexpected rcs upon their return. 4.2.4 h4: there is a significant difference between students’ rcs based on the length time since their return an independent t-test is conducted to test this hypothesis. the results revealed that on average, the participants whose time since the return to home was over a year (m = 3.6008, sd =0.66267) faced rcs more than the ones whose time since the return to home was one year or less (m = 3.5502, sd = 0.60354). however, this difference, -0.05056, at 95% confidence interval (-0.27078, 016966), is not statistically significant, t(134) = -0.454, p = 0.651. thus, we can say that there is no significant difference between students whose time since return differs with regard to rcs. as a result, hypothesis four is not supported. the present study reverse culture shock among international business administration exchange students 88 contradicts what szkudlarek (2009) referred to. szkudlarek (2009) illustrates that some authors such as (gregersen and stroh, 1997; sáchez vidal et al., 2007) highlighted a significant connection between the time since going back home and the rcs and reentry readaptation challenges. however, this present research goes in line with cox’s (2004, p.211) research. 4.2.5 h5: there is a significant difference between the students in different age categories with regard to their rcs. to test this hypothesis, a one-way anova is conducted. the age categories used are 18-24, 25-35, and 36-45. levene’s test is not significant. thus, the assumption of homogeneity of variance is not violated. the results of the anova test indicate that there is no statistically significant difference between students in different age categories with respect to their rcs (f = 1.787; p = 0.172). hence, hypothesis five is not supported. these results replicate the findings of (hammer et al., 1998; uehara, 1986) as referred to and cited in szkudlarek (2009). on the other hand, this present research’s results are not in line with skudlarek’s study (2009) as he illustrates that some authors such as (black & gregersen, 1991; cox, 2004; gullahorn & gullahorn, 1963; hyder & lovblad, 2007) concluded that there is a negative relationship between the age and reentry challenges. when the returnees get older, the possibility of facing the rcs and reentry adaptation problems decreases. 4.3 the relationship between rcs and cultural intelligence is there any relationship between rcs and each dimension of cq and the total cq of business administration/ mba international students who studied abroad & went back home? to answer the research question, five hypotheses were highlighted: 4.3.1 h6: there is a significant relationship between the rcs and the total cultural intelligence of the participants. ola m.a. agha & nurgül keleş tayşi̇r 89 the results show a medium significant positive relationship between rcs and cultural intelligence. 1. the direction of the correlation between the variables (from the pearson correlation): it’s a positive correlation between rcs and cultural intelligence. 2. the correlation is 0.3 or above so the correlation is medium, and (r=0.470). 3. the correlation is significant. it is concluded that sig. = 0.000 which is less than 5 percent (p<0.05). 4.3.2 h6a: there is a significant relationship between the rcs and the motivational cultural intelligence of the participants. the results show a medium significant positive relationship between rcs and motivational cultural intelligence. 1. the direction of the correlation between the variables (from the pearson correlation): it’s a positive correlation between rcs and motivational cq. 2. the correlation is 0.3 or above so the correlation is medium, and (r=0.444). 3. the correlation is significant. it is concluded that sig. = 0.000 which is less than 5 percent (p<0.05). ang, soon, et al. (2007) confirmed that motivational cultural intelligence is positively related to cultural adaptation. 4.3.3 h6b: there is a significant relationship between the rcs and the behavioral cultural intelligence of the participants. the results show a medium significant positive relationship between rcs and behavioral cultural intelligence. 1. the direction of the correlation between the variables (from the pearson correlation): it’s a positive correlation between rcs and behavioral cq. 2. the correlation is 0.3 or above so the correlation is medium, and (r=0.402). reverse culture shock among international business administration exchange students 90 3. the correlation is significant. it is concluded that sig. = 0.000 which is less than 5 percent (p<0.05). ang, soon, et al. (2007) confirmed that behavioral cultural intelligence is positively related to cultural adaptation. 4.3.4 h6c: there is a significant relationship between the rcs and the metacognitive cultural intelligence of the participants. the results show a weak non significant positive relationship between rcs and metacognitive cultural intelligence. 1. the direction of the correlation between the variables (from the pearson correlation): it’s a positive correlation between rcs and metacognitive cq. this study goes in line with jyoti & kour (2015) and jyoti et al. (2015). their study revealed no significant relationship between the meta-cognitive cultural intelligence and cultural adaptation. 2. the correlation is less than 0.3, so the correlation is weak, and (r=0.140). 3. the correlation is non significant. it is concluded that sig.= 0.104 which is more than 5 percent (p>0.05). 4.3.5 h6d: there is a significant relationship between the rcs and the cognitive cultural intelligence of the participants. the results show a medium significant positive relationship between rcs and cognitive cq. 1. the direction of the correlation between the variables (from the pearson correlation): it’s a positive correlation between rcs and cognitive cq. 2. the correlation is higher than 0.3, and less than 0.5 so the correlation is medium, and (r=0.351). 3.the correlation is significant. it is concluded that sig.= 0.000 which is less than 5 percent (p<0.05). 5. conclusion and discussion ola m.a. agha & nurgül keleş tayşi̇r 91 returning home after being done with an exchange program is a challenging experience. this study is in line with other previous studies which show that students who return from abroad suffer from rcs. the objective of this study is to find out whether there are significant mean differences in rcs among the participants in terms of their demographic factors such as gender, age, degree level, trip length, time since return. to achieve this, a cross-sectional survey method of data collection was used. the participants in this study were business administration/ mba international students who joined the erasmus exchange program for six months, one year or above, and others pursued full degrees abroad. students who participated were from different countries and went to different host countries. data were analyzed using spss 25, and various tests were conducted which were descriptive analyses to determine the overall rcs. the independent t-test indicates no significant mean differences in rcs between male and female respondents. additionally, their rcs doesn’t differ significantly based on their trip length, time since return and education degree level. also, the anova results revealed no significant difference between the students in different age categories with regard to their rcs. as a result, there was no need to conduct a post-hoc test. finally, the results related to the cq and rcs show that there is a medium significant positive relationship between rcs and total cq, motivational, behavioral and cognitive cq while there is a weak non-significant positive relationship between rcs and metacognitive cq. these results replicate some previous studies while contradicting other previous studies. 6. limitations due to the time constraints, the researcher couldn’t reach several returnees from different nationalities to compare the rcs in terms of cultural differences. thus, most of the respondents were jordanian students, and there was no balance between the differences in nationalities. the researcher was also unable to reach a wide range of sources such as families reverse culture shock among international business administration exchange students 92 and friends of the returnees to explore more details about the returnees’ adjustment process. additionally, asking the participants for extra interviews in order to be able to elaborate more about the stages of the readaptation process. moreover, since some of the returnees went back home longer than 2-3 years ago, those returnees must have found it difficult to remember their exact initial readjustment process. 7. recommendations for future research this study suggests that to better understand rcs and readjustment difficulties, it is necessary to include various areas for future research. based on the findings of the study, the following suggestions have been developed for researchers studying with exchange students. first, reverse culture shock is a long process that requires a long time to expand more analytical frameworks for rcs and to understand the long different stages of the re-adjustment process. second, instead of a cross-sectional study, qualitative longitudinal interviews are suggested to be used for testing the reverse culture shock of future studies about business students returnees. additionally, it is suggested to conduct more than one interview with returnees. for instance, three interviews can be conducted during three different periods of the exchange program such as: before the mobility interview, during the mobility interview, and after the mobility interview. thus, this can give a wide range of results to compare between the three stages. third, since this study is about business administration/ mba students who faced reverse culture shock, it is suggested that the administrative staff in the universities have some counselors for the returnees to guide the students about the readjustment period. having guidance teachers or helping staff in universities will minimize the rcs the returnees will face as they will be aware of what they might go through. additionally, it can be beneficial for the student's success, especially the ones writing their thesis. they can be helped to see the academic differences between the two countries from different perspectives. in a nutshell, having a good administrative staff caring about the returnees can help promote the coming ola m.a. agha & nurgül keleş tayşi̇r 93 exchange programs and enhance intercultural awareness among students. finally, everyone who is involved in the exchange program should be part of this experience to encourage the returnees to reach their goals without having their home academics get affected references adler, n. j. 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(1986), “the nature of american student reentry adjustment and perceptions of the sojourn experience”, international journal ofintercultural relations, 10, pp415-438. ward, c. & kennedy, a. (1999), “the measurement of sociocultural adaptation”, international journal of intercultural relations, 23, pp659– 677. appendix 1: the questionnaire 1. demographic factors 1. gender ● female http://epubs.surrey.ac.uk/804948/1/shibuya2004.pdf http://fsu.digital.flvc.org/ https://eprints/ https://etd.ohiolink.edu/rws_etd/document/get/bgsu1206387236/inline ola m.a. agha & nurgül keleş tayşi̇r 97 ● male 2. age ● 18-24 years ● 25-35 years ● 36-45 years ● +46 years 3. nationality ………... 4. where have you studied abroad ? (host country) …………. 5. the degree level in the host country ● bachelor’s degree ● master’s degree ● phd degree 6. length of trip ● one semester ● one year & above 7. length of time since return ● one year or less ● over a year 2. the challenges faced when returning home ( rcs) in relation to the challenges of returning home, please indicate your degree of agreement with the following statements by ticking an appropriate number. ( 1 =strongly disagree (very dissatisfied) ; 5 = strongly agree (very satisfied) ). tick “3” if you are uncertain. 1when i returned, people did not seem that interested in my experiences abroad. 2life was more exciting in the host culture. 3my friends seem to have changed since i have been gone. reverse culture shock among international business administration exchange students 98 4when i returned home, i felt really depressed. 5i had difficulty adjusting to my home culture after returning from abroad. 6since i have been abroad i have become more critical of my home culture’s values. 7i miss the foreign culture where i stayed. 8i had a lot of contact with members of the host culture. 9i feel like i have changed a lot because of my experience abroad. 10when i returned home, i felt generally alienated. 11my friends and i have grown in seperate directions since i have returned. 12life in my home culture is boring after the excitement of living abroad. 13i miss the friends that i made in the host culture. 14since i have been abroad, i have become more critical of my home culture’s government. 15my friends and family have pressured me to “fit in” upon returning home. 16the values and beliefs of the host culture are very different from those of my home culture. 3. the cultural intelligence scale (cqs) read each statement and select the response that best describes your capabilities. select the answer that best describes you as you really are (1 = strongly disagree; 5 = strongly agree). cq dimensions questionnaire items ola m.a. agha & nurgül keleş tayşi̇r 99 mc1 i am conscious of the cultural knowledge i use when interacting with people with different cultural backgrounds. mc2 i adjust my cultural knowledge as i interact with people from a culture that is unfamiliar to me. mc3 i am conscious of the cultural knowledge i apply to cross-cultural interactions. mc4 i check the accuracy of my cultural knowledge as i interact with people from different cultures cog1 i know the legal and economic systems of other cultures. cog2 i know the rules (e.g., vocabulary, grammar) of other languages. cog3 i know the cultural values and religious beliefs of other cultures. cog4 i know the marriage systems of other cultures. cog5 i know the arts and crafts of other cultures. cog6 i know the rules for expressing nonverbal behaviors in other cultures. mot1 i enjoy interacting with people from different cultures. mot2 i am confident that i can socialize with locals in a culture that is unfamiliar to me. reverse culture shock among international business administration exchange students 100 mot3 i am sure i can deal with the stresses of adjusting to a culture that is new to me. mot4 i enjoy living in cultures that are unfamiliar to me. mot5 i am confident that i can get accustomed to the shopping conditions in a different culture. beh1 i change my verbal behavior (e.g., accent, tone) when a cross-cultural interaction requires it. beh2 i use pause and silence differently to suit different cross-cultural situations. beh3 i vary the rate of my speaking when a cross-cultural situation requires it. beh4 i change my non-verbal behavior when a cross-cultural situation requires it. beh5 i alter my facial expressions when a cross-cultural interaction requires it. international journal of commerce and finance, vol. 4, issue 1, 2018, 66-75 66 gender, entrepreneurship and socioeconomic reparation in jammu & kashmir bilal ahmad pandow, salma shabir ashai, gousiya hussain senior lecturer, middle east college, sultanate of oman (ibilalhussai@gmail.com) abstract the entrepreneurship growth is being recognized as a serviceable means of tackling jammu and kashmir’s [j&k] socioeconomic challenges of high unemployment, and unbalanced distribution of income. the unemployment rates revealed by national sample survey office (nsso) for the state presents a depressed image of the condition of women in the state. according to the nsso employment position of females in urban areas are worse than that of men. the indicators were analyzed and found that the females in urban arears are unemployed and the rate is at 11.7 percent. and the same pointer for the unemployment rate for male population is hovering at 6.7 percent and the figure at all-india for the woman (urban) joblessness rate is at 7.9 percent. it is observed that existing policies overlook the gender as a potential input for addressing the grave issue. despite this females have proven their mettle using their peculiar gender nature effectively and efficiently in small and micro business which calls for an immediate attention by the government towards promotion of women in entrepreneurship. keywords: gender, entrepreneurship, jammu and kashmir, sociocultural diversity. jel classification: l26; j16; m13; z18 1. introduction a robust economy driven by entrepreneurs needs an array of support from all stakeholders and together all can shape and endure a vigorous economic milieu where entrepreneurship can flourish. the stakeholders can include investors, bankers, customers, suppliers, service providers, family and others relevant members. the attitudes at society level are consequently significant as entrepreneurs in general and women entrepreneurs in particular depend on many stakeholders in the community. the education of the women is considered to be an operative instrument for women’s enablement, also it has interlinkage with additional societal parameters like employment, health, population, etc. this enables females to acquire information and technological awareness, needed for evolving and refining their work in the relevant fields of business. also, women learning is vital for them to go up in economic productivity. notwithstanding the linkage of constructive consequences and the growth finished over the previous tens of annual, women literateness rests short compared to men in jammu and kashmir. the literateness rate in the state has gone up by 13 percent in the past 10 years from 55 percent in 2001 to 68 percent in the 2011. however, women literateness has not seen much of the change and has gone up from 42.22 percent in 2001 to 58.01 percent in 2011. the sexual category discrepancy quiet occurs equally in urban plus rural regions however, the situation is reasonably on upper side in pastoral areas. and this is ascribed towards a total of aspects like deficiency of admission to teaching, insecurity of blood relation for directing daughters towards educational institutes, females are used as workforce for agricultural and additional domestic activities. also, it has been observed that females in most economies have on an average, lesser insights about prospects and competences, poorer intentions and upper fear of failure than males. despite being in a disadvantageous spot, the women in the state are breaking the barriers and securing the equal share for themselves. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e gender, entrepreneurship and socioeconomic reparation in jammu & kashmir 67 2. literature review numerous studies including humbert & drew, (2010) have shown that here exists a solid effect of sex going on few elements, however, the gender dimension in itself demands towards be observed beside using extra public elements so as to realize variation in inspirations. now specific, matrimonial rank, having a child plus, also gender interaction, is valuable in explaining dissimilarities in conduits into entrepreneurship for different genders. similarly, from a policy perspective, researchers have suggested that admission towards training in the business to women entrepreneurs in which they faith toward establish their business could be key resource. further, the research suggest though males plus females entrepreneurs do vary popular approximately in features of presentation, however, here stands not one solid proof that females entrepreneurs stand obstructed by the owners’ relative lack of education or experience. the education proposes that aimed at all genders, the finest method to make themselves toward ensure trade in a specific area or business is by gaining knowledge in that business filed, in addition to to secure experience towards corporate start-ups (fischer, et.al. 1993). some studies have found that free enterprise learning might reduce the gender dissimilarities for the women having entrepreneurial ambitions. in this manner, entrepreneurship learning can be situated as a balancer, also reducing and limiting the impact of small self-efficacy plus eventually accumulative the probabilities aimed at efficacious scheme formation through womenfolk (wilson, kickul & marlino, 2007). also, the research has shown that the influence of gender has been observed in both demand and supply side factors. it has been seen that the results as of now point towards non-discrimination through the groups. however, the situation is likely that mutual sides: supply and claim issues relate by the fact of interaction to mutually produce the result. the study also revealed that the character that both sides show in the business loaning judgement. the coproduction of consequences, the outcome of demand-side and supply-side dealings, represents a significant advance in the thoughtful influence of gender in obtaining business investment (carter, et.al. 2006). besides, the researchers have probed the effects of perception taking on sentiments about compensations for sufferers of past damage. the studies further reveal that in case of australia, non-indigenous australians acquired a unique australian viewpoint, this augmented supposed right towards, as well as reduced antagonism to, fiscal reimbursement. furthermore, professed right arbitrated the association between annoyance about monetary reimbursement and viewpoint taking, the common stimulus of feelings and apparent right (berndsen & mcgarty, 2012). also, many researches make it known that swelling figures of fierce way demonstrations plus uprisings produced by social and economic complaints frequently happen in nations whose fact directives devise deliberated on related previous incidents of ferocity plus suppression. these fresh series of ferocity thrust toward request whatever extra intermediate honesty can prepare toward encourage the objects of understanding plus justifiable harmony. numerous studies including laplante, (2008) have shown that fact instructions enlarge their obligations toward contain a lawful agenda that observes the social and economic basis reasons of fierceness in relations of destructions of financial, public plus ethnic truths. the researchers like baba et.al. (2010) have widely considered the outline of gender influence in unlike activities and choices that intricate in agrarian farming. and the results have shown that though ladies have significant role in many developments of vegetal farming but in totally men participation was found more significant. also, it was recommended by investigators that that teaching services to female may be delivered on urgently so as to broaden their external prospect that can finally enhance their contribution in decision-making. passable postponement amenities rather by woman workers should be rationalized to rural females to acquaint them with latest innovation in vegetal progress. the contribution of women in such agendas is likely to bring advancing the real and applied difficulties, which need instant consideration of the strategy producers. similarly, researchers like gul et.al. (2014) have proved that gender justness is the practice of being reasonable to females and males. to safeguard justice, policies and dealings should be accessible to reward for females' ancient and community neglected. the government, and non-government bodies are functioning together for the development bilal ahmad pandow 68 of education for women. the study discovered the level of participation of women in learning and to discover the obstacles to females’ education. also, many researches have been done on the progress of an effectual promotion system, society of fruit cultivators, and growth of business aptitudes toward start minor produce dispensation businesses plus the capability plus implementation of bio-technological novelties promising toward paucity discount drive consume the ongoing consequence for free enterprise growth over gardening. the researcher advocates for consciousness, inspiration, practical talent, the correct help and care since family by allowance smooth and administration plus additional administrative aid toward the gardening businesspersons on strategy equal container reinforce their capabilities also accumulation to the domestic pay plus countrywide production (nain et.al. 2013). while, absence of mindfulness about free enterprise was found to be a one of the reasons bhat, & khan, (2014) recognized among the accomplished youth in the government of j&k that takes greatly added towards the current state of businesses wherein there is an ever swelling rate of joblessness with the every passing day. the information about free enterprise as an occupation choice remains therefore miniscule that a refined adolescence arises towards identify almost the situation later he/she woman consumes now misused centuries collected observing aimed at a work plus on the time somewhere private enterprise develops a inevitability somewhat than a prime. given the situation the role of females within the entrepreneurial situation is of substantial standing. the women not only produce jobs for themselves and others but also make available society with diverse way out to management, organization and professional difficulties as well as to the utilization of business prospects (baba, 2013). also, in an important dimension that requires to be taken into account while studying entrepreneurship is that the state is in undergoing a political conflict which is having a huge impact on all start-ups including the ones started by females. as suggested by butt & pandow (2012), the state is gifted with scenic beauty, world famous health resorts, fascinating landscape and historical legacies in craftsmanship skills, thus enjoying a distinct and an important place in handicrafts and tourism industry. for sustainable development in the industrial sector, there is an equal need for peace and stability but unfortunate the state has remained politically most unstable right from the beginning. it is a bone of contention between india & pakistan and the two countries have fought three wars over the state right from 1947. as a result of the lack of peace and stability, the state has suffered on all fronts including the industrial front. in yet another significant study by wahidi, (2017), the researchers have emphasized that the topographies of recipients of microcredit allotted by mfis in lebanon. as a result of information attained from mfi heads, the outcomes have revealed that mfis give more credit to males related to females, and a low fraction of cred it goes to startups. in addition, recipients have a low level of schooling, poor or abstemiously poor, and are situated in countryside areas. the gender refinement in the distribution of micro-credits was underlined on the basis of the first data administered in this work. the results of the talks with mfi’s managerial administrators seem to demonstrate that the male’s loan officers may discriminate between man and woman recipients and favor to grant microcredit to a male. also, females recipients may have less information about the credits accessible by them, or do not take inventiveness as they live in a male-controlled culture. moreover, men go through their spouses to get additional microcredit. the above cited studies clearly suggest that not many studies have been conducted that address all the issues a concerns regarding the gender, entrepreneurship and socioeconomic reparation in jammu & kashmir. in this research paper the focus will be to highlight and raise critical factors that hamper the growth of the entrepreneurship in general and female’s free enterprise in particular in the state. 3. need for the study the females’ free enterprise needs to be deliberated in depth for two substantial motives. the first motive is that female entrepreneurship has been renowned during the last era as a significant untouched basis of fiscal development. also, female entrepreneurs generate new employments for others and through presence diverse moreover offer civilization through varied resolutions towards administration, plus commercial glitches such as to protect more openings. however, the females still signify a marginal of all businesspersons. thus there happens a gender, entrepreneurship and socioeconomic reparation in jammu & kashmir 69 market letdown discerning against females’ likelihood to develop effective entrepreneurs. this market catastrophe needs to be talked as to safeguard the financial prospective of this neglected collection be able to be wholly used. also, devoid of a hesitation the influence of females in financial development is considerable, though the lack a dependable picture unfolding in detail that precise impact is still omitted. the females now private enterprise consumes remained mostly deserted equally now culture in over-all and in the societal disciplines is the other motives for the study. the females not only have poor contribution rates in start-ups than males but they also normally cherry-pick to start and manage firms in diverse businesses related to males. the commercial events like principally trade, teaching plus extra facility region through females remain frequently apparent by way of existence fewer significant to financial progress plus development than industrial and latest technology. additionally, conventional research, strategies and curricula incline towards be menfolk controlled plus also frequently fix not yield hooked happening explanation the exact needs of female businesspersons. as a consequence, equal prospects amid both the genders since the viewpoint of private enterprise remains motionless not a representativeness of ground truth. now instruction aimed at strategy creators towards report the present condition this paper endeavors to create some commendations. also, in order to understand the paybacks of strategy variations and it is significant to include a females business measurement while bearing now totally smes plus development rules for example gathering ladies’ funding requirements on altogether phases of the commerce; acceptance of trade expansion plus provision amenities; admission to business, administration plus global marketplaces, machinery admission, utilization, plus more. moreover it would means occasionally assessing the influence of these actions on the achievement of female entrepreneurs and trading good replicas and best practices, through collaboration with principal national and global organizations in order to constantly advance strategies and plans. however, a better qualitative material and quantitative information would be of valuable usage to profile women entrepreneurs and the information would include demographic figures, blockades to new business and development likewise contribution in encouraging consciousness of the character of female businesspersons in the monetary system. in many a places all over the globe it is perceived that womenfolk’s entrepreneur linkages could prove a main foundations of understanding about female’s free enterprise and world over the networks are progressively recognized as a vital instrument for their overall growth. the strategy makers are obliged to adopt the linkage of associations to inspire collaboration and shape conglomerates amid local, state and global linkages. this will enable the women commercial activities in the economy. the entrepreneurship by females is both about the position of women in the culture plus the part of private enterprise in the similar culture. the females face exact hindrances like domestic duties which needs a redressal in command towards provide them admission towards the equal chances as males. also, increased involvement of females in the workforce stands a precondition aimed at refining the location of womenfolk in the civilization. moreover, self-employment signifies one of the supreme professional prospects for women. this holds true irrespective of which country or economy one is observing. the self-employment characterizes a significant work though unconventional aimed at numerous females. however, it is observed globally so is the case of jammu and kashmir that the women is still in minority in starting new companies, are independent, or are small commercial owner-managers. 3.1. objectives 1. to analyze the issues of unemployment among females in jammu and kashmir. 2. to critically analyze the initiatives of edp taken to deal with the problem of unemployment among women in the state. 3. to highlight the challenges confronted in the state in women's entrepreneurship development. 4. to suggest policy measures to introduce women towards entrepreneurship. bilal ahmad pandow 70 4. methodology the paper analyzes the demographic positioning of women in the state. in this paper we have also tried to examine the women entrepreneurship through informal interviews which includes inquiries about the manifestation of entrepreneurship opportunities, principles of competences for starting a business, anxiety of letdown, insights about the position of businesspersons, the appeal of entrepreneurship as a livelihood choice and, finally, resolve to start a business. also, we have used both secondary data from government sources, journals and magazines for the analysis purposes. and have employed statistical tools like growth-rates, percentages using ms-excel. however, the accessibility of data is still rare especially in case of women entrepreneurship. furthermore, the existing systems at large don't have data on the separate level, making analyses on gender specific challenging. 5. results & discussions the women population of jammu and kashmir (j&k) reduced miserably from 47.15percent of the whole inhabitants in 2001 to 46.88 percent in 2011. according to the survey 2011 that jammu and kashmir has an inhabitants of 1.25 crore populaces above the number of 1.01 crore in 2001. while, the over-all inhabitants of j&k as per 2011 survey is 12,548,926 of which men and women are 6,665,561 and 5,883,365 correspondingly representing a condensed gender relation of 883. the matching statistics of men and women as per survey 2001 were 5,360,926 and 4,782,774 correspondingly representing gender relation of 892. likewise, the populace progression now this period was 23.71 percent though in preceding era, it remained 29.04 percent. the inhabitants of the state practices 1.04 percent of india in 2011 and in 2001, the number remained 0.99 percent. this change specifies an abundant greater amount of development in contrast to altogether india average development amount. the demographic unevenness amid male and female, though, remains towards occur plus has supplementary depreciated and be able to be understood in the below mentioned table 1: table 1: relative position of sex wise population all india j&k 2001 2011(prov.) 2001 2011(prov.) population 1028737436 1210193422 10143700 12548926 males 532223090 623724248 5360926 6665561 females 496514346 586469174 4782774 5883365 child population (0 to 6yrs) 163837395 158789287 1485803 2008642 males 85008267 82952135 765394 1080662 females 78829128 75837152 720409 927980 child sex ratio 927 914* 941 859 *the kid gender proportion on all india level (914) is lowest reordered since independence of india the gender proportion (women per thousand of males) is measured to be a significant pointer of the community circumstances mainly through admiration towards ladies’ rank in that community mandate. the small gender proportion displays tolerance of non-natural involvements, misrepresenting the organic movement plus regular gender, entrepreneurship and socioeconomic reparation in jammu & kashmir 71 stability in rapports of sum of ladies each thousand guys. an imperative apprehension in the current position of j & k demographic move tells towards hostile gender proportion. the sex-ratio for example each survey 2001 is 892 which is very uncomplimentary to the females of the government. the sex-ratio as per survey 2011 remained 883 which remains a problem of abundant apprehension and desires to be spoken on precedence. the table 1 huts bright scheduled amount change in the gender proportion above the age. 5.1 unemployment the word cast-off aimed at gauging joblessness is the ‘joblessness rate’, clear by nsso as the amount of peoples unwaged each 1000 peoples in the work power (which contains mutually the working and the jobless). aimed at control of unemployment degree, person-days as per the present regular rank methodology practice is tracked. this, in outcome, offers the unutilized location of labor power. therefore, it is an extra knowledgeable pointer of appointment condition in a people than the ‘quantity unemployed’, which is just the sum of unemployed per thousand persons in the people as a total. the quinquennial assessment on engagement – joblessness approved available by nsso offers approximations on numerous topographies relating to profession plus joblessness at the nationwide as well as government level. the facts on joblessnessemploy situation through the national has also develop an unwavering story of all the nsso assessment series on some specific limitations. the newest nss study66th round directed throughout july, 2009 – june, 2010 all over india establishes a significant foundation of data on unemployment. the joblessness charges exposed by 66th round of nss for j&k state in contrast to all india statistics are assumed in the following table 2: table 2: unemployment rate for j&k state vis-a-vis all india s. no area j&k (%) india (%) male female persons male female persons 1 rural ups 3.1 19.3 4.9 2 2.5 2.1 cws 3 5.7 3.9 3.4 3.7 3.5 cds 3.8 10.3 5.1 6.7 8.3 7 2 urban ups 5 14.5 6.5 3 7.3 3.7 cws 5.2 13.1 6.9 3.7 7.7 4.3 cds 5.5 15 7.3 5.2 9.6 5.9 3 combined (rural + urban) ups 3.6 17.1 5.3 2.3 3.6 2.6 cws 3.6 7.1 4.6 3.4 4.6 3.6 cds 4.2 11.1 5.6 6.2 8.5 6.7 the examination of data discloses that the joblessness rate for combined under ups (5.3 percent) and cws (4.6 percent) while-as the pointer for cds was (5.6 percent). as in contradiction of this the all india level indicator was smaller than that of state-owned level below ups as well as cws rank. though, below cds the unemployment amount for all india level was greater after linked to the state-run figures as stated in the overhead table. at national level, the unemployment charges for females as per all the three methods viz. ups, cws and cds were on the upper side when associated to consistent facts for menfolk. therefore the consequences displays that the difficult of joblessness is extra major amid women in the state-owned. bilal ahmad pandow 72 table 3: contrast amid male/female joblessness degree nss rounds male female combined( male+ female) ups cws cds ups cws cds ups cws cds 66 th rural 3.1 3 3.8 19.3 5.7 10.3 4.9 3.9 5.1 urban 5 5.2 5.5 14.5 13.1 15 6.5 6.9 7.3 62 nd rural 5.1 6.5 7.9 0.6 0.3 0.5 4.7 5 6.7 urban 6.7 7 7.6 11.7 8.1 8.7 7.3 7.1 7.7 combined 5.4 6.6 7.9 3.5 1.2 1.8 5.2 5.4 6.9 the joblessness degree as per ups in jammu and kashmir consumes continued almost the same and is estimated at 5.2% and 5.3% during 62nd and 66th round of nss respectively. the joblessness degree in respect of present weekly position method has come down from 5.4% in 62nd round to 4.6% in 66th round. also, joblessness rate as per current daily status approach has come down from 6.9% to 5% during the period designated above. also, as per the 66 round of nss, based on ups, j&k consumes the maximum unemployment degree of 5.3 % in assessment to its adjacent federation viz. punjab (4.5%), himachal pradesh (2.8 %), delhi (2.7 %), haryana (2.6 %). all india statistics for joblessness rate stood at 2.6 % only. the joblessness degree for men in j&k remained 3.6 % merely though that of women remained 17.1 % which is extreme also great when linked to the neighboring federation viz. punjab (11.7 %), haryana (2.8 %), delhi (2.8 %), and himachal pradesh (2.5 %). the disruptive of joblessness amid women is major in jammu and kashmir founded on normal principal rank has shown as the flaws amid unemployment degree of females in jammu and kashmir (17 percent) and that of all india level (3.6 percent) which is enormous. additional, the joblessness is extra mainly in city than in pastoral areas of jammu and kashmir. the joblessness degree in city area of jammu and kashmir founded on 66th round of nss stood at 6.5 percent as against 4.9 percent in pastoral area but the problem of joblessness amid pastoral women (19.3%) is higher than that of urban women (14.5 %). the joblessness amongst urban men (5 percent) is higher than that of rural men (3.1 percent) in jammu and kashmir. the pastoral feminine joblessness in jammu and kashmir stood at 19.3 percent which is extreme too great as linked to the nearby federations viz. punjab (11.4 percent), h.p (2.2 percent), haryana (2.2 percent) and all india statistics of 2.5 percent merely. the females are dynamic and industrious labors in nationwide budget. “idea of bharat nirman”, “feel good”, “socio economic development” and “good governance” is not imaginable deprived of influence and approval of womenfolk. the females’ defense, wellbeing, contribution plus enablement are, thus, vital for social growth and development in economy. the administration of india had directed in the fresh age by declaring the year 2001 as 'women's empowerment year' to emphasis on a dream 'where women are equal companions similar to men. also, enablement is now progressively seen as a procedure by which the ones deprived of control improvement better regulated over their lives. this means control over physical possessions, scholarly capitals and philosophy. it gender, entrepreneurship and socioeconomic reparation in jammu & kashmir 73 includes command to, command by plus command inside. through orientation to females the control relative that has to be intricate comprises their breathes at manifold levels, household, public, marketplace and the government. importantly, it includes the mental level ladies' ability to declare themselves and this is built by the gender roles allocated to her particularly in an ethos which struggles alteration like india. the belief of sex fairness is cherished in the indian composition in its overview, essential human truths, central obligations and instruction values. the structure not only awards likeness to womenfolk but also approvals the government to accept events of constructive insight in service of womenfolk. 5.2 present status the women establish nearby 47 percent of the whole populace of the government. the growth of womenfolk, no hesitation, has remained a portion of the growth development practice precise since beginning of five year strategies nonetheless the move in method since wellbeing to growth to womenfolk acquired room in a concentrating funds in the 6th and 7th five year plans (fyp). the 8th fyp guaranteed to safeguard that aids of development do not by-pass womenfolk. while, the 9th fyp altered the plan for womenfolk from growth to authorization and stress on groundwork of distinct females constituent strategy (wcp) by categorizing openly schemes consuming straight manner on wellbeing and growth of females. the 10th fyp further reinforced the execution of wcp. also, the females and teen growth section in the organization of social justice and empowerment has also commanded upon the states to observe carefully the movement of goods of various preparations for the authorization of females on steady foundation. these advantages have aided in refining the position of women in various compasses to a countless degree, but the disparity quiet happens which wants to be talked above the ages. 5.3 financial authorization of females since the females take writhed severely throughout the previous binary eras due to the combativeness connected occasions in jammu and kashmir, their financial authorization is measured to be the lone means to support the females in suffering. the administration has been realizing numerous agendas which care womenfolk to revenue up new undertakings and jump self-employment, over subsequent sections/groups: i. state-owned females growth company. ii. societal wellbeing section. iii. rural development department. in this context, the authorizing expert fresh females structure that procedures a part of sher-i-kashmir service and wellbeing programme remained thrown by j&k state females growth company (jkwdc) in 2010. also, out of the total release of inr 6.50 crore, jkwdc has sanctioned inr 6.46 crore in favour of 403 females businesspersons fitting to diverse regions of the state for establishment of profitable pay producing components on minimal awareness degree of 6%. the businesspersons availed the loan facility for the following trades: i. ready-to-wear garments ii. perfumed medicinal plants iii. boutique iv. style designing v. beautifying shop vi. desk top printing vii. curative health care viii. mushroom farming ix. floriculture/farming etc. bilal ahmad pandow 74 the jkwdc is rising credit since nmdfc and liberating the period credits to feminine receivers for opening revenue generating elements. inr 17.33 crore have been gained from nmdfc and 3300 receivers have been protected through 10th plan. in contrast, throughout the year 2008-09, actuality the first year of the eleventh five year plan, 745 receivers have been helped with an outflow of inr 460 lakhs. throughout 2009-10, 1176 receivers were protected with a fiscal care of inr 496 lakhs and throughout the year 2010-11, 1002 receivers were protected with a monetary help of inr 663.55 lakhs. throughout the present monetary year 865 receivers have been protected with an outflow of inr 556.87 lakhs up to november 2011. 6. conclusions & suggestions in this learning the researchers devise measured the position of females’ enterprise. the stumpy charges of females’ private enterprise are both connected to the rank of ladies and the rank of private enterprise, the study suggests that snowballing the aptitudes of females to contribute in the work power in the need of the hour. also, to advance the situation of women in society by swelling the likelihood to involve in private enterprise accomplishments. though, additional beleaguered creativities remain too wanted towards care women businesspersons and would be entrepreneurs. the conclusions of the paper can help policy makers, experts and teachers comprehend the incidence and flora of females’ private enterprise in the state. subsequent are some key assumptions from the paper. i. in civilizations where females observe that they have the capabilities for free enterprise, they are more possible to trust that risk-taking occasions occur. ii. linked to menfolk, womenfolk stand similarly probable towards see private enterprise as eye-catching, hitherto they dearth optimistic approaches around their specific private dimensions or predispositions for opening productions, plus they take fewer private connection through businesspersons. iii. largely, females are fewer probable to undertaking hooked on private enterprise than menfolk; this program is exaggerated in precise markets like that of j&k. iv. females businesspersons in less-developed parsimonies are extra possible than menfolk to be interested by inevitability, but the hole may be preliminary to nearby. v. in developing markets, necessity-based private enterprise may partially plug in appointment holes throughout financial declines. vi. a important encounter for females businesspersons in initial development-stage thrifts is supporting their trades elsewhere the startup and initial stages. vii. systems of females businesspersons and trade vendors are normally lesser and fewer varied than persons of their masculine matches, and females incline to lure extra on their private relations, largely household, than on additional foundations. viii. likened through their masculine lords, female’s businesspersons in comfortable markets incline to be mature, as similarly cultured and as probable to generate ground-breaking foodstuffs; nevertheless, their development prospects are semi persons of menfolk. we close the paper with these procedure commendations for promoting private enterprise among women. also, there is a need for promotion of societal approaches concerning private enterprise, and in precise, females’ appointment in private enterprise. besides, supporting women-run trade start-ups by creation prospects and capitals obtainable. besides there should be a support to females’ commercial development with mechanical aid and teaching. bibliography [1]. baba, m. m. 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(2007). gender, entrepreneurial self‐efficacy, and entrepreneurial career intentions: implications for entrepreneurship education. entrepreneurship theory and practice, 31(3), 387-406. international journal of commerce and finance, vol. 3, issue 1, 2017, 13-25 cost benefit analyses of developing a legislation to attract non-resident high net worth individuals to use estonian private foundation platform urmas kaarlep, (phd candidate) estonian business school, tallinn, estonia hamed alavi, (phd candidate) estonian business school, tallinn, estonia abstract on a global level, the high net worth population is expanding, and the wealth of high net worth individuals (hnwi) is increasing rapidly. for various reasons, high net worth families and individuals are searching for vehicles to assist them in safeguarding and conveniently managing their wealth. private foundations represent one useful avenue for achieving this end, and the use of private foundations has become increasingly popular in recent years, particularly in european countries. many countries have laws which regulate private foundations and several are looking for adjusting or introducing legislation. in this article, authors analysing benefits for a country like estonia in case the country increases the attractiveness of its jurisdiction for non-residents who are looking for establishment of a private foundation. the article comes to the conclusion that to be competitive, a country cannot collect tax revenues from private foundations established by non-residents except from income originated in the very same country. however, the country can earn benefits from revenues received by companies rendering services to non-residents and their private foundations. the article demonstrates that service fees a country earns and taxes collected from these fees would be substantial enough to make necessary changes to legislation beneficial for a country. keywords: taxation, private foundation, cost-benefit analysis 1. introduction in the course of history, development of institutions has been both reactive and proactive beginning with social interactions, social behavioural code or social contracts develop. for example ken binmore (2010) defines social contract as “the set of common understandings that allow the citizens of a society to coordinate their efforts”. social contract itself does not need a law as the social system holds it together, however, it works until all agents of a social system are motivated to keep the contract. at the point when some agents for a selfish reason see possibility to break the contract, then it will be time for the masonry arch1 to fall down. this could indicate a point when a legal system is needed to secure the majority from potential damages by some selfish agents. for example, high net worth individuals need a system to solve problem of their family business continuity and inheritance issues. historically there were different social contracts, like in some cultures the oldest son inherited everything so continuity of family business was secured. the next development was introduction of trusts although they are more common in anglo-saxon countries. among family members there is a possibility to agree on a way how to keep family business continuing in a healthy manner, however, with more than one descendant there is always a risk for conflict of interests. even if it is possible that sisters and brothers can keep the interests aligned then their spouses with likely opportunistic behaviour of “gold-diggers” will make keeping a social contract close to impossible. hence, the need for a special legislation is unavoidable to support the continuity of family businesses in the current economy. at the end of the last century european states introduced relevant laws for regulating private foundations of private purposes2. 1 a metaphor used by david hume (1978). 2 whereas in austria until 1993 foundations had no choice except to be charitable, the private foundations law of 1993 enabled private foundations. in belgium, the private foundation was introduced in 2002 and the foundation in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 14 urmas kaarlep & hamed alavi http://ijcf.ticaret.edu.tr in this paper first we look for how private foundation platforms satisfy more important concerns and needs of high net worth individuals. next will be discussion on views in respect of social importance of the project and the methodology that should be applied. afterwards analysis of social benefits, cost and net present value are going to be presented. 2. literature review 2.1. high net worth individuals and private foundation high net worth individuals is a group which is seen by private banks as a separate client segment. a common definition used is that these are individuals who possess individually investable assets (exclude private residence) more than $1 million us dollars (knight frank llp, 2016). to focus more on the higher end of the group another term, ultra-high net worth individuals is commonly used for persons who possess investable assets more than $30 million. based on knight frank llp survey (2016), hnwi-s are globally most concerned about family business succession issues, potential increase in wealth taxes and increased scrutiny of wealth by government. although, private foundations do not address directly the second and third concern, it does directly help to solve the first issue. in his presentation on non-tax needs of high net worth individuals, philip marcovici (2015) lists among others: business succession, managing risks of divorce, “second” families, “living” wills, asset gathering and identification, family conflict resolution, asset protection and preservation, special assets (art etc.), disability/illness as main concerns of nhwi-s. private foundations are used for a large variety of purposes (sepp and kaarlep, 2016, pp. 96 104): they can be used to prevent the dispersal of the estate (business) after one’s death; they can ensure continuity in management. this could be useful when a founder has no children or if he considers some of his heirs not fit to run the business or they do not wish to do so. they can enable the reaching of a specific goal. the familial estate can be assigned to a specific purpose, such as providing for a relative in the case of incapacity or lack of financial maturity. for example, parents with a disabled or minor child may be concerned with identity of person who will manage their child’s assets after their demise, and perhaps when they themselves become disabled. nowadays, people are tending to live longer, and there is an increase in the number of people who are affected by conditions such as dementia and alzheimer’s disease, which can result in restricted active legal capacity. another purpose is to protect specific assets, as in the case of keeping the family home out of the reach of creditors. this could be especially attractive for businessmen or for those whose professions open themselves up to the risk of civil liability (e.g., doctors or lawyers), but in the light of today’s economic and financial instability – and, in some regions, political instability it could be attractive for anyone. it should be kept in mind, though, that there are usually some specific rules protecting creditors in a case wherein a private foundation is set up to harm existing creditors or with no actual change in the control of the property. they can also be used to optimize tax liability. the principal structure of a private foundation is presented on figure 1. sector in belgium has been growing since. malta enacted specific foundation legislation in 2007. the legal and tax landscape on dutch private foundations dramatically changed with the introduction of a new tax doctrine on ‘segregated private capital’ as of 2010. even before that, one specific foundation form, the so-called ‘depository foundation’ (stichting administratiekantoor, stak) for the purpose of acquiring and administering assets (shares) was widely used. (sepp and kaarlep 2016) cost benefit analyses of developing a legislation to attract non-resident high net worth individuals to use estonian private foundation platform 15 http://ijcf.ticaret.edu.tr figure 1. 2.2. social importance countries like estonia facing at present a situation where it is difficult to attract foreign direct investments. one reason is that the cost level of labour has increased over years and is not so competitive as it was in the past especially for mass production. other reasons are that limited market for labour and goods and services due to low level of population. there is not enough people nether for production nor for consumption of the products and services. migration could be a solution however it will have its own side effects. government of a country like estonia should ask about opportunities which are available for tackling limitations mentioned above. opportunities should satisfy criteria of limited number of population and create higher value per person. the first criteria come from a limitation that there are few people available. the second relates to the fact that in given situation, cost of labour increases (alavi, 2016 ,pp. 139-145). because of increasing cost an opportunity should have less dependence on labour cost. to achieve the latter the delivered value should be more substantial to a limited number of population to reduce the cost of labour in determination of a location of a direct investment. another important element for an opportunity would be that the size of a local market is not important. that would eliminate most investments into production of physical goods. thus, countries like estonia are left more or less with 2 options: to attract production of digital goods and/or attract non-residents to use services of the residents of the country. an opportunity to attract non-residents to use jurisdiction of country like estonia for the purpose of establishing private foundations satisfies the criteria described above. to render services to private foundations a country does not need massive number of people and it creates a need for people with higher skills and therefore the salaries of these people are expected to be higher. cost of labour would be important also in respect of servicing private foundations however as it would not be mass production and ultimately the cost is not a final determinant for a location. private foundation, administrator(s) founder supervisory board beneficiaries distribution contribution of assets + bylaws can be appointed to control administrator(s) 16 urmas kaarlep & hamed alavi http://ijcf.ticaret.edu.tr in the current situation with limited opportunities to attract foreign direct investments and to increase utility of residents of a country, an offer of the jurisdiction for establishing private foundations would be beneficial for the country. it is possible to prove it looking at the kaldor-hicks criterion which say that “a given project will be desirable if those who gain from it could fully compensate the loss for those who will lose from it and still be better off”. after the project is finished there will be no one in the country who will pay more taxes if we do not impose higher taxes on hnwi-s. as per current plan local hnwi-s benefit from the change of legislation. a potential negative effect might be in case estonia to become a very popular destination for private foundations and face with shortage of highly skilled professionals like accountants and lawyers. that would likely mean higher prices and decreased local demand. in this paper, authors analyse costs and benefits for a country, however, we can also look for a wider social impact on a country. we can analyse if the results of the development of legislation can be regarded as pareto-improvement. if we look how hnwi-s have solved their wealth succession today then there are a lot of opportunities available like trusts and private foundations of different countries. however, these platforms are not available in all countries where hnwi-s are residents. thus, there is a demand for wealth succession structures in the countries where there is no trusts nor private foundations. these hnwi-s are looking for a jurisdiction outside of their own and estonia being an alternative option would not make anyone worse. thus from this point of view the project would be pareto improvement. although it might be that some of hnwi-s who already using other jurisdictions for their wealth succession, might consider change of the jurisdiction. this would mean that the jurisdiction which will be abandoned would be worse off and thus it would not be pareto improvement. however, likeliness of hnwi-s who already have settled themselves in a country to move elsewhere for less cost does not seem to be high. the benefits that a country can offer to a hnwi who already have established is very limited which means the main target would be anyway hnwi-s who are looking for a solution to their wealth succession. we can conclude despite theoretically there might be a few individuals/families who would change the jurisdiction it is unlikely and in most cases non-residents to be attracted have not established themselves yet anywhere. 3. methodology standard cost-benefit analysis is structured in seven steps: (european commission, 2014) 1. description of the context this means description of social, economic, political and institutional context in which the project will be implemented. more important socio-economic conditions for the project are the facts that only limited opportunities for gdp growth in countries like estonia exist due to labour market cost and limited number of people. the positive element for estonia is that the country has reasonably flexible foundation act and business friendly tax system. so there is limited changes needed to make the platform attractive for non-resident hnwi-s. important is also to be aware of current initiatives against tax evasion and end of bank secrecy. that gives opportunity for transparent countries like estonia to compete with countries who have offered off-shore privacy. beneficial element for estonia is that the country does not have off-shore image which gives for non-residence more confidence to use the jurisdiction and there would be less chance for interrogation from home tax authorities. 2. definition of objectives the objective of the project is to increase utility of a country like estonia. in more detail the project is looking for positive effect on gdp and taxation revenues for state budget. more gdp means more working places and this project would envisage requirement for higher than average skill level. the latter would mean that these people will be paid more than average causing also improvement of average income per person to raise. 3. identification of the project in principle, the project has one phase: analysis of current legislation and competition, and afterwards developing changes to the current legislation, in particular foundation act and income tax act, to improve competitiveness of private foundation platform. later further adjustments might be needed to respond changes on competitive landscape. 4. technical feasibility & environmental sustainability cost benefit analyses of developing a legislation to attract non-resident high net worth individuals to use estonian private foundation platform 17 http://ijcf.ticaret.edu.tr technical feasibility relates to ability of information systems to govern the process and give necessary information for all stakeholders. for example, it might be that taxation of payments to beneficiaries of private foundation might depend on source of income from which the payments is made. that means source of income needs to be accounted, reported to tax authorities and updated if needed. at present the information system on tax authorities is able to separate income from dividends where tax has been paid from other income sources. thus, it is highly likely that current level of information technology would not be a “deal breaker” and it can handle the implementation of the project. the project does not envisage investments into “brick and mortar” or to say differently into “real economy” with property, plant and equipment. that means there would be only trivial indirect impact to environment (every additional business traveller to estonia makes his/her additional carbon footprint and have a negative environmental effect although each non-resident visit brings more additional utility to residents of the country). 5. financial analysis financial analysis assessment provides profitability of the project for the owner and some key stakeholders and verify the project financial sustainability. key stakeholders of the project are country’s financial sector (including accountants, asset managers, lawyers etc.) both owners and current/ future employees and all residents of the country (through additions to state budget). in respect to financial sustainability, the project does not require huge financial investment at initial stage, mainly it consists of time of the involved personnel in development of the project. later it depends on the marketing strategy as it is possible to take a passive approach or wait and see strategy. another option would be choice of active marketing strategy and to participate in conferences, write articles etc in order to raise awareness among hnwi-s globally. it would be possible to limit marketing action to a certain budget available. the methodology commonly used for financial analyses is the discounted cash flow method where cash inflows and outflows are estimated. afterwards net cash flows are discounted using appropriate discount rate to find net present value of the project. 6. economic analysis. economic analysis covers shadow prices in addition to market benefits and cost in order to reflect the social opportunity cost of goods and services. at the financial analysis, we look explicit benefits and exclude implicit benefits/costs. in addition, externalities are supposed to be taken into consideration. for example, finance sector will benefit directly from rendering services to private foundations, however, due to existence of other business organizations in the country as well as its historical and touristic background, there might be interest to visit the country from the owners of above mentioned projects. that means there will be also benefits for hotels, airlines etc. in result of economic analysis, we will calculate economic performance of the project which include economic net present value, economic rate of return and benefit/cost ration. 7. risk assessment. the recommended steps by european commission for assessing the project risks include sensitivity analysis, qualitative risk analysis, probabilistic risk analysis and risk prevention and mitigation. sensitivity analysis identifies the “critical” variables of the project. in respect of legislation development project the most “critical” variables are the growth of hnwi number in the target countries and proportion of hnwi-s who are interested to set up private foundation outside of their home country. qualitative risk analysis is looking for a list of adverse events. with respect to legislation development for the project, main possible adverse event is rejection of the changes in legislation by estonian parliament after clarification of necessary areas of change in law. collapse of financial system is also possible, however, the level of uncertainty is very high as it is impossible to estimate the timing and extent of implications from this event. 18 urmas kaarlep & hamed alavi http://ijcf.ticaret.edu.tr one more important element would be a risk of tax heaven image. in the past tax heavens were normal part of global economic system. however, recently “a war” against tax avoidance has been announced by oecd and its base erosion and profit shifting actions (oecd 2013). a key element of a tax heaven is that it gives opportunity for hiding tax income and avoiding taxes. with the current tax transparency initiatives by oecd hiding tax income and avoiding taxes becomes close to impossible. estonia has an image of transparent country the best tax code in the oecd (the international tax competitiveness index 2016). contrary to tax heavens selling their jurisdiction to avoid taxes, estonia would sell the jurisdiction as transparent and competitive. the project is not about creating possibilities to create tax avoidance schemes but to offer modern platform for hnwi-s who are ready to comply with tax rules of all countries involved. the project’s residual risk exposure due to relatively low level of investment is small. that means probabilistic risk analysis for this project is not appropriate. 3.1. social benefits and social costs the social benefits of the project to develop legislation for private foundation platform can be divided among following stakeholders: (figure 2 and table 1) 1. owners of the companies in financial sector rendering services needed by private foundations like domiciliation, accounting, auditing, legal and other services. 2. employees of the companies in financial sector mentioned in the point 1. 3. the state who will get more tax revenues. 4. other companies, their owners and employees who benefit because the founders and beneficiaries of private foundation would visit the country. figure 2. the social costs consist mainly of time spent by developers of the project. the developers group include the employees of finance sector and relevant ministries (finance ministry and justice ministry). at the later stage when the proposal goes to comments round there will be involved employees of different organisation and finally parliament commissions need to express their opinion and parliament members need to vote to approve the changes. we should also consider the promotional costs after implementation of the changes. the cost can be born either by government or service providers or both. there is also an option for government to promote the project together with another initiative. for example, e-residency project would clearly benefit from the attractive private foundation platform and the budget of e-residency program is more than 800 thousand euros (enterprise estonia 2017). it is private foundation trust services: domiciliation accounting management other services: asset management legal audit founders’ and beneficiaries’ visits: airport fees, accommodation and restaurant services holding company cost benefit analyses of developing a legislation to attract non-resident high net worth individuals to use estonian private foundation platform 19 http://ijcf.ticaret.edu.tr highly likely that hnwi-s who today have no clear reason to become estonian e-residents would seriously consider to become after establishment of their family foundation in estonia. social benefits social cost service fees development of the legislation salaries to employees approval of the legislation taxes for government promotional cost table 1. 3.2. calculation method 3.2.1. benefits it worth to ask why a government should bother with establishing a legal instrument like a private foundation (sepp and kaarlep, 2016 pp. 96 104). an immediate answer could be that the country’s wealthy voters need such an instrument for their family and business succession needs. however, it would be useful to assume the number of wealthy voters in the country. in case of estonia, such number is so limited that government would not definitely worry about them. however, there can be another financial reason why several governments establish such a legal instrument. what is the benefit of private foundation to a country after being used of such instrument by non-residents? we assume that the private foundation will not be involved with trading and other active business and tax neutral approach is also applied. it is common that under the private foundation a holding company to be established as well (vogel 2015). the total benefit for the country can be expressed with a formula: b = (k + uk) × (p + r) + ∑ (k + uk) × (ai+bi) for i = 1,….., n, (1) where k is the number of families who will establish a private foundation in a country; u is the proportion hnwi-s who establish an holding company; p represents state fee on establishment per unit; r is a service fee to establish a legal entity; a represents annual service fees per entity (domiciliation, management and accounting services which are normally provided by companies who provide trust services); b is annual fees for other services (legal, audit, asset management etc.) per entity; i is a fiscal year and n is a lifetime of the legal entity. there are other indirect revenues for the country coming from high net worth individuals. for example v their visits to estonia which are not included in the formula above like airport fees, accommodation and restaurant services etc. elements of the formula is drawn on figure 2. 3.2.2. cost as mentioned earlier the costs of the project are time cost of participants and promotional cost. time cost relates to the time spent by members of parliament and employees of government and financial sector companies. one alternative for determining development and approval cost (later named “initial cost”) would be to look at what would be the salary compensation at the time implementing and running the project. we can estimate total time t needed to complete the project by all participants and multiply it with average salary cost for the employer in the financial sector: c1 = t × (sav × e), (2) 20 urmas kaarlep & hamed alavi http://ijcf.ticaret.edu.tr where sav is average salary in the financial sector and e represents taxes payable by employer on the salary cost. it would be more reasonable to take salary data in the financial sector where compensations are higher compared with average salary in the country as it is expected that participants have higher skill and experience level. thus, their salary cost is expected to be higher. another way to look at initial cost is to analyse what would be the alternative benefit that participants would create in case they would use the time somewhere else. one option to calculate an opportunity cost would be to find gdp contribution by an employee in the finance sector: c2 = [(g × f): n] × t, (3) where g is total gdp for a country, f represents contribution of financial and insurance activities sector to the gdp, n is number of people working in the sector and t represents total time needed for the project. when using the formula, attention should be given to time period. if we take annual gdp figure also time needed should be represented in man-years. 3.2.3. discount factor to calculate net present value, we need discount rate for discounting future cash-flows. selection of discount rate is an ongoing debate among social scientists. zhuang et al. (2007) have made a survey about different rates used in different countries. they state that public discount rates used around the world vary significantly with developed countries applying lower rates (3-7%) than developing countries surveyed (8-15%). years which were covered by this survey were a period with steady and relatively fast growth in global economy with significantly higher interest rates than today. european commission’s guide when talking about financial discount rates gives nominal annual return simple average of estimates 5,1% and long-term inflation rate 2,2%, and real annual return simple average of estimates 2,9%. as common way of inflation rate calculation does not include all goods traded in the world (for example value of land) i prefer to ignore inflation (that means i will not adjust by inflation also the calculated social benefits) and use real discount rate. one way to approach social discount rate is to use social rate of time preference (srtp). a relatively easy and largely used way to estimate the srtp is based on the following formula, which is obtained from the ramsey economic growth model (european commission, 2014): srtp = p + e x g (4) where p is the pure time preference, e is the elasticity of the marginal utility of consumption, i.e. the percentage change in individuals’ marginal utility corresponding to each percentage change in consumption; g is the expected growth rate of per capita consumption. it is reasonable to assume the growth rate of per capital consumption in long run as 1 and to use empirical evidence of the utility discount rate for pure time preference. based on zhuang et.al. (2007) survey the variation of the utility discount rate is from 0,1-3% with simple average 1,3%. the same authors also surveyed elasticity of marginal utility of consumption and found out that it varies between 0,2 and 4 with simple average 1,55%. the results based on srtp formula above gives 1,3% + 1,55% x 1 = 2,85%. as a coincidence, the result is almost the same as simple average financial real discount rate 2,9% stated above. the biggest issue with social time preference and marginal utility of consumption is that majority of people have a relatively short-term view. often they prefer utility today and devalue the future benefits especially if the timing is so far away that next generation will get advantage of benefits. expected growth of per capita consumption is also debateable as the growth is possible until we have enough natural resources available although when this is not a case anymore the growth can start to be negative. the issues described in this paragraph are not covered further by this paper. cost benefit analyses of developing a legislation to attract non-resident high net worth individuals to use estonian private foundation platform 21 http://ijcf.ticaret.edu.tr 4. discussion and findings 4.1. benefits to give an example i try to estimate for estonia what could be an annual effect for gdp and state budget. we assume the main target markets for estonian private foundations would be europe, russia & cis and turkey. and the target client group would be hnwi-s with more than $10m investable assets (multimillionaires). based on current numbers there are 205 thousand multimillionaires in the countries mentioned above and forecast for 2025 is 273 thousand. (knight&frank 2016) for example there were in 2011 in belgium 725 and in 2010 in austria 2881 private purpose foundations (european commission 2015). in 2009, the dutch trust firms served about 16 400 clients (though not all were related to hnwi-s), who together held about 20 100 legal entities, that is on average 1.2 legal entities per client (risseeuw and dosker 2011). for now we can expect there are more as existing data belongs to the period when tax havens were widely used due to bank secrecy,. based on above a conservative estimation will be that estonia can attract only 1,000 new non-resident clients who establish a private foundation. based on dutch empirical evidence (risseeuw and dosker 2011) it is reasonable to assume that at least 20% of private foundations establish also a holding company. current prices for domiciliation, management and accounting services start from 7,200 euros included vat (the tax is not reimbursable for private foundation as it cannot be registered for vat) per entity (henley business services (estonia) oü 2016, prospera eesti oü 2016). that means in average 7,200 x 1.2 = 8,640 euros. from a survey of the dutch trust industry examining the amount of other services (legal, auditing, etc.), these entities’ needs come to around 70% of the amount for trust services. hence the total fees per investor could be easily around 15 thousand euros (8640 x 1,7 = 14,688). if we multiply the result with a number of expected investors, the outcome will be 15 million euros additional gdp annually. to calculate potential tax revenue for state budget we use latest officially available total tax revenues of gdp – 32,5% (eurostat). that means for state budget annually at least 5 more million euros for government to spend. 4.2. timing of benefits it is unlikely that all 1000 private foundations will be established in the year after implementation of the changes to the law. thus, we make 3 estimates for how fast the number of entities will grow presented in the table 2. optimistic view would be that 1000 private foundations will be established by the end of 7th year, realistic estimate assumes to reach the number by the end of 10th year and conservative estimate would assume to reach the level of 700 foundations by the end of 10th year. table 2. number of private foundations year 1 2 3 4 5 6 7 8 9 10 optimistic 100 250 400 550 700 850 1000 1100 1200 1300 realistic 100 200 300 400 500 600 700 800 900 1000 conservative 50 100 175 250 325 400 475 550 625 700 in respect of when the year 1 starts i expect realistically that the implementation of the project and final approval of the parliament takes on more year that means that benefits start to emerge starting from 2018 or in average 1 year from now. it is clear that benefits of the project will not end after 10th year however uncertainties will increase and for the current paper i have excluded these benefits. 22 urmas kaarlep & hamed alavi http://ijcf.ticaret.edu.tr 4.3. cost first we need to estimate of time. we have 2 more or less distinct teams: one team is working with necessary changes in respect of foundation act and liaising with ministry of justice and the second team is working with unavoidable changes in respect of income tax act and cooperating with ministry of finance. both teams have 2 participants from private sector, from ministry of justice there 2 employees and from ministry of finance there are 4 employees involved however most of the time in both cases are spent by 2 persons. the first phase of analysis of the current situation and comparing it with competition took around 6 man-weeks. next phase would be agreeing concrete changes with ministries. that is estimated to take 4 more man-weeks. the final stage of getting it approved by parliament might take around 15 man-weeks. that means altogether around 25 man-weeks or 1000 man-hours. there were 255 working days in estonia in 2016. if we deduct statutory holiday 4 weeks or 20 working days, then in 2016 it is expected that average employee worked 235 days or 1880 hours. calculating the time needed for the project in man-years we get 1000 : 1880 = 0,532. average monthly gross salary of employees in financial sector in 2016 was 1,856 euros (statistics estonia 2017). showing the result as annual gross salary we end up 1,856 × 12 = 22,272 euros. employer taxes in estonia consist of social thax 33% and unemployment tax 0,8%, together 33,8%. using the formula (2) we get total estimated employment cost 0,532 × (22,272 × 1,338) = 15,854 which makes in round numbers 16 thousand euros. now we calculate the initial cost of the project using the formula (3). based on official statistics total gdp in 2016 was 20,9 billion euros (statistics estonia, 2017) and contribution of financial sector to the gdp was in 2015 3,9% (statistics estonia, 2016). it is reasonable to assume that annual change of the contribution is marginal so we can find total gdp of the sector 20,9 × 3,9% = 0,815 billion or 815 million euros. number of people working in the sector is close to 10,000 (laming et al. 2016). that means annual gdp contribution per one employee in the financial sector is 815,000 thousand euros : 10,000 = 81,5 thousand euros. to find level of initial cost we need to multiply the result with the number of man-years estimated above: 81,5 × 0,532 = 43 thousand euros. in respect of operating cost the service providers will incur cost for office equipment and furniture, rental cost and opportunity cost for staff to do something else. for the calculation in this paper we assume total economic cost to be 50% from revenues. for simplicity of the calculation we also assume that promotional cost of the sector is included in the 50%. further analysis of the financial statements of these companies would give more exact data however it is highly likely that the possible adjustment would not change the overall result of the analyses. to consider also government promotional activities, we add 200 thousand euros annually to support the marketing of the project. comparing with total budget of e-residency program around 800,000 in 2017 the amount used seems reasonable assumption. 4.4. net present value for net present value calculation, i will use calculated above srtp in the amount of 2,85% and i use 15 thousand euros as average annual benefit from one investor and 43 thousand euros as initial cost. i ignore inflation as i use a rate close to real discount rate. in the table 3 net present value calculation is presented. cost benefit analyses of developing a legislation to attract non-resident high net worth individuals to use estonian private foundation platform 23 http://ijcf.ticaret.edu.tr table 3. net present value calculation (thousand eur) discounte rate 2,85% minimal benefit per investor (eur) 15 service providers´ cost per investor (eur) 7,5 net benefits per investor (eur) 7,5 annual government budget for promotion 200 year 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 discount factor 0,958629 0,932065 0,906238 0,881126 0,856709 0,832970 0,809888 0,787446 0,765625 0,744410 optimistic 519 1548 2519 3435 4298 5110 5874 6296 6691 7058 realistic 519 1198 1839 2443 3013 3548 4052 4525 4968 5383 conservative 159 499 989 1452 1888 2299 2685 3048 3389 3708 discounted cash-flow (thousand eur) initial cost net present value of the project (thousand eur) optimistic 43347 43 43304 realistic 31488 43 31445 conservative 20118 43 20075 5. conclusion a distinct group of high net worth individuals is an interesting target for countries who are looking for more foreign direct investments. based on analyses of the needs of the group one of solutions a country can offer is an institution called private foundation. there are undisputable social benefits for finance and business tourism sector of a country. although timing and speed of development of the market are uncertain. as costs of the project to develop legislation for private foundations are limited then even conservative net present value of the project is 20 million euros positive and as per optimistic scenario we could even get 43 million euros benefits. these numbers exclude benefits after 10th year. results gives us confidence that it is socially beneficial to change legislation and attract non-residents to establish private foundations in a country to address their business and wealth succession issues. references alavi.h,2016,cost and benefit analysis of fair trade, european journal of social and human sciences, 2016, vol.(12), is. 4, pp. 139-145 binmore, k. 2010. game theory and institutions. journal of comparative economics. volume 38, issue 3, september 2010, pages 245–252. enteprice estonia 2017. ettevõtluse arendamise sihtasutuse 2017. aasta koondtegevuskava. http://www.eas.ee/wp-content/uploads/2015/11/easi-2017.-aasta-tegevuskava.pdf (most recently accessed on 15.03.2017). european comission 2014. guide to cost-benefit analysis of investment projects. 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international journal of commerce and finance, vol. 5, issue 1, 2019, 34-50 34 effectiveness of tax audit: a study in kembata tembaro zone, southern ethiopia beyene yosef nurebo department of accounting and finance, jimma university deresse mersha lekaw department of accounting and finance, jimma university mathewos w/mariam department of accounting and finance, jimma university abstract purposethe aim of the study is to assess factors affecting tax audit effectiveness as effective tax audit enhances tax administration. research methodology – to achieve objective of the study, both qualitative and quantitative research methods have been employed. the sample respondents selected for the study were 146 by employing purposive sampling technique out of which 106 questionnaires were returned back. descriptive statistic and multiple linear regression analysis via statistical package for social science (spss) version 20.0 were employed. findingsthe result revealed that management support, audit quality, taxpayers’ awareness, and standardized integrated government tax administration system have statistically significant positive effect on audit effectiveness, while tax law complexity and tax accounting and reporting have statistically significant negative effect on tax audit effectiveness. research limitationsthe empirical research was carried out on tax audit effectiveness by using tax officials who are working in tax authority, but it did not include taxpayers in the study. because of this and limited scope of the study area may not ensure that the indicated results are characteristic for the tax audit activity in ethiopia at national level. future researchers on the topic can include taxpayers’ opinion and widening the scope of the study area. practical implications it is recommended that the concerned authority should simplify the area of complex tax laws and encourage taxpayers who declare using relatively good accounting system by assessing tax on their accounting records rather than assessing by estimation. in addition, assessing tax on the specified period of five years to save taxpayers from the unnecessary burden of penalty and interest. originality/valueprevious studies din not address effect of tax audit in tax administrative functions on taxpayers’ registration, return reporting and effect of sigtas on tax audit. keywords: kembata tembaro zone, revenue generation, self-assessment, tax assessment, tax audit, tax estimation jel classification: h25 1. introduction tax is a pecuniary burden levied upon individuals or property to support the government, and its payment exacted by legislative authority (aronson, 1985). it is compulsory payment which is related with certain business activities. revenues collected via taxation are used to buy the inputs essential to provide government supplied goods and services or to reallocate purchasing power among peoples (hyman, 2011). according to bird (2010), political willingness, a clear strategy and adequate resources are ingredients that are essential to effective tax administration. unfair and unpredictable tax administration might bring tax system into disrupt and deteriorate legality of government. registering for tax; filling tax returns on time; correctly reporting tax liabilities; and paying taxes on time are four universal classes of obligation likely exist for almost all taxpayers (oecd, 2014). an examination of whether a in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e effectiveness of tax audit: a study in kembata tembaro zone, southern ethiopia 35 taxpayer has appropriately assessed and declared their tax liability and fulfilled other tax legislative responsibilities is referred as tax audit. effective audit of tax can significantly contribute to the administration of the tax system. tax administration and tax revenue collection of the government improved by the efficient and effective tax audit. specifically, a tax audit supported by information technology plays vital role (zabihollah, ahmad, rick & peter, 2018). weak tax administration can make unfair competition among taxpayers and cannot address the problem of tax avoidance and evasion (organization for economic cooperation and development (oecd), 2006). according to ethiopia constitution hpr (1994), proclamation no 1/1994), there are political, economic, social, cultural and environmental objectives of taxation. the implementation of tax legislation helps for attainment of the government objective. in order to achieve such objectives, a good tax system contributes a lot which require citizens understanding of the tax laws of the country. major components of the reform in 1990 to 2003 had given due attention on dropping income tax rate of corporation from 35% to 30% and the upper limit of income tax rate for individual taxpayers and associations who are not categorized under corporation from 40% to 35% and replacement of sales tax with vat and tot (geda & shimeles, 2005). according to export initiative and partnerships division (2016), fiscal deficit in 2013/14 was 2.6% of gdp and projected to remain for coming years. tax revenue to gdp ratio is 12.7%, which is much bellow from sub-saharan africa average of about 20%. also tax revenue covers 84.2% of the total government revenue, which requires high mobilization of tax revenue through effective tax administration and dynamic tax reforms. according to birskyte, (2013), tax audit increases the revenue of the government directly and detect taxpayers who fail to fulfill tax obligation and may impose penalty and fines. 2. statement of the problem tax reform in ethiopia focus on three broad categories in addition to the administrative reform: they are taxes on income and profits, taxes on goods and services and taxes on international trade. major components of the reform in 1990 to 2003 were due attention on dropping income tax rate of corporation from 35% to 30% and the upper limit of income tax rate for individual taxpayers and associations who are not categorized under corporation 40% to 35%. subsequent to this reform, hpr (2002a) income tax proclamation 286/2002, hpr (2002b) turnover tax proclamation no 308/2002, hpr (2002c), value added proclamation no 285/2002 and other tax law issuance and amendments of existing tax laws have been undertaken in the country (geda & shimeles, 2005). some empirical studies have been undertaken in the tax audit practice, effectiveness of tax audit practice, impact of tax audit in revenue generation and factors affecting the tax audit practice (ayalew, 2014; adediran, alade & oshode, 2013); bibisso, 2014; & mihret, 2011. however, neither of these studies have addressed the effect of tax audit in the tax administrative functions on taxpayers’ registration, declaration of return and financial reporting. moreover, the effect of sigtas in the effectiveness of tax audit practice has not been addressed on those studies. therefore, the main objective of this study is to investigate detrminats of tax audit effectivenss taking evidence from kambata tembaro zone, ethiopia. 3. literature review 3.1. tax audit effectiveness (tae) according to chen (2013), tax audit is aimed to enhance the compliance behavior of taxpayers with the tax legislations in the self-assessment system. specifically, clement, stephen, festus (2018) found that effective field tax audit has significant positive impact on tax productivity in nigeria. similarly, zakir (2018) found that large corporate tax payers tend to comply with the tax law as a result of rigorous tax audit in bangladesh. tax assessors are required to undertake their responsibilities professionally and successfully to confirm that taxpayers are filling their tax requirements. on the other hands, a tax investigation is the procedure of gathering evidence to decide the projected quantity of tax evaded and the likely suit of taxpayers engaging in tax evasion endeavors. beyene yosef nurebo & deresse mersha lekaw & mathewos w/mariam 36 quality of tax audit focuses, on the targeted risk, technical correction, procedural correction and correct reference. tracking of tax violation, non-compliance detection and additional revenue expected from tax audit are measures of tax audit effectiveness (drogalas, ioannis, dimitra & iohannis, 2015 & oecd, 2006). effective audit is truly challenging and examines the fillings of the financial transactions in order to give an opinion on whether taxpayers report an accurate and reasonable view. it is expected to fulfill with necessary auditing and ethical values. in addition, an effective audit activity modified for risks confronting the entity, the business arrangement and the government regulation, auditors should be equipped with theoretically and practically, knowledgeably inquisitive and free from biasness, its approach depending on an awareness of the regulatory environment and it must deliver the right audit opinion, in which investors have confidence (hobbs, 2013). the specific obligation of the taxpayers varies from one taxation role to another and from one jurisdiction to the next. the worldwide requirements are likely to exist for almost all taxpayers including, registration in the tax system; timely filing of tax returns; reporting of complete and accurate information in tax returns; and payment of tax obligations on time. these obligations measure the compliance outcome and that its best outcome represents the effectiveness and efficiency that could be expected (oecd, 2010). in addition to the dependent variable explained above, the following independent variables that affect tax audit effectiveness were carefully selected from earlier researches and used in this study. 3.2. management support (ms) the tax authorities audit efficiency and effectiveness activity determined by the nature and scope of powers in the fundamental legislation framework and greatly facilitated by information communication technology. specifically, in this age of high competition and complex business world, use of information technology and audit software is becoming a necessity (zabihollah, ahmad, rick & peter, 2018). now days, every business activity is integrated with it using enterprise resource planning (erp), online marketing and online reporting. as a result, properly skilled it auditors should be trained in order to enhance quality of financial reporting and auditing of business organizations (barta, 2018). this implies, effective tax audit necessitates the support of higher management and resource allocation, competency of audit staff and quality of audit (oecd, 2006). h1: management support has significant positive relation to the tax audit effectiveness. 3.3. audit quality (aq) the audit quality is multifaceted and it has no worldwide meaning which debates among participants, officials, standard establishers, auditing companies and concerned bodies, and strategy setting. it can be attained when the investigators’ judgment on the financial reports will be reliable upon as it was based on adequate and appropriate audit evidence gathered by an appointed audit team which reveals suitable outcome; adequately educated, wellinformed and had enough time allocated to implement it. functional thorough investigation process and quality control procedures provide valuable and timely reports and interacted appropriately with a variety of different stakeholders (international auditing and assurance standards board (iaasb), 2013). audit quality is delivering an appropriate professional opinion supported by necessary evidence and objective judgment. it is said quality audit when its report is independent reliable and supported by sufficient evidence. it also involves appropriate and complete reporting by auditors that enables the concerned body to discharge its responsibility. to this end, evidence should be sufficient in order to produce an objective judgment and complete reporting. tax auditors should have strong evidence before deciding rejecting financial report prepared by business organizations. in this connection, antonia and cristina (2018) argued that income tax computed based on financial statement that is not reliable is by far better than levying tax based on subjective estimation. they further argued that presumptive taxation should be the last resort in tax levy and priority should be given to financial report whatever the quality might be. it can be derived from the philosophy within the audit firm, technical skill and personal quality of audit partner and staff, audit process effectiveness and audit reporting reliability and usefulness. users of the audit report relay on giving robust and objective opinion in which financial statement indicates a fair and true view, prepared in line with applicable accounting framework and prepared in line with relevant legal requirement (financial reporting council, 2006). in connection to this, safa, nadia and faten (2017) found that quality of audit in tunisian family businesses has reduced tax avoidance which in turn means achievement of audit effectiveness. h2: tax audit quality has a significant positive effect on the tax audit effectiveness. effectiveness of tax audit: a study in kembata tembaro zone, southern ethiopia 37 3.4. standardized integrated government tax administration system (sigtas) automation of the tax system can be used to perform the function of tax administration more rapidly, which enables easy detection of defaulters and reduces corruption by reducing personal contact between tax officials and taxpayers that is necessitated by inefficient manual systems. automation by itself does not necessarily improve tax administration without the combination of the political willing and effective management system (kayaga, 2007). according to drogalas et al. (2015), effectively designed information technology enables tax auditor to track tax violation, which enhance tax audit effectiveness. h3: automation of tax system has significant positive effect on the tax audit effectiveness. 3.5. taxpayers’ awareness (tpa) according to mukhtar, abdi & elmi (2015), conducting effective taxpayers’ awareness, business owners gain more knowledge of tax and it is advantageous for them to comply voluntarily. on the contrary, the failure to create awareness for the taxpayers’ result of continues failure of taxpayers to comply voluntarily in payment of taxes its consequence is painful losses with the government. continues taxpayers’ education and awareness about the rights and obligations build good relationships between taxpayers’ and tax authority, which creates citizens who have better understanding about tax, which will bring about honest and voluntary compliance. further, diana (2016) argued that improving taxpayers attitude enhances the tax compliance behavior and he recommended that future researches should emphasis on mechanisms of enhancing tax payers attitude. a tax practitioner prepares financial reports, that indicates a tax return or other data for declaration to tax authority, taxpayers are yet accountable for the accuracy of the income filing. the taxpayers might be responsible to administrative penalty and criminal penalty in the ‘noncollaboration’ group when he or she fails to wholly collaborate with the conduct of an intervention. awareness of taxpayers’ reduces administrative as well as the criminal penalty that faces for taxpayers’. according to ola (2001), cited in peter (2013), education about tax is a strategy which performed by a tax authority to ensure taxpayers’ compliance. taxpayers’ education is pillar to effective and efficient tax administration function. susan, tim and marty (2017) argued that tax payers should believe that any tax levy by the government is faire and equitable as much as possible. taxpayers are expected to understand the tax laws, regulation and procedure how computations and assessments will be for the tax they are going to pay. these tax legislatives and rules should be straightforward, clear and understandable in order to improve tax compliance. the awareness creation and education taxpayers enhance the altitude of voluntary tax compliance and reduce tax avoidance and evasion (olowookere, 2013). h4: awareness of taxpayers has significant positive relation to the tax audit effectiveness. 3.6. tax legislations complexity (tlc) tax laws and procedures should be simple taxpayers to comply with their obligations and access their entitlements; taxpayers may not voluntarily comply if the tax system itself makes it too difficult or too expensive for them to meet their obligations. antonia and cristina (2018) found that significant amount of tax evasion in portuguese as a result of complex tax laws they are having. tax legislation is expected to be simple for tax officials, so that tax inspectors and experts would not have to devote their time on the interpretation of tax proclamations and regulations. effectiveness of tax audit will be subjective as a result of complex tax laws; since complicated legislation significantly affects compliance (drogalas et al. (2015). effective tax audit necessitate audit program to be supported by legislative framework, which requires taxpayers’ to maintain appropriate books and records; provides the administration with adequate powers to conduct wide ranging inquiries; allows delegation of the powers to staff conducting audits; allows reconstruction of income and reassessments of tax using a range of methods and techniques within a generous timeframe; gives taxpayers a right of appeal, places a burden of proof on the taxpayer; and applies sufficient penalties to deter noncompliance (forum on tax administration’s, 2006). h5: complexity of tax legislation has significant negative effect on the tax audit effectiveness. beyene yosef nurebo & deresse mersha lekaw & mathewos w/mariam 38 3.7. tax accounting and reporting (tar) the presentation of uniform financial reporting framework enhances transparency and responsibility by centralizing financial reporting. it is pillar to support the economy and reduce the risk of economic crisis, business malfunction’ and related negative economic impact; it also ensures the provision of financial information meets internationally recognized reporting standards (hpr, 2014). except category “c” taxpayer category “a” and” b” are required to maintain books and accounts records by having vouchers authorized by tax authority. the accounting method to determine the income generates and expense rendered in the tax period shall be made in generally accepted accounting principles. the accounting methods in the ethiopian income tax proclamation specifies taxpayers to compute some transactions in line with accounting principles and income tax legislations, i.e. inventory shall be valued at average method; depreciation expense shall be in the straight line method, bad debt shall be deductible when any lawful act to collect the money owing is undertaken, however, liability is not recoverable, etc. financial reporting standard enhances shareholders value and benefits investors, lenders; other capital providers as well as reduce cost of compliance facilitate education and training (pacter, 2011). in connection to this small and medium enterprise in malaysia who did not keep book of account evade to much tax and the researchers recommended that government should make it an obligation to prepare financial report though it may not be to the standard (azhar, mohd & zarinah, 2016). h6: tax accounting and reporting has significant positive relation to the tax audit effectiveness. 4. research design and methodology this study is designed to identify factors affecting tax audit effectiveness significantly by employing explanatory research design. purposive sampling technique has been adopted in order to address the tax officials who have direct relation with the tax audit practice. accordingly, the participants for the study were the tax auditors, tax assessment and collection officials, taxpayers’ education officials, including the job process owners and head of the tax authorities. however, sample for the study did not include the taxpayers. out of the 146 questionnaires distributed, 106 questionnaires were returned back from the respondents with the response rate of about 73%. according to the stevens (1996), cited in pallant (2005), generalization cannot be repeated for other samples with small sample size. it is scientific to take sample of 15 for each predictor variable, accordingly the number of sample size is greater than fifty plus eight times the number of independent variable in the study. the data collected from 106 respondents with the response rate of 73% is sufficient to generalize about the study, because the numbers of predictor variables in the study are six. to undertake the study primary data were gathered via questionnaire and interview in 2017. semistructured interview has been conducted to 6 tax auditors and 2 audit team coordinator of the tax authority. the questionnaire was developed considering all variables to be analyzed. according to kothari, (2004) the sample should be optimal which satisfies the necessities the efficient, representation and consistency. whereas determining size of the sample from the population, the investigator should decide the desired accuracy as similarly a tolerable confidence level for approximation. sample size is the subjective to researcher rather than objective determination based on designing formula for calculation. according to yamane (1967)), sample size can be computed in the formula, 1 …………………………………………………………. (1) where, n is sample size of the study n is the population of the study e is level of precision to this study the sample size computed as: effectiveness of tax audit: a study in kembata tembaro zone, southern ethiopia 39 it is important to set structure of the dependent variable and explanatory variables with their measurements in order to interpret the findings of the study. this analytical framework indicates the reflection of independent variables on the dependent variables via mechanisms and achievement of a tax audit. based on the literatures defined in the model specification part of the study, the following analytical framework has been developed to show the independent variables and mechanisms to achieve revenue via tax audit. figure 1: analytical framework based on literature on the model specification . 4.1. measures of dependent and independent variables tax audit effectiveness is dependent variable. questionnaires were included to evaluate the tax audit effectiveness in terms of tracking of tax violation, non-compliance detection, additional revenue and other tax audit related issues. each item of tax audit effectiveness will be measured on a 5-point likert scale ranging from (1) ‘strongly disagree’ to (5) ‘strongly agree’. management support, audit quality, automation of the tax system, awareness of taxpayers’, and tax legislation are investigated as having a direct impact on tracking of tax violation, non-compliance detection and other tax audit related issues. to create a proper measure of independent variables employed in a tax audit, the questionnaires were prepared for each independent variable in the measurement scale of likert scale ranging from (1) “strongly disagree” to (5) “strongly agree”. level of agreements will be arranged strongly agree (5), agree (4), neutral (3), disagree (2), and strongly disagree (1). data has been analyzed on quantitative basis using pearson’s correlation, linear regression analysis and descriptive statistics. moreover, the researcher has undertaken the diagnostic tests for the assumption of the classical linear regression model (clrm). based on the nature of the data collected through questionnaire and semi-structured interview and document review, the descriptive as well as the inferential statistical tools were employed to analysis and presentation of data. before starting analysis, data has been checked for consistency and completeness and then labeled and entered into a computer, and then it has been processed and analyzed using spss software version 20. the data obtained about the effectiveness of tax audit have been analyzed via multiple linear regression technique to determine the significance of the independent variables on the dependent variable. multiple regression analysis has been employed to estimate the magnitude of the effect of the independent variable on dependent variables. ordinary least squares (ols) regression model is specified as follows: beyene yosef nurebo & deresse mersha lekaw & mathewos w/mariam 40 ……….... (2) where: tae = tax audit effectiveness ms = management support aq = audit quality sigtas = standardized integrated government tax administration system tpa = taxpayers awareness tlc = tax legislation complexity tar = tax accounting and reporting = random error = constant the coefficients , , and are the parameters of the predictor variables. 5. result and discussion degree of correspondence between the ordering of two random variables will be measured by correlation. the value of pearson’s correlation coefficient ranges between -1 and +1, which is an arithmetical measure of the strength of a linear relationship between paired data. the positive sign of correlation designates the increase of a variable increases the other variable and vise-versa, whereas, the negative correlation sign shows the increase of a variable decreases the other variable and vise-versa as well as no correlation means the effect of one variable has no effect on the other variable by either increase or decrease table 1: correlation between variables tae 1 ms aq sigtas tpa tlc tar tae pearson correlation ms pearson correlation .332** 1 aq pearson correlation .518** .365** 1 sigtas pearson correlation .341** .269** .364** 1 tpa pearson correlation .453** .256** .454** .249** 1 tlc pearson correlation -.319** .006 -.078 -.011 -.050 1 tar pearson correlation -.190 .235* .138 .143 .087 .224* 1 **. correlation is significant at the 0.01 level (2-tailed). *. correlation is significant at the 0.05 level (2-tailed). source: field survey, 2017 as it has been revealed in the correlation table about the relationship between dependents and independent variables, among the independent variables, tlc and tar have inverse relation with the tae. on the contrary, ms, aq, sigtas and tpa have positive relationship with tae. the correlation between tar and tae is -0.190 and the correlation values between tae and other independent variable are in the range of 0.319 to 0.519. according to pallant (2005), the correlation between variables ranged in r = ±0.10 to ±0.29 are small, r = ±0.30 to ±0.49 are medium and r = ±0.50 to ±1.0 are large. except tar which is found in the small correlation value range, the correlation of other independent variables and tae were in the range of medium and large. these indicate that tar was weak negative relationship with the tae and ms, sigtas and tpa were medium and aq has high positive relationship with tae. on the other hand, tlc was negative relationship with medium range of correlation with effectiveness of tax audit: a study in kembata tembaro zone, southern ethiopia 41 tae. there was significant correlation between tax audit effectiveness and predictor variables with (p<0.01) except tar. tae significantly correlated with ms (r=.332), tae and taq (r=.518), tae and sigtas (r=.341), tae and tpa (r= .453) and tae and tlc (r=-.319). also the association between two predictor variables is below 0.454 which is far below the limit of multicollinearity diagnosis value of 0.7. 5.1. regression result on the tax audit effectiveness effective application and implementation of the tax audit can be enhanced by the scope of powers in the fundamental lawful outline, that provides the appropriate influences for getting evidence and a reasonable regime of penalty to discourage and fine taxpayers’ who fail to comply with tax law. effectively carried out tax audit can reduce tax evasion and avoidance, detect compliance, establish viable and effective tax administration, bring default taxpayers to tax net, verify completeness, correctness and timely filing of returns, teach taxpayers and differentiate the areas of tax laws which necessitate clarification for the concerned party (oecd, 2006). the following section discusses the model summary, anova and the coefficients of variables. table 2: model summaryb r r square adjusted r square std. error of the estimate change statistics durbin-watson r square change f change df1 df2 sig. f change .709a .503 .473 .63194 .503 16.713 6 99 .000 1.664 a. predictors: (constant), tar, tpa, sigtas, tlc, tms, aq b. dependent variable: tae source: field survey, 2017 the model summary box outlines the overall fitness of the model. the model summary shows the amount of variation in the explained variable by the predictor variables. the above model summary table shows that tax audit effectiveness and six explanatory variables were significantly associated with the correlation coefficient r=.709. the model summary table also shows the model of tax audit effectiveness with the coefficient of determination = .503. the coefficient of determination specified that 50.3% of the deviation in tax audit effectiveness for the 106 responded tax officials explained by variations in practices of management support, audit quality, standardized integrated government tax administration system, taxpayers’ awareness, tax legislation complexity and tax accounting and reporting while 49.7% remains unexplained. according to signh (2007), an adjusted r square of above 75 percent is very good; adjusted r square values in the range of 50–75 percent is good; adjusted r square values in the range of 25–50 percent is fair and adjusted r square value below 25 percent is poor. therefore, the adjusted r square of this study is 47.3% which is in the range of fair but it approaches to the range of good. table 3: anovaa model sum of squares df mean square f sig. regression 40.045 6 6.674 16.713 .000b residual 39.535 99 .399 total 79.580 105 a. dependent variable: tax audit effectiveness b. predictors: (constant), tar, tpa, sigtas, tlc, ms, aq source: field survey, 2017 beyene yosef nurebo & deresse mersha lekaw & mathewos w/mariam 42 the anova table above reveals that the summary of analysis of deviation and f-statistics, which discloses the value of f (6, 99) = 16.713, p < .0005 which represents significant at 0.0001. the result for f value is large because fcalculated is greater than table value of f (6, 99) = 2.29 it can be concluded that the set of independent variables (ms, aq, sigtas, tpa tlc and tar) as a whole were contributing to the variance of tax audit effectiveness and consequently, the model shows the real practice of the tax audit for the study. table 4: coefficientsa model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b collinearity statistics b std. error beta lower bound upper bound tolerance vif (constant) 1.365 .463 2.951 .004 .447 2.283 ms .265 .115 .181 2.298 .024 .036 .493 .808 1.237 aq .409 .115 .305 3.548 .001 .180 .637 .680 1.472 sigtas .166 .082 .157 2.026 .045 .003 .329 .836 1.197 tpa .238 .079 .241 3.008 .003 .081 .396 .778 1.285 tlc -.231 .076 -.222 -3.039 .003 -.383 -.080 .937 1.067 tar -.298 .083 -.269 -3.569 .001 -.463 -.132 .885 1.130 a. dependent variable: tax audit effectiveness source: field survey, 2017 econometric model from spss result: tae= 1.365+.181ms+.305taq+.157sigtas+.241tpa-.222tlc-.269tar where, ms= management support, aq=audit quality, sigtas=standardized integrated government tax administration system, tpa=taxpayers awareness, tlc=tax legislation complexity and tar=tax accounting and reporting. multiple regressions were employed to investigate the effect of management support, tax audit quality, standardized integrated government tax administration system, taxpayers’ awareness, tax legislation complexity and tax accounting and reporting to predict levels of tax audit effectiveness. employing multiple regressions necessitate variables to satisfy the assumptions of multicollinearity, autocorrelation, outliers and normality (wooldridge, 2013). introductory analysis was conducted to check violation for assumptions of outliers, normality, multicollinearity, autocorrelation and data reliability. also, the correlations between the predictor variables included in the study were examined. all independent variables in the study were statistically interrelated with tax audit effectiveness which shows that the data was appropriately associated with the dependent variable for investigation via multiple linear regressions. in the table 4 above, all predictor variables were statistically significant with p<.05, ( =.181, p= .024), ( = .305, p= .001), ( .157, p= .045), ( .241, p= .003), ( -.222, p=.003) and ( -.269, p=.001). the results were confirmed the expected sign of hypothesis for all predictor variables, except the tax accounting and reporting. 5.2. hypothesis testing it is necessary to test expected hypothesis of the multiple regression result of each predictor variables with the dependent variable. effectiveness of tax audit: a study in kembata tembaro zone, southern ethiopia 43 5.2.1. management support (ms) the political appointment of management as well as the employees of the tax authority exposes the revenue body to regular ruling party interfering. tax legislations are not required to be forced powerfully in the cases of taxpayers with politically by the ruling party. as result, trustworthiness of tax authority hurts and worsens the voluntary taxpayers. in addition, political interference creates incredible self-doubt in the tax authority. the instability of tax authority affects organized remembrance and everyday works. the level of consideration by the governing party to the tax authority is vital for the tax authority to correctly assess, audit and collection based on the tax legislation. low consideration to the tax authority, particularly in the high profile issues of tax evasion disturbs implementation activities and reflects an incorrect communication to the taxpayer society. without strong participation of top governmental officials, the bringing the change expected to progress tax authority efficiency cannot be achieved (gill, 2000). political instability of government in a given country not only affect the financial system but also reduce citizens’ trust on government. trust on stability of the ruling party of a given country negatively affects the compliance of the taxpayers’ (simon james & clinton alley, 1999). as it has been revealed table labelled coefficient, management support has positive relationship to the of effectiveness tax audit with ( =.181, p=.024), thus, expected hypothesis was strongly supported in the study. the result indicates when other predictors (taq, tpa, sigtas, tlc and tar) were constant, for every increase of ms, the tae increases by 0.181. 5.2.2. audit quality (aq) audit is said quality, when its report is independent reliable and supported by sufficient evidence. it also involves appropriate and complete reporting by auditors that enables the concerned body to discharge its responsibility. to this end, evidence should be sufficient in order to produce an objective judgment and complete reporting. audit quality can be resulting from the philosophy within the audit firm, technical skill and personal quality of audit partner and staff, audit process effectiveness and audit reporting reliability and practicality. users of the audit report relay on giving robust and objective opinion in which financial statement indicates a fair and true view, prepared in line with applicable accounting framework and prepared in line with relevant legal requirement (financial reporting council , 2006). the presence of substantial misrepresentation of financial transactions which not distinguished by the investigators can be an indication for the failure audit activity. but, lack of substantial misrepresentations of financial statements is not the only evaluation technique of audit quality since there may have been no substantial misrepresentations to notice. even the presence of a hidden substantial misrepresentation in the audited economic transactions may not necessarily show a poor quality audit as audits are intended to get relative, not absolute. the difference between complete and rational assurance is particularly applicable when misrepresentation result from frauds that is hidden via fake, collusion and deliberate misstatement (‘iaasb, 2013). coefficient table shows that tax audit quality was positively related to the tax audit effectiveness with ( =.305, p<=.001) thus, expected hypothesis was strongly supported in the study with p<0.05. the result indicates when other predictors (ms, tpa, sigtas, tlc and tar) were constant or controlled the increase for every aq, increases the tae by 0.305. tax audit done by tax authority to examine the compliance of the taxpayers’ to the hpr (2002a), income tax proclamation no 286/2002, hpr (2002c), vat proclamation 285/2002 and hpr (2002b) tot proclamation no 308/2002 ethiopian tax laws, cross checked by the number of audit cases that submitted by the taxpayers’ to the review committee with in ten days from the receiving assessment notice or submitted to appeal committee with in thirty days after the date of receiving decision of review committee and they can forward to the court when they are not satisfied with the decision of the appeal committee. as per the document review result indicates, in kembata tembaro zone, all audited taxpayers submitted to the review committee with in ten days but no case of appeal has been submitted to the appeal committee or court because to provide appeal taxpayer is subject to the payment of half of the sum of tax, penalty and interest which is decided by review committee and to appeal the case to the court he/she is subject to pay all taxes, penalty and interest on the unpaid tax. this has been hindering the taxpayers beyene yosef nurebo & deresse mersha lekaw & mathewos w/mariam 44 submitting the appeal to appeal committee as well as the court. the members of review committee are the tax officials who work in the office which makes the impartiality in question. 5.2.3. standardized integrated government tax administration system (sigtas) information technology provides support for the registration of taxpayers’, to issue identification number for taxpayer; authenticating and handling taxpayers returns and receiving tax payments via different networks; taxpayers account creation; identification of delinquent taxpayers; computerizing appeal tracking; and enables an improved service to taxpayers (guillermo, niall & anton, 2013). in the audit module, risk criteria are used to determine how files are selected for audit. a wide range of options exist. in this way, files are identified for audit, and transmitted to the audit manager for assignment to the audit team. according to toro (2011) effective information technology reduces compliance costs, facilitate self-assessment and tax administration cost. effective computer aided or information technology enhances tax auditors to detect violation of tax laws (drogalas et al. 2015). in the model, the standardized integrated tax administration system (sigtas) was significant at 5% significance level and positively related to the tax audit effectiveness with ( .157, p=.045). this result shows, the increase of implementation standardized integrated tax administration system increases the effectiveness of tax audit. when other predictor variables controlled, the increase in sigtas by one unit increases the tae by 0.157. 5.2.4. taxpayers’ awareness (tpa) according to islamiah (2015), awareness taxpayers strongly influence the tax compliance. taxpayers’ awareness can be ensured by the early payment of tax, filing of their return, registration as the taxpayers’ and reporting trend. educating tax payer’s is input for the effective administration which enhanced by the simple and clear tax legislation. the simplified tax legislation and the taxpayer’s awareness about the tax rules and regulations improves the compliance. the degree of awareness about taxation is higher in the business students when compared to nonbusiness students (hastuti, 2014). awareness of the taxpayers has positive and significant relationship with taxpayers’ compliance (islamiah, 2015). as it has been shown in the coefficient table above, taxpayers awareness was positively related to the tax audit effectiveness with the ( .241, p =.003), this implies the hypothesis is strongly supported with p<0.05. this means that the tax audit effectiveness strongly influenced by the taxpayers, the higher the awareness of taxpayers, then the effectiveness of tax audit will increase and vise-versa. on the other hand, for every additional awareness creation of taxpayers’ by controlling other predictor variables, the tax effectiveness will be improved by 0.241. 5.2.5. tax legislation complexity (tlc) the ability of tax administrator to understand tax policy matters and enact tax legislation in a simple, precise language is very vital to the tax authority. lack of clearness or complication in tax laws complicates taxpayers, bases for errors in tax revenues, rises cost of compliance and cost of administration and encourages non-compliance. vagueness of tax legislation makes to reduce the common understanding between the tax authority and taxpayers of the given country, which consume massive organizational resources and interruption tax assessment, audit and tax collections. moreover, the tendency of representatives to upsurge government revenue collection estimates to finance projects, rises the pressure on the tax authority to collect extra taxes revenue (gill, 2000). according to toro (2011), tax law simplification and implementation of tax system codes simplify the tax government and compliance with the tax laws. tax procedure code strengthens administrative powers of audit and debts collection while keeping taxpayers’ rights. it cannot be effective when, accompanying actions are absent and unwillingness to implement the rule of law and to levy the strictest of penalties. according to baer (1997) simplification of tax system enhances effective and efficient tax administrations which encourages the voluntary compliance and reduce compliance cost of the taxpayers. on the contrary, complexity of the tax law increase cost of compliance and tax administration cost (drogalas et al. 2015). it is impossible to evaluate the effectiveness or success of tax administration without considering both the level of complication of the tax system and the extent that the tax system remains stable for the long period time. it is effectiveness of tax audit: a study in kembata tembaro zone, southern ethiopia 45 essential to simplify tax payment procedures to taxpayers by removing demands for excess information in tax returns. as mentioned earlier, limiting the number of policy objectives and hence the number of tax expenditures, as well as being willing to accept only basic issues related to taxation that meet the objectives of tax authority. when a number of objectives like political, social and economic policy are combined into tax legislation, the result may cause the tax system to be too complex for both taxpayers and tax authority for the proper administration of tax. the issue of voluntary compliance will be in doubt when taxpayers find it hard to compute correct figure of their requirements appropriately and withholding, its verification becomes problematic when there are a number of tax exemptions and deductions (bird, 2015). in the regression analysis result, tax legislation complexity was negatively related to the tax audit effectiveness with ( -.222, p=.003), which is strongly supported by stated hypothesis with p<0.05. the result supports the previous study which concludes the negative effect of complex tax legislation on the tax audit effectiveness (drogalas et al., 2015). the result implies that when complexity of tax legislation increases by one more, the tax audit effectiveness will decrease by .222 by controlling other predictor variables. on the other hand, which means that the effectiveness tax audit is strongly affected by the complexity of tax legislation itself, the higher the level of complexity of tax legislations, then the level of tae on the tax office in the kembata tembaro zone will decrease. 5.2.6. tax accounting and reporting (tar) the result revealed in the coefficient table, tax accounting and reporting standard was negatively related to the tax audit effectiveness with ( -.269, p=.001), which did not support the stated hypothesis. the result indicates when taxpayers’ use appropriate tax accounting and reporting standards as per the income tax laws, the tax audit effectiveness will be reduced and vise-versa. on the other hand, the one more appropriate use of tax accounting and reporting of taxpayers reduces the tax audit effectiveness by 0.269, when other predictor variables are controlled or constant. according to hpr (2002a) income tax proclamation no 286/2002, taxpayers required to prepare their financial statements in line with tax law and generally accepted accounting principles. accordingly, inventory should be computed in average valuation method, depreciation is expected to be valued at straight line method, and taxpayer shall account for tax purposes on a cash or accrual basis. according to hpr (2002c) vat proclamation no 285/2002 (art 29), hpr (2002b), tot proclamation no. 308/2002 (art 11) and hpr (2002a) income tax proclamation no 286/2002 (art 69), after reviewing by the authority, a person has understated his tax obligation, fail to maintain books of accounts and records or for any reason the records and books of accounts are unacceptable to the tax authority, or when taxpayer fails to declare his or her return in the time arranged by proclamations, tax authority might assess tax liability by estimation by these proclamations, the tax authority may assess the tax by estimation and shall issue an additional assessment within five years after the end of specified accounting period, but in the case of dishonesty or willful negligence, nevertheless any restriction in any other regulation, the tax assessment will be done at any time. when taxpayer fails to maintain records and books of account, or for any motive, the books of account and records of taxpayers are not acceptable by the tax authority, or when taxpayer fails to proclaim his or her return in the time arranged by proclamation, as a result tax authority might assess tax liability by estimation (2002a), income tax proclamation no 286/2002 and hpr (2002c), vat proclamation no 285/2002. according to circular issued by snnpr revenue authority (2006) reference no 28/ገባ/23/9/06 date 27/9/06 ethiopian fiscal year. during the estimation of taxpayer who fail to maintain records and books of account auditors should understand about sales condition of taxpayer, sales transaction based on economic condition, number of taxpayer’s customers, comparison of other similar taxpayers’ transaction, bank transaction of the taxpayer etc. taxpayers who their books of account and records fail acceptance by taxpayers subjected to pay tax which its computation is based on annual sale. to compute tax sales multiplied by taxable income rate which is for category “c” taxpayers without considering actual administrative cost and cost of purchase of goods or services. according to the circular issued on 03/12/99 reference number ደህ/ሪመ/180/632 and date 25/10/99 efy (ethiopian fiscal year) reference number አማ3/16/28/509 states category “c” taxpayers assessment to be done by taxable income range of 10% to 30% beyene yosef nurebo & deresse mersha lekaw & mathewos w/mariam 46 according to the nature of business (for example coffee trade 10% of the sale as taxable income, pension 26%, general merchandise 14%, contractor 16%). when the accounting reports prepared by taxpayer fails acceptance by tax authority for any reason, category “a” and “b” taxpayers tax assessment subjected to the taxable income rate rather than the modification of the self-assessment of taxpayers (snnpr tax authority, 1999). thus, when taxpayers use proper books of accounting and records they become eligible to reduce cost of production or cost of purchase and administrative expense as well as at the same time incurred loss can be off set against taxable income for the coming five tax periods, prior losses being set off before later losses. net operating loss might be carried forward and subtracted only for two periods of three years, hpr (2002a), income tax proclamation 286/2002 (art 28) and council of minister (2002a), income tax regulation78/2002 (art 12). therefore, when taxpayers prepare financial statements based on knowledge, then reduce government revenue just by trying to find loopholes to avoid tax liability. as per the document review result of the tax audit report, out of audited taxpayers’ there were taxpayers whose self-assessment shows loss, but there were no taxpayers who privileged to the scheme of loss carry forward. the taxpayers’ tax assessment due to audit is based on highest sales of taxpayer by comparing number of alternative sales which found from monthly vat report, quarterly tot report, annual financial statement report, withholding, and other third party reports and converting highest purchase to sales based on taxable income rate which was designed for category “c” taxpayers’. moreover, as it has been reported in the tax audit report kembata tembaro, tax audit has been carried out by estimation rather than books of account and records with modification. the taxpayers who innocently declared their sales were subject to more tax and unnecessary penalty and interest which do not encourage voluntary compliance. since the effectiveness of tax audit can be measured by reduction of tax evasion, reduction of tax avoidance, encouraging voluntary compliance and finally to generate tax revenue to support government expenditure. these can be done through auditing taxpayers with risk based selection criteria by discouraging those evaders and providing information to competent body to the area of tax law that has loophole to avoid tax and assessment of tax and penalty in the evaders. in the tax assessment by estimation scheme the evidences gathered from third party, financial statement of the taxpayer, monthly report of the taxpayer, quarterly report of the taxpayer, withholding report of the taxpayer, information gathered by interviewing taxpayers will be compared with each other and tax will be assessed by using highest sales or service revenue of the taxpayer by applying taxable income rate without considering the cost of purchase and administrative expense of taxpayer. therefore, those who declared high sales or service revenue innocently have been taxed highly due to audit those who conceal their sales or service revenue subject to low tax liability, penalty and interest on unpaid taxes, which discourage voluntary compliance and make taxpayers to be out of the tax net. 6. conclusion and recommendation tax audit is one of the activities that helps to achieve the objectives of government revenue. the objective of study is to probe factors that significantly contribute to enhance effectiveness of tax audit. to address the objective of the study, data were gathered from primary sources. based on the collected data, analysis and the findings of the study, the following conclusion and recommendation have been forwarded. expected hypothesis of each predictor variables with the dependent variable has been tested. accordingly, the management support, audit quality, standardized integrated government tax administration system and taxpayers’ awareness were statistically significant factors that have been affecting the effectiveness of tax audit positively. on the contrary, tax law complexity and tax accounting and reporting were factors that significantly affecting the effectiveness of the tax audit practice negatively. except tax accounting and reporting, all predictor variables result is the same with the expected hypothesis. the simplification of tax laws and applicable regulations and directives are important to undertake effective tax administration and tax audit. automation is essential element for modernizing tax administration in general and tax audit in particular. tax auditors are not using sigtas software from the planning of the tax activity to the production of the audit report due to lack of assessing the financial statement of the taxpayers’ and document creation especially for business income tax and tot. in principle appropriate tax accounting and reporting is expected to improve the effectiveness of the tax audit practice. but, in kembata tembaro zone tax authority taxpayers who declare relatively better return and cost of goods purchase has been subjected to high tax liability, effectiveness of tax audit: a study in kembata tembaro zone, southern ethiopia 47 interest on tax liability and administrative penalty than those who conceal their return and cost of goods purchase in their financial report. kembata tembaro zone tax authority should advance the factors positively affecting the effectiveness of the tax audit, such as management support, audit quality, standardized integrated government tax administration system and taxpayers’ awareness in order to improve the effectiveness of tax audit practice and concerned authority should simplify tax laws and change assessment trend based on taxable income rate of category “c” taxpayers in order to reduce the negative effect of tax law complexity and tax accounting and reporting variables on tax audit effectiveness. to ensure the fair, equitable and reduce subjective assessment of tax among taxpayers’ concerned authority should simplify tax laws and issue workable regulations especially to the tot proclamation 308/2002, regarding to the administrative and criminal penalty fail to provide sales invoice for service provide and sales made. since automation is essential element for modernizing of tax administration in general and tax audit in particular. the tax authority of kembata tembaro zone should fulfil the computers, provide sufficient training to tax auditors in the sigtas software and create document number and make the assessment especially for business income tax and tot. to levy and collect based on ability to pay principle, tax auditors should encourage those taxpayers’ who maintain relatively proper books of account and recording to assess tax based on the return they provide and tax they declare with the modification rather than rejecting the self-assessment of taxpayers’ and assessing based on taxable income rate of category “c” taxpayers which discourage voluntary compliance. tax authority should follow up the taxpayers’ premises periodically and teach taxpayers’ in order to improve taxpayers’ record keeping nature and to get evidence about business transaction to assess tax based on either objective evidence or taxpayer’s books of account/record by replacing the taxable income rate of category “c” taxpayers. references adediran, s. a, alade s.o & oshode,a.a. 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(2018), the influence of the corporate sector on the effectiveness of tax compliance instruments, in john hasseldine (ed.) advances in taxation (advances in taxation, volume 25) emerald publishing limited, pp.119 146 international journal of commerce and finance, vol. 5, issue 2, 2019, 167-186 167 relationship between stock markets in africa: a case of five selected countries abdifitah mohamed jama deer istanbul commerce university,turkey ayben koy istanbul commerce university, turkey abstract this article aims to analyze the relationship between the stock markets in africa (egypt, kenya, morocco, nigeria and south africa). the sample used in the study is beginning from 2009 to 2018 in a weekly data range. the main findings in the study are: (1) price indices of casablanca stock exchange are not influenced by other stock markets in the long run (2) egyptian stock market can be used to predict the kenyan stock market but not morocco, south africa, or nigeria, (3) south african stock market can be used to pred ict the egyptian, nigerian, and kenya stock markets, and (4) johannesburg stock exchange plays a vital role in effecting the stock prices of other african countries. keywords: stock market, causality 1. introduction one of the results of globalization is a free flow of capital speculations, dominatingly from developed markets to developing nations such as asia, africa, eastern europe and south america (adjei, 2015, p.7). a large number of such emerging and frontier economies have come a long way with democratic governance, accountability and upgrades in their financial administration, which has led to strengthened institutions and administrative frameworks. as of 2012, the emerging economies had contributed 38% of worldwide gdp which could ascend to 63% by 2050 (adjei, 2015, p.8). statistics show that the african continent has yet to play a unique role in global economic growth, though the potential exists. nonetheless, some of the world top growing economies are in sub-saharan africa (imf, 2015). between 1995 and 2013, the economy of sub-saharan africa grew at 4.5% per annum on average (world bank, 2015). commonly, many african face issues that limit speculation, such as obsolete business laws and guidelines, poor infrastructure, challenges in getting to money related capital, resolute and complex duty approach, and frequent conflicts that have resulted to regional instability. the formal financial markets in africa have developed from the last two decades (ntim et al., 2011). the considerable growth in formal financial markets was brought by the establishment of several capital and money markets in africa. from the mid-1990s, african nations sold the vast majority of their stakes of public organizations to provoke the development of the private sector (ly, 2011, p.6). there has been an increased number of african nations setting up stock markets from 18 in 2002 to 29 active stock markets in 2018 (coetzer, 2018). this mirrors a picture of readiness to grow and eventually overcome any gap between africa and other nations across the globe. the aim behind the creation of stock trades in africa was to mobilize national resource and attract foreign investors (mahama, 2013, p.6). in general, african stock markets can't flaunt an exceptionally outstanding share of the world market capitalization yet (coetzer, 2018). there has however been at least one african stock trade on the world top ten best performing stock markets. this is viewed as an impression of the endeavors on the headway of stock trades in the african district. it is an inspiration for both neighborhood and remote financial specialists to think about putting resources into african stocks. the rise of african stock markets has raised worries about the mix of african stocks as money related center point with the influence of pulling in universal financial specialists to africa (mahama, 2013, p.7). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e abdifitah mohamed jama deer & ayben koy 168 in this study, the stock market for five countries in the last ten (10) years are analyzed in a weekly data range. the five countries (egypt, kenya, morocco, nigeria and south africa) position themselves as the giants in the african region. they also command the highest stock market in the entire african continent. stock markets in africa represent a quickly developing portion of the world economy. they offer conceivably exceptional returns. in the last decade, some of the best performers in the stock market have hailed from this region. experimentally, it has been shown that albeit individual developing stock markets have been volatile, their riskbalanced return in groups has been higher than their counterparts in developed markets. 2. literature review 2.1 history of development of african stock markets african stock markets have indicated an aggregate indication of agile development and improvement after some time. in 1987, the stock market had only eight stock exchanges, and by 2018 it had a total of 29 stock markets from a total of 38 countries (coetzer, 2018). the oldest stock exchange is the egyptian stock exchange which was established in 1883 (asea, 2012). it is thus correct to say that african stock exchanges have been in the market for quite some time. african stock markets differ significantly in institutional and market infrastructural attributes. ntim (2012) offers a five-tier characterization of african stock markets. the first level consists exclusively of south africa – the most well built up, the biggest, and one of the early established financial exchanges in africa. the second level comprises of several medium-size markets among them egypt, tunisia, nigeria, morocco, kenya, and zimbabwe (ntim, 2012). the third level is comprised of new and small, however quickly developing markets, consisting of ghana, cote d'ivoire, namibia, mauritius and botswana (ntim, 2012). the fourth level comprises of exceptionally new and small markets, including libya, sudan, uganda, tanzania, mozambique, malawi, zambia and swaziland. the fifth tier includes seven markets, to be specific; algeria, cameroon, gabon, cape verde, rwanda, angola, and sierra leone, which either regardless of having been in presence for moderately longer time are not widely known or are not formally known in light of the fact that they are essentially excessively youthful (ntim, 2012). among the five stock markets under this study, the oldest market in egyptian stock exchange founded in 1883 followed by johannesburg stock exchanged founded in 1887. casablanca stock exchange was established in 1929 while the nairobi stock exchange was started in 1954. the youngest among the five is nigerian stock exchange which was launched in 1998. all the stock markets are located in their respective countries capital cities (coetzer, 2018). 2.1.1. egyptian stock exchange (egypt) the egyptian stock exchange (egx) is the oldest stock exchange in africa. though in africa, the market is in most cases counted as a middle east stock market. the number of firms trading with the egx has increased tremendously over the years (african securities exchanges association (asea), 2018). the egx trades in stocks, funds and known related items issued by specific global monetary organizations. the egx has task instrument where there are potential outcomes of intraday and online exchanging availabilities, which shows how well the stock trade has developed throughout the years. the egx has kept its performance consistently throughout the years. in 2014 the egx was positioned second by the msci lists in 2013 and number one among developing business sector peers in two years spreading over 2012-2014 (asea yearbook, 2014). in the year ending 2012, it was voted the most lucrative securities exchange by garnering 49.56%. this may be credited to the european predicament, preparing for expansion into developing markets. the main index under the egx is the egx 30 which includes 30 listed companies. 2.1.2. casablanca stock exchange (morocco) the casablanca stock exchange (csex) was initially known as was known as the "office de compensation des valeurs mobilières." it is africa's third biggest bourse after johannesburg stock exchange and nigerian stock exchange (asea, 2018). in january 1997, morocco enacted a law making further enhancements to securities exchange organization. in 2000 the name of the stock market was further changed from société de la bourse des valeurs de casablanca (sbvc) to casablanca stock exchange. in january 2007, the cse upgraded its visual character with a desire to help its adjustment in size. relationship between stock markets in africa: a case of five selected countries 169 formation of a casablanca stock exchange follow-up council made by the board chiefs for the redoing of the rules of the organization was done in december 2008. the cse officially received corporate governance with board of directors and general management in april 2009. in 2015 cse recorded a value turnover of us$ 20.4 billion with 130 exchanges. the stock trade which recorded a total market capitalization of us$ 45,763,178,295 in 2015, and had a sum of 75 listed firms. the csx has two indices; morocco all share and ftse cse morocco 15 index. 2.1.3. johannesburg stock exchange (south africa) johannesburg stock exchange (jse) is one of the most established markets in africa. jse is currently positioned nineteenth biggest stock trade globally and the greatest in africa as far as market capitalization (asea, 2018). the jse is a member of world federation of trades after joining 1963. the jse has more than 395 listed firms (johannesburg stock exchange, 2018). jse has an automatic trade service. in 2010, total trade raised to $438.08 billion from $374.00 billion in 2009. in 2015, its sum market capitalization was 756.8 billion usd. it recorded a turnover of 392.6 billion usd with a total of 61,894,253 exchanges. the jse index is jse/ftse all share index with approximately 99% of the market capitalization. this study will utilize the ftse/jse africa all-share as a stock market representing south africa. 2.1.4. nairobi securities exchange (kenya) nairobi securities exchange (nse) was set up in 1954 (asea, 2018). nse has throughout the years experienced numerous changes to turn into the most exceptional stock trade in the east africa region and a standout amongst the most lucrative markets worldwide (ventures africa, 2013). the nse has developed into a full securities service exchange dealing with derivatives, debt, clearing, and repayment of equities and other related instruments (nairobi securities exchange, 2018). it is one of only a few stock exchanges with live exchanging through computerized trading services. in 2015, with 63 listed firms, nse recorded a market capitalization of us$20 billion. its turnover was us$2,045, and it had 406,634 exchanges amid a similar period. it is a price weight index, and the individuals are chosen dependent on weighted market performance for a year: 40% for market capitalization, 30% for shares traded, 20% for number of deals 20%, and 10% for turnover (asea, 2018). the nse has one major index which is the nse-20 started in 1994. the index return of the nse-20 is fundamentally founded on capital increase/decrease of the 20 most prominent securities recorded the study will use the nse 20-share index (nse-20) to determine the stock market of kenya as its members make up 80% of the stock trade in the country. 2.1.5. nigerian stock exchange (nigeria) nigerian stock exchange (ngse) was built up in 1960. it was officially started in 1961 with a total of 19 listed firms. the total number of listed firms has risen to 184 companies by 2018 (nigeria stock exchange, 2018). the managing body is the securities and exchange commission (sec) while its certification comes from investments and securities act (isa). the listed firms hail from 11 key sectors among them financial services, construction, agriculture, and consumer goods. in 2015, it recorded a total market capitalization of us$49,456,969,735, and it had 184 registered organizations. around the same time, it registered a turnover of us$3,931,503,298 and had 917,946 exchanges. the ngse has two main indices; the ngse 30 index and the ngse all-share index (asi) (nigeria stock exchange, 2016). in the year 2012, the nse all offer index shut the year with its most astounding execution since 2008 with a 35.45% addition. all out exchange an incentive in the year-end 2013 was terrific and has been same in earlier years and volume of trade developed from 89 billion of every 2013 to 105 billion out of 2013, connoting the potential displayed by the market. additionally, market capitalization for the years 2010, 2011, 2012 and 2013 has been $53.40, $43.06, $57.77 and $80.69 billion, of course clarifying the development in the market and its chances accessible to financial specialists (asea, yearbook, 2014). abdifitah mohamed jama deer & ayben koy 170 2.2. empirical review in the us and norway, næs, skjeltorp and ødegaard (2011) set out to demonstrate that financial exchange liquidity is a fitting driving marker of the real economy. concentrating on the year 1947 – 2008, næs et al. (2011) picked various liquidity estimates dependent on their requirement for a sensibly prolonged time series. to quantify the condition of the real economy, the indicators utilized are unemployment, real consumption, real gdp and real investment. the study uses the var methodology. næs et al. (2011) finds a significant relationship between liquidity and the real economy (30). moreover, it is discovered that there is a connection between time difference in market liquidity and the adjustments in interest in the stock market. a chile study by brandao-marques (2016) examines the liquidity of the stock market in the chilean stock exchange. time series is used to test the cyclical behavior and liquidity (6). a total of 23 emerging markets are included for the year ranging from 2003 to 2014 using panel regression. (brandao-marques, 2016: 8). it is discovered that market liquidity improved with a better assurance of minority investors. brandao-marques (2016) noted the likelihood that the positive connection among liquidity and financial specialist assurance is a minor impression of the cross-country disparity of the significance of institutional speculators, similar to insurance agencies, annuity reserves and shared assets (12). in taiwan, hoang, (2017) examines the connection between liquidity and stock returns. the study covers the period from 2007 to 2014. the study utilize the capm three moment model and the fama – french model. results of the investigation establish a positive connection between illiquidity proportion and stock returns. in poland, lischewski and voronkova (2012, p.13) explore the impact of value, size and liquidity on stock return in the most exceptional stock trades in the country. results in this market are steady to those in developed markets as far as market, estimate, book – to – market yet could barely completely clarify whole equity premium notwithstanding when incorporating liquidity factor in the model. liquidity factor, however, assumes a job in diminishing event of the measurably huge hazard balanced abundance return, has no proof as an estimated factor in this market (lischewski & voronkova, 2012, p.21). a study conducted in latin america examine the relationship among four (4) latin american nations to be specific argentina, brazil, chile and mexico while utilizing the u.s market as linkage (diamandis & drakos, 2010, p.384). the dynamic relationship between stock and foreign trade markets are analyzed by utilizing a cointegration approach. moreover the markets show their connections with the united states market (diamandis & drakos, 2010, p.386). in china, jayasuriya (2011, p. 420) analyze the inter-linkages between the chinese stock and the emerging markets in its neighborhoods. vector autoregressive (var) model is employed in this study. monthly data covering the year 1993 to 2008 was used for the countries including the philippines, thailand, indonesia, and china. results indicated that china stock market had a controlling role in the return behavior of the other markets throughout the years. this is evidence that stuns originating from china are incredibly felt in different markets (jayasuriya, 2011, p.422). the markets were found not to be interrelated, but instead, there is a dimension of connection among china and different markets when foreign investor return is represented. focusing on asian markets, ali, butt, and rehman (2011, p.398) explored co-developments among developing and developed stock markets. the stock markets in the study included pakistan, china, taiwan, malaysia, indonesia, singapore, japan, uk, and the usa. monthly data for the period ranging from july 1998 to june 2008 was used. ali et al. (2011, p.401) employed the gregory and hansen cointegration test, the johansen cointegration test, englegranger cointegration test, and granger causality test. the outcomes from the investigation demonstrated that there is no cointegration connection between the pakistani securities exchange and the malaysia, taiwan, singapore, uk and usa markets. pakistani stock market was observed to be cointegrated with china, indonesia, india, and japan stock markets (p.402) using african stocks markets, alagidede, panagiotidis, and zhang (2010) analyzed the level of integration between african markets, emerging markets and developed markets. african countries were represented by kenya, egypt, south africa and nigeria. the emerging markets selected were india, brazil and mexico while the uk, japan and usa represented the developed markets. bivariate cointegration tests were run (alagidede et al., 2010: 4). the outcomes demonstrated the presence of a long-run connection among egypt and japan, kenya and japan, and south africa and brazil. conversely, african markets had no cointegration amongst each other. breitung test found a cointegration between only egypt and brazil, and egypt and south africa (alagidede et al., 2010: 9). relationship between stock markets in africa: a case of five selected countries 171 the frontier economies (tunisia, ghana, kenya, ivory coast, mauritius and botswana) and ifc global category (egypt, morocco, nigeria and south africa) are analyzed by agyei-ampomah (2011) beginning from 1998 to 2007 in a monthly data range. results have got low dimensions of the connection between's african stock markets. besides, no proof of integration is found between them and the worldwide stock markets except for south africa (agyeiampomah, 2011: 12). ncube and mingiri (2015) compare johannesburg stock exchange to other african countries. using a monthly data beginning from 2000 to 2008, johansen and julius cointegration methods are used. ncube and mingiri (2015) notes a division of the different value markets. the consequences of whether world market exercises influence the african equity markets additionally proved positive. in south africa, vacu (2013) analyze the long-run relationship between the stock market and the development of the economy. quarterly data is used covering the years 1990 to 2010. all share index, turnover ratio, market capitalization and gdp are analyzed by johansen cointegration test, vector error correction model (vecm) and granger causality tests. results indicate a long run relationship existing between the factors. focusing on three african countries, osamwonyi and kasimu (2013) examine the causal and direction of the relationship for the countries ghana, kenya, and nigeria. in the period beginning from 1989 to 2009, granger test for causality is employed. outcomes indicate that the stock market for nigeria and ghana have got no causal connection to economic development. in kenya, a unidirectional and bidirectional causal relationship is found. the unidirectional causality that moved from the stock market to gdp is found in market capitalization and number of listed securities. the bidirectional causality is found in the ratio of stock turnover and gdp (osamwonyi & kasimu, 2013, p.88). mohanasundaram and parthasarathy (2015) examined the presence of securities exchange relationship and cointegration between india, south africa, and the usa. the study employed the johansen-juselius multivariate cointegration approach. a month to month estimations of the market major indices (for example the indian national stock exchange cnx nifty 50, the jse africa all share file and the nasdaq composite) are utilized. the study covers the period from april 2004 to march 2014. correlation test revealed high degrees of connection between the markets (481). granger causality test is also run, and results show unidirectional causality relationship between the nifty 50 and jse all share index (483). 3. empirical results and analysis 3.1. descriptive statistics business performance is a multi-dimensional concept (hofer, 1983; lenz, 1981) as it depends on a large number of different decisions, actions and measures. that’s why it is used in several research areas. for this reason, parallel to the study discussed in the literature, the following sub-dimensions will be analyzed briefly in this section. 3.1.1 financial performance the mean, median, maximum and minimum data of the respective stock market prices of the selected countries are as shown in table 2. as shown in the table, nigeria (318.3987) has got the least standard deviation followed by kenya (690.6346). the standard deviation for morocco, egypt and south africa are 1318.455, 3581.288 and 8920.007 respectively. egypt, kenya morocco and nigeria have got a positive skewness indicating that their data are skewed toward the right. south africa shows a negative skewness indicating that the data tends towards the left. the kurtosis of egypt is close to the recommended value of 3 (at 2.732502). the value of kurtosis for other countries is less than the recommended value, 1.947046 for kenya, 1.755484 for morocco, 1.772826 for nigeria and 1.676452 for south africa. the probability value of less than 5% (0.00 for all the five countries) confirms that the data is not normally distributed. the results imply that the data under study is not normally distributed. abdifitah mohamed jama deer & ayben koy 172 table 1 descriptive data 3.2. stationarity tests stationarity tests are used to check the presence or absence of unit root. if a model has unit root it is said to be nonstationary while absence of unit root indicates a stationary model. in this study, both augmented dickey-fuller (adf) test and phillips-perron (pp) test were applied. 3.2.1 unit root test at level it is recommended that models should be non-stationary at level. the following hypothesis are applied; null hypothesis: variable is not stationary at level alternative hypothesis: variable is stationary the null hypothesis is rejected if p value is less than 5% hence the model is said to be non stationary at level. table 2 unit root test at level augmented dickey-fuller test phillips-perron test variable with intercept with intercept and trend with intercept and trend with intercept with intercept and trend with intercept and trend cse -1.781499 -1.780278 -0.005967 -1.796627 -1.786004 0.149022 esx -0.834036 -1.796313 0.788502 -0.769235 -1.819126 0.790037 jse -1.801935 -2.568563 1.491941 -1.546017 -2.136619 1.435523 ngse -2.867576 -2.001596 -0.119393 -2.037062 -1.817870 0.082386 nse -2.160294 -2.219030 -0.110967 -1.105160 -1.082913 -0.533515 the probability value for all the variables is more than 5% thus we cannot reject the null hypothesis. therefore, the conclusion is that the variables are not stationary at level. 3.2.2 unit root test after first difference it is expected that after first difference, the model should become stationary. the following hypotheses were therefore tested; null hypothesis: variable is not stationary alternative hypothesis: variable is stationary relationship between stock markets in africa: a case of five selected countries 173 table 3 unit root test after first difference augmented dickey-fuller test phillips-perron test variable with intercept with intercept and trend with intercept and trend with intercept with intercept and trend with intercept and trend cse -11.51419* -11.50245* -11.52352* -21.69550* -21.67780* -21.71274* esx -20.63693* -20.62013* -20.59118* -20.61512* -20.59824* -20.58874* jse -12.44174* -12.54008* -12.23853* -24.76864* -25.33432* -23.99369* ngse -6.051426* -6.080612* -6.048666* -20.00283* -20.01353* -20.01330* nse -7.273237* -18.90213* -7.284279* -18.85886* -18.90213* -18.87249* the * sign denotes a probability value of less than 0.05 or 5%. this therefore means the we reject the null hypothesis and conclude that the variables are stationary at first difference. 3.3. var lag order var lag order for every two coutries stock indices are determined. to get the optimal lag length for each relationship, the order that has got the highest number of recommendation is taken. according to the results of final prediction error (fpe), akaike information criteria (aic), schwarz criterion (sc), and hannan quinn (hq) the optimal number of lags are as following: cse & esx: 3; cse & jse: 1; cse & ngse: 1; cse & nse: 3; esx & jse: 2; esx & ngse: 2; esx & nse:2, jse & ngse: 3; jse & nse:3 and ngse & nse: 3. 3.4. var analysis following determining the lags for all index duals, var test is used. the test is applied to the first difference since the variables are stationary at first difference. tables 7-16 are the var analysis results for the times series duals. table 4 var analysis between cse and jse coefficient std. error t-statistic prob. c(1) 0.058066 0.043687 1.329134 0.1844 c(2) 0.008736 0.008722 1.001585 0.3170 c(3) 1.668440 7.104298 0.234849 0.8144 r-squared 0.005331 mean dependent var 2.290212 adjusted r-squared 0.001483 s.d. dependent var 161.7794 s.e. of regression 161.6594 akaike info criterion 13.01461 sum squared resid 13511153 schwarz criterion 13.03915 log likelihood -3380.799 hannan-quinn criter. 13.02423 f-statistic 1.385505 durbin-watson stat 2.013289 prob(f-statistic) 0.251125 coefficient std. error t-statistic prob. c(4) -0.235098 0.219581 -1.070667 0.2848 c(5) -0.023638 0.043838 -0.539210 0.5900 c(6) 54.19977 35.70780 1.517869 0.1297 r-squared 0.002773 mean dependent var 52.27754 adjusted r-squared -0.001085 s.d. dependent var 812.0962 s.e. of regression 812.5365 akaike info criterion 16.24395 sum squared resid 3.41e+08 schwarz criterion 16.26849 log likelihood -4220.427 hannan-quinn criter. 16.25357 f-statistic 0.718806 durbin-watson stat 2.009816 prob(f-statistic) 0.487820 abdifitah mohamed jama deer & ayben koy 174 table 5 var analysis between cse and esx coefficient std. error t-statistic prob. c(1) 0.025052 0.044773 0.559531 0.5760 c(2) 0.072052 0.044698 1.611957 0.1076 c(3) 0.065623 0.044939 1.460262 0.1448 c(4) 0.025265 0.024301 1.039704 0.2990 c(5) 0.010785 0.024216 0.445340 0.6563 c(6) 0.017542 0.024136 0.726781 0.4677 c(7) -0.360219 7.073295 -0.050927 0.9594 r-squared 0.018018 mean dependent var 0.588630 adjusted r-squared 0.006328 s.d. dependent var 159.6266 s.e. of regression 159.1207 akaike info criterion 12.99081 sum squared resid 12760982 schwarz criterion 13.04884 log likelihood -3312.151 hannan-quinn criter. 13.01356 f-statistic 1.541269 durbin-watson stat 1.992900 prob(f-statistic) 0.162635 coefficient std. error t-statistic prob. c(8) 0.101411 0.082699 1.226265 0.2207 c(9) 0.192504 0.082561 2.331640 0.0201 c(10) 0.075770 0.083007 0.912815 0.3618 c(11) 0.074382 0.044885 1.657166 0.0981 c(12) -0.050733 0.044730 -1.134208 0.2572 c(13) 0.012937 0.044581 0.290183 0.7718 c(14) 17.60973 13.06497 1.347858 0.1783 r-squared 0.025276 mean dependent var 18.37526 adjusted r-squared 0.013672 s.d. dependent var 295.9395 s.e. of regression 293.9094 akaike info criterion 14.21802 sum squared resid 43536913 schwarz criterion 14.27606 log likelihood -3625.705 hannan-quinn criter. 14.24078 f-statistic 2.178238 durbin-watson stat 1.990813 prob(f-statistic) 0.043774 table 6 var analysis between cse and ngse coefficient std. error t-statistic prob. c(1) 0.066001 0.046192 1.428846 0.1537 c(2) 0.006760 0.176524 0.038292 0.9695 c(3) 1.325417 7.305795 0.181420 0.8561 r-squared 0.004362 mean dependent var 1.440596 adjusted r-squared 0.000098 s.d. dependent var 158.3176 s.e. of regression 158.3098 akaike info criterion 12.97335 sum squared resid 11703956 schwarz criterion 12.99985 log likelihood -3045.737 hannan-quinn criter. 12.98378 f-statistic 1.023036 durbin-watson stat 1.999807 prob(f-statistic) 0.360306 coefficient std. error t-statistic prob. c(4) 0.001543 0.012075 0.127792 0.8984 c(5) 0.078820 0.046147 1.708026 0.0883 c(6) 1.030684 1.909873 0.539661 0.5897 r-squared 0.006264 mean dependent var 1.129234 adjusted r-squared 0.002008 s.d. dependent var 41.42680 s.e. of regression 41.38519 akaike info criterion 10.29009 sum squared resid 799846.7 schwarz criterion 10.31659 log likelihood -2415.170 hannan-quinn criter. 10.30051 f-statistic 1.471791 durbin-watson stat 1.987909 prob(f-statistic) 0.230577 relationship between stock markets in africa: a case of five selected countries 175 table 7 var analysis between cse and nse coefficient std. error t-statistic prob. c(1) 0.046584 0.044095 1.056452 0.2913 c(2) 0.076471 0.044022 1.737094 0.0830 c(3) 0.056116 0.044075 1.273181 0.2035 c(4) -0.008558 0.098277 -0.087078 0.9306 c(5) 0.025213 0.098897 0.254944 0.7989 c(6) 0.119564 0.097406 1.227480 0.2202 c(7) 1.645390 7.103537 0.231630 0.8169 r-squared 0.016210 mean dependent var 1.906506 adjusted r-squared 0.004659 s.d. dependent var 161.9408 s.e. of regression 161.5632 akaike info criterion 13.02109 sum squared resid 13338460 schwarz criterion 13.07852 log likelihood -3365.463 hannan-quinn criter. 13.04359 f-statistic 1.403317 durbin-watson stat 1.987602 prob(f-statistic) 0.211306 coefficient std. error t-statistic prob. c(8) -0.011730 0.019842 -0.591200 0.5546 c(9) 0.039061 0.019809 1.971872 0.0492 c(10) -0.014749 0.019833 -0.743658 0.4574 c(11) 0.176166 0.044222 3.983633 0.0001 c(12) 0.061205 0.044502 1.375356 0.1696 c(13) -0.000653 0.043831 -0.014906 0.9881 c(14) -0.590080 3.196436 -0.184606 0.8536 r-squared 0.046126 mean dependent var -0.801197 adjusted r-squared 0.034926 s.d. dependent var 74.00368 s.e. of regression 72.69988 akaike info criterion 11.42398 sum squared resid 2700774. schwarz criterion 11.48141 log likelihood -2951.810 hannan-quinn criter. 11.44648 f-statistic 4.118342 durbin-watson stat 1.981709 prob(f-statistic) 0.000475 table 8 var analysis between esx and jse coefficient std. error t-statistic prob. c(1) 0.064763 0.044421 1.457926 0.1455 c(2) -0.029191 0.043686 -0.668200 0.5043 c(3) 0.063199 0.015972 3.956973 0.0001 c(4) 0.021170 0.016211 1.305930 0.1922 c(5) 12.99107 12.93924 1.004005 0.3159 r-squared 0.040679 mean dependent var 18.46586 adjusted r-squared 0.033110 s.d. dependent var 295.6569 s.e. of regression 290.7210 akaike info criterion 14.19232 sum squared resid 42850994 schwarz criterion 14.23371 log likelihood -3628.235 hannan-quinn criter. 14.20855 f-statistic 5.374669 durbin-watson stat 1.989281 prob(f-statistic) 0.000303 coefficient std. error t-statistic prob. c(6) -0.009097 0.123537 -0.073639 0.9413 c(7) 0.013389 0.121491 0.110201 0.9123 c(8) -0.034324 0.044418 -0.772757 0.4400 c(9) -0.082337 0.045083 -1.826322 0.0684 c(10) 61.72324 35.98450 1.715273 0.0869 r-squared 0.007877 mean dependent var 55.13189 adjusted r-squared 0.000050 s.d. dependent var 808.5257 s.e. of regression 808.5056 akaike info criterion 16.23797 sum squared resid 3.31e+08 schwarz criterion 16.27936 log likelihood -4151.920 hannan-quinn criter. 16.25419 f-statistic 1.006359 durbin-watson stat 2.012551 prob(f-statistic) 0.403651 table 9 interdependencies between esx and ngse coefficient std. error t-statistic prob. c(1) 0.110894 0.046372 2.391400 0.0172 c(2) -0.051656 0.046316 -1.115307 0.2653 c(3) 0.518772 0.332114 1.562028 0.1190 c(4) -0.304757 0.332492 -0.916585 0.3598 c(5) 14.06164 13.67194 1.028504 0.3042 r-squared 0.021758 mean dependent var 15.07299 adjusted r-squared 0.013325 s.d. dependent var 297.3441 s.e. of regression 295.3564 akaike info criterion 14.22485 sum squared resid 40477235 schwarz criterion 14.26910 log likelihood -3330.727 hannan-quinn criter. 14.24226 f-statistic 2.580085 durbin-watson stat 1.987408 prob(f-statistic) 0.036739 coefficient std. error t-statistic prob. c(6) -0.006362 0.006490 -0.980363 0.3274 c(7) 0.002171 0.006482 0.334918 0.7378 c(8) 0.088230 0.046478 1.898324 0.0583 c(9) -0.067828 0.046531 -1.457686 0.1456 c(10) 1.074114 1.913335 0.561383 0.5748 r-squared 0.013089 mean dependent var 1.043220 adjusted r-squared 0.004581 s.d. dependent var 41.42900 s.e. of regression 41.33399 akaike info criterion 10.29185 sum squared resid 792743.5 schwarz criterion 10.33610 log likelihood -2408.439 hannan-quinn criter. 10.30926 f-statistic 1.538481 durbin-watson stat 2.003774 prob(f-statistic) 0.189890 abdifitah mohamed jama deer & ayben koy 176 table 10 interdependencies between esx and nse coefficient std. error t-statistic prob. c(1) 0.086178 0.044657 1.929774 0.0542 c(2) -0.033226 0.044726 -0.742880 0.4579 c(3) 0.131392 0.184723 0.711292 0.4772 c(4) 0.011945 0.184111 0.064880 0.9483 c(5) 17.44468 13.09235 1.332433 0.1833 r-squared 0.009678 mean dependent var 18.46586 adjusted r-squared 0.001865 s.d. dependent var 295.6569 s.e. of regression 295.3811 akaike info criterion 14.22413 sum squared resid 44235733 schwarz criterion 14.26552 log likelihood -3636.377 hannan-quinn criter. 14.24035 f-statistic 1.238685 durbin-watson stat 1.995695 prob(f-statistic) 0.293468 coefficient std. error t-statistic prob. c(6) 0.016793 0.010706 1.568482 0.1174 c(7) 0.007208 0.010723 0.672220 0.5017 c(8) 0.143088 0.044286 3.230979 0.0013 c(9) 0.040409 0.044140 0.915472 0.3604 c(10) -0.138339 3.138812 -0.044074 0.9649 r-squared 0.034387 mean dependent var 0.406465 adjusted r-squared 0.026768 s.d. dependent var 71.78313 s.e. of regression 70.81586 akaike info criterion 11.36776 sum squared resid 2542547. schwarz criterion 11.40915 log likelihood -2905.147 hannan-quinn criter. 11.38399 f-statistic 4.513706 durbin-watson stat 2.003667 prob(f-statistic) 0.001365 table 11 interdependencies between jse and ngse coefficient std. error t-statistic prob. c(1) -0.047488 0.046644 -1.018095 0.3092 c(2) -0.091164 0.047347 -1.925457 0.0548 c(3) -0.053769 0.047476 -1.132544 0.2580 c(4) 1.047503 0.952680 1.099533 0.2721 c(5) -1.047110 0.950826 -1.101264 0.2714 c(6) -0.573130 0.934377 -0.613382 0.5399 c(7) 53.83033 38.54297 1.396631 0.1632 r-squared 0.018277 mean dependent var 44.61006 adjusted r-squared 0.005500 s.d. dependent var 831.8252 s.e. of regression 829.5345 akaike info criterion 16.29445 sum squared resid 3.17e+08 schwarz criterion 16.35650 log likelihood -3805.901 hannan-quinn criter. 16.31887 f-statistic 1.430452 durbin-watson stat 2.004189 prob(f-statistic) 0.201111 coefficient std. error t-statistic prob. c(8) 0.009571 0.002289 4.181122 0.0000 c(9) 0.002499 0.002323 1.075391 0.2828 c(10) 0.000829 0.002330 0.355752 0.7222 c(11) 0.059058 0.046752 1.263225 0.2071 c(12) -0.080623 0.046661 -1.727851 0.0847 c(13) 0.007439 0.045854 0.162224 0.8712 c(14) 0.444316 1.891456 0.234907 0.8144 r-squared 0.048411 mean dependent var 0.998996 adjusted r-squared 0.036026 s.d. dependent var 41.46225 s.e. of regression 40.70853 akaike info criterion 10.26560 sum squared resid 763962.1 schwarz criterion 10.32765 log likelihood -2395.150 hannan-quinn criter. 10.29001 f-statistic 3.908846 durbin-watson stat 2.000432 prob(f-statistic) 0.000805 relationship between stock markets in africa: a case of five selected countries 177 table 12 interdependencies between jse and nse coefficient std. error t-statistic prob. c(1) -0.038387 0.044022 -0.872002 0.3836 c(2) -0.100111 0.044143 -2.267890 0.0238 c(3) -0.067616 0.044431 -1.521825 0.1287 c(4) 0.712840 0.495129 1.439705 0.1506 c(5) -0.519209 0.497380 -1.043888 0.2970 c(6) -0.748027 0.486337 -1.538082 0.1246 c(7) 62.81324 35.63379 1.762744 0.0785 r-squared 0.024138 mean dependent var 53.35201 adjusted r-squared 0.012680 s.d. dependent var 809.9353 s.e. of regression 804.7840 akaike info criterion 16.23245 sum squared resid 3.31e+08 schwarz criterion 16.28988 log likelihood -4197.204 hannan-quinn criter. 16.25495 f-statistic 2.106601 durbin-watson stat 1.996998 prob(f-statistic) 0.051053 coefficient std. error t-statistic prob. c(8) 0.013634 0.003935 3.464595 0.0006 c(9) 0.007516 0.003946 1.904845 0.0574 c(10) -0.000530 0.003972 -0.133561 0.8938 c(11) 0.156360 0.044260 3.532746 0.0004 c(12) 0.062720 0.044461 1.410648 0.1590 c(13) 0.007614 0.043474 0.175148 0.8610 c(14) -1.693260 3.185356 -0.531576 0.5953 r-squared 0.065941 mean dependent var -0.801197 adjusted r-squared 0.054974 s.d. dependent var 74.00368 s.e. of regression 71.94080 akaike info criterion 11.40299 sum squared resid 2644670. schwarz criterion 11.46042 log likelihood -2946.373 hannan-quinn criter. 11.42549 f-statistic 6.012449 durbin-watson stat 1.976492 prob(f-statistic) 0.000004 table 13 interdependencies between ngse and nse coefficient std. error t-statistic prob. c(1) 0.081690 0.048072 1.699342 0.0899 c(2) -0.098379 0.047867 -2.055249 0.0404 c(3) -0.016649 0.048085 -0.346230 0.7293 c(4) -0.002083 0.027798 -0.074922 0.9403 c(5) 0.069184 0.027998 2.471063 0.0138 c(6) 0.001038 0.027738 0.037411 0.9702 c(7) 1.113673 1.909197 0.583320 0.5600 r-squared 0.024226 mean dependent var 0.998996 adjusted r-squared 0.011526 s.d. dependent var 41.46225 s.e. of regression 41.22261 akaike info criterion 10.29070 sum squared resid 783379.1 schwarz criterion 10.35275 log likelihood -2401.023 hannan-quinn criter. 10.31511 f-statistic 1.907556 durbin-watson stat 1.996824 prob(f-statistic) 0.078020 coefficient std. error t-statistic prob. c(8) 0.167162 0.082551 2.024953 0.0434 c(9) 0.056686 0.082200 0.689607 0.4908 c(10) 0.040869 0.082574 0.494939 0.6209 c(11) 0.128628 0.047736 2.694590 0.0073 c(12) 0.024133 0.048079 0.501936 0.6160 c(13) -0.032499 0.047633 -0.682271 0.4954 c(14) -1.675492 3.278556 -0.511046 0.6096 r-squared 0.037484 mean dependent var -1.511325 adjusted r-squared 0.024957 s.d. dependent var 71.68950 s.e. of regression 70.78927 akaike info criterion 11.37214 sum squared resid 2310126. schwarz criterion 11.43419 log likelihood -2654.080 hannan-quinn criter. 11.39655 f-statistic 2.992218 durbin-watson stat 2.005899 prob(f-statistic) 0.007059 3.5. impulse response tests an impulse response function traces the effect of a one-time shock to one of the innovations on current and future values of the endogenous variables. this study uses cholesky decomposition to determine the influence of shocks on one variable to another. cholesky uses the inverse of the cholesky factor of the residual covariance matrix to orthogonalize the impulses. abdifitah mohamed jama deer & ayben koy 178 0 40 80 120 160 1 2 3 4 5 6 7 8 9 10 response of d(cse) to d(cse) 0 40 80 120 160 1 2 3 4 5 6 7 8 9 10 response of d(cse) to d(esx) 0 100 200 300 1 2 3 4 5 6 7 8 9 10 response of d(esx) to d(cse) 0 100 200 300 1 2 3 4 5 6 7 8 9 10 response of d(esx) to d(esx) response to cholesky one s.d. (d.f. adjusted) innovations ± 2 s.e. figure 1: interdependencies between cse and esx using cholesky decomposition as shown in figure 1, esx is partially affected by the shocks in cse in the first week, however the shocks applied to esx do not affect csx prominently. 0 40 80 120 160 1 2 3 4 5 6 7 8 9 10 response of d(cse) to d(cse) 0 40 80 120 160 1 2 3 4 5 6 7 8 9 10 response of d(cse) to d(jse) 0 200 400 600 800 1 2 3 4 5 6 7 8 9 10 response of d(jse) to d(cse) 0 200 400 600 800 1 2 3 4 5 6 7 8 9 10 response of d(jse) to d(jse) response to cholesky one s.d. (d.f. adjusted) innovations ± 2 s.e. figure 2: interdependencies between cse and jse using cholesky decomposition it is seen in figure 2 that both cse and jse do not affected prominently from the shocks on each other. 0 40 80 120 160 1 2 3 4 5 6 7 8 9 10 response of d(cse) to d(cse) 0 40 80 120 160 1 2 3 4 5 6 7 8 9 10 response of d(cse) to d(ngse) 0 10 20 30 40 1 2 3 4 5 6 7 8 9 10 response of d(ngse) to d(cse) 0 10 20 30 40 1 2 3 4 5 6 7 8 9 10 response of d(ngse) to d(ngse) response to cholesky one s.d. (d.f. adjusted) innovations ± 2 s.e. figure 3: interdependencies between cse and ngse using cholesky decomposition it is seen in figure 3 that both cse and ngse do not affected prominently from the shocks on each other. relationship between stock markets in africa: a case of five selected countries 179 0 40 80 120 160 1 2 3 4 5 6 7 8 9 10 response of d(cse) to d(cse) 0 40 80 120 160 1 2 3 4 5 6 7 8 9 10 response of d(cse) to d(nse) 0 20 40 60 1 2 3 4 5 6 7 8 9 10 response of d(nse) to d(cse) 0 20 40 60 1 2 3 4 5 6 7 8 9 10 response of d(nse) to d(nse) response to cholesky one s.d. (d.f. adjusted) innovations ± 2 s.e. figure 4: interdependencies between cse and nse using cholesky decomposition while the short term effect is examined, it is seen that nse is effected from the shocks on cse on the third week. cse responses to shocks on nse weakly in the fourth week. 0 100 200 300 1 2 3 4 5 6 7 8 9 10 response of d(esx) to d(esx) 0 100 200 300 1 2 3 4 5 6 7 8 9 10 response of d(esx) to d(jse) 0 200 400 600 800 1 2 3 4 5 6 7 8 9 10 response of d(jse) to d(esx) 0 200 400 600 800 1 2 3 4 5 6 7 8 9 10 response of d(jse) to d(jse) response to cholesky one s.d. (d.f. adjusted) innovations ± 2 s.e. figure 5: interdependencies between esx and jse using cholesky decomposition figure 5 shows that esx is influenced by jse shocks in the second week. the changes are felt later and the effect dies down. but jse react immediately to own shock in the first week. abdifitah mohamed jama deer & ayben koy 180 0 100 200 300 1 2 3 4 5 6 7 8 9 10 response of d(esx) to d(esx) 0 100 200 300 1 2 3 4 5 6 7 8 9 10 response of d(esx) to d(ngse) 0 10 20 30 40 1 2 3 4 5 6 7 8 9 10 response of d(ngse) to d(esx) 0 10 20 30 40 1 2 3 4 5 6 7 8 9 10 response of d(ngse) to d(ngse) response to cholesky one s.d. (d.f. adjusted) innovations ± 2 s.e. figure 6: interdependencies between esx and ngse using cholesky decomposition figure 6 shows that, shocks in ngse stock prices influences ngse stock prices in the first two weeks there is not a strong effect on esx by the shocks on ngse. 0 100 200 300 1 2 3 4 5 6 7 8 9 10 response of d(esx) to d(esx) 0 100 200 300 1 2 3 4 5 6 7 8 9 10 response of d(esx) to d(nse) 0 20 40 60 1 2 3 4 5 6 7 8 9 10 response of d(nse) to d(esx) 0 20 40 60 1 2 3 4 5 6 7 8 9 10 response of d(nse) to d(nse) response to cholesky one s.d. (d.f. adjusted) innovations ± 2 s.e. figure 7: interdependencies between esx and nse using cholesky decomposition as indicated in figure 7, the effect of shocks on esx on nse continues gradually up to the fourth week where it recedes, however shocks in nse do not cause prominent effects on esx. relationship between stock markets in africa: a case of five selected countries 181 0 200 400 600 800 1 2 3 4 5 6 7 8 9 10 response of d(jse) to d(jse) 0 200 400 600 800 1 2 3 4 5 6 7 8 9 10 response of d(jse) to d(ngse) 0 10 20 30 40 1 2 3 4 5 6 7 8 9 10 response of d(ngse) to d(jse) 0 10 20 30 40 1 2 3 4 5 6 7 8 9 10 response of d(ngse) to d(ngse) response to cholesky one s.d. (d.f. adjusted) innovations ± 2 s.e. figure 8: interdependencies between jse and ngse using cholesky decomposition shocks in jse stock prices and ngse stock prices are immediately felt by their own stock markets. however, shocks in jse stock prices are felt by ngse stock prices in the first to third period. shocks in ngse stock prices have zero influence on jse stock prices in the first period and subsequent periods. 0 200 400 600 800 1 2 3 4 5 6 7 8 9 10 response of d(jse) to d(jse) 0 200 400 600 800 1 2 3 4 5 6 7 8 9 10 response of d(jse) to d(nse) 0 20 40 60 1 2 3 4 5 6 7 8 9 10 response of d(nse) to d(jse) 0 20 40 60 1 2 3 4 5 6 7 8 9 10 response of d(nse) to d(nse) response to cholesky one s.d. (d.f. adjusted) innovations ± 2 s.e. figure 9: interdependencies between jse and nse using cholesky decomposition figure 9 show that shocks in jse stock prices and nse stock prices are immediately felt by their own stock markets. shocks in nse prices have no influence on jse prices. however, shocks in jse stock prices are not felt by nse stock prices in the first but the subsequent periods feels the shock. abdifitah mohamed jama deer & ayben koy 182 0 10 20 30 40 1 2 3 4 5 6 7 8 9 10 response of d(ngse) to d(ngse) 0 10 20 30 40 1 2 3 4 5 6 7 8 9 10 response of d(ngse) to d(nse) 0 20 40 60 1 2 3 4 5 6 7 8 9 10 response of d(nse) to d(ngse) 0 20 40 60 1 2 3 4 5 6 7 8 9 10 response of d(nse) to d(nse) response to cholesky one s.d. (d.f. adjusted) innovations ± 2 s.e. figure 10: interdependencies between ngse and nse using cholesky decomposition shocks in ngse as indicated in fig. 10 are immediately felt in the first week by nse. and the shocks of nse have got weak effect on nse in the third week. 3.6. granger causality granger causality is used to detect presence of either unidirectional or bidirectional causality between the stock market prices of the five selected countries. the lag length is based on the predictions done earlier in the study. table 14 granger causality between cse and esx dependent variable: esx excluded chi-sq df prob. cse 7.556056 3 0.0561 all 7.556056 3 0.0561 dependent variable: cse excluded chi-sq df prob. esx 2.434922 3 0.4872 all 2.434922 3 0.4872 with esx as the dependent variable, the p-value is 0.0561 which is greater than the recommended value of 0.05. thus, cse does not granger cause esx. taking cse as the dependent variable, the probability value for esx is 0.4872 (greater than 0.05). we therefore conclude that esx does not granger cause cse. table 15 granger causality between cse and jse excluded chi-sq df prob. cse 0.178826 1 0.6724 all 0.178826 1 0.6724 dependent variable: cse excluded chi-sq df prob. jse 0.109819 1 0.7404 all 0.109819 1 0.7404 the results shown in table 29 shows that the first null hypothesis cannot be rejected as the p-value is 0.6724. thus, cse does not granger cause jse. also, jse does not granger cause cse (p-value=0.7404 >0.05). relationship between stock markets in africa: a case of five selected countries 183 table 16 granger causality between cse and ngse dependent variable: ngse excluded chi-sq df prob. cse 0.153352 1 0.6954 all 0.153352 1 0.6954 dependent variable: cse excluded chi-sq df prob. ngse 0.150202 1 0.6983 all 0.150202 1 0.6983 a p-value of 0.6954 indicates that the first hypothesis cannot be rejected. therefore, cse does not granger cause ngse. the p-value for the second hypothesis is 0.6983>0.05 hence ngse does not granger cause cse. table 17 granger causality between cse and nse dependent variable: nse excluded chi-sq df prob. cse 5.487182 3 0.1394 all 5.487182 3 0.1394 dependent variable: cse excluded chi-sq df prob. nse 0.765466 3 0.8577 all 0.765466 3 0.8577 taking nse as the dependent variable, the probability value is 0.1394> 0.05 thus we conclude cse does not granger cause nse. on the other hand nse does not granger cause cse as the p-value is 0.8577. table 18 granger causality between esx and jse dependent variable: jse excluded chi-sq df prob. esx 0.388657 2 0.8234 all 0.388657 2 0.8234 dependent variable: esx excluded chi-sq df prob. jse 16.37996 2 0.0003 all 16.37996 2 0.0003 the first hypothesis of esx does not granger cause jse is not rejected as the p-value exceeds 0.05. the conclusion therefore is esx does not granger cause jse. the second hypothesis of jse does not granger cause esx is rejected (p-value=0.0003<0.05). thus jse does granger cause esx. table 19 granger causality between esx and ngse dependent variable: ngse excluded chi-sq df prob. esx 0.961717 2 0.6183 all 0.961717 2 0.6183 dependent variable: esx excluded chi-sq df prob. ngse 3.162612 2 0.2057 all 3.162612 2 0.2057 abdifitah mohamed jama deer & ayben koy 184 the first hypothesis of esx does not granger cause ngse is not rejected as the p-value exceeds 0.05 (p=0.6183). the conclusion therefore is esx does not granger cause ngse. the second hypothesis of ngse does not granger cause esx is not rejected (p-value=0.2057<0.05). thus ngse does not granger cause esx. table 20 granger causality between esx and nse dependent variable: nse excluded chi-sq df prob. esx 6.961702 2 0.0308 all 6.961702 2 0.0308 dependent variable: esx excluded chi-sq df prob. nse 0.962768 2 0.6179 all 0.962768 2 0.6179 the first hypothesis is rejected (p-value = 0.0308< 0.05). the conclusion is esx does granger cause nse. the second hypothesis of jse does not granger cause esx is accepted (p-value=0.6179>0.05). thus nse does not granger cause esx. table 21 granger causality between jse and ngse dependent variable: ngse excluded chi-sq df prob. jse 18.26396 3 0.0004 all 18.26396 3 0.0004 dependent variable: jse excluded chi-sq df prob. ngse 3.623450 3 0.3051 all 3.623450 3 0.3051 the first hypothesis of jse does not granger cause ngse is rejected as the p-value is less than 0.05 (0.0004). the conclusion therefore is jse does granger cause ngse. the second hypothesis of ngse does not granger cause jse is accepted (p value = 0.3051 > 0.05). thus ngse does not granger cause jse. table 22 granger causality between jse and nse dependent variable: nse excluded chi-sq df prob. jse 17.59385 3 0.0005 all 17.59385 3 0.0005 dependent variable: jse excluded chi-sq df prob. nse 4.296359 3 0.2312 all 4.296359 3 0.2312 the probability value for the first hypothesis (jse does not granger cause nse) is less than 0.05 (p-value = 0.0005) hence its rejection. the conclusion therefore is jse does granger cause nse. the p-value for the second hypothesis is greater than 0.05 (p=0.2312) hence nse does not granger cause jse. table 23 granger causality between ngse and nse dependent variable: nse excluded chi-sq df prob. ngse 5.261217 3 0.1536 all 5.261217 3 0.1536 dependent variable: ngse excluded chi-sq df prob. nse 6.116412 3 0.1061 all 6.116412 3 0.1061 relationship between stock markets in africa: a case of five selected countries 185 the p-value for the first hypothesis is greater than 0.05 (p-value = 0.1536) hence it is not rejected. the conclusion therefore is ngse does not granger cause nse. the p-value for the second hypothesis is 0.1061 > 0.05 hence we conclude that nse does not granger cause ngse. 4. conclusion as the african continent has yet to play a unique role in global economic growth, the potential of african financial markets has got an increasing importance. on this content, this study focuses on the relationship of the african stock markets. in the ten years (2009 – 2018) period, egypt, kenya, morocco, nigeria and south africa stock markets’ relationships are analyzed by var models and granger causality test. one of the main results is that casablanca stock exchange is not influenced by other stock markets. both in the short term and long term any significant result is not found. in the long term, the stock index of egypt is not influenced by the indices too. but it can be used to predict the kenyan stock market. though egypt also considered not part of africa, it can have a significant influence on weaker countries. kenya, for instance, is seen as a weaker economy compared to the other four countries under study. while the johannesburg stock market index is not influenced by other stock prices, south african stock market can be used to predict the egyptian, nigerian, and kenya stock markets. south africa is considered the giant economy of africa. it is therefore not expected to be swayed by the performance of other african countries. however, an influence on other countries shows its superiority. nse and jse stock indices have a significant influence on the performance of nigeria stock exchange in the long run. nigeria and kenya are known to have a special relationship. the two countries heavily rely on each other. south african being the giant economy is expected to determine stock prices of other economies in africa. ngse responds to immediate changes in jse and esx stock performance. the stock performance of the nairobi stock exchange is seen to be influenced by the past performance of itself, cse, jse, and ngse. kenya heavily relies on other african countries in its investment strategies. this can, therefore, explain why the performance of other countries influences it. the nse stock price responds to immediate performances of esx and ngse. kenya also relies on the daily updates of other african countries. it particularly has a special relationship with nigeria. the kenyan stock market cannot predict the morocco, egypt, nigeria, or south africa stock markets. though it is a giant in the east african community, kenya is weak compared to the four nations under study. the study concludes that johannesburg stock exchange plays a vital role in influencing the stock prices of other african countries. african countries can, therefore, predict their future performances using south africa stock market. the egyptian stock market is also useful in predicting the stock performances of weaker countries. references adjei, b. 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(2013). impact of stock market development on economic growth: evidence from south africa international journal of commerce and finance, vol. 6, issue 1, 2020, 1-14 1 factors affecting profitability of insurance companies in ethiopia: panel evidence mengistu tegegn nib international bank, ethiopia leta sera jimma university, ethiopia tesfaye melaku merra jimma university, ethiopia abstract profitability is one of the most important objectives of financial management because one goal of financial management is to maximize the owner` s wealth. this paper examined the effects of firm specific factors (age of company, size of company, leverage ratio, premium growth rate liquidity ratio and tangibility of assets) on profitability proxied by roa. profitability is dependent variable while age of company, size of company, premium growth rate,leverage liquidity ratio and tangibility of assets) are independent variables. the sample in this study includes nine of the listed insurance companies for twelve years (2005-2016). secondary data obtained from the financial statements (balance sheet and profit/loss account) of insurance companies, financial publications of nbe are analyzed.panel data analyzed using random effect model (fem) after testing the appropriateness of the model with fixed effect and pooled regression model. from the regression results; size,premium growth rate and liquidity and age are identified as most important determinant factors of profitability hence premium growth rate and size, are positively related. in contrast liquidity and age negatively but significantly related with profitability. lastly, leverage and tangibility of asset are not significantly related with profitability. keywords: roa, profitability, insurance, regression, panel, 1. introduction the concept of insurance particularly the “social insurance program” dealing with socio-economic problems has been around ethiopia for a long time. members of a community pooled together resources to create aidir“social insurance fund”. the “premiums” ranged from material to moral support or other payments in kind. from the fund, “drawings were made out” to support the few unfortunate members exposed to perils. here more the insurance in its basic essence meant the social investments in which the families in the single village used to prepare drinks, and invite other families in the village which could join hands on grass cultivations and diggings for that particular’s farm till the end, this process continued for the whole village and the ones who did not participate, were abandoned and could not get the assistance when the matter comes to them on grass farming. however, the history of the modern development of commercial insurance in ethiopia is closely related to the historical emperor menelik ii and a representative of the british owned national bank of egypt to open a new bank in ethiopia. insurance provides protection by compensating financial loss that arises from fortuities. the loss must be measurable in monetary value. the insurer deals with thousands of insured party a the history of insurance service is as far back as modern form of banking service in ethiopia which was introduced in 1905. at the time, an agreement was reached between emperor menelik ii and a representative of the british owned national bank of egypt to open a new bank in ethiopia. similarly, modern insurance service, which were introduced in ethiopia by foreigners, mark out their origin as far back as 1905 when the bank of abyssinia began to in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e tesfaye melaku merra 2 transact fire and marine insurance as an agent of a foreign insurance company. according to a survey made in 1954, there were nine insurance companies that were providing insurance service in the country. after the change in the political environment in 1991, the proclamation for the licensing and supervision of insurance business heralded the beginning of a new era. immediately after the enactment of the proclamation in the 1994, private insurance companies began to increase. currently, there are 17 insurance companies in operation. both public owned (1) and private (16) insurance companies which are operating as on december, 2016 throughout the country are listed in the following table 1.1 table 1.1 lists of insurance companies operating in ethiopia as on 2016 s/n name type establishment year 1 ethiopian insurance corporation general 01/01/1975 2 national insurance company of ethiopia s.c general 23/09/1994 3 awash insurance company s.c general 01/10/1994 4 africa insurance company s.c general 01/12/1994 5 nyala insurance company s.c general 06/01/1995 6 nile insurance company s.c general 11/04/1995 7 global insurance company s.c general 11/01/1997 8 the united insurance s.c general 01/04/1997 9 nib insurance company s.c general 11/04/2002 10 lion insurance company s.c general 01/07/2007 11 ethio-life and general insurance s.c general 23/10/2008 12 oromia insurance company s.c general 26/01/2009 13 abay insurance company s.c general 26/07/2010 14 berhan insurance company s.c general 24/05/2011 15 tsehay insurance s.c general 28/03/2012 16 lucy insurance s.c general 28/03/2012 17 bunna insurance s.c general 21/05/2013 source: http://www.nbe.gov.et/financial/insurer.htm accessed dec 1, 2016 profitability is one of the most important objectives of financial management. one goal of financial management is to maximize the owner`s wealth and profitability which is very important determinants of performance. measuring the performance of financial institutions has gained the relevance in the corporate finance literature because as intermediaries, these companies in the sector are not only providing the mechanism of saving money and transferring risk but also helps to channel funds in an appropriate way from surplus economic units to deficit economic units so as to support the investment activities in the economy. the insurance industry has an important role to resistant and keeps an economic system to have a successful operation of the industry by setting energy for other industries and development of an economy. to do so the insurance industry is expected to be financially solvent and strong through being profitable in operation. hence, not only measuring the financial performance of insurance companies but also to have a clear insight about factors affecting financial performance in the industry which, is the main problem to be investigated. therefore, the determinants of insurance company’s performance have attracted the interest of various academicians, practitioners and institutional supervisors. the profitability of insurance companies in ethiopia has been fluctuating over time since their establishment. in developing countries, only smaller group of studies examined financial performance of insurance companies; hence there is a need for such studies in insurance sector in developing countries. this is because identifying the factors of financial performance help to avoid losses (malik, 2011). moreover, as noted in nbe (2016/17) annual report low contribution of the sector to gross domestic product (gdp) despite the increasing contribution of the service factors affecting profitability of insurance companies in ethiopia: panel evidence 3 sector to gdp is also another indicator of low performance of the sector. some of internal factors that affecting profitability in insurance sector are age of company, leverage, size of company, growth rate, volume of capital, and liquidity growth rate according to some studies (camelia, 2011; hifza, 2011). however, others scholars also arguing that there are external factors which affecting profitability like gdp, inflation and interest rate in a given country at a national (riaz & mehar, 2013) and fadzlan & chong 2008). chen-ying lee (2014) measured insurance company profitability by using operating ratio and return on assets (roa) for the two kinds of profitability indicators to measure insurer’s profitability while others also used the combination of roa and roe as indicator of profitability. various researchers from both developed and developing countries have showed an interest to do study on the profitability of banking sector rather than to investigate the financial performance of insurance industries. hence, this results insufficient literatures availability in the study area. in ethiopia concerning, determinants of insurance company’s profitability is the one which motivates the researcher to analyzed and investigate what factors significantly affecting the financial performance of insurance companies in ethiopia. therefore, to achieve the intended objective of the study, the paper has included premium growth rate as an explanatory variable in addition to other studies which has been reviewed in this study. this study has expected that, the profitability of insurance companies in ethiopia is being affected by internal factors like: age of company, size of company, premium growth rate, leverage ratio, liquidity ratio, and tangibility of assets. the main objective of the study is that to identify the major determinants of profitability of ethiopian insurance companies for the period 2005 to 2016. 2. emperical literature review the insurance companies of ethiopia perform a wide range of activities such as service designing, preparing contract and policy, marketing and selling, underwriting, rating, reinsurance and other services and claim settlement. the governments owned insurance companies ethiopian insurance corporation they get all the government insurance business. according to the rule, all insurance need in the government sector is done through these nationalized insurance companies, so it enjoys a monopoly. none of the private insurance companies are allowed to offer insurance services to government organizations. furthermore, this corporation is also allowed to underwrite private businesses, and people feel confident about its reliability. so they have not yet felt any strong need to practice marketing properly, and usually they have reported annually profits over the years. the insurance industry forms an integral part of the global financial market, with insurance companies being significant institutional investors. in recent decades, the insurance sector, like other financial services, has grown in economic importance. this growth can be attributed to a number of factors including, but not exclusively: rising income and demand for insurance, rising insurance sector employment, and increasing financial intermediary services for policyholders, particularly in the pension business (ward and zurbruegg, 2002). expanding on the link between gdp and insurance market development, it must be remembered that the insurance industry‘s primary function is to supply individuals and businesses with coverage against specified contingencies, by redistributing losses among the pool of policyholders. insurance companies, therefore, engage in underwriting, managing, and financing risks. the importance of insurance in modern economies is unquestioned and has been recognized for centuries. but insurance also serves a broad public interest far beyond its role in business affairs and its protection of a large part of the country’s wealth. it is the essential means by which the disaster to an individual is shared by many, the disaster to a community shared by other communities; great catastrophes are thereby lessened, and, it may be, repaired. insurance is an essential element in the operation of sophisticated national economies throughout the world today. without insurance coverage, the private commercial sector would be unable to function (peter r. haiss and kjellsumegi (2008). insurance enables businesses to operate in a cost-effective manner by providing risk transfer mechanisms whereby risks associated with business activities are assumed by third parties. it allows businesses to take on credit that otherwise would be unavailable from banks and other credit-providers fearful of losing their capital without such protection, and it provides protection against the business risks of expanding into unfamiliar territory – new locations, products or services – which is critical for encouraging risk taking and creating tesfaye melaku merra 4 and ensuring economic growth(ward and zurbruegg, 2002).beyond the commercial world, insurance is vital to individuals. lack of insurance coverage would leave individuals and families without protection from the uncertainties of everyday life. life, health, property and other insurance coverage’s are essential to the financial stability, well-being and peace of mind of the average person. insurance is a financial product that legally binds the insurance company to pay losses of the policyholder when a specific event occurs. the insurer accepts the risk that the event will occur in exchange for a fee, the premium. the insurer, in turn, may pass on some of that risk to other insurers or reinsurers. insurance makes possible ventures that would otherwise be prohibitively expensive if one party had to absorb all the risk .advancements in medicine, product development, space exploration and technology all have become a reality because of insurance. distribution of insurance is handled in a number of ways. the most common is through the use of insurance intermediaries. insurance intermediaries serve as the critical link between insurance companies seeking to place insurance policies and consumers seeking to procure insurance coverage (ward and zurbruegg, 2002).according to hifza malik (2011) insurance plays a crucial role in fostering commercial and infrastructural businesses. from the latter perspective, it promotes financial and social stability; mobilizes and channels savings; supports trade, commerce and entrepreneurial activity and improves the quality of the lives of individuals and the overall wellbeing in a country. michael koller (2011) in his investigation identified that insurance companies are playing the role of transferring risk channeling funds from one unit to the other (financial intermediation) such as general insurance companies and life insurance companies respectively. this implies that insurance companies are helping the economy of a country one way by transferring and sharing of risk which can create confidence over the occurrences of uncertain event and in another way insurance companies like other financial institutions plays the role of financial intermediation so as to channel financial resources from one to the other. therefore, we can divide insurance companies in to two broad categories based on their role to the economy; the general insurance companies and life insurance companies. for instance, renbao chen et.al (2004) summarized firm specific factors affecting property/liability which is general insurers and life/health insurance profitability separately that again provide valuable guidelines for insurers financial health. this is because life/health insurance companies are different from property/liability insurers in terms of operation, investment activities, vulnerability and duration of liabilities. life insurers are said to function as financial intermediaries while general insurers function as risk takers, renbao chen et..al (2004). accordingly, hifza malik (2011) in pakistan, sylwesterkozak (2011) in poland, hamadan ahamed ali al-shami (2008) in united arab emirates (uae), swiss re (2008) in egypt and jay angoff roger brown (2007) in united kingdom conducted their research concerning determinants of profitability in property/liability or general insurance companies where as naveed ahmed, zulfqar ahmed, ahmad usman (2011), in pakistan, adams m., hardwick p. and zou h., (2008) in canada, desheng wu z., sandra v. &lianga (2007), wright, k. m. (1992), and others conducted their study on determinants of life and health insurance companies. profitability in insurance companies could be affected by a number of determining factors. these factors, as explained above could be further classified as internal, industry, and macroeconomic factors. hence, most of the researchers and also our study focused on internal factors affecting profitability and most of the factors considered are age of company, asset size of company, leverage ratio, growth rate, premium growth rate, tangibility of assets and liquidity ratio. most literatures focus on factors affecting profitability of banks rather than insurance companies. therefore, there are fewer literatures concerning insurance companies as compared to banks. the existing literatures concerning insurance companies could be classified into two: determinants of financial performance of general and life insurance companies. empirical evidences regarding determinants of insurance companies focused only on internal factors such as age, size, leverage, premium growth rate, tangibility of assets and liquidity ratio. the results found by the researchers mentioned above in the empirical revealed inconsistencies according to the country in which the research is conducted regarding some variables. 3. research methodology 3.1. data type and data sources the study was used secondary data, which are obtained from annual reports of individual insurance companies and nbe. and this is because the advantage of using secondary data includes the higher quality data compared with factors affecting profitability of insurance companies in ethiopia: panel evidence 5 primary data collected by researchers themselves stewart and kamins, (1993) as cited by yuqi li (2007); the feasibility to conduct panel evidence, which is the case in this study; and the permanence of data, which means secondary data generally provide a source of data that is both permanent and available in a form that be checked relatively easily by others, i.e. more open to public scrutiny. 3.2. research approach the deductive approach introduces a high level of objectiveness in research through external observation insofar as the choice of questions and subsequent phrasings are not subjective. in contrast, the inductive approach provides a high level of subjective and a number of theoretical possibilities based on the context of the individual research situation yuqi li (2007). this study examines the previous findings in the literature, and applies the model in ethiopian insurance companies. therefore, a deductive approach is adopted by constructing an empirical model and hypothesizing its collinear relationship between determinants and its dependent variable: profitability of insurance companies in ethiopia. 3.3. econometric model specification the literature generally, in so far as it is discuss, comes to the conclusion that the appropriate functional form for testing is a linear function although there are dissenting. the davidson, godfrey, mackinnon (1985) as cited by swiss re (2008) specification test was also applied with results that supported the use of the linear function. the regression model is used to identify the relationship between the profitability of insurance companies and age of company, leverage ratio, company size, premium growth rate, liquidity and tangibility of asset. data analyze are with one dependent variable (profitability) and six independent variables (age of companies, size of companies, premium growth rate,leverage ratio, tangibility of assets, liquidity and previous profitability). the generally accepted way of choosing between fixed and random effects is running a hausman test. random effects is give better p-values as they are a more efficient estimator, so random effects regression should be adopted if it is statistically justifiable to do so. the hausman test checks a more efficient model against a less efficient but consistent model to make sure that the more efficient model also gives consistent results. it tests the null hypothesis that the coefficients estimated by the efficient random effects estimator are the same as the ones estimated by the consistent fixed effect estimator. for estimation purposes, the study is use following general linear model: 〖roa〗_(i,t)=α+∑▒〖β_j x_(i,t)^j+v_i 〗………………………………………………………….…… (1) where, 〖roa〗_(i,t)is the return on assets of insurance i for period t; α is the regression constant; xji,tdenote insurance specific determinants; νi,t= εi,tis the disturbance term. by using the model and comparing the co-efficiency of each explanatory variable, it is generate the finding that which factor is more significant in relation to insurance companies ‟ profitability’’ and the finding is correspond to the evidence in the literature. 3.4. variable selection and measurement this paper is attempted to examine the main determinants of profits of insurance company’s measurement of profitability. according to hamadan ahamed ali al-shami (2008), three important measures of firm’s performance are: profitability, size and survivorship. profitability indicates the firm’s ability to achievement of the rate of return on a company’s assets and investment funds. with regard to size, it is revealed in his work as a firm’s ability to expand its size could be a reflection of it success as earnings are reinvested and external funding could be easily found. whereas survivorship indicates the ability to earn sustainable development concerning competitive advantages beyond initial opportunities like an economic upturn or the early growth stage of an industry. tesfaye melaku merra 6 in line with earlier studies that examined the determinants of insurance companies’ profitability, accounting ratios are used as measurement of individual variables. in specific, the dependent variable, profitability of insurance companies, is measured by roa. in order to select the determinants as explanatory variables in the model, previous studies have also been reviewed and literature suggests that the following factors exert strong impact on insurance company’s profitability as internal determinants; therefore, they are adopted in the constructed model. and following is the details of variables selected. profitability: there are many different ways to measure profitability, as shown in previous studies. in this study net income before tax to total assets (roa) is used to measure profitability, because most of the studies regarding the subject used this ratio to determine the profitability of insurance companies. age of company: this variable is measured by the number of years from the date of establishment until 20052016 for 12 consecutive years. company size: in different studies, different researchers use different measurements of company size such as number of employees and total assets of a company. however, most of the researchers use the log value of total assets as a measure of size in such area. therefore, company size is measure by total assets in log value. leverage: the amount of debt used to finance a company’s assets. a company with significantly more debt than equity may consider to be highly leveraged. this variable is measured by total debt to total equity value of the company. premium growth rate: the main source of income earned by insurance companies resulting from insurance activities is the gross written premiums. the increase in premium growth rate is ensuring the growth of the company and increase of its market share. liquidity: liquidity from the context of insurance companies is the probability of an insurer to pay liabilities which include operating expenses and payments for losses/benefits under insurance policies, when due and therefore, measured by total current assets to total current liabilities. to capture the tendency of profits to be persistent over time, the researcher was tried to adopt a dynamic specification of the model, with a lagged dependent variable among the repressor. cheris brooks (2008) in his book for introductory econometrics for finance argued that lagged values of variables may capture important dynamic structure in the dependent variable that might be caused by a number of factors such as inertia of the dependent variable and overreactions. this yields the following model specification: roai,t = α+ γroai,t-1 + σβj,t+υi------------------------------------------------------------(2) where roai,t-1 is the one period lagged profitability and γ measures the speed of mean reversion. a value of delta between 0 and 1 indicates that profits are persistent, but they are eventually returned to the equilibrium level. specifically, values close to zero denote a high speed of adjustment and imply relatively competitive market structure, while a value closer to 1 implies slower mean reversion, and therefore, less competitive markets. taking all these explanatory variables into consideration, the extended equation to reflect the variables is formulated as follows: roai,t= α + γroai,t-1+β0agei,t + β1lnsizei,t + β2levi,t+ β3pgri,t+ β4tai,t+β5lqi,t+εi,t------(3) where: table 3.1 variable formula α is constant β coefficient of independent variables 𝑅𝑂𝐴𝑖,𝑡 return on assets (roa)= net income before taxes / total assets 𝑆𝐼𝑍𝐸𝑖,𝑡 size=total assets in log value 𝑇𝐴𝑁𝐺𝑖,𝑡 tangibility = (fixed assets / total assets) 𝐿𝐼𝑄𝑖,𝑡 liquidity = (current assets / current liabilities). pgri,t premium growth rate = the percentage increase in gross writtenpremiums (gwp(t) − gwp(t−1))/gwp(t−1) 𝐴𝐺𝐸𝑖,𝑡 age = (the difference between the current year and the year of establishment of the company). factors affecting profitability of insurance companies in ethiopia: panel evidence 7 lev𝑖,𝑡 leverage = (total debt / total assets). 𝜀𝑖,𝑡 the error term. 4. result and findings 4.1. descriptive analysis his section concerns with the overall summary of all the variables involved in the model aimed to understand their distinct behavior independently through computing their mean value, standard deviation and related statistics whereas the joint behavior of each variable with the rest of the others are also assessed using correlation analysis. this part of the analysis aimed in providing supportive evidences for the econometric model as well as simultaneously checks if there exist unusual values such as out layer in the data. 4.1.1. descriptive statistics table 4.1: descriptive statistics variable mean std deviation min max roa 0.080 0.055 -0.05 0.40 agc 2.11 0.873 1.47 7.72 lvc 0.67 0.086 0.45 0.84 szc 8.379 0.447 7.36 9.45 lqc 0.981 0.259 0.26 2.31 pgc 7.800 23.43 -0.14 221 tac 0.183 0.109 0.04 0.54 source: own computation and stata reg, 2018. based on the table above (table 4.1) the average values of all the variables involved in the model are limited within the rage of 8 to 0.08.the maximum mean value is registered by size of the company where as the minimum value belongs to the dependent variable (roa). the profitability of the companies (roa) on average is estimated to be around 8 for ethiopian insurance companies during the study period with the standard deviation of 0.055 implying that the variability of the profit is relatively low in the sector. the minimum variability is the most important aspect not only in insurance companies but also in any business so as to be able to predict its future prospects. the average value of leverage as measured by the ratio of debt to equity is estimated to be 0.67 with the variability of 0.08 indicating that the sample companies are at relatively similar position in terms of their leverage. the average value of age is 2.11 years along with the standard deviation of 0.87 years indicating that there is a little variation of companies in terms of their year of establishment where their age may be associated with their ability to reap economies of scale in the sector. relative similarity of age may be viewed in terms of the absence of a monopoly power in the sector, at least due to the accumulated experiences and associated reduction in the cost of service delivery in the sector. the mean value of the size of the company, on the other hand, is about8.39 ranging from 7.36 to 9.45. given this information, it can be concluded that the sample insurance companies are relatively similar in terms of their size as the 0.44 standard deviation also strengthens this argument. similarly the mean value of liquidity ratio and premium growth respectively are 0.98 and 7.8 with their respective standard deviation of 0.26 and 23.4 respectively where the variability as measured by standard deviation for premium growth is exceptionally large ranging from the minimum value of -0.14 to 221. this might imply that there is a significant difference among insurance companies in ethiopia in terms of their premium growth. in terms of tangibility, on the other hand, insurance companies in ethiopia are relatively in a similar position as the mean value is tesfaye melaku merra 8 0.18 with the associated variability of only 0.11. its value ranges from the minimum of 0.14 to 0.5.as indicated in appendix 2; profitability measured by roa for different insurance companies considered for this study for nine consecutive years is different. identification of the internal factors that affect the profitability of these companies is the task of the researcher for this study. 4.2. correlation analysis the correlation among the variables included into the model is computed in order to give a supportive evidence for the relationship of different variables assumed as explanatory variables that are expected to influence the profitability of a firm. the reported statistics disregard the cause-effect relationship among the variables by simply measuring the association (co-movement) of the variables. accordingly, the negative sign implies that the two variables under consideration move to the opposite direction and vice versa. table 4.2.correlation among the variables variable roa agc lvc szc lqc pgc tac roa agc -0.042 lvc -0.074 -0.150 szc 0.259 0.057 0.504 lqc 0.263 0.079 -0.323 -0.050 pgc 0.510 -0.075 0.027 0.025 0.126 tac -0.222 0.195 -0.388 -0.324 -0.373 0.188 source: own computation and stata reg., 2018 given the whole dataset into consideration, there exists a negative correlation between profitability of a company and its age. in a literal sense, this relation is against the common sense as profitability is expected to increase with age, because of the fact that companies are expected to prepare themselves in the long run, for more competition engaging into research and development so as to be competent as well as the degree of competitiveness is expected to increase with increase in age as economies of scale will improve in the long run. on the other hand, leverage and companies profitability move to the opposite direction as expected. whereas, company’s tangibility as measured by fixed asset per unit of total asset is negatively correlated with the profitability. other variables such as size of the company, liquidity and premium growth have a positive association with profitability with slightly different degree of association. premium growth (pgc) has relatively strong positive association (0.51) followed by liquidity and size of a company respectively. 4.2.1. diagnostic test table 4.3 unit-root test variable harris-tzavali unit-root test breitung unit-root test statistics p-value statistics p-value roa 0.135 0.00 -1.86 0.43 agc 0.044 0.00 1.35 0.09 lvc 0.570 0.00 -2.37 0.00 szc 0.834 0.75 3.69 0.06 lqc 0.21 0.00 -1.36 0.08 pgc 0.456 0.00 2.12 0.15 tac 0.726 0.02 -1.252 0.07 source: own computation and stata reg., 2018 factors affecting profitability of insurance companies in ethiopia: panel evidence 9 as it is common in time series econometrics that the existence of unit root problem leads to spurious regression and which obviously applies for panel data because of the time dimension in the panel data framework. the unit root problem is particularly the concern in data obtained at different point in time (culver, 1997). and hence, this section detects the presence of a unit root problems by adopting two commonly used tests (harris tzavali and breitung unit root tests) as reported in table 4.2. the first tests assume common autoregressive parameters and include panel mean as well as time trends whereas the second test assumes both time and space components to be asymptotically infinity. both test statistics claim the existence of unit root (non-stationarity) problem in the panel under the null against the alternative hypothesis claiming the panels data under consideration are stationary. based on the harris-tzavalis test, exceptthe size of the company (szc) all variables are stationary at least at 10 percent level of significance. as it can be viewed from the table above, all variables are stationary at least based on one of the two test statistics and hence, it can be generalized that a unit root problem is not a series problem in the model. 4.3. regression analysis aimed to test the hypothesis established earlier, the researcher has employed a regression analysis using the model compatible for panel data (fixed effect model and random effect model). .fixed effect and random effect models may be the popularly used models with panel data. as to which model to employ, hausman test is used. in running a hausman test the null hypothesis claims the preferred model is random effects against the alternative, the fixed effects. it basically tests whether the unique errors (εi) are correlated with at least one of the repressors, such that the null hypothesis claims they are not correlated. if the null hypothesis is rejected, the conclusion is that the random effect is not appropriate and that we may be better off using fixed effect model (fem), in which case statistical inferences will be conditional on the εi in the sample. table 4.4: hausman test statistics coefficients variables fixed effect random effect difference std. error agc -.0035174 -.0041597 .0006423 .004871 lvc -.1664678 -.1715774 .0051095 .0548795 szc .0577347 .0483027 .0094319 .0103894 lqc .0221213 .0249822 -.0028609 .0142596 pgc .0009172 .0010817 -.0001645 .0001051 tac -.0143101 -.0237003 .0093902 .0402843 chi2(6)= 3.15 prob>chi2 = 0.7892 source: own computation and stata reg., 2018 based on the table above (4.5) the hausman test reveals that the appropriate model is random effect model as the null hypothesis of the model which claims the difference in coefficients are not systematic (random), can’t be rejected at any level of significance based on the chi2 value reported above. accordingly, the model selected for the data under consideration is random effect (error component) model. by selecting the random effect model, we acknowledge that the error term is not systematically correlated with any of the explanatory variables involved in the model and any variation in the error term is subject to chance. table 4.5. estimation results of the random effect model roa coefficients z-value probabilities tesfaye melaku merra 10 agc -.0041597 -1.79 0.074*** lvc -.1715774 -2.47 0.013** szc .0483027 5.52 0.000* lqc .0249822 1.22 0.224 pgc .0010817 21.33 0.000* tac -.0237003 -1.02 0.307 cons -.228719 -3.62 0.000* number of obs = 108 wald chi2(6) = 9374.64 prob> chi2 = 0.0000 r-sq: within = 0.3517 between = 0.7946 overall = 0.4071 *, ** and *** represent the coefficient under consideration is statistically significant at 1 %, 5% and 10% level of significance respectively source: own computation and stata reg.,2018 the wald chi2 statistics, as reported in the table above (table 4.6), ensures the overall significance of the estimated coefficients, as the null hypothesis which claims the parameters are simultaneously equal to zero, would be rejected at 1 per cent significance level. given the r-sq (0.407), out of the total variation of the dependent variable (returns on asset), 41 percent is explained by (due to) the variation of the explanatory variables involved in the model. given the regression result reported above, (table 4.6) size of a company (szc), premium growth rate (pgr) of a company, leverage (lvc) and age of the company (agc), are statistically significant at 1, 5 and 10 percent level where the first two variables are significant at one percent level where as the remaining two variables are significant at five percent and ten percent level respectively. on the other hand, liquidity of a company (lqc) and tangibility of a company (tac) are statistically insignificant in affecting profitability of the insurance company under consideration at any reasonable significance level. among the statistically significant variables in affecting the profitability of the firm, leverage and age have negative impact on profitability while the other two variables such as size and premium growth have a positive and significant impact on profitability of the company. 4.3.1. age of the companies age of the company is negatively related with profitability of insurance companies in ethiopia. the estimation result of the random effect model reveals that there is a negative and significant relation between profitability and age of the company with the estimated coefficient of -0.004. it can be interpreted as a one year increase in the age of the company would result in a 0.4 percent decrease in the profitability of the company keeping other things unchanged. this result is against the expectation as well as against the theory and hence is not consistent with the hypothesis of the study. it is expected that as the years of operations increases both their experiences in the sector will increase as well as the company is expected to get enough time to engage in research and development so as to increase its market share leading to increased profitability. on the other hand it is also expected that in the initial years of their operation, increased initial cost is expected which is associated with lower profitability. literatures also provide inconclusive evidence in relation to the profitability-age relationship in the insurance sector as some researcher such as ali al-shami (2008) reported the absence of any significant relationship between the two variables whereas swiss re (2008) confirms this finding by concluding younger firms are relatively more profitable (grow faster) as compared to the older one based on his research finding conducted on insurance companies located in egypt. 4.3.2. size of the companies size of the company, as measured in terms of their total asset, is positively and significantly influencing the profitability of the firm. the coefficient obtained from the regression (0.048) implies that keeping all else constant, a one percent increase in the size of the company causes a 4.8 percent increase in the profitability. the finding is in factors affecting profitability of insurance companies in ethiopia: panel evidence 11 line with both theory and expectation supporting the fact that both economies of scale and market power would be built as size increases. the find is supported by different literatures such as abate (2012), al-shami (2008) and swiss (2008) all claiming the existence of positive and significant relationship between size and profitability in the insurance companies. 4.3.3. leverage ratio of the companies leverage, as measured by total debt divided by total asset, is happen to be one of the limiting factor in firms’ profitability in the insurance sector in the country. according to the random effect model estimation, the coefficient of leverage is happens to be negative and significant at five per cent level of significance. a negative 0.17 estimated coefficient of leverage can be interpreted as; a one percent increase in the leverage of the company would cause a decrease in the profitability by 17 percent point, in a citrus-paribus condition. the negative sign is expected on both theoretical and empirical ground. on the other hand there are literatures who argue the existence of some threshold values of leverage below which profitability is directly related with leverage and when the leverage increases above its optimum mix, it influences the profitability negatively. the finding of this paper is also in conformity with other previous researches, such as renbao and wong (2004), alshami (2008), malik (2011)and abate (2012)who came up with a negative relation between leverage and profitability based on the study in different parts of the world. 4.3.4. premium growth rate of the companies referring to the table above, premium growth rate (pgc) has a positive and significant impact on profitability of the insurance companies with the estimated coefficient of 0.001 which is significant at 1 % level of significance. the coefficient obtained from the regression (0.001) implies that keeping all else constant, a one percent increase in the premium growth rate of the company causes a 1 percent increase in the profitability. the positive sign is in line with our expectation, as the increase in premium growth rate ensures the growth of the company as well as the increase in its market share. this finding is supported by other literatures such as yuqi li (2007) and al-shami(2008) as both researches claim the existence of positive and significant relation between premium growth rate and companies’ profitability. on the other hand it is against the findings of chen and wong (2004) and mistresisay (2015) who claimed the absence of any significant relationship between the two variables. 4.4. consistency of the estimated coefficients across different models for further inferences using the estimated coefficients, the estimated coefficients should not be too volatile from one model to the other, so that its value should not be arbitrary and hence relayed upon. to make sure that the estimated coefficients of the random effect model is consistent, alternative models are employed such as the fixed effect model as well as the ordinary list square model (ols) as reported in the table below (table 4.6). in terms of their sign and magnitude as well as statistical significance, variables are more or less consistent in all the three models. table 4.6: coefficients across different models coefficients roa re fe ols agc -0.0041 -0.0035 -0.0042 lvc -0.1715* -0.1664 -0.1741* szc 0.0483*** 0.0577*** 0.0465*** lqc 0.0249 0.0221 0.0251 pgc 0.0010*** 0.0009*** 0.0011*** tesfaye melaku merra 12 tac -0.0237 -0.0143 -0.0302 cons -0.228* -3.62*** -0.2111* chi2 64.32 aic -370.70 -361.03 bic -351.92 -342.25 legend: * p <0.05, ** p<0.01, *** p<0.001 source: own computation and stata reg., 2018 the negative result obtained from the random effect model for age, leverage and tangibility remain negative in all the three models whereas the remaining variables are positive. in terms of their statistical significance, except leverage which is not significant in the fixed effect model while significant in the other two models, the remaining coefficients are either significant or insignificant in all the three models. 5. conclusion according to the descriptive statistics using covariance analysis, variables such as age of the company, leverage ratio and liquidity of the company are negatively correlated with the profitability of the firm while the remaining variables (size of the company and premium growth rate) have a positive association with the profitability. to this end, the negative relationship between age and profitability as well as leverage and profitability from the descriptive statistics is also confirmed using the econometric model and the sign is consistent between fixed and random effect models. based on the regression results, the company specific variables such as the size of a company, premium growth rate of a company, leverage ratio and age of the company play strong impact on the profitability of the company. on the other hand, liquidity of the company and tangibility of a company do not have any significant impact in affecting the profitability. among the statistically significant variables in affecting the profitability of the firm, leverage ratio and age of the companies have negative impact on profitability while the other two variables such as size of the company and premium growth rate of the company have a positive and significant impact on profitability of the companies. through, it needs further study in the area so as to confirm using alternative research, the negative relation between age and profitability is unexpected and against the research hypothesis. this may be due to the old system and technology adopted by the earlier established companies may cause the loss of their customers, as the unsatisfied customers may migrate towards the newly established companies so that as more and more companies join the market, the older companies may lose their market share in the industry. references abate, g. ,&yuvaraj, s. (2013). a study on performance of insurance companies in ethiopia. international journal of marketing, financial services and management research, 2(7), abreu, m. and mendes b. (2002), commercial bank interest margins and profitability: evidence form e.u countries, porto working paper series. aburime t. (2008), determinant of bank profitability: company level evidence from nigeria, working paper, department of banking and finance, university of nigeria. adams m., hardwick p. and zou h., (2008), “reinsurance and corporate taxation in the united kingdom life insurance industry”, journal of banking and finance, vol. 32. agiobenebo, t.j and ezirim b.c. (2002) “impact of financial intermediation on the profitability of insurance companies in nigeria”, first bank of nigeria quarterly review; vol. 2, no.1. athanasoglous p. et al., (2005), bank-specific, industryspecific and macroeconomic determinants of bank profitability, bank of greece working paper, no. 25 factors affecting profitability of insurance companies in ethiopia: panel evidence 13 belayneh hailegeorgis damena (2011), determinants of commercial banks profitability: an empirical study on ethiopian commercial banks, addis ababa university. born h. p. (2001), “insurer profitability in different regulatory and legal environments”, journal of regulatory economics, vol. 19, issue. 3. demirguc-kunt, a. and h. huizinga. 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(2006) measuring services trade liberalization and its impact on economic growth: an illustration. journal of economic integration. 3 n.k childambaran et.al. (1997) an investigation of the performance of the u.s property/liability insurance industry, the journal of risk and insurance, volume 64. naveed ahmed, zulfqar ahmed, ahmad usman (2011), determinants of performance: a case of life insurance sector of pakistan, international research journal of finance and economics, eurojournals publishing, inc. 2011 available at http://www.eurojournals.com/finance.htm philip harwick and mike adams (1999) firm size and growth in the uk insurance industry. rashiah devinaga (2010) review of literature and theories on commercial bank profitability, journal of performance management. tesfaye melaku merra 14 rebao chen and ann wong (2004) determinants of financial health of asian insurance companies, the journal of risk and insurance volume 71 number 3. swiss re (2008), profitability of non-life insurance industry, egypt, available at www.insureegypt.com. tesfaye boru lelissa (2007), the impact of financial liberalization one ownership, market structure and performance of the ethiopian banking industry, addis ababa university. valentina flaminin. et.al,. (2009), determinants of commercial bank profitability in sub-saharan africa, international monitory fund (imf) working paper, wp/09/15. w.greene (2000), “econometric analysis” fourth edition, prentice hall. william h. greene and dan segal (2004) profitability and efficiency in the u.s life insuranceindustry, journal of productivity analysis, kluwer academic publisher, netherlands. www.nbe.gog.et 4wright, k. m. (1992), “the life insurance industry in the united states an analysis of economic and regulatory issues”, country economics department the world bank policy research working paper 857 yuqi li (2007) determinants of banks‟ profitability and its implication on risk management practices: panel evidence from the uk, the university of nottingham.. international journal of commerce and finance, vol. 9, issue 1, 2023, 68-87 * * i̇stanbul ticaret university, turkey, taysabd2@gmail.com ** i̇stanbul ticaret university, turkey, oiyigun@ticaret.edu.tr 68 the relationship between employee engagement and job satisfaction: a study on moroccan companies tays abderrahim* öykü i̇yigün** submitted: 02.01.2023 accepted: 30.03.2023 published: 06.07.2023 abstract employee engagement is declining, and employees are becoming increasingly disengaged. engaged employees with a full workforce can mean the difference between a company's survival and success. employee engagement and job satisfaction are two distinct constructs that have been discovered to be related, and the concept of employee engagement extends beyond job satisfaction. various studies claim that employee engagement predicts job satisfaction, but other studies find that job satisfaction leads to employee engagement. the aim of this paper is to investigate the relationship between employee engagement and job satisfaction. the study was conducted on 235 employees from various moroccan companies. primary data was collected using a questionnaire. a correlation analysis was used to determine the relation between employee engagement and job satisfaction. the results showed significant correlations between employee engagement and job satisfaction. keywords: employee engagement, job satisfaction, organizational commitment, correlation analysis, moroccan companies. jel classification: o15, m51 1. introduction job satisfaction (js) is probably the most popular topic in organizational psychology and one of its oldest and most influential fields of investigation (judge & kammeyer-mueller, 2012). thus, job satisfaction remains a dominant construct in the organizational literature for various reasons, including employee satisfaction being intrinsically desirable as well as the relationship international journal of commerce and finance tays abderrahim öykü i̇yigün 69 of satisfaction with many relevant behaviors in the workplace, such as job performance and employee behavior, and with related constructs such as organizational commitment and perceived organizational support (crede et al., 2007, p.3). employee engagement (ee) is one of the most important concerns for companies. ee is described as an employee's satisfaction with and involvement in his or her work. employee engagement may play a role in employee retention. employees who are satisfied with their jobs are more likely to be creative and able to keep up with the challenges of today's work force. these employees assist their companies in sustaining global market competition. many businesses are already aware of this fact, which is why more specialists evaluate and monitor employee job satisfaction (vorina et al., 2017, p.247). employee engagement has different meanings for different people and organizations. some people associate this with job satisfaction, while others measure it by assessing employees' emotional commitment to their company. employers in today's workplace would seek an engaged and satisfied employee for a variety of reasons. engagement has been defined as the desire, commitment, and willingness to invest oneself and use one's maximum efforts to assist the employer in succeeding (erickson, 2005). according to singh (2017), organizations with fully engaged employees have increased retention, productivity, customer satisfaction, innovation rates, and quality. they also have fewer accidents and need less training time. it signifies that engaged employees outperform typical employees at a lower cost. job satisfaction can be described as a person's positive emotional responses to a specific job. it is an affective reaction that occurs in the workplace as a result of a comparison between actual outcomes and those desired, predicted, or deserved by an employee (oshagbemi, 1999, p.112). in a variety of organizations, job satisfaction is widely researched and studied for work-related purposes. it is because it is assumed that job satisfaction is an important determinant of disengagement, retention, efficiency, achievement, and extra-role behavior. previously, organizations measured job satisfaction to guarantee that their organizational practices resulted in a positive or pleasurable experience among employees, allowing them to perform at their best at work. nowadays, the emphasis is on employee engagement, as an engaged employee is excited, enthusiastic, motivated, and passionate about their job (salanova et al., 2005, p.1218). they are assumed to demonstrate greater commitment, satisfaction, organizational citizenship behavior, and intention to stay (saks, 2006, p.601). international journal of commerce and finance tays abderrahim öykü i̇yigün 70 job satisfaction and employee engagement appear to be similar and related. the purpose of this study is to determine the relationship between employee engagement and job satisfaction as well as investigate the impact of job satisfaction on employee engagement. 2. theoretical background 2.1 employee engagement the term "employee engagement" (ee) has received attention from academics, particularly those in business management, psychology, and organizational behavior (welch, 2011). employee engagement has been described by many researchers. it was defined for the first time by kahn (1990) as the harnessing of organization members' selves to their work tasks: in engagement, people employ and demonstrate themselves physically, mentally, emotionally, and cognitively during work roles. employee engagement refers to employees' ability and willingness to contribute to organizational success, particularly their desire to exert maximum effort, going above and beyond what is typically required in their position to ensure the organization's success. employee engagement is a measurable way of measuring an employee's positive or negative emotional attachment to their job, coworkers, and company, which has a significant impact on their willingness to learn and perform at work (shanmuga & vijayadurai, 2014). work engagement is described as a positive, satisfying work-related mental state characterized by vigor, dedication, and absorption (schaufeli et al., 2006). employee engagement is a unique and distinct concept comprised of cognitive, sentimental, and behavioral components related to individual role performance (saks, 2006). according to maslach et al. (2001), engagement is defined by energy, participation, and effectiveness, the exact opposites of the three burnout dimensions of exhaustion, cynicism, and inefficacy. an engaged employee is much more satisfied, dedicated, and loyal to the organization, and such an employee advocates the organization's purpose by speaking well of it, staying with it, and striving to work hard beyond the call of responsibility (sharma & raina, 2013). as shown, various definitions of employee engagement have been formed over the last thirty years, with the majority of them incorporating physical, emotional, and cognitive components. four academic models can be used to define the concept of ee. the first is, as previously stated, kahn's (1990) personal engagement model, and the second is the concept of burnout, which is the inverse of engagement (maslach et al., 2001). the third is the multiple models of ee international journal of commerce and finance tays abderrahim öykü i̇yigün 71 developed by schaufeli et al. (2006), and the fourth and final is saks' (2006) multidimensional approach to engagement. employees become much more engaged when they feel appreciated by their organization, which also improves their well-being and leads to improved results. in terms of individual outcomes, it also aids in the achievement of business objectives and goals such as organizational commitment, improved retention, and job satisfaction (schaufeli et al. 2002, p.702). 2.2 job satisfaction job satisfaction (js) is considered to be a fundamental attitude of employees (saari & judge, 2004, p.398). it is considered an older concept that emerged between the mid-1970s and 1976. job satisfaction is defined as an individual's pleasant or positive emotional state as a result of evaluating work experiences (locke, 1969). similarly, brief & weiss (2002) define job satisfaction as an affective reaction to work or a psychological state represented simultaneously by cognitive and affective indicators. job satisfaction is described as a positive or negative overall evaluation of one's job or job situation. numerous efforts have been made to define the term "job satisfaction," which has excited the interest of many scholars. they presented the concept of js in various ways and were unable to agree on a single general definition. this disparity is caused by the researchers' differing interests and beliefs. brief & roberson (1989) define job satisfaction as an internal state expressed by affectively and/or cognitively evaluating one's work experience favorably or unfavorably. in connection with the above, judge et al. (2012) note that job satisfaction represents multidimensional psychological responses of the individual to his work, consisting of cognitive (evaluative) and affective (emotional) responses. furthermore, paillé (2010) observes that the current scientific literature agrees that job satisfaction is the result of work evaluations. job satisfaction is positively related to worker productivity and negatively related to employee turnover. it also states that higher job satisfaction is associated with higher productivity, implying that employees who are more satisfied will be more productive (silverthorne, 2004, p.595). an engaged employee is also more productive and less likely to leave the organization, allowing us to conclude that job satisfaction is related to employee engagement. employees international journal of commerce and finance tays abderrahim öykü i̇yigün 72 that completely like their jobs will report high levels of job satisfaction. if not, they will be dissatisfied with their jobs. three characteristics distinguish job satisfaction definitions (baş, 2002, p.22). to begin, job satisfaction is a type of emotional reaction developed in response to situations that arise in the workplace. as a result, it cannot be seen but must be felt. second, job satisfaction is affected by how well outcomes meet expectations. as a result, environmental factors influence job satisfaction. people who cannot find what they are looking for will be dissatisfied. finally, job satisfaction influences people's attitudes toward their jobs. in other words, while people may have positive attitudes toward some aspects of their jobs, they may have negative attitudes toward others. according to schneider et al. (2003), the success of an organization increases general satisfaction with work and significantly increases the correlation between joy and workplace productivity. even events outside of the workplace have an impact on job satisfaction. job satisfaction is one of the most perplexing concepts in organizational psychology. this is because it is an emotional state that is challenging to measure and study objectively. the ambiguity of this concept is what led to the emergence of hundreds of research studies on it. 2.3 relationship between employee engagement and job satisfaction according to hochschild's (1990) research, disengaged employees exhibit apathy, discontent, and social detachment. it is the opposite of engaged employees, who have a pleasurable emotional state at work and demonstrate a high level of job satisfaction. fernandez (2007) indicated the distinction between engagement and job satisfaction and stated that both are not the same and that, because an organization cannot rely on employee satisfaction to retain the best and brightest employees, employee engagement becomes much more important. according to schneider et al. (2009), employee engagement emotions and behaviors differ from job satisfaction. it also mentions that they deal with various types of issues and have different drivers. the engagement is said to be more than satisfied. the drivers of job satisfaction are related to company practices for employees such as benefits, job stability, and advancement opportunities, whereas the drivers of engagement are all about the emotions that arise when abilities and skills are fully utilized. employee engagement also refers to a sense of connection between an employee's work and the company's goals, as well as encouragement to innovate. biswas & bhatnagar's (2013) research provides empirical data about job satisfaction and its international journal of commerce and finance tays abderrahim öykü i̇yigün 73 relationship to employee engagement. they discovered that employee engagement causes variations in organizational commitment and job satisfaction. they also investigated the impact of employee engagement on job satisfaction and discovered a significantly positive impact. low levels of engagement and job satisfaction can lead to a variety of organizational issues. the same has been linked to increased levels of turnover and absenteeism, potentially increasing the organization's costs in terms of poor performance and reduced productivity. ferreira et al. (2014) examined the connection between engagement and company performance as a result of engagement as mediated by job satisfaction. according to the findings, engagement is positively associated with employees, and job satisfaction influences company performance. there is a connection between employee engagement and job satisfaction because the two terms influence each other in terms of job motivation, satisfaction, and efficiency. these variables are related but different. job satisfaction is one of the factors that influence employee engagement, and the most significant elements of job satisfaction are working conditions, employment relationships, and the possibility of advancement (blanchard et al., 2019). 3 methodology 3.1 theoretical framework and hypotheses the study's goal is to discover the relationship between employee engagement and job satisfaction. figure 1 represents the theoretical framework that describes the variables in the conceptual model. based on a review of the literature, the model proposes employee engagement as a dependent variable and job satisfaction as an independent variable. figure 1: conceptual model based on the literature cited above, the following hypothesis was formulated: hypothesis 1: there is significant relationship between job satisfaction and employee engagement. hypothesis 2: employee engagement is affected by job satisfaction. job satisfaction employee engagement international journal of commerce and finance tays abderrahim öykü i̇yigün 74 3.2 method primary data collection was implemented via a questionnaire to test the hypotheses, with a predetermined list of questions provided to all respondents. the quantitative questionnaire was distributed through an electronic survey. google forms was used to construct the form. this enables us to create a link for the questionnaire that respondents can easily use to answer the questions. the goal is to examine the impact of job satisfaction on employee engagement in various moroccan companies. 3.3 scales after further review of the literature, it was attempted to identify the scales that might best measure the variables used, and it was decided to use the scales in studies whose validity had been verified in various situations in the literature. the questionnaire form has three sections. in the first section, questions were asked to assess the participants' demographic characteristics. in this context, information about the participants' age, gender, education, and level of experience was obtained. in the second section, to measure job satisfaction, which is the independent variable of the model developed in line with the purpose of the research, the minnesota satisfaction questionnaire (msq) was used to determine the power of the "job satisfaction scale" (kardaş & şencan, 2018). the short version of msq is a 5-point likert-type scale consisting of 20 items. no changes were made to the scale. msq scale is made up of two distinct components: intrinsic job satisfaction measuring the nature of the tasks at work, for example the item “the chance to do something that makes use of my abilities”, and job satisfaction extrinsic measuring situational aspects outside of work, for example the item “my pay and the amount of work i do”. in addition, the expression “in my current job, i am satisfied with…” was introduced to each of the twenty items. we used the minnesota satisfaction questionnaire validated and adapted to the french context by roussel et al. (1996). msq is widely used in the scientific literature and known for its stability and excellent internal consistency through numerous preliminary studies (martins & proença, 2012). in the third section, to measure the "employee engagement scale," which constitutes the dependent variable of the research, the uwes-17 was used. this scale, called the utrecht work engagement scale (uwes), is composed of 17 items and was found to have good psychometric properties (schaufeli & bakker, 2004). international journal of commerce and finance tays abderrahim öykü i̇yigün 75 the uwes-17 scale is grouped into three subscales with three items each: vigor, dedication, and absorption (carmona-halty et al., 2019). employees indicate their feelings and opinions utilizing a seven-point likert-type scale, helping us to gather insight into employee motivation and productivity. all items are scored on a 7-point likert-type scale, ranging from 1 (never) to 7 (always). for the purposes of this study, the french version of the uwes–17 was adapted from schaufeli and bakker's (2004) report. 4 findings all analyses were conducted using spss 20. first, demographic information about participants is provided in order to define sample characteristics. following that, we examined the descriptive statistics values and correlations between the variables of interest. in this study, we gathered data from moroccan workers in a variety of sectors. questionnaires were presented and completed via google forms. in total 235 surveys were completed and the results used to inform our hypothesis. the participants in this survey included a wide range of age groups. 38.3% of those surveyed were aged between 18 25 years old, 43% of the participants were aged 26 35 years, 13.2% were aged 36 45 years, 3.8% were aged 46 55 years, and 1.7% were aged over 56 years old. the survey has 40% female participants and 60% male participants. as well as, marital status indicated that 73.6% of the participants were single and 26.4% were married. participants in the survey were asked to indicate their level of education. the results of the study determine that 5.5% of those surveyed were without a degree, 12.8% of the participants had institute degree, 41.7% had bachelor degree, 35.3% had master degree, and 4.7% had a phd. participants' levels of job experience were also reported in the survey. the study found that 25.1% of respondents had been working for less than 1 year, 37% had been working from 1 to 5 years, 32.3% had been working from 6 to 10 years, and 5.5% had been working more than 10 years. the following table resumes demographic information about participants (n=235). table 1: demographic information of participants variable frequency percentage international journal of commerce and finance tays abderrahim öykü i̇yigün 76 gender female male 94 141 40.0% 60.0% age 18 25 90 38.3% 26 35 101 43.0% 36 45 31 13.2% 46 55 9 3.8% over 56 4 1.70% marital status single 173 73.6% married 62 26.4% level of education without a degree 13 5.5% institute 30 12.8% bachelor degree 98 41.7% master degree 83 35.3% phd 11 4.7% job experience less than 1 year 59 25.11% 1 – 5 years 87 37.02% 6 – 10 years 76 32.34% more than 10 years 13 5.53% 4.1 reliability analysis cronbach's alpha was used to measure the reliability of each scale, as shown in table 2. though that the scales employed are validated, the researcher investigated their reliability and determined that both scales are reliable with cronbach’s alpha values greater than 0.8 (nunnaly international journal of commerce and finance tays abderrahim öykü i̇yigün 77 & bernstein, 1994). the alpha coefficient for the job satisfaction scale is 0.877, while the alpha coefficient for the employee engagement scale is 0.944. the overall scale's alpha coefficient is 0.910, indicating that the scales had an acceptable level of reliability. table 2: reliability analysis of scales scale no. of items cronbach’s alpha job satisfaction scale 20 .877 employee engagement scale 17 .944 general reliability .910 4.2 descriptive statistics table 3 presents the descriptive statistics for the two variables examined in the study, namely employee engagement and job satisfaction. in the survey, the mean score for employee engagement is 73.63, and the mean score for job satisfaction is 57.60. table 3: descriptive statistics n mean standard deviation job_satisfaction 235 57.60 12.112 employee_engagement 235 73.63 19.823 n valid (list-wise) 235 4.3 factor analysis factor analysis was conducted with varimax rotation in order to determine the factors of the "job satisfaction" and "employee engagement" variables. 4.3.1 factor analysis of job satisfaction the kaiser-meyer-olkin (kmo) value was found as 0.886 and ranges between 0.8 and 1, thus it is acceptable. the value demonstrates that the items are correlated and are appropriate for factor analysis. barlett’s test produced a value of 965.893 with a significance level of 0.000, which confirms the conclusion that the data is suitable for factor analysis. items 2, 4, 7, 10, and 20 were removed because of their poor loading (under 0.5). loadings less than 0.5 do not contribute significantly to determining the underlying factors (hair et al., 2011). international journal of commerce and finance tays abderrahim öykü i̇yigün 78 moreover, chin (1998) argued that manifest variables with loading values less than 0.5 should be removed. table 4: factor analysis and reliability test of job satisfaction no items loading variance ex. 1 being able to keep busy all the time. .862 50.01% 3 the chance to do different things from time to time. .604 5 the way my boss handles his/her workers. .545 6 the competence of my supervisor in making decisions. .728 8 the way my job provides for steady employment. .509 9 the chance to do things for other people. .526 11 the chance to do something that makes use of my abilities. .655 12 the way company policies are put into practice. .508 13 my pay and the amount of work i do. .569 14 the chances for advancement on this job. .542 15 the freedom to use my own judgment. .563 16 the chance to try my own methods of doing the job. .589 17 the working conditions. .511 18 the way my co-workers get along with each other. .553 19 the praise i get for doing a good job. .535 kaiser-meyer-olkin measure of sampling adequacy .886 barlett’s test of sphericity chi square 965.893 df 105 sig .000 international journal of commerce and finance tays abderrahim öykü i̇yigün 79 4.3.2 factor analysis of employee engagement: the kaiser-meyer-olkin (kmo) value was found as 0.956 and ranges between 0.8 and 1, thus it is acceptable. the value demonstrates that the items are correlated and are appropriate for factor analysis. barlett’s test produced a value of 2355.906 with a significance level of 0.000, which confirms the conclusion that the data is suitable for factor analysis. table 5: factor analysis and reliability test of employee engagement no items loading variance ex. 1 at my work, i feel bursting with energy .651 59.54% 2 i find the work that i do full of meaning and purpose .650 3 time flies when i'm working .566 4 at my job, i feel strong and vigorous .546 5 i am enthusiastic about my job .594 6 when i am working, i forget everything else around me .609 7 my job inspires me .616 8 when i get up in the morning, i feel like going to work .663 9 i feel happy when i am working intensely .604 10 i am proud on the work that i do .633 11 i am immersed in my work .583 12 i can continue working for very long periods at a time .518 13 to me, my job is challenging .620 14 i get carried away when i’m working .627 15 at my job, i am very resilient, mentally .551 16 it is difficult to detach myself from my job .587 international journal of commerce and finance tays abderrahim öykü i̇yigün 80 17 at my work i always persevere, even when things do not go well .557 kaiser-meyer-olkin measure of sampling adequacy .956 barlett’s test of sphericity chi square 2355.906 df 136 sig .000 confirmatory factor analysis loads of the job satisfaction variable have ranged from 0.508 to 0.862. composite reliability (cr) value related with the factor is 0.781; and average variance extracted (ave) is 0.500. confirmatory factor analysis loads related with employee engagement variable have ranged from 0.518 to 0.663. cr value related with the factor is 0.904 and ave value is 0.595. kmo (kaiser-meyer-olkin) which indicates the appropriateness of the data for factor analysis was 0.886 for job satisfaction; and 0.956 for employee engagement. in this regard, data with msa (measure of sampling adequacy) values above 0.800 are considered appropriate for factor analysis. 4.4 correlation analyses the data was analyzed using correlation analysis for the purposes of the study, and the results are described in tables 6. pearson's correlation analysis was used to evaluate the relationship between job satisfaction and employee engagement. the pearson's correlation coefficient is 0.208 (table 6), and the p value for the two-tailed test of significance is less than 0.05 (p=0.000). table 6: correlations for variables job satisfaction employee engagement job satisfaction pearson correlation 1 . 208* sig. (2-tailed) .000 n 235 235 employee engagement pearson correlation .208* 1 sig. (2-tailed) .000 international journal of commerce and finance tays abderrahim öykü i̇yigün 81 n 235 235 *. correlation is significant at the 0.01 level (2-tailed). the data shows that employee engagement has a weak positive relationship with job satisfaction (r = 0.208 < 0.50). moreover, the relationship between employee engagement and job satisfaction is statistically significant (p = 0.000 < 0.05). this indicates that job satisfaction has a positive impact on employee engagement. hypothesis 1: there is significant relationship between job satisfaction and employee engagement. (accepted) 4.5 regression analysis table 7: regression statistics multiple r 0.207969 r square 0.043251 adjusted r square 0.039145 standard error 19.431586 observations 235 table 8: anova a (simple linear regression model output) sum of squares df mean square f sig. regression 3977.129 1 3977.129 10.533 .001 residual 87977.662 233 377.587 total 91954.791 234 a. dependent variable: employee engagement table 9: coefficients a (simple linear regression model output) coefficients standard error t stat p-value intercept 6.172660 8.752077 .000 job satisfaction 0.207969 0.104880 3.245463 .001 international journal of commerce and finance tays abderrahim öykü i̇yigün 82 a. dependent variable: employee engagement from the regression statistics, the multiple correlation coefficient (r) value is 0.208 and this indicates a low level of prediction. the r squared value is 0.043 and this means that job satisfaction explains just 4.3% of the variability of employee engagement. from the anova results, it can be seen that f is 10.533 and the p-value is 0.001. this implies that the regression is a good fit for the data. from the output of regression, the coefficient and p-value of job satisfaction are 0.208 and 0.001 respectively. this implies that there is a positive and significant relationship between job satisfaction and employee engagement (p= 0.001 < 0.05). it can be concluded that job satisfaction has a positive impact on employee engagement. a unit increase in job satisfaction will lead to an increase in employee engagement by 20.8%. hypothesis 2: employee engagement is impacted by job satisfaction. (accepted) 5 discussion and conclusion the first section of the thesis examined the study topic, "the relationship between employee engagement and job satisfaction." the purpose of the research was stated, and the previous work on the research topic was provided. employee engagement and job satisfaction, as well as their types and factors, were discussed in this section. in the second section of the thesis study, the thesis research technique is discussed in detail. in this context, the theoretical framework is examined, as are the research model and main hypotheses. also, the data collection method and statistical techniques used in the research were specified, as well as information about the sample selection and the scales used in the research. in the third section, the research findings and results were evaluated. furthermore, all of the findings and the main conclusion regarding the relationship between employee engagement and job satisfaction variables are provided. research hypotheses are based on the relationship between employee engagement and job satisfaction. the hypotheses suggested were tested using appropriate statistical analysis with the help of data obtained from moroccan employees. these findings are summarized below. in terms of the general demographic structure of the participants, the vast majorities are males (60%), between 26 and 35 years old (43%), followed by those between 18 and 25 years old (38.3%), and single (73.6%). in terms of educational level, 41.7% of respondents have a international journal of commerce and finance tays abderrahim öykü i̇yigün 83 bachelor's degree, and 35.3% have a master's degree. in terms of working experience years, 37% of employees have between 1 and 5 years, 32.3% have between 6 and 10 years, and 25.1% have less than one year of work experience. the study findings section was obtained using correlation and regression analyses. employee engagement and job satisfaction had a generally favorable and significant relationship. employee engagement was found to be related to job satisfaction (r =.156, p > 0.05). there were statistically significant variations based on gender, age, and marital status. employee engagement and job satisfaction would differ between men and women, employees' ages would differ in employee engagement and job satisfaction, and marital status would differ in employee engagement and job satisfaction. overall, the study on employee engagement and the influence of job satisfaction demonstrates that job satisfaction is highly important in achieving increased employee engagement. job satisfaction is classified as either intrinsic or extrinsic satisfaction. this research showed a link between employee engagement and job satisfaction. thus, by providing possibilities for job satisfaction, a company may increase employee engagement. finally, given the importance of evaluating employee engagement in organizational environments as mentioned above, researchers are invited to invest their efforts in this field of scientific research that we qualify as beneficial for organizations and employees at the same time. managers within the administration must be aware of the importance of evaluating employee engagement in order to ensure the efficient and sustainable functioning of their organizations. in addition, this type of research makes it possible to highlight the psychological mechanisms underlying the structuring of job satisfaction as well as the contextual and cultural factors. 6 limitations this study, like other studies, has limitations. although this study aims to contribute to the literature on employee engagement, it is not without limits. to begin, the sample size (n = 235) is considered to be very average. furthermore, because the data in the survey was taken by email and the participants' mental and physical situations were unknown, the consistency of the appropriate responses may be faulty. however, using a quantitative technique based on a single questionnaire is insufficient. to provide meaning to the determining variables of job satisfaction or dissatisfaction, it was preferable to employ a mixed approach (semi-structured interviews). international journal of commerce and finance tays abderrahim öykü i̇yigün 84 future research should look at the relationships between job satisfaction and other variables such as quality of life at work, organizational commitment, turnover, absenteeism, and so on. these studies will contribute to the evaluation of employee satisfaction and the development of effective human resource management strategies. furthermore, in future research, companies from different sectors should be studied; analyzed and comparative studies should be conducted between the sectors. references baş, t. 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(2011). the evolution of the employee engagement concept: communication implications. corporate communications: an international journal, 16(4), 328-346. international journal of commerce and finance, vol. 8, issue 2, 2022, 180-194 * department of accountancy, osun state polytechnic, iree, nigeria, taodeen2015@gmail.com ** department of accounting, osun state university, okuku campus, nigeria, adewumi.adeyemi@uniosun.edu.ng *** department of accounting and finance, ajayi crowther university, oyo, nigeria, oyeoloruntoba01@yahoo.com **** department of business studies, landmark university, omu-aran, nigeria, sajuyigbeademola@yahoo.com mediating effect of financial self-control in the relationship between financial behavior and financial wellbeing tajudeen adewale odetayo* adewumi zaid adeyemi** oloruntoba oyedele*** ademola samuel sajuyigbe**** submitted: 12.08.2022 accepted: 15.09.2022 published: 01.11.2022 abstract this study examines the mediating effect of financial self-control in the relationship between financial behavior and financial well-being. current research conceptualizes financial behavior in terms of credit discipline, savings and investment, and financial awareness. the data from this study came from a survey of 550 employees who have worked with the osun government for at least 10 years. the structural equation model (sem) using stata version 15 was used to analyze the data. this study establishes a positive and significant relationship between financial behavioral parameters and financial self-control and financial wellbeing. it also showed that financial self-control is a powerful predictor of financial well-being. given this, civil servants must be rational in their financial behavior in order to provide post-retirement financial stability and long-term financial well-being. in addition, the results of the survey provide relevant data for governments and educators to hold seminars and workshops on the importance of financial behavior and self-regulation. this greatly contributes to ensuring that civil servants are financially safe after retirement and well cared for in the long run. keywords: financial behavior, financial well-being, investment, savings, self-control. mailto:taodeen2015@gmail.com mailto:adewumi.adeyemi@uniosun.edu.ng mailto:oyeoloruntoba01@yahoo.com international journal of commerce and finance tajudeen adewale odetayo & adewumi zaid adeyemi & oloruntoba oyedele & ademola samuel sajuyigbe 181 1.introduction recently, nigeria has experienced economic instability and the financial crisis caused by new threats of omicron surge, high levels of corruption, unimaginable inflation surges, income inequality, and spikes in external and domestic debt. clearly, the national bureau of statistics (2021) has revealed that the country's external debt reached $ 38 billion in september 2021 and its domestic debt increased to n20.64 trillion. given these unfriendly indicators, the world bank (2022) predicts that per capita income in 2022 will be lower than in the previous year. in addition, the study carried out by sajuyigbe, eniola, ayeni, and sanusi (2021) shows that the majority of retirees find it extremely difficult to have their daily bread within a few years of retirement. this connotes that financial behavior among civil servants is a perpetual issue despite the contributory scheme initiated by the government to serve as an incentive to save for the future. no wonder why civil servants become vulnerable spice after retirement in nigeria. therefore, it is important for civil servants to develop appropriate financial behavior to promote financial well-being after retirement. financial behavior is associated with increased retirement savings (arifin, 2017), investment (miotto & parente, 2015), and debt reduction (sajuyigbe, et al., 2021). financial behavior is a construct related to financial implementation such as cash and credit management, savings budgets, and investments. hasibuan, lubis, and walad (2017) see financial behavior as how well people handle, manage, and use their financial resources. previous studies have shown that financial behavior is an indicator of financial well-being (gutter & copur, 2011; starobin et al., 2013). financial well-being means having financial freedom and being able to save for future goals, including retirement. studies show that financial behavior is significantly associated with financial well-being (chavali, mohanraj, & ahmed, 2021). starobin et al., (2013) argue that individuals who show financial behavior have a correspondingly significant impact on their financial well-being. financial self-control is another construct recognized by scholars and financial analysts as a predictor of financial behavior and financial well-being. studies have shown that financial behavior and financial well-being lead to a high level of involvement in financial self-control (lusardi, 2012; miotto and parente, 2015). strömbäck et al.,(2017) confirm that financial selfcontrol affects people's economic behavior and their perceived financial well-being. previous studies have pointed out the relationship between these three constructs components, but no study focus on the mediating role of financial self-control, therefore, this study examines the international journal of commerce and finance tajudeen adewale odetayo & adewumi zaid adeyemi & oloruntoba oyedele & ademola samuel sajuyigbe 182 mediating role of financial self-control in relation to the relationship between financial behavior and financial well-being of civil servants in osun, nigeria. conceptual review concept of financial behavior the concept of financial behavior can be traced back to selden's 1912 stock market psychology, fesinger's 1956 study of cognitive dissonance, and pratt's 1964 discussion of risk aversion and utility functions (zulfaris et al., 2020). financial behavior is not only related to emotions and behaviors, but also many psychologies (miotto & parente, 2015). over the last three decades, the field of behavioral finance has grown significantly to help people make better investment decisions (hasibuan et al., 2017). financial behavior is defined as how well a household or individual manages financial resources such as budget savings, insurance and investment. a person's financial behavior can be judged by how well he manages cash, debt, savings, and other costs (arifin, 2017). financial behavior states that people often make financial decisions based on emotional and cognitive bias rather than rational and computational (akben, 2015). dew and xiao (2011) also argue that financial behavior is a financial decision that individuals make in their daily lives, such as cash, loan, savings, and investment management. hasibuan, lubis, and walad (2017) see financial behavior as how well people handle, manage, and use their financial resources. research evidence that individuals with responsible financial behavior tend to manage and earn money effectively (susilowati et al., 2017). the study identified financial literacy, financial socialization, and financial attitudes as factors influencing financial behavior (akben, 2015; arifin, 2017; zulfaris et al., 2020). a study by gathergood (2012) confirms that financial behavior is affected by spending and savings. financial wellbeing financial well-being is important to policymakers, industry, and stakeholders, especially as the global economy is slowly recovering from the recent financial turmoil caused by the covid19 surge. nigeria has a fundamental lack of incentives to save due to rising consumer demand, poor banking habits and directions, and high unemployment, which had adversely affected financial wellbeing. financial well-being is a state in which a person fulfills his or her financial obligations and feels at ease in the economic future. financial well-being has been studied in areas such as economics, marketing, organizational psychology, financial consulting, and planning. however, there is no universally accepted definition of financial behavior and its international journal of commerce and finance tajudeen adewale odetayo & adewumi zaid adeyemi & oloruntoba oyedele & ademola samuel sajuyigbe 183 conceptualization. some scholars use objective and subjective traits to measure financial wellbeing. for example, shim et al., (2009) conceptualized the financial well-being of individuals, including the level of individual debt as an objective measure of well-being and their satisfaction with their financial position as a subjective measure. in a similar study, porter and garman (1992) used quantitative indicators of financial statuses, such as income levels, as an objective measure of economic well-being, and recognized satisfaction with living standards as a more subjective measure. aggarwal (2014) sees financial well-being as an individual's ability to increase and manage liquidity. relationship between financial behavior and financial wellbeing numerous studies that examined the relationship between financial behavior and financial wellbeing are reviewed as follows: brüggen et al (2017) examine the extent to which financial behavior influences financial well-being. they discovered that the financial behavior framework is an alternative paradigm to financial wellbeing. in another study, osman1, madzlan, and ing (2018) examine the relationship between financial literacy, financial stress, financial behavior, and financial well-being. the findings show that financial literacy, and financial stress, have a significant correlation with financial well-being, while financial behavior has no significant relationship with financial well-being. a study by starobin et al., (2013) evaluates the significant relationship between financial behavior and financial wellbeing. their results establish a positive relationship between financial behavior and financial well-being. a study conducted in ghana by adam, frimpong, and boadu (2017) on the effect of financial literacy, financial behavior, family support, and financial wellbeing. the results reveal that financial literacy, financial behavior, and family support are strong predictors of financial wellbeing. in the same perception, lusardi and mitchell (2011) assert that financial well-being is a function of financial behavior, financial literacy, investment, and retirement planning. research advocates that exhibition of positive financial behavior, is a platform for financial empowerment and future social security (hasibuan, lubis, & walad, 2017). a similar study carried out in india by chavali, mohanraj, and ahmed (2021) on the influence of financial behavior on financial wellbeing, reveals that savings and investments, cash management, financial consciousness, and credit indiscipline are financial behavioral characteristics that international journal of commerce and finance tajudeen adewale odetayo & adewumi zaid adeyemi & oloruntoba oyedele & ademola samuel sajuyigbe 184 influence the financial well-being of an individual. in this vein, the studies of starobin et al., (2013) and gutter and copur (2011) affirm that saving and investment, credit indiscipline, and financial consciousness influence financial well-being. another study was conducted by selvia1, rahmayanti, afandy, and zoraya (2021) on the relationship between financial knowledge, financial behavior, financial inclusion, and financial well-being. the result reveals financial knowledge, financial behavior, and financial inclusion, have a significant influence on financial well-being. also, delafrooz and paim (2013) reaffirm that cash management, credit indiscipline, savings habit, and investment influence an individual’s financial wellbeing. additionally, research by bruggen et al (2017) proves a positive relationship between financial behavior and financial well-being. xiao et al., (2009) also reiterate that individuals who exhibit positive financial behaviors such as budgets maintenance, savings, avoidance of wrong financial decisions, cash management, and investment, have high financial well-being. based on the above empirical claims, the following hypotheses are proposed: h1: savings and investments have a positive association with financial wellbeing. h2: credit discipline has a negative association with financial wellbeing. h3: financial consciousness has a positive association with financial wellbeing. financial self-control as a mediator financial self-control is the ability of an individual to adjust his financial behavior and be rational in spending and maintaining a happy mood all the time (baumeister, 2002). tangney et al. (2004) argue that high levels of self-control make people control impulse buying and be rational in spending. the theory of mental accounting advocates that people are highly selfcontrolled by keeping track records of their income and expenses in their minds and allocating money accordingly to different categories and using them to cover expenses. in the same direction, the life cycle theory of saving propended by modigliani and brumberg (1954) reiterates that people are rational and consistent with their decisions. thus, both theories conclude that positive financial self-control has a significant link to financial wellbeing. additionally, the behavioral life cycle (blc) theory developed by shefrin and thaler (1988) argues that people are irrational in financial behavior because they have dual-self conflict and are not consistent with their decision due to the framing effect. the theory advocates that lack international journal of commerce and finance tajudeen adewale odetayo & adewumi zaid adeyemi & oloruntoba oyedele & ademola samuel sajuyigbe 185 of financial self-control has a significant inverse relationship with financial wellbeing. the ability to control impulses is a vital factor for financial security and long-term financial wellbeing. the studies of ballinger et al. (2011) and miotto and parente (2015) predict the linear relationship between financial self-control, financial discipline, cash management, saving and investment, credit commitment, and financial wellbeing. self-control has been proved to be positively related to financial wellbeing, savings and investment, credit discipline, and retirement planning (kim et al., 2006; wang & hesketh, 2012; biljanovska & palligkinis, 2015; achtziger et al., 2015). thus, the following hypotheses emerged: h4: financial control mediates between savings and investments, and financial wellbeing h5: financial control mediates between credit discipline and financial wellbeing. h6: financial control mediates between financial consciousness and financial wellbeing. methods sample and procedure the data for this study were obtained from 550 civil servants that are working with the osun state government for not less than 10 years through a questionnaire survey. all respondents were informed of data confidentiality and that information supply will be strictly used for research purposes alone. among them, males represent 59%, while females represent 41%; the mean age of the sample was 48.89 years old. ph.d. degree holders accounted for 1.30%, master's degree holders accounted for 30.50%, b.sc/hnd holders accounted for 48.72%, nce/nd holders accounted for 15.71% while school certificate holders accounted for 3.77%; in terms of length of service, 30.56% of the respondents have 5-10 years, 50.23% have 11-20 years, while 19.21% have more than 20 years. measures the financial behavior construct was conceptualized by saving and investment, credit discipline, and financial consciousness as follows: international journal of commerce and finance tajudeen adewale odetayo & adewumi zaid adeyemi & oloruntoba oyedele & ademola samuel sajuyigbe 186 savings and investments scale: this scale was developed and validated by chavali et al., (2021) and has a total of 3 items, for example, i keep the money for a transactional motive in an account, and i invest in treasury bills, bonds, and stocks. the likert 5-point scale was used ranging from 1 (strongly disagree) to 5 (strongly agree). the scale's internal consistency factor α was 0.812. credit discipline scale: this scale was developed and validated by chavali et al., (2021) and has a total of 4 items, for example, i make only minimum payments on a loan, and i settle my bills each month. the likert 5-point scale was used ranging from 1 (strongly disagree) to 5 (strongly agree). the scale's internal consistency factor α was 0.821. financial consciousness scale: this scale was developed and validated by stromback et al., (2017) and has a total of 3 items, for example, i keep a written record of my expenses, and i stay within my budget or spending plan. the likert 5-point scale was used ranging from 1 (strongly disagree) to 5 (strongly agree). the scale's internal consistency factor α was 0.805. financial self-control scale: this scale was developed and validated by stromback et al., (2017) and has a total of 4 items, for example, i don’t act impulsively, and i have a hard time breaking bad behavior. the likert 5-point scale was used ranging from 1 (strongly disagree) to 5 (strongly agree). the scale's internal consistency factor α was 0.817. financial wellbeing scale: this scale was developed and validated by stromback et al., (2017) and has a total of 3 items, for example, i feel confident about having enough money to support myself in retirement, no matter how long i live, and i feel secure in my current financial situation. the likert 5-point scale was used ranging from 1 (strongly disagree) to 5 (strongly agree). the scale's internal consistency factor α was 0.819. international journal of commerce and finance tajudeen adewale odetayo & adewumi zaid adeyemi & oloruntoba oyedele & ademola samuel sajuyigbe 187 data analysis and results table 1: path analysis without mediation relationship between variables coef. std. err. z p>|z| cds→ 𝐹𝐶𝑆 sic→ 𝐹𝐶𝑆 fds→ 𝐹𝐶𝑆 fcs→ 𝐹𝑊𝑆 cds→ 𝐹𝑊𝑆 sic→ 𝐹𝑊𝑆 fds→ 𝐹𝑊𝑆 .6973838 .0175211 .1946694 .5296302 .1725638 .0827168 .0449394 .1056053 .0941616 .0932651 .0540081 .1150092 .0968961 .0965433 6.60 0.19 2.09 9.81 1.50 0.85 0.47 0.000 0.852 0.037 0.000 0.134 0.393 0.642 table 1 shows the direct effect of financial behavior on financial self-control and financial wellbeing. the results reveal that credit discipline (cds) has a positive and significant effect on financial self-control (fcs) with a beta value of 0.697, z-value of 6.60, and p-value of 0.000. this implies that financial self-control is bound out of credit discipline. it was also revealed that savings and investments (sic) (β = 0175; z = 0.19; p>.05) have a positive linear relationship with financial self-control but are insignificant. this suggests that savings and investment have a weak impact on financial self-control. the most likely of these weak effects is the domestic epilepsy economic syndrome. in addition, a z-value of 2.09 and a beta value of 0.194 indicate that financial consciousness (fds) is predictive of financial self-control, while the p-value of 0.035, connotes that financial consciousness has a significant effect on financial self-control at a 5% level of significance. conclusively, the study concurs with the previous studies that financial behavior is a major determinant of financial self-control (kim et al., 2013; liu, 2014; biljanovska & palligkinis, 2015; achtziger et al., 2015; ballinger et al., 2011; miotto & parente, 2015). the results from table 1 also reveal that financial self-control is a strong predictor of financial well-being with a beta-value of 0.529 and z-value of 9.81. the p-value of 0.000 indicates that financial self-control is significantly influenced by financial well-being at a 5% level of international journal of commerce and finance tajudeen adewale odetayo & adewumi zaid adeyemi & oloruntoba oyedele & ademola samuel sajuyigbe 188 significance. the z-value of 1.50 and beta value of 0.172 suggest that credit discipline is positively related to financial wellbeing, while the p-value of 0.134 indicates that credit discipline is not significantly influenced financial wellbeing. it was also revealed that savings and investments have a positive association with financial well-being with a beta-value of .082 and a z-value of 0.85. the p-value of 0.393 shows that savings and investments did not have a significant effect on financial wellbeing. furthermore, the beta value of 0.044, z-value of 0.47, and p-value of 0.642 indicate that financial consciousness has a positive effect on financial well-being but is insignificant. table 2: the mediating effect of financial self-control relationship between variables coef. std. err. z p>|z| cds→fcs→fws sic→ 𝐹𝐶𝑆 →fws fds→ 𝐹𝐶𝑆 →fws .3693555 .0092797 .1031028 .0674312 .0498798 .0505025 5.48 0.19 2.04 0.000 0.852 0.041 table 2 shows the mediating effect of financial self-control between aspects of financial behavior and financial wellbeing. a z-value of 5.48 and a p-value of 0.000 indicate partial mediation. this suggests that financial self-control partially mediates between credit discipline and financial wellbeing. this result is consistent with baron and kenny (1986) that partial mediation occurs when both direct and indirect effects are significant. this result also shows that when the p-value is 0.009 and the p-value is 0.852, financial self-control has no mediating effect between savings, investment, and financial well-being. baron and kenny (1986) argue that no mediation occurs if the p-value for the indirect effect is greater than 0.05. this shows that financial self-control does not have a significant mediating effect between savings and investment and financial wellbeing. in addition, a z-score of 0.103 and a p-value of 0.041 indicate that financial self-control partially mediates between financial consciousness and financial wellbeing. international journal of commerce and finance tajudeen adewale odetayo & adewumi zaid adeyemi & oloruntoba oyedele & ademola samuel sajuyigbe 189 structural equation modelling figure 1: structural equation model table 3 equation-level goodness of fit depvars variance residual r-squared mc mc2 fitted predicted observed fcs 1.011614 .3606979 .6509158 .356557 .5971239 .356557 fws 1.12153 .4323242 .6892055 .3854773 .6208681 .3854773 overall .3766072 mc = correlation between depvar and its prediction mc2 = mc^2 is the bentler-raykov squared multiple correlation coefficient fcs .04  1 .65 cds .48 4.1 sic .38 4.2 fds .48 4.1 fws .46  2 .69 .7 .018 .19 .53 .17 .083 .045 international journal of commerce and finance tajudeen adewale odetayo & adewumi zaid adeyemi & oloruntoba oyedele & ademola samuel sajuyigbe 190 table 3 shows the equation-level goodness of fit test. the fitted and predicted variance in financial self-control is 1.011614 and 0. 3606979, while the computed r-square value is 0.356557. this connotes that 35.65% of the variation in the dependent variable in this particular model (financial self-control) is accounted for by variations in the explanatory variables (cis, cds, and fds). furthermore, the fitted and predicted variance in financial wellbeing is 1.12153 and 0.4323242, thus resulting in a computed r-square value of 0.385. this value indicates that 38.50% of the variation in financial wellbeing is explained by (cis, cds, and fds) with financial self–control as a mediator. conclusion this study examines the mediating effect of financial self-control in the relationship between financial behavior and financial well-being. current research conceptualizes financial behavior in terms of credit discipline, savings and investment, and financial awareness. the data from this study came from a survey of 550 employees who have worked with the osun government for at least 10 years. the structural equation model (sem) using stata version 15 was used to analyze the data. this study establishes a positive and significant relationship between financial behavioral parameters and financial self-control and financial wellbeing. it also showed that financial self-control is a powerful predictor of financial well-being. therefore, this finding is consistent with the claims of mental accounting theory and behavioral life cycle theory (blc) that financial self-control is significantly associated with financial wellbeing. consistent with researchers' expectations, there is also a positive link between financial behavior, self-control, and financial wellbeing. policy implication the results of this study have important implications for policymakers, civil servants, and researchers. as a result, it was confirmed that people with unreasonable financial behavior tend to experience financial instability in the future. also, people with the ability to control purchasing impulses tend to experience financial security and long-term financial well-being. given this, civil servants must be rational in their financial behavior in order to provide postretirement financial stability and long-term financial well-being. in addition, the results provide relevant data for governments and educators to hold seminars and workshops on the importance of financial behavior and self-regulation. this greatly contributes to ensuring that civil servants are financially safe after retirement and well cared for in the long run. international journal of commerce and finance tajudeen adewale odetayo & adewumi zaid adeyemi & oloruntoba oyedele & ademola samuel sajuyigbe 191 contribution to knowledge this study provided empirical evidence of the mediating effect of financial self-control in the relationship between financial behavior and financial well-being. the results of the study are inputs that significantly improve the ability of policymakers, civil servants, and educators to understand the importance of financial self-control as a driving force for improving the financial well-being of 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(2020). students and money management behavior of a malaysian public university. the journal of asian finance, economics, and business, 7(3), 245–251. https://www.thecable.ng/world-bank-forecasts-nigerias-economy-to-grow-by-2-5-in-2022 international journal of commerce and finance, vol. 4, issue 2, 2018, 94-107 94 the relationship between organizational ambidexterity and family business performance aylin gözen istanbul commerce university, phd. candidate, turkey prof. dr. beliz ülgen istanbul commerce university, turkey abstract the concept of organizational ambidexterity is vitally important for family businesses as they have specific characteristics that lead to the ability to pursue both exploitive and exploratory orientation which results in a positive performance effect on family businesses. organizational ambidexterity (oa) is currently recognized as one of the most critical factors in achieving sustainable competitive advantage; since there is not only short-term activity but also long-term innovation at the basis of organizational ambidexterity. in this respect, the aim of this study is to examine the concept of organizational ambidexterity from the theoretical perspective and to determine the organizational ambidexterity levels of the family businesses within the scope of this research and to determine the relationship between the organizational ambidexterity levels of those family businesses and their performances. for this purpose, the questionnaire technique was utilized developing questions from the existing literature. the questionnaire considering 47 items was presented to approximately 500 family businesses operating in turkey through face to face interviews or via internet. at the end of the research 349 net responses were obtained from those family businesses. as a result of the structural equation model used in the analysis, findings indicate that there is a positive and statistically significant relationship between organizational ambidexterity and the family business performance. keywords: organizational ambidexterity, exploration, exploitation, family business, business performance 1. introduction businesses in general struggle to be profitable while also trying to be active, adaptable and flexible. particularly in the markets with high turnover rates, it is expected that businesses will not only be able to make use of their existing resources effectively, but also it is required to conduct resource intensive research activities as well. therefore, it is inevitable that these businesses struggle significantly if they cannot manage both processes at the same time. according to o'reilly and tushman (2008), being large and successful in a given period of time is not a guarantee of continuous success and sustainability. in many recent studies, the concept of organizational ambidexterity has been presented as a solution to these challenges. as a dictionary meaning, ambidexterity means the ability of using both hands with equal skill. in terms of management literature, it means being capable of exploiting the existing competencies of any business as well as exploring new opportunities with equal dexterity. however, organizational ambidexterity is a new concept with limited studies in the area. moreover, when the concept is reviewed in the area of family business, the number of studies is even more limited. specific to turkish family business literature, there is not a single study in this area. therefore, in order to contribute to the field, the relationship between organizational ambidexterity and family business performance is analyzed in this study. 2. literature review in this section, the concepts of organizational ambidexterity and business performance will be analyzed in a general view considering their sub dimensions like exploration and exploitation dimensions and financial performance, production performance, marketing performance, human resources performance and innovation performance for business performance. later on the major studies regarding organizational ambidexterity and family business performance of the management will be examined under this section. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the relationship between organizational ambidexterity and family business performance 95 2.1 organizational ambidexterity the concept of organizational ambidexterity was first expressed by robert duncan (1976) showing the need for organizations to have a bilateral structure in the form of adaptation and alignment, respectively. referring to the previous studies (burns and stalker, 1961; thompson, 1967), duncan argued that organizations should consider a dual form of organization for long-term success which in turn means long-term profit and long-term growth driven by global integration and staying local at the same time, based on the use of seemingly contradictory strategies such as standardization, innovation, differentiation and cost leadership, (gibson and birkinshaw, 2004, he and wong, 2004). there is a lot of confusion in the use of the term, as it contains many different elements that seem to contradict each other; and for this reason, it is possible to encounter many different definitions and approaches regarding the concept of organizational ambidexterity. from another point of view, organizational ambidexterity refers to the ability of simultaneously engaging in exploration activities to enable the organization to grow in the future, while at the same time providing the sustainability of maximizing profits (benner and tushman, 2003, kohtamaki et al., 2010, stubner et al., 2012). in this sense, ambidextrous organizations not only manage today's business demands, but are also flexible enough to adapt to changes in an ever-changing, uncertain and dynamic environment to achieve sustainability (gibson and birkinshaw, 2004). however, it is very difficult and complex to manage those two contradictory processes as it requires competing for the scarce resources available (simsek, 2009). exploration and exploitation activities require significantly different, even contradictory, constructs, processes, abilities and cultures (sheremata, 2000; tushman and o'reilly iii, 1996). conflicts, contradictions and inconsistencies can be anticipated as natural consequences of this situation. in this sense, ambidextrous organizations are the ones that can successfully manage this process as they have dynamic competency that can successfully adapt to environmental factors in a continuous process of change and that can balance the use of the current resources of the business effectively while searching for new opportunities and reshaping existing resources. according to gibson and birkenshaw (2004), organizational ambidexterity is based on individual competence in relation to exploration and exploitation activities. however, tushman and o'reilly (1996) oppose this view. according to them, organizational ambidexterity is not just a question of competence (tushman and o'reilly, 1996; gupta et al., 2006), but it is a dynamic talent encompassing a complex set of routines that require in-place management, differentiation, targeted integration, and top-level leadership ability to synchronize a number of routines that the process requires (o'reilly and tushman, 2008). one of the most important problems faced by large and successful organizations is the sustainability of their success and growth. for example, louca and mondonca studied the largest industrial organizations operating in the us in the 20th century, between 1917 and 1997, and it was observed that only 28 of 266 organizations kept pace with change by continuing to make change. mckinsey's work examining the average life span of organizations in the s & p 500 was 75 years in 1975, while the expectation was 90 years in 1935. the expectation for the next years of the report is limited to just 15 years (foster and kaplan, 2011). as it can be seen, being large and successful business is not a guarantee of continuity (o'reilly and tushman, 2008). one another important problem faced by successful organizations is the fear towards the change itself to protect their current position, strategy and goals. this fear leads the organizations to a situation called "success paradoxsuccess trap." organizations that have achieved a stable process and charted a path to success may start to repeat themselves after a while and thus fall behind the sectoral and technological developments and as a result miss new opportunities. on the other hand, if they are engaged in only exploration and development activities, ignoring existing functioning processes in search for future benefit, they may be dragged into a process which is costly and does produce a short-term output or guarantee long-term result. in the literature this is defined as "failure paradoxfailure trap" (carroll, 2012). in this regard, the concept of organizational ambidexterity has recently attracted attention as one of the main topics frequently discussed in the literature as a proposed solution to this problem. organizational ambidexterity offers to any business the opportunity to adapt their structure and processes to their aylin gözen & beliz ülgen 96 strategies and objectives, as well as to be able to manage and adapt to changes in the internal and external environment. organizations that achieve organizational ambidexterity by providing a balance between exploration and exploitation activities as the two main fields of activity of organizational ambidexterity are successful organizations that have also succeeded in maintaining sustainability in the long run beyond the paradox of success and failure trap mentioned above. 2.2 the dimensions of organizational ambidexterity one of the most influential scientific studies of the management literature over the past two decades is the study of james march, "exploration and exploitation in organizational learning" (march, 1991). this study includes the basic institutional challenges faced by investments in two different activities: exploration and exploitation. exploration activities include more sophisticated areas of activities such as developing new capabilities, investing in new technologies, tracking new customer segments and new markets. on the other hand, the focus of exploitation activities is the existing competencies, processes and products. the important thing is to be able to increase the efficiency and profitability of the organization by making the most effective use of these competencies (carroll, 2012). nevertheless, it is very difficult for the organizations to accommodate these two different activities together. at the heart of exploitation activities is “expanding and improving the existing competencies, technologies and paradigms” while “experimenting with the new alternatives” is laying at the heart of the exploration activities (march 1991, pp. 85). the exploitation activities are essential to improve the existing activities and the results of these activities are positive and yield short-term results. on the other hand, at the heart of the exploration activities, it is the idea of the next breakthrough the expectation of generating a new product or a profit from the market but it is inevitable that the outcome will be long-term with no certainty (carroll, 2012). figure 1. the relationship between exploration and exploitation activities source: lavie vd., 2010 figure 1 demonstrates the relationship between exploration and exploitation activities in a general sense. in this section, the features of both dimensions will be evaluated under separate headings. 2.2.1 exploitation dimension the "exploitation dimension" is one of the two basic dimensions of organizational ambidexterity. it is defined as an organizational function or activity that allows the organization to briefly utilize and distribute all of its existing resources, in particular its own knowledge and to put forward its own existence accordingly (march, 1991; o'reilly and tushman, 2008). exploitation activities focus on using its own knowledge (march, 1991). this dimension is based on the assumption that the organization has complete knowledge of all its own internal competencies and external opportunities. exploitation-oriented organizations expect to work in an environment where problems are clearly defined and solutions are clear. the focus of these organizations is on the tasks they are currently involved in, exploration opportunities profit exploitation revenue the relationship between organizational ambidexterity and family business performance 97 their current mode of doing business, achieving their short-term organizational goals and protecting their current position in the market. exploitation activities are success-oriented at the highest level and uncertainty oriented at the lowest level (chen, 2017). as it can be seen in figure 1, the exploration activities that take place within a certain period of time result in new opportunities and the use of these opportunities leads to an increase in income. this revenue growth and the profit in turn are used again to discover new opportunities. in this way, when both functions are successfully accomplished on time, sustainability of success and growth will be provided in the context of the organization’s activities (lavie et al., 2010, petro, 2017). when the effects of exploitation activities on organizational structure and organizational strategies are examined, it is seen that the organizational structure has a centralized side in terms of efficiency and production process, and the authority is moving downwards. therefore, it is criticized for creating a mechanical structure by increasing organizational rigidity (benner and tushman, 2003, p. 248). 2.2.2 exploration dimension the exploration dimension of organizational ambidexterity is described as a dimension that allows the organization to expand locally and abroad, and to invest in the future (march, 1991, o'reilly and tushman, 2008) for the settlement and sustainability of existing operations to legitimize organizational continuity. the exploration dimension is based on learning through change and experience and its main focus is the future of the organization (smith and tushman, 2005). unlike the exploitation dimension, the exploration dimension is focused on discovering what has not yet been discovered (march, 1991). it is always in search of new jobs or new ways of doing business. unlike exploitation activities exploration activities consume resources in the short run, and their returns are uncertain, remote and often delayed (arend and chen, 2012). although it creates new possibilities, it is likely that the first outputs obtained might result in failure and temporary performance degradation. in fact, many well-managed enterprises may succeed in exploitation activities, while they may be weak at exploration activities (christensen, 1997). for this reason, it can be considered as a natural approach to focus their attention on the exploitation activities that create value as much as possible in the short run instead of exploration which may not provide results in the long run and in which case, the success rate is low. but if the defects that seem like failure in the first stage are consequently concealed, the long-term new expansions will be available. therefore, it is important to understand and manage this process well in order to get results from exploration activities. in this regard, the most important point is the efficient distribution of resources. transferring more resources to exploration activities may result in higher costs of services and accordingly may reduce the speed of exploitation activities. in other words, too much focus on exploration activities may cause the organization to move away from the economies of scale by substantially losing its effectiveness. on the other hand, too much focus on exploitation may lead to inertia and it may lead the organization into a constant routine by lowering its awareness of new opportunities. on the contrary, with exploration activities, an organizational environment can be formed in which acquisition of new information is supported by a centralized structure and an innovation-oriented leadership (adler et al., 1999; raisch et al., 2009; lin and mc donough, 2011). in this way, it is not possible to get any result in the short run, but in the long run, the organization contributes positively to its sustainability and performance. according to march (1991), while the logic of exploration is based on innovation, research of new opportunities and change, the logic of exploitation dimension is based on the topics such as production, efficiency and application. but what is important for the organizations is the effective handling of those two dimensions at the same time (soosay and hyland, 2008, chaharmahali and siadat, 2010). therefore, organizations that are able to simultaneously manage both functions successfully are described as "ambidextrous organizations" (petro, 2017). 3. business performance the when the business management literature is reviewed, it can be seen that many topics and concepts are associated with the concept of business performance. in this context, it is a general concept that has been evaluated within a very wide field of study and is associated with many different concepts. according to the association of aylin gözen & beliz ülgen 98 turkish language, the concept of performance is a french term and is defined as what has already done, skill, capacity or the achievement of the business in general (denison and mishra, 1995, fisher, 1997). when it is considered within the framework of business management, the concept of performance is meaningful to the extent that it achieves the goals that it has set out by effectively using organizational resources (mowday, porter and steers, 1982; gibb dyer, 2006). according to a more general definition, business performance is the outputs or outcomes of business activities carried out within a certain period of time (bolat, 2000; öncü et al., 2015). the concept of performance is not only confined to the business, but also is a concept that is related with many fields such as psychology and sociology (lebas and euske, 2005; neely et al., 2005). the concept of performance is based on organizational theory (venkatraman and ramanujam, 1987), production (neely and austin, 2002), organizational behavior (osterloh and frey, 2005). it is also used in many subdisciplines, such as marketing (ambler and kokkinaki, 2005), state government (ogata and goodkey, 2005), innovation (katila, 2005), electronic commerce (neely et al., 2005) 2008). as you can see, although there is a wide range of definitions, it is not possible to mention any commonly accepted definition. in general, it is observed that the concept of performance is evaluated under two subheadings qualitatively and quantitatively. quantitative performance depends on the success of marketing and financial management, under the influence of qualitative performance, while qualitative performance includes elements such as organizational culture, employee commitment, satisfaction with their work and customer satisfaction ratings, quality and innovation performance (denison, 2000) as well as measures such as turnover, market share and profitability increase. of all these performance measures, the most frequently considered quantitative business performance criterion is, naturally, financial performance. afterwards, performance criteria such as market performance, innovation performance and production performance can be listed (yılmaz et al., 2005). business performance is crucially important as it affects the behavior of all internal and external stakeholders, such as shareholders, managers and employees, as well as outside investors, customers and the community (kaplan and norton, 1996). while internal stakeholders influence business practices and objectives, external stakeholders also make decisions on whether or not the business is worth investing and lending, whether to use the products of that business, or whether to maintain business relations based on the performance of the business (karabag, 2008). therefore the concepts of performance or business performance are uncertain concepts and difficult to measure and accordingly they do not have any compromised definition (rogers and wright, 1998; verweire and van den berghe, 2004; as cited in biçkes, 2011). 3.1 dimensions of business performance business performance is a multi-dimensional concept (hofer, 1983; lenz, 1981) as it depends on a large number of different decisions, actions and measures. that’s why it is used in several research areas. for this reason, parallel to the study discussed in the literature, the following sub-dimensions will be analyzed briefly in this section. 3.1.1 financial performance business performance is embraced with financial performance measurements (objective and quantitative) and nonfinancial performance measurements (subjective and qualitative). this distinction is based on traditional accounting based performance measures and perceived financial performance measures. objective financial performance measures that are relatively easier to measure are based on accounting data such as return on asset (roa), return on equity (roe) and return on sales (ros). in this way, the operating performance of the company can be measured by determining the financial performance of many operational results such as productivity and profitability, shareholder value and indebtedness. although it is criticized and cautiously approached as alleged to be unreliable, it is important to make regular performance measures in order to be able to make long-term healthy decisions on behalf of the enterprise and to perform functions such as planning, inspection and control. 3.1.2 production performance it is the business unit responsible for producing the desired product in the shortest possible time period, at the lowest cost with the desired quality, using the business assets such as raw materials, equipment, energy and human the relationship between organizational ambidexterity and family business performance 99 resources (gezgin et al., 2002). features such as low price, quality, flexibility and logistics performance, which provide competitive advantage to the business, are also among the factors that determine the production performance of that business (ward et al., 1996; çatı et al., 2012)production performance is also an important factor in determining an enterprise's competitive advantage. the intense competition and the complexity and variability of markets create an uncertain environment for businesses. in order to compete under these conditions and to be able to meet the expectations of all internal and external stakeholders while maintaining profitability, it is inevitably important to control and measure production performance continuously. thus, what is needed for the success of the business and what needs to be done has been highly clarified and the roadmap to carry the organization to success has become clear. when the production performance literature is reviewed, skinner's study (1969), which emphasizes the importance of achieving competitive advantage of production strategies, is one of the reference studies on production performance. however, there are no common concepts in the literature that are accepted as the main determinants of production performance. one other study, filippini (1998) emphasized the production performance in terms of economic advantage, quality and time performance. rosenfield et al. (1985) have considered the costs and delivery time as the main parameters for their performance in terms of production performance (yavuz, 2010).to sum up, it is known that major production performance criteria are cost, quality, delivery and flexibility. however, it is inevitable that production performance criteria may differ in parallel with the changing environmental conditions. today, there is a shift towards modern performance measurement criteria with customer satisfaction, quality, technology and innovation from the understanding of maximum production and profit-oriented traditional performance measurement depending on minimum cost. 3.1.3 marketing performance marketing performance considers all the activities aiming to increase the current market share considering the long term profitability in the target market and to motivate all units to be customer oriented in general, to develop new products that will meet the needs of the customers, and to conduct pricing activities that can be accepted by all the customers (moorman and rust, 1999). coordination and integration with all existing units of the enterprise is vitally important for the marketing activities to be carried out correctly (apaydın, 2012). however, harmony, communication and coordination among all units, particularly between production and marketing units is crucially important, since the sustainability of any enterprise is possible only if they are providing any product or service that meet the expectations of the target market. this process is only possible through coordination of production and marketing units. on the other hand, the previous studies reveal that the two units that are most difficult to coordinate and integrate are production and marketing units (gezgin et al., 2002). the main reason behind this situation is the differences in target of those units (bayrak and özdil, 2003; jerath et al., 2007; catı et al., 2012). according to morgan and turnell (2003) marketing performance can be measured by market share, customer satisfaction, competitive position of the firm against competitors, customer loyalty and sales growth (öztürk, 2012). performance indicators are also measured and evaluated by the change criterion in the product and brand range, sales strategies, promotion and advertising strategies of the enterprise (liu et al., 2002). in general, many of the research studies measure the market performance depending on the sales, market share and profitability (green et al., 1995; morgan et al., 2002; hooley et al., 2003). 3.1.4 human resources performance as mentioned before, it is difficult to make a definite definition of the concept of performance because of the many different factors that influence the performance of the business. undoubtedly, one of the most important factors affecting performance is the human factor. therefore, when the concept is considered from the perspective of human resources management, business performance is defined as the result of the interaction of the target of the business (çalık, 2003; ozden, 2014). in terms of business performance, human resources management practices aylin gözen & beliz ülgen 100 (hrm) have increased considerably in recognition of the fact that the most important competitive power is human resources in an environment where developing technologies and fast competition conditions are experienced. when the is literature reviewed in this sense, it is easy to find several research studies regarding human resources (rogers and wright, 1998, harris and ogbonna, 2009, ahmad and schroeder, 2003, stavrou et al., 2007, biber, 2006, liu et al. budhwar, 2010). when all these studies are examined, it is seen that there is a positive relationship between hrm practices and organizational performance in general terms. providing a continuous lifelong education opportunities according to the duties and responsibilities of the employees, sharing knowledge and experiences gained over time with employees in a transparent management approach and ultimately increasing role of the employees both in the decision and solution processes will result in improvement of the products and services quality in the short term and satisfaction and motivation of the employees in the long term. this will be decreasing the costs as well as increasing the amount of value added products and the service quality. as a result, the business performance will be affected positively. 3.1.5 innovation performance the performance dimension which is discussed more frequently in the literature in relation to the concept of business performance in the recent period is the innovation performance. before referring to innovation performance, it is important to refer the concept of innovation which is a kind of change in the product itself, in its production process or in the marketing process in order to respond better to the needs of the target market or to get competitive advantage over the competitors (alpkan et al., 2005, pp.175-189). just as the concept of performance, there is not any common and precise definition of the concept of innovation. the notion is brought into the literature by classical economist joseph a. schumpeter, an austrian classical economist who lived between 1883 and 1950. in his book "capitalism, socialism and democracy" written in 1942, he talked about innovation in the context of his own discourse of "creative destruction". according to this approach, the competitiveness of non-innovative entrepreneurial businesses is declining. by the way the performance of less competitive businesses will also decline. according to schumpeter, innovation can be achieved by (1) the production of a new commodity or qualification which is not known by the consumer, (2) the application of a new production method, (3) entering into a new market, (4) and the realization of a new organization (ülgener, 2006). according to another definition; innovation, the creation of a new and original idea, and the transformation of the product into a preferred product compared to the alternatives available in the market. innovation helps the operator better adapt to changing environmental conditions by altering the operator's existing products, resources or processes. the concept of innovation is defined in various forms as a process and an output. but the point is that it is a very critical concept for businesses in today's market conditions where innovation, competition and change are very intense and rapid. from this point of view, the concept of innovation is defined as a tool for creating and sustaining competitive advantage (standing and kiniti, 2011, p.289; as cited in gürkan and gürkan, 2017). relatively as there is not any border in the international market, the impact of globalization has also led to significant changes in the purchasing behaviors of the customers. for this reason, businesses can only gain competitive advantage through innovation (porter, 1990). therefore, it is required to adopt more innovative approach towards production, marketing, human resource applications and customer services from a wider perspective in terms of technology, and in the case of doing business. for this reason, the ability of innovativeness is a dynamic capability that affects the performance of any business (mengüç and seigyoung, 2006; as cited in öncü et al., 2015). when national and international studies on the innovation performance of enterprises are examined, it has been observed that there is a limited number of studies carried out in the national field (akses, 2012; kiler and bilginoğlu, 2010; güler and kanber, 2011; erdem et al., 2011; çiçek and onat, 2012; atalay et al., 2013; öncü et al., 2015; kitapçı and çömez, 2016; şişmanoğlu and akçalı, 2016). on the other hand, in the international arena there are several studies regarding innovation performance (chaganti and damanpour, 1991; han et al., 1998; calantone et al., 2002; jong and vermeulen, 2003; hult et al., 2004; cho and pucik, 2005; hansonlou, 2009; hinloopen, 2003; laursen and salter, 2006; na lim and peltner, 2011; bigliardi, 2013; heshmati, 2006; matsuo, 2006; prajogo, 2006; the relationship between organizational ambidexterity and family business performance 101 cosh et al., 2012; czarnitzki and hottenrott, 2009; muiruri and ngari, 2014; lundvall and nielsen, 2007; ottenbacher, shaw and lockwood, 2006; parida, westerberg and frishammar, 2012; prajogo and ahmed, 2006; saenz et al., 2009; orfilasintes and mattsson, 2010; juanez-jimenez and sanz-valle, 2011; tanev, 2005, zeng et al., 2010; zhang and duan, 2010; zhao, 2001; as cited in kaygısız ertuğ and bülbül, 2015). although the analysis of innovation performance has been based on many different elements, many researchers (bulut et al., 2009; calantone et al., 2002; comanor and schrerer, 1969; dutta and weis, 1997; ernst, 2001; günday, 2007; hagedoorn and cloodt, 2003; katila, 2005), especially references patents and notifications of new products as measures of innovation performance (yavuz, 2010). 4. literature review regarding organizational ambidexterity and business performance the concept of organizational ambidexterity is crucially important due to the relationship between organizational ambidexterity and business performance. according to o'reilly and tushman, organizational ambidexterity is one of the most critical factors in achieving sustainable competitive advantage because, at the core of organizational ambidexterity, there is not only short-term activity but also long-term innovation as well. in this respect, organizational ambidexterity is an important concept that provides organizations with competitive advantage by achieving both long-term and short term goals of the organization. in general, it is emphasized in the literature that organizational ambidexterity has a direct or indirect positive effects on organizational performance (raisch and birkinshaw, 2008; simsek, 2009; chrisman et al., 2003; gibb dyer, 2006; rutherford et al. 2008; stubner et al., 2012). the overall focus of organizational ambidexterity in the literature is its consequences on the organizations. for example, long-term success (raisch et al., 2009) and sustainable competitive advantage (o'reilly and tushman, 2008) are also the major consequences of organizational ambidexterity as well as better business performance (gibson and birkinshaw, 2004; smith and tushman, 2005). although not often emphasized, a few studies have addressed some of the negative consequences of organizational ambidexterity. for example, gibson and birkinshaw highlighted the high cost of ambidexterity in their study in 2004. they emphasized that this process has a serious cost, yet the cost is far below the benefits and advantages created at the end of the process. smith and tushman (2005) highlighted that businesses must be both proactive and effective in their areas of activity in order to be able to perform in the long run. this urges the organizations to be flexible: focusing on its ongoing jobs while being forward looking and focusing on research activities as well. when it comes to ambidexterity, it is expected that ambidextrous organizations will do these things simultaneously. in addition, raisch et al, (2009) highlighted the need for organizations to use their existing competencies while underlining the importance of developing new competencies. in another study, it was emphasized that the failure rate of organizations which are good at balancing the exploration and exploitation activities is very low (probst and raisch, 2005). literature review of the studies on the subject of ambidexterity in turkey shows that there is very limited number of studies in turkey. in the level of phd there are two thesis written by melis attar (2014) “the impact of organizational ambidexterity of leadership features of top managers: exploration on the turkish banking sector" and elif yılmaz (2017) “the relationship of organizational ambidexterity with whistleblowing act and employees’ intention to leave.” however, no thesis or article has been found to directly examine the relationship between organizational ambidexterity and business performance. 5. research model and the methodology the data for the study were obtained as a result of a survey conducted by face to face interviews or via internet with a family member in a top management position of the family businesses using simple random sampling method from september 2017 march 2018. the questionnaire considering 47 items was presented to approximately 500 family aylin gözen & beliz ülgen 102 businesses operating in turkey. at the end of the survey 349 net responses were obtained from those family businesses. before beginning to analyze the data gathered, all the questionnaires were rechecked for outliers or incomplete values and erroneous coding, the inappropriate questionnaire data were excluded from the study resulting in 349 surveys with valid data. the number of family businesses in turkey is unknown. for this reason, when the sample size is not clearly known, it is stated that the sample size should be 5 times as large as the number of questions included in the study (yıldırım, 2010). thus, with 38 questions on the questionnaire, the minimum number of valid responses required is 190. since this study resulted in 349 valid responses, sufficient data for the study was obtained. this data was analyzed using spss 22.0 and amos 22 statistical data analysis programs. additionally, in this study, structural equation model (sem) was used to determine the relationship between organizational ambidexterity and business performance in the family businesses. 5.1. descriptive statistics the questionnaire considering 47 items was presented to approximately 500 family businesses operating in turkey. at the end of the survey 349 net responses were obtained from those family businesses. in this context, the oldest family businesses were founded in 1924 and the newest one was established in 2018. 43.3% of the enterprises were founded from 19812000.furthermore, 82% of the participants are male and 18% are female. family business managers participating in the study examined in terms of age; the youngest participant was 18 years old and the oldest participant was 81 years old. in addition, 11.7% of the participants were aged 30 and under, 22% were between 31 and 40 years, 26.9% were 41 to 50 years, 20.9% between 51 and 60 years and 5% are 61 years and older. participants were generally in the middle age group. 18% of the participants stated that they are with high school education, 11% with associate degree, 46% with undergraduate education and 20% with postgraduate education. 43% of the participants have 1 to 5 years, 20% have 6 to 10 years, 12% have 11 to 15 years, 8% have 16 to 20 years, and 17% have 20 years and above family business experience. it is a natural result that in the turkish family business culture, the founder's presumptive succession candidates are directed to work for others, especially at a young age. among the participants, 38% stated that they are active in production, 33% in services and 11% in the food sector. when the results of the number of employees are examined, 23% of the participants stated that they are working with 1 to 9 employees, 39% of them with 10 to 49, 25% of them with 50 to 249, and 13% of them working with 250 or more employees, respectively. therefore, the majority of participants are small and medium-sized smes. when the ownership structure of the family businesses in the study is examined; 45.3% belonged to the first generation and 24.4% to the first and second generation. in addition, when the findings are evaluated in terms of the generations that manage the business, 44.4% of the participants indicate that they are in management of the first generation, 19.5% of the second generation and 20.6% of the first and second generation. moreover, it is natural that these enterprises are sme-level family businesses that are under the management of the founder. when the results are analyzed in terms of the generations that are active in the board of directors, 43.6% of the participants stated that the first generation, 17.2% of the second generation and 24.1% of the participants were active in the first and second generation of the board of directors. it is meaningful that the generation, which is actively on the board of directors, is the first generation in the family businesses, where the ownership is largely in the management of the founder. 5.2. structural equation model compared to the regression technique used in cases where the variables are continuous and measurable, more complex techniques are required to analyze a model consisting of other variables known as latent, dimension and structural variables. one of the most important techniques used to combine latent or structural variables is the structural equation model (randhawa and ahuja, 2017). structural equation modeling (sem) is a multivariate method that can be observed due to a particular theory and defines the relationship between latent variables and causality as a model (karagöz, 2017). sem has a wide range of applications as well as economics and social sciences. the relationship between organizational ambidexterity and family business performance 103 sem has the power to produce complementary effects, which are the final sum of linear and nonlinear effects, rather than the linear regression that shows only linear effects, as well as the linear and nonlinear effects between the interrelated variables (randhawa and ahuja, 2017). furthermore, sem provides a framework for a very general and useful statistical analysis that includes a large number of traditional and multivariate analysis methods, including quantitative, regression analysis, discriminant analysis, and canonical correlation analysis in particular cases. the structural equation model is usually visualized by a graphical path diagram. as a statistical model, it is usually represented by a set of matrix equations. the recently developed software enables researchers to present the model in the form of a direct road diagram. for a simple set of models it is convenient to use this way, but for more complex models the situation can be annoying. for this reason, the current sem software still supports the command or matrix style model specification (hox and bechger, 1998). the main reason why sem, which examines the relationship between the observed variables and latent variables, is being used very frequently in scientific studies is due to the fact that it has a technique that can analyze the relationship between the internal variables and the measurement error between the variables and internal-external variables (randhawa and ahuja, 2017). 5.3 findings and results as a result of the structural equation model established and used to examine the relationship between organizational ambidexterity and business performance, it was determined that there is a statistically significant correlation between organizational ambidexterity and business performance (β = 0.48, p <0.05). this means that a unit increase in the variable of organizational ambidexterity leads to an increase of 0.48 units in business performance. r2 of the relation between organizational ambidexterity and business performance is found to be 0.23, which indicates that 23% of the variance in organizational performance would be explained by organizational ambidexterity. aylin gözen & beliz ülgen 104 figure 2. structural equation model examining the relationship between organizational ambidexterity and business performance when the model is examined on the basis of latent variables; it is found that there is a strong and statistically significant relationship between the exploration r (β = 0.89, p <0.05) and exploitation dimensions (β = 0.95, p <0.05), which are the subscales of organizational ambidexterity. besides, as it is shown in the model 1, there is a strong positive, and statistically significant relationship between business performance and the market performance (β = 0.80, p <0,05), human resources performance (β = 0,84, p <0,05), innovation performance (β = 0,70, p <0), 05), production performance (β = 0.77, p <0,05) and financial performance (β = 0.70, p <0,05). on the other hand, when the consistency values of the model are analyzed, the values of x2 / sd (2,636 <3), cfi (0,906> 0.90), gfi (0,962> 0,90) and rmsea (0,060 <0,08) are obtained, it reveals that the scale is verified and that the observed variables represent the latent variables adequately. chart 1. structural equation model for the relationship between organizational ambidexterity and business performance β s.e. t p standardize β r 2 business performance <-- organizational ambidexterity 0,219 0,039 5,671 *** 0,475 0,226 financial <-- business performance 1,000 0,698 0,394 human resources <-- business performance 1,483 0,117 12,635 *** 0,835 0,697 production <-- business performance 1,058 0,102 10,393 *** 0,774 0,600 model 1: business performance=0,48*organizational ambidexterity+ε1 oa: organizational ambidexterity bp: business performance exploration exploitation marketing performance production performance hr performance financial performance innovation performance oa bp .80 .91 .89 .95 .48 .23 .70 .70 .84 .77 .80 -.14 .16 -.18 e1 e2 e3 e4 e5 e6 e7 e8 the relationship between organizational ambidexterity and family business performance 105 marketing <-- business performance 1,109 0,106 10,512 *** 0,800 0,639 innovation <-- business performance 1,537 0,108 14,248 *** 0,697 0,485 exploitation <-- business performance 1,006 0,071 14,202 *** 0,952 0,906 exploration <-- business performance 1,000 0,894 0,800 x 2 /sd=2,636; cfi=0,906; gfi=0,962; rmsea=0,06 ***it shows that the variables are statistically significant at the level of 0,001. 6. conclusion the purpose of this study is to analyze the relationship between organizational ambidexterity and business performance of family businesses by using structural equation model. accordingly it is derived from the analysis that there is positive and statistically significant correlation between organizational ambidexterity and business performance. from this point of view, when the organizational ambidexterity level of any business was increased, its business performance was also affected positively; however, in the case of a declining level of oa, business performance will be affected negatively. the most important contribution of this study to the existing literature is that it enables us to analyze the sub-dimensions of the variables with the help of the structural equation modeling which is used in the research model. in this respect, future studies can make additional contributions to the literature to by effectively focusing on the different business sectors (sectoral analysis) in order to get more specific results, or by concentrating separately on small, medium and large enterprises. this study also aims to contribute to the professional life of family business members. the findings of this study, in which the mediator role between organizational ambidexterity and family influence is analyzed, are parallel with the findings of many previous studies. accordingly, increasing the level of organizational ambidexterity taking into consideration the specific family dynamics of each family business affects the performance of the business positively. therefore, it is important to increase the organizational ambidexterity levels of the family businesses, to determine which ambidexterity type is more suitable for the family business and to restructure the family business accordingly. as it is seen in this model, the performance dimension that has the greatest impact on the business performance is human resources performance. hence, proper human resources practices and performance management as well as getting consultancy services from professionals particularly in the area of succession planning and family constitution are important for the family businesses which have achieved a certain scale and complexity. references adler, p. s., goldoftas, b. & levine, d. i. 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(2017). the relatıonshıp of organizational ambidexterity with whistleblowing act and employees’ intention to leave. unpublished doctoral thesis. yeditepe university/institute of social sciences. international journal of commerce and finance, vol. 5, issue 1, 2019, 102-120 102 the effects of team enablers and team cohesion on project team success murat özer istanbul commerce university, turkey prof. dr. a.tuğba karabulut istanbul commerce university, turkey abstract the purpose of this study is to explore effects of team enablers (team autonomy and organizational support) and team cohesion dimensions on project team success and the mediating effect of team cohesion dimensions in this relation. partial least squares structural equation model (pls-sem) was used in the study conducted on 110 project teams which had 343 team members in a multinational financial institution. reliability of the measures were calculated by cronbach alpha (α) coefficient and validity of the measures were calculated by exploratory and confirmatory factor analyses. as the unit of analysis is “project team”, the question items were aggregated to team level by calculating the arithmetic mean and inter-rater agreement values (rwg) were checked for reliability. the findings of the research revealed that organizational support was a significant antecedent of team task cohesion and team effectiveness. team task cohesion was found to have a partial mediating role in the relationship between organizational support and team effectiveness. in addition, although the significant positive effects of team autonomy on project team success dimensions were confirmed, none of the dimensions of team cohesion had a significant relationship with team autonomy. in accordance with the literature, positive effects of task cohesion on team effectiveness and team innovation were supported, however the effect of social cohesion on project team success was not significant. keywords: project team success, perceived team support, organizational support, team autonomy, team cohesion, task cohesion, social cohesion, team effectiveness, team innovation 1. introduction according to stewart (2006), the number of companies which adopt team-based structures has increased since the 1980s (jin and zhong, 2014, p. 517). companies invest substantial resources in teams. understanding organizational factors which are related to team effectiveness is important. thus, companies can lead their investments to maximize their performances (kennedy et.al., 2009, p. 73). 2. teams in organizational setting according to salas, dickinson, converse, & tannenbaum (1992), teams can be defined as complex entities which have two or more people who interact adaptively and socially, have common or shared goals, and hold reasonable task interdependencies; it is structured and has a limited life duration; in it roles and expertise are distributed; and it is embedded in an environmental/organizational context which affects and is affected by continous processes and performances (salas et.al, 2007, p. 189). companies can have four types of teams namely project teams, parallel teams, management teams and work teams (cohen & bailey, 1997, p. 241). project teams produce one-time unique outcomes, perform tasks which are cross-functional and non repetitive (cohen & bailey, 1997, p. 242). 3. team enabling factors 3.1. team autonomy according to langfred (2004), team autonomy is the extent to which team members have discretion and freedom to initiate and regulate team actions (chen et.al., 2018, p. 4). trist (1981) acknowledges that autonomous work groups can be linked into the socio-technical model of group effectiveness. the model finds a way to optimize technological and social systems in the group to achieve effectiveness and productivity and improve self-managing teams. trist and bamforth (1951) describe early forms of self-managing teams in a coal mine in uk. according to goodman et al. (1988) and wall et. al. (1986), some examples were derived their intellectual foundation from this study (man and lam, 2003, pp. 983-984). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the effects of team enablers and team cohesion on project team success 107 hackman (2002) states that team autonomy enables the ones closest to task to make critical decisions (haas, 2010, p. 990). langfred (2000, p. 568) suggests that group autonomy is considered as a signal of management's faith and endorsement of the group which increases the team identity. eisenhardt (1989) mentions that a lack of decision making autonomy can decrease long term product development speed, because not making decisions prevents the ability of team members to learn from experiences (koch, 2011, p. 990). gerwin and moffat (1997, p. 1275) indicate that withdrawing autonomy decreases team performance. carmen et.al. (2006, p. 196) comment that autonomy and informal communication are the informal team characteristics which affect innovation. haas (2010, p. 1004) found that autonomy and external knowledge are positively associated with performance, operational and strategic effectiveness in companies. 3.2. organizational support according to eisenberger et.al (1986, 1997), the concept of organizational support proposes that employees build up beliefs which concern the extent to which their values and care about their well-being. in line with the social exchange view, employees reciprocate perceived organizational support with effort, attachement to the organization, job satisfaction, low absenteeism, and positive work behaviors (gelbard and carmeli, 2009, p. 465) similar to perceived organizational support, which is proposed by eisenberger et.al. (1990), perceived team support is the extent to which teams perceive that an organization provides tools to perform. perceived team support is measured at the team level and a management system, resources, and training are included in this concept (pearce & herbik, 2004, p. 296). based on hall’s (1998) study, kennedy et al. (2009, p. 75) suggested seven categories in which teams need organizational support: integration, group design, information systems, management support, teamwork training, performance measurement, rewards and recognition. they revealed a positive relationship between organizational support and potency which is mediated by team processes (kennedy et.al., 2009, p. 72). bishop et. al. (2005, p. 153) suggested that perceived support from an entity positively effected commitment to that spesific entity. kim (2017, p. 1255) conveyed that the negative effects of attitudes toward diversity decreased in teams whose members had strong perceptions of organizational support. ehrhardt (2014, p. 443), suggested that team members’ perceptions of organizational support shaped project committment which is an important driver of team performance. cramm et. al. (2013, p. 119) revealed that perceived effectiveness, organizational support, and management support predicted innovative culture of quality improvement teams. 4. team cohesion festinger (1950) believed that cohesiveness was ‘‘the resultant of all the forces acting on the members to remain in the group’’ he suggested the three dimensions to form cohesion namely member attraction, group activities, and prestige. however, other researchers have emphasized one of these dimensions. for example, evans and jarvis (1980) believed that mutual member attraction to the collective was the most well known definition of cohesiveness. carron (1982) added that cohesiveness was a process to reflect tendency of a group to stick together and remain united to achieve a goal. goodman, ravlin, and schminke (1987) added that cohesiveness was the members’ commitment to the task of a group (kozlowski & ilgen, 2006, pp. 87-88). according to beal et.al. (2003) and kozlowski & ilgen (2006), group cohesion has two dimensions; namely task cohesion and social cohesion. task cohesion is a shared commitment of a group to the task and increases commitment to the task and members’ effort on the task. social cohesion is an attraction of group members, allowing them to coordinate their efforts and have less inhibited communication (picazo et.al., 2015, p. 297). picazo et.al. (2015, p. 297) suggests that task cohesion emerges stronger than social cohesion during the first stages of projects and task cohesion mediated the cross-lagged relationship between social cohesion and individual satisfaction with the team. hirunyawipada, paswan and blankson’s (2015, p. 855) study shows that team task cohesion mediates the relationship between organizational commitment and social competency and production of a successful idea. chiocchio and essiembre (2009, p. 382), in their meta-analysis, revealed that cohesion-performance effect in project teams demonstrated larger effect sizes than other teams. mullen and cooper (1994, pp. 2-3), highlighted that group cohesion might affect performance. carless and paola (2000, p. 71) suggested that task cohesion compared to social cohesion and individual attraction to the group was the strongest predictor of workgroup performance. beal et al. (2003, p. 989), in their meta-analysis, concluded that there was a stronger correlation between cohesion and performance when performance was defined as behavior, assessed with efficiency measures and as patterns of team workflow became more intensive. murat özer & prof. dr. a.tuğba karabulut 106 5. project success in the meta-analysis performed by liu (2012), the most commonly-studied technical performance measures of teams were found to be efficiency, innovation, and effectiveness (liu and cross, 2016, p. 1150). in this study, effectiveness and innovation are accepted as project success measures, as efficiency and effectiveness measures are considered similar. 5.1. team effectiveness according to lee (2008), effectiveness is the extent to which the project outputs achieved the performance expectations of stakeholders. the expectations differs for various projects and across various stakeholders; several measures are used to measure effectiveness in the literature (liu and cross, 2016, p. 1152). literature reviews highlighted that the most frequent effectiveness measure of project teams were external perceptions of team members, managers, customers and other external stakeholders (cohen and bailey, 1997, p. 260). 5.2 team innovation amabile et. al. (1996, pp. 1154) states that innovations start with good ideas. they (1996, p. 1155) believe that creativity is the production of new and useful ideas and innovation is the successful implementations of creative ideas in an organization. west and farr (1990) add that innovation is “the introduction and application, within a group, organization, or wider society, of processes, products, or procedures new to the relevant unit of adoption and intended to benefit the group, individual, or wider society” (west and anderson, 1996, p. 681). according to pirolamerlo & mann (2004) and west (2002), team innovation is the combination of the quality and quantity of ideas which are developed and implemented (jordan, 2014, p. 26). drucker (1985) and hirst et al. (2009) mention that team-level innovation is caused by challenges and problems that occur while striving toward goals and as an outcome resulting from teams developing and implementing original and useful solutions to these problems and challenges (schippers, west ve dawson, 2015, p. 771). west et.al. (2003, p. 407) showed that there was a strong relationship between leadership clarity and team processes and team processes were strongly related with team innovation. hülsheger, anderson and salgado (2009, p. 1128) performed a meta-analysis examining 30 years of literature and concluded that team process variables of vision, support for innovation, external communication, and task orientation showed the strongest relationships with creativity and innovation at team-level and with self-report measures. glynn et. al. (2010, p. 1082) disclosed that strong team identification and perception of high interteam interdependence had positive influences on intentions of innovation. 6. .relations among construct a number of researches which have studied the relations among the constructs included in the hypothesized model are demonstrated in table 1. the effects of team enablers and team cohesion on project team success 107 table 1. literature review on relations among constructs in the hypothesized model author/ year purpose of the study sample measures analysis tool findings team autonomyteam outcomes chen et.al. (2015) explore the effect of team autonomy on the team operational results and the effect of technological turbulence on this relationship 212 new product development teams 86 companies development speed (kessler and chakrabarti, 1999), development cost and product success cooper and kleinschmidt, 1987), team autonomy (langfred, 2004), technological turbulence (jaworski and kohli, 1993) hierarchical regression analysis the relationship between team autonomy and operational outcomes in technologically turbulent environments is inverse u-shaped and u-shaped in technologically stable environments. the operational results mediate the relationship between team autonomy and product success (p. 83) günsel et.al. (2012) investigate the relationships among software team flexibility (team autonomy, team diversity) and software project outputs (market success, speed to market, the functionality of the new software product) 86 software development projects team flexibility (lee and xia, 2007), market success (cooper and kleinschmidt, 1987), speed to market (kessler and chakrabarti, 1999), software functionality (lee and xia, 2007) pls-sem in plsgraph 3.0 the results showed that the team autonomy positively affected market success, speed to market, and software functionality (p. 853) haas (2010) discover the effects of autonomy and external knowledge on the effectiveness of knowledge-intensive self-managing teams 96 teams in fin. and tech. dept.of a international company team autonomy (hackman , 1987, 2000)-other scales were developed by the authors. ordinal logit analysis the significant positive effect of team autonomy and external information on team performance and the moderating effect of knowledge characteristics, task uncertainty and task pressure variables in this relationship were found. organizational support-team outcomes gelbard and carmeli (2009) examine the interactive effect of team dynamics and organizational support on ict project success. 191 ict project managers organizational support, team dynamics, ict project success (developed by authors) regression analysis team dynamics (communication, collaboration, knowledge sharing) were positively related to budgetary time performance and functionality performance of ict projects. also, organizational support was positively related to performance (p. 468) jin and zhong (2014) investigate the relationship between perceived organizational support and team innovative performance, with team knowledge integration behavior as a mediating variable 127 scientific research teams in universities in china team innovation performance (jin and sun, 2010), perceived organizational support (eisenberger et. al, 1990), knowledge integration (lin and wu, 2005) hierarchical multiple regression knowledge integration mediated the relationship between perceived organizational support and team innovative performance; climate for innovation and organizational context moderated the positive relationship between team knowledge integration behavior and team innovative performance (p. 517) kennedy et. al. (2009) focus on team members’ perceptions of organizational support as antecedents of team 39 work teams in six organizations potency (guzzo et al., 1993), team processes (stevens and campion, 1994), organizational multiple regression positive relationship was found between organizational support and potency that was mediated by team processes. a positive relationship between team processes and team performance was detected that was murat özer & prof. dr. a.tuğba karabulut 106 team cohesion-team outcomes liu and cross (2016) develop a model of project technical performance identifying the influencing variables (management support, cooperation, communication, goal clarity, cooperation, team harmony, knowledge/skill and cohesion) 133 project teams team cohesion (dobbins and zaccaro, 1986), team effectiveness (hoegl and gemuenden, 2001), team innovation (liu and cross, 2016) regression analysis in sas and sem the primary dimensions of project technical performance were found to be effectiveness, efficiency and innovation. cohesion was related to innovation, there were no shared significant predictors across outcomes (p.1150) picazo, gamero, zornoza and peiro (2015) investigate the effects of task and social cohesion on team satisfaction within a certain time interval in the project teams 74 teams in a mba class task and social cohesion (widmeyer, brawley and carron, 1985), team satisfaction (mason and griffin, 2002) sem task cohesion appears stronger than social cohesion during the first stages of projects. task cohesion mediated the cross-lagged relationship between social cohesion and individual satisfaction with the team (p. 297) bahli and büyükkurt (2005) identify, define and measure the determinants of group performance in isd projects. 35 teams of undergrad students in mis task and social cohesion (chang and bordia, 2001), team building (salas, 1999), group performance (hackman, 1990) partial least squares task cohesion positively effects group performance, however social cohesion does not have any effect on group performance (p. 109) organizational support-team cohesion ehrhardt et.al. (2014) investigate the antecedents and consequences of project commitment for members of crossfunctional teams in light of signaling theory 24 product development teams in 6 manufacturing company in us & canada team cohesion (seashore, 1954), perceived team support (peter et.al., 1985), project commitment (o'reilly and chatman, 1986) hierarchical regression analysis sem project commitment significantly effects team performance. many factors contribute to shape project commitment, including perceptions of members of an organization’s support for the project. (p. 443) kim (2014) explore the leader’s role in enhancing team members’ atitudes, adopt a relational model including the role of the leader’s social capital, perceived power, and team commitment in enhancing team-level perceived support, efficacy, and cohesion 84 leaders, 44 executives, and 469 team members organizational support (kennedy et.al., 2009), team cohesion (carless and paola, 2000). hierarchical regression analysis sem team climate for organizational support was found positively related to team cohesion (p. iii) processes and potency support (hall, 1998). analysis mediated by potency (pp.72-88) the effects of team enablers and team cohesion on project team success 107 mediating effect of team cohesion man and lam (2003) examine the mediating effect of cohesion on the relationship between job characteristics and performance and moderating effects of individualism/ collectivism on job characteristics-performance relationship 381 teams in us and hong kong branches of a bank job complexity and autonomy (hackman & oldham, 1974), group cohesiveness (widmeyer et.al., 1985),group performance (heilman, block, lucas, 1992), collectivism (erez and earley, 1987) regression analysis an increase in job complexity and/or task autonomy will increase group cohesiveness that subsequently increases performance. the positive effects of complexity and autonomy on group cohesiveness are more apparent in individualistic rather than collectivistic groups (p. 979) langfred (2000) explore the effects of autonomy at the individual and the group levels on group cohesiveness 67 teams in illinois children and family services the worker/supervisor/manager instrument of the organizational assessment inventory, (van de ven and ferry, 1980) multiple regression group and individual autonomy effected group effectiveness in the two organizations studied. the group cohesiveness/group performance orientation interaction was found to partially mediate this relationship. team autonomy in the child and family services positively affected the team cohesion, but in the military sample the effect was insignificant (pp. 580-582) hirunyawip ada, paswan and blankson (2015) investigate asymmetric effects of team cohesion and relational qualification of members on the creativity of new product ideas. 195 new product development practitioners in high-tech industries in us social and task cohesion (carless and de paola, 2000), product idea newness and usefulness to customers (im and workman, 2004), social competency (kauffel, 2006), organizational commitment (o'reilly ve chatman, 1986) sem the study shows that team task cohesion mediates the relationship between organizational commitment, social competency and the dimensions of a successful product idea. however, team members’interpersonal relationship does not have any relation with task cohesion and the product ideas (p. 855) the effects of team enablers and team cohesion on project team success 108 7. the purpose of the study the purpose of this study is to explore the effects of the team enablers (team autonomy and organizational support) and team cohesion dimensions (task and social cohesion) on project team success dimensions (team effectiveness and team innovation). the mediating roles of task and social cohesion in the relation between enabler variables and project team success were also investigated. the field study was performed within knowledge-intensive project teams of cross-functional nature for new product, process and technology development in a private multinational bank in turkey. 8. hypothesis development figure 1 shows our research model. team autonomy organizational support task cohesion social cohesion team effectiveness team innovation h1 h3 h9 h8 h6 h12 h2 h5 h10 h11 h7h4 figure 1. proposed research model table 2 shows the hypotheses of the study. table 2. hypotheses of the study h 1 : there is a positive relationship between team autonomy and task cohesion. h 2 : there is a positive relationship between team autonomy and social cohesion. h 3 : there is a positive relationship between team autonomy and team effectiveness h 4 :there is a positive relationship between team autonomy and team innovation h 5 : there is a positive relationship between perceived organizational support and task cohesion. h 6 : there is a positive relationship between perceived organizational support and social cohesion. h 7 : there is a positive relationship between perceived organizational support and team effectiveness h 8: there is a positive relationship between perceived organizational support and team innovation h 9 : there is a positive relationship between task cohesion and team effectiveness. h 10 : there is a positive relationship between task cohesion and team innovation. h 11 : there is a positive relationship between social cohesion and team effectiveness h 12 : there is a positive relationship between social cohesion and team innovation h 13 :task cohesion mediates the relationship between team autonomy and team effectiveness. h 14 :social cohesion mediates the relationship between team autonomy and team effectiveness. h 15 :task cohesion mediates the relationship between team autonomy and team innovation. h 16 :social cohesion mediates the relationship between team autonomy and team innovation. the effects of team enablers and team cohesion on project team success 109 h 17 :task cohesion mediates the relationship between organizational support and team effectiveness. h 18 :social cohesion mediates the relationship between organizational support and team effectiveness h 19 :task cohesion mediates the relationship between organizational support and team innovation. h 20 :social cohesion mediates the relationship between organizational support and team innovation. 9. measures and sampling the sample of the study consists project teams that have completed projects in a multinational bank located in istanbul. during the data sampling process, first the list of projects completed in 2016-2017 and the team members being involved in each project were obtained from project management office. the initial sample consisted of 566 employees within 180 project teams. an e-mail was sent to each project team, explaining the scope and aim of the study. the participants were informed that all responses would be anonymous and there were no right or wrong answers. the questionnaire items were also included. data were collected through several waves of mail surveys between january 30, 2017january 30, 2018. at least two respondents from each project were asked to complete the survey to avoid single-source bias. a total of 343 usable questionnaires from 110 project teams were collected. multi item scales from previous studies for the measurement of variables were adopted to test the hypotheses. 5-point likert scales ranging from 1: strongly disagree, 2: disagree, 3: undecided, 4: agree, 5: strongly agree was used. the appendix includes the measures used. the measures are briefly explained below; for team autonomy, four question items from akgün, keskin, lynn and dogan (2012) were asked and they were adapted from sethi (2000). seven question items drawn from cramm, strating, bal and nieboer (2013), were used to assess organizational support (original measure from strating et al., 2008). for measuring the two dimensions of team cohesion (social and task), eight question items were taken from hirunyawipada, paswan and blankson (2015). its original scale was developed by carless and de paola (2000). finally, for project team success, the model includes two dimensions, effectiveness and innovation. there are totally twelve question items drawn from liu and cross (2016), of which eight question items measure effectiveness dimension and four items measure innovation dimension. though, in this study, efficiency was also measured as an indicator of project team success, considering the similar characteristics of effectiveness and efficiency scales, the efficiency scale of the primary measures of project team success was eliminated. the effectiveness scale was developed by hoegl and gemuenden (2001) whereas the innovation scale was developed by liu and cross (2016). 10. analysis and results 10.1. measure validity and reliability as the questionnaires were translated to turkish for the first time, exploratory factor analysis was performed first. the principle component analysis was chosen in the spss 22 program. varimax rotation with kaiser normalization was applied, choosing eigenvalue 1 as cut-off point. factor loadings lower than 0,5 were eliminated (akgün and lynn, 2002, p. 271). at the end, all factor loadings are formed between 0,515 and 0.848, which is over 0.5 and the kmo measure of sampling adequacy is 0,911> 0,70 and the bartlett test of sphericity is p <0.000 (χ2 (378) = 5730,857), which is statistically significant, indicating that the data set is appropriate for the next step of the analysis. the factor loadings are demonstrated in table 3. confirmatory factor analysis was used to test for convergent validity. using the amos 22 program, confirmatory factor model was established for the 28 items remaining after exploaratory factor analysis. after problematic questions were removed from the scale in the first run, confirmatory factor analysis was repeated. model fit indices were checked. absolute fit indices indicates the extent of fit of the proposed theory to the data (mcdonald and ho, 2002). according to jöreskog and sörbom (1993), the calculation doesn’t rely on comparison with a base model. chi-square test, gfi, agfi, rmsea, rmr and srmr are among common absolute fit indices. according to hu and bentler (1999), chi-square value is a long-established measure to evaluate model fit and evaluates the size of variance between the sample and fitted covariance matrices. there are limitations for using chi murat özer & prof. dr. a.tuğba karabulut 110 square value, eg. assumption of normality (mcintosh, 2006), sensitivity to sample size (bentler and bonnet, 1980; jöreskog and sörbom, 1993). due to the limitations of chi-square test, different indices were hunted for model fit. wheaton et al’s (1977) relative/normed chi-square (χ2/df) is an example of a statistic that reduces the effects of sample size. there is no agreed range for (χ2/df) ratios, wheaton et. al. (1977) recommend a maximum ratio up to 5.0, whereas tabachnick and fidell (2007) recommend a ratio as low as 2.0. regarding rmsea, recent studies indicate that a cut-off value close to 0.06 (hu and bentler, 1999) or a strict upper limit of 0.07 (steiger, 2007) are the agreed values by authorities in this field (hooper, coughlan and mullen, 2008, pp. 53-54). in addition, though sensitive to sample size, gfi and agfi are also reported in covariance structure analyses given their historical importance. marsh & grayson (1995) and schumacker & lomax (1996) mention that gfi values above 0.9 can be interpreted as an acceptable fit, whereas for agfi, values above 0.9 indicate a good fit and values above 0.85 may be considered as an acceptable fit. according to anderson and gerbing (1984), both indices decrease as the research model gets more complex especially for small sample sizes (schermelleh-engel et. al, 2003, pp. 40-43). srmr values close to zero indicate a good fit (hu and bentler, 1998), less than 0,05 suggest a good fit (hu and bentler, 1995), whereas srmr values below 0,1 indicate an acceptable fit (schermelleh-engel et. al, 2003, p. 38). incremental fit indices don’t use the chi-square in its raw form instead they compare the chi-square value to a baseline model. according to mcdonald and ho (2002), the null hypothesis proposes that there is no correlation among the variables in these models. usually, the incremental indices nfi and nnfi (tli), cfi are reported in the literature. nfi ranges between 0 and 1 and bentler and bonnet (1980) recommend values above 0.90 for a good fit. hu and bentler (1999) state that the cut-off point should be 0.95 for nfi. for nnfi, a cut-off point as low as 0.80 has been proposed as acceptable in the previous literature, but hu and bentler (1999) have proposed nnfi ≥ 0.95 as the threshold. again for cfi, according to hu and bentler (1999), a threshold of 0.90 is accepted initially for eliminating the possibility of accepting misspecified models, in the current studies a value above 0.95 indicates a good fit (hooper, coughlan and mullen, 2008, p. 55). the fit indices for the final confirmatory factor model proves that the model has acceptable fit values ( χ2/df = 2,213, gfi = 0.88, agfi = 0.85, rmsea = 0.060, rmr = 0.035, srmr= 0.053, nfi= 0.89, nnfi (tli) = 0.93, cfi = 0.94). table 4 shows the standard factor loads to the variables as a result of confirmatory factor analysis. as stated by chin (1988), the standard factor loads were checked and found to be over the value of 0.6 and as indicated by fornell and larcker (1981) the calculated ave values were over 0.5 (akgün, keskin and byrne, 2010, p. 1103) (table 5) in this context, it can be concluded that the convergence validity of the measurement model is reached. at the next step, the discriminant validity of the measurement model was tested. among the variables, low to moderate correlations show evidence of discriminant validity (akgün et.al., 2006, p. 103). according to fornell and larcker (1981), in order to confirm discriminant validity, the square root of the the mean variance (ave) of a variable must exceed the latent correlation coefficients between that specific variable and the other variables in the model. as indicated in table 5, in this study, correlations between any of the variables is lower than the square root of the mean variance (ave) of the variables, providing evidence of discriminant validity (akgün, et.al. 2016, pp. 112113) (see table 5). after performing the scale validity tests, reliability analysis was conducted to test whether the questionnaire items were interrelated, consistent, understandable and sufficient in terms of quantity and quality that could reveal the accuracy of the research conducted. the cronbach alpha value (α) is between 0 and 1, whereas values closer to 1 mean that the scale is more reliable. as shown in table 5, cronbach’s alpha for each construct is equal or greater than 0.7, which shows good reliability as suggested by nunnally’s (1978) study (liu and cross, 2016, p. 1158). table 3. exploratory factor analysis results the effects of team enablers and team cohesion on project team success 111 variable item autonomy organizational support task cohesion social cohesion effectiveness innovation autonomy o1 0.80 o2 0.79 o3 0.78 o4 0.67 organizational support d1 0.78 d2 0.79 d3 0.78 d4 0.58 d5 0.59 d7 0.52 task cohesion gd2 0.74 gd3 0.79 gd4 0.75 social cohesion sd1 0.65 sd2 0.82 sd3 0.76 sd4 0.78 effectiveness e1 0.73 e2 0.78 e3 0.80 e4 0.75 e5 0.73 e6 0.79 e7 0.70 innovation i1 0.71 i2 0.80 i3 0.82 i4 0.85 10.2. aggregation of the measures at team level since the unit of analysis is "project team" and each team is comprising at least two team members, the individual responses were aggregated at the team level by calculating arithmetic means before testing the hypotheses. in this context, the inter-rater agreement (rwg) values of the team-level measures were calculated; the calculated rwg values ranged between 0,88 and 0,97. since these values are above the threshold value of 0.60 (hurley and hult, 1998), a satisfactory inter-rater agreement level is provided for each measurement clustered in the project teams. the calculated inter-rater agreement values are given in table 5 together with the cronbach's α and the average variance values (akgün, keskin and byrne, 2010, p. 1103). table 4. confirmatory factor analysis results item variable unstandardized regression weights standardized regression weights standard error t-value (critical ratio) pvalue o1 autonomy 1,00 0,83 murat özer & prof. dr. a.tuğba karabulut 112 o2 0,97 0,88 0,05 18,54 0,00 o3 0,77 0,68 0,06 13,39 0,00 o4 0,83 0,77 0,05 15,72 0,00 d3 organizational support 1,08 0,68 0,09 11,46 0,00 d4 1,28 0,88 0,09 14,26 0,00 d5 1,25 0,83 0,09 13,63 0,00 d7 1,00 0,69 0,00 gd2 task cohesion 1,00 0,82 0,00 gd3 0,95 0,78 0,07 14,44 0,00 gd4 0,85 0,73 0,06 13,52 0,00 sd2 social cohesion 1,00 0,71 0,00 sd3 1,06 0,76 0,10 10,48 0,00 sd4 1,04 0,72 0,10 10,39 0,00 e1 effectiveness 1,00 0,79 0,00 e2 1,01 0,84 0,06 17,42 0,00 e3 1,06 0,87 0,06 18,21 0,00 e4 0,95 0,77 0,06 15,63 0,00 e5 1,05 0,82 0,06 16,93 0,00 e6 0,95 0,79 0,06 16,18 0,00 e7 1,05 0,71 0,08 14,08 0,00 i1 innovation 1,00 0,74 0,00 i2 1,15 0,77 0,09 13,44 0,00 i3 1,22 0,77 0,09 13,40 0,00 i4 1,20 0,82 0,08 14,29 0,00 table 5. descriptive statistics, correlation coefficients and reliability results avg. std. dev 1 2 3 4 5 6 1 autonomy 3,87 0,67 (0,79) 2. organizational support 3,92 0,64 0,65 (0,77) 3. task cohesion 3,90 0,74 0,47 0,63 (0,78) 4. social cohesion 3,19 0,79 0,05 0,13 0,36 (0,73) 5. effectiveness 3,94 0,63 0,60 0,71 0,63 0,19 (0,80) 6. innovation 3,63 0,73 0,38 0,38 0,31 0,17 0,49 (0,78) ave 0,63 0,60 0,61 0,53 0,64 0,60 cronbach's α 0,87 0,85 0,82 0,77 0,92 0,86 rwg 0,93 0,94 0,88 0,93 0,97 0,92 note: values in parentheses show the square root of the ave value. 10.3 hypothesis testing the effects of team enablers and team cohesion on project team success 113 to test our hypotheses, smart-pls 3.0 (ringle, wende and becker, 2015) with the boot-strapping resampling method was used. according to fornell and bookstein (1982) and hair et. al (2006), pls does not require the restrictive assumptions that maximum likelihood techniques have, prevents factor indeterminacy and inappropriate solutions. parametric distribution is not required and sample size does not have any effect on the solution, this makes small and large samples easier to use than structural equation modeling (akgün et.al., 2014, pp. 41-42). since the sample size is small (110 project teams) for covariance based sem technique in amos and the sample does not show a normal distribution, pls-sem was implemented. smart-pls 3.0 with bootstrapping re-sampling methods were used for hypothesis testing. within smart-pls 3.0, 5000 sub-samples were drawn from the original data by randomly selecting sub-samples, with replacements. path coefficients were calculated for each sub-sample and t-statistics were calculated for all coefficients checking the stability across the sub-samples to detect the statistically significant relations. the path coefficients and t-statistics demonstrated which relationships are significant (akgün, keskin and byrne, 2010, p. 1104). the research findings revealed that team autonomy has a positive effect on team effectiveness. hypothesis 3 was found statistically significant at %95 confidence level, but the relationship between team autonomy and team innovation as predicted in hypothesis 4 was found to be significant at %90 confidence level. also, organizational support was positively related with team task cohesion and team effectiveness. hypothesis 5 and hypothesis 7 were supported with a high level of statistical significance at %99 confidence level. again, hypothesis 9 was supported indicating that team task cohesion had a significant positive effect on team effectiveness with a high level of statistical significance at %99 confidence level. on the other hand, the relationship between team task cohesion and team innovation as proposed in hypothesis 10 was found to be significant at %90 confidence level. other relations predicted in the research model were not statistically significant. table 6 shows hypothesized relationships, including beta coefficients and significance levels. table 6. hypothesis testing results hypothesis relation β t-statistic p-value result h1 ogd 0.103 0,982 0,326 not supported h2 osd -0.088 0,381 0,703 not supported h3 oe 0.203** 2,113 0,035 supported h4 oi 0.208* 1,915 0,055 supported h5 odgd 0.566*** 5,652 0,000 supported h6 odsd 0.179 0,795 0,427 not supported h7 ode 0.430*** 4,848 0,000 supported h8 odi 0.193 1,367 0,172 not supported h9 gde 0.293*** 4,304 0,000 supported h10 gdi 0.170* 1,734 0,083 supported h11 sde 0.035 0,401 0,689 not supported h12 sdi 0.112 1,136 0,256 not supported note: o = team autonomy, gd = task cohesion, sd = social cohesion, od = organizational support, e = team effectiveness, i = team innovation *p < .10, ** p < .05, *** p < .01 murat özer & prof. dr. a.tuğba karabulut 114 10.4. mediation analysis also, the mediating effect (see figure 2) of team cohesion dimensions on the relationship between the antecedent variables (team autonomy and organizational support) and the outcome variables (team effectiveness and team innovation) were investigated. figure 2simple mediator model (source: https://www.smartpls.com/documentation/algorithms-andtechniques/mediation) the below algorithm proposed by zhao, lynch jr. and chen (2010, p. 201) was implemented to decide on the presence and type of mediation. figure 3mediation algorithm by zhao, lynch jr. and chen (2010) and hair et. al. (2017) (source:https://www.smartpls.com/documentation/algorithms-and-techniques/mediation) as proposed by zhao, lynch jr. and chen (2010), in the analysis of the mediation effect of the team cohesion dimensions, first, the significance level of the indirect effects of the independent variables and the outcome variables were evaluated through the smartpls3 program. the results of the analysis of hypothesized indirect relationships are shown in table 7, including beta coefficient values (β) and significance levels. table 7. mediating effect analysis results the effects of team enablers and team cohesion on project team success 115 hypothesis relation β t-statistic p-value result h13 ogde 0,031 0,934 0,351 not supported h14 osde -0,006 0,137 0,891 not supported h15 ogdi 0,018 0,777 0,437 not supported h16 osdi -0,011 0,318 0,750 not supported h17 odgde 0,165 3,590 0,000 supported h18 odsde 0,008 0,248 0,804 not supported h19 odgdi 0,097 1,576 0,115 not supported h20 od-->sdi 0,022 0,607 0,544 not supported note: o = team autonomy, gd = task cohesion, sd = social cohesion, od = organizational support, e = team effectiveness, i = team innovation the results of the analysis showed that organizational support had a statistically significant indirect effect on team effectiveness through team task cohesion (p1.p2 is significant). as the direct relationship between organizational support and team effectiveness was also found to be statistically significant (p3 is significant) and the sign of p1.p2.p3 was positive, it was concluded that task cohesion had complementary partial mediation role in the relationship between organizational support and team effectiveness (zhao, lynch jr. and chen, 2010; hair et. al., 2017). therefore, only hypothesis 17 was supported for partial mediation. 10.5. model fit since there is not any generally accepted goodness-of-fit measure for pls-sem models, the pls structural model was validated by the coefficient of determination r² and stone-geisser coefficient of predictive relevance coefficient (q2). the r² of the endogenous variables was calculated to assess the model fit (see table 8). according to hair et al. (2011, p.145), r² values of 0.75, 0.50 or 0.25 for endogenous latent variables are defined as substantial, moderate and weak respectively. according to stone (1974) and geisser (1974), in addition to the coefficient of determination r2, the predictive sample reuse technique (q2) can be used as a criteria for measuring predictive relevance. q2 evaluates the predictive validity of a structural model using pls based on blindfolding procedure,. q² values greater than zero for endogenous variables indicate predictive relevance (hair, 2011, p. 147; aydın, 2016, p. 100) (see table 8). table 8. explanatory power of the structural model (r²) variables r² r² adjusted effectiveness 0,728 0,718 task cohesion 0,502 0,493 innovation 0,310 0,284 social cohesion 0,013 -0,005 regarding the explanatory power of the structural model, it was observed that the antecedent variables could explain 50.2% (r² = 0.502) of the variance of task cohesion. however, the proposed model could not explain the variance of the social cohesion (r² = 0.013). it was also found that the variance of team effectiveness could be explained by 72.8% (r² = 0.728) and the variance of team innovation could be explained by 31% (r² = 0.31). murat özer & prof. dr. a.tuğba karabulut 116 table 9. predictive relevance of the structural model (q²) variables sso sse q² (=1-sse/sso) organizational support 440,000 440,000 effectiveness 770,000 391,867 0,491 task cohesion 330,000 228,203 0,308 innovation 440,000 367,875 0,164 autonomy 440,000 440,000 social cohesion 330,000 336,999 -0,021 in the proposed structural model, the stone-geisser's q² value for effectiveness, task cohesion and innovation variables are greater than zero. in this context, the model has predictive relevance for these variables. 11. discussion and implementation this study shows the asymmetric effects of team cohesion dimensions on project team outcomes in line with the previous literature (bahli and büyükkurt, 2005; mullen and copper, 1994; carless and paola, 2000; hirunyawipada, paswan and blankson, 2015). task cohesion had a significant impact on team effectiveness, whereas the effect of social cohesion was insignificant. the results demonstrated that teams focusing on a shared set of goals and committed to perform project tasks in harmony with the other team members, had the tendency to perform better than teams that only socialised. in addition, though to a limited degree, task cohesion also effected innovation, but social cohesion did not. this finding supports the previous suggestions of many authors (i.e. hirunyawipada, paswan and blankson, 2015). second, this study highlighted the importance of organizational support in success or failure of the projects (gelbard and carmeli, 2009; ehrhardt, 2014). organizational support was found to be the variable having the greatest effect on team task cohesion and team effectiveness. this finding is in line with ehrhardt’s (2014) study that investigated similar variables in light of signaling theory and found the significant effects of perceived project support on project committment and project committment on project success successively. there were no significant effects of organizational support on team social cohesion and team innovation as a result of our study. the other team supporting factor, autonomy was revealed to have positive effects on project team success for both dimensions of effectiveness and innovation. the findings are consistent with the study of kirkman & rosen (1999, p. 70) who concluded that teams should be highly effective to be autonomous. in addition, the results also support the studies of carmen et.al. (2006) and amabile et.al. (1996) who declare that team autonomy has a direct effect on innovation performance. though, the effect of autonomy on project team success was confirmed in line with the previous research, opposite to our expectations and the prevalent literature, no significant effects of team autonomy on team cohesion dimensions were found. langfred (2000) found that team autonomy positively effected team cohesion for a social service agency, but no relation was found between these variables in a sample from danish military. these findings refer that the relation between autonomy and cohesiveness can vary according to the culture of the organization, task design, task interdependence, functioning of the entity. financial institutions are functional and hierarchical organizations and this study was conducted in a financial institution. the sample project teams examined mainly had cross-functional nature, where the team members were strongly binded to main departments. this might have prevented teams to earn cohesiveness, though they were granted autonomy. lastly, this study empirically demonstrated that team task cohesion partially mediated the relation between organizational support and team effectiveness. the results showed that task cohesion was the only variable which had a mediating effect in the model. the previous research supported the mediator role of cohesion between similar variables, etc. team member trust to senior management/coach and performance (mach et.al., 2010), intra-team environment and effectiveness (daspit et.al, 2013), team trust and effectiveness (deortentiis et.al., 2013). the effects of team enablers and team cohesion on project team success 117 12. limitations and future research there are many limitations in this study. the sample size and scope are limited, only a sample of 110 project teams could be collected from one financial institution, so the readers should be attentive to generalize the results to different contexts. a limited number of variables are included in the research model. factors affecting project team success are numerous. also, this study, as a cross-sectional study, is limited to identify and confirm causal relationships. the future researches should include longitudinal data to test causal relationships. finally, as mentioned by hair et al. (2006), the analysis technique pls-sem is mainly based on prediction and does not come up with a test of theoretical fit (akgün et. al., 2014, p. 44). 13. conclusion as successsful implementation of innovative projects is a requirement for growth and sustainability of businesses in knowledge intensive industries, companies need to enhance projects and project teams to achieve better outcomes. previous research has demonstrated several factors that can foster project outcomes. in this study, we investigated the role of enabler variables, organizational support and team autonomy on team cohesion and the impact of team cohesion dimensions on project outcomes. our results confirmed that autonomy and the task cohesion dimension of cohesiveness have significant effects on innovation and effectiveness. also, organizational support has a positive effect on team task cohesion and team effectiveness. in addition, our results demonstrated that task cohesion has a partial mediating effect in the relationship between organizational support and team effectiveness. references adler, akgün, a. e., & lynn, g. s. 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(2010). reconsidering baron and kenny: myths and truths about mediation analysis. journal of consumer research inc., 37(2), 197–206.nces international journal of commerce and finance, vol. 6, issue 1, 2020, 61-69 61 factors affecting employees work ethical in organizations: the case of addis ababa city road authority tomas tadesse jimma university, ethiopia chalchissa amentie kero jimma university, ethiopia abstract the main objective of the study was to assess factors affecting employee’s work ethics. to achieve objective of the study, 346 respondents were selected by simple random sampling method, and data were gathered through questionnaire. the major findings of the study show that leadership, organization structure, control, recruitment selection and training were factors affecting employee work ethics. also the study found there was a statistically significant and positive relationship between the leadership, organization structure and control and recruitment selection and training and employee work ethics. therefore, the study recommends organization administrator be supposed to involve employees in key decision making and create a relationship where employees can be open and free, management should support the employees and work together with employees in ensuring the procedures, code of conduct and processes are well understood and followed. lastly recruitment should be done in a fair way and that the human resources department should ensure that proper vetting is done in order to hire staff with good ethical morals right from the beginning keywords: leadership, organization structure, control, recruitment and training and employee work ethics. 1. background of the study ethics is the code of moral principles that guide the behaviors of a person, group, or organization, and that constitute the boundaries of truth or wrong, good or evil (çalışlar, 1983). according to drucker (1954) described ethical behavior as a reflection process and a communal exercise that concerns the moral behavior of individuals based on an established and expressed standard of individual values. the ethical purpose is based on aristotelian thought and it is "to aim good life". the moral rule is "based on kant's conservatism and it is an obligation to obey the rule." for this reason, a person must first have ethics in order to have morals; the ethical purpose must go through the sieve of the rule. ethical the orientation of a leader is the key factor in promoting ethical behavior; ethical leaders must take personal, ethical responsibilities for their actions and decision making. leaders who show high ethical standards become role models for others and raise the organizations overall level of ethical behavior (dess, 2010). ethics has been a matter of public concern since the industrial revolution. much of the current concern of ethics has been encouraged by a resurfacing of public criticism if organizations are perceived to have amassed a vast personal fortune at the expense of the public or being ruthless and corrupt in their dealings with anyone. ethical dilemmas arise in business more frequently than it is convenient to recognize. indeed what is right or wrong is sometimes very unclear in organizations and varies from place to place and change with time (rollinson, 2002). unethical behavior is periodic and individualistic in nature, evil is systemic and embedded in the culture of the organization. programs, policies, practices, reward systems, hiring and training, external and internal relations all are designed with the intention to seek immediate advantage through the deliberate harm of others. the climate in some organizations does not encourage people to think through the ethical consequences of organizational decisions. an organizational culture that de-emphasizes business ethics and considers all decisions to be purely economic ones, another cause of unethical behavior maybe pressure from top management to meet performance goals that are not realistic and can only be attained by cutting corners or acting in an unethical manner. an organizations culture can in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e tomas tadesse & chalchissa amentie “legitimize” behavior that society would judge as unethical, particularly when this is mixed with a focus upon unrealistic performance goals such as maximizing short-term economic performance regardless of the cost (jones and hill, 2013). according to rollinson (2002) there are various factors that influence workers behavior, some of which are not conducive to the individual behavior in a way that is ethical in a particularorganizational context. since the list of issues about the ethical standards is continually growing, a convenient way to consider matters is to examine two relationships: the internal relationship between the organization and its employees and the relationship between an organization and its external stakeholders. for this study the researcher focused on the internal relationship between the organization and its employees that is the way an organization deals with employees and the way that employees deal with the organization. ethical and unethical behaviors are behaviors that occur within organizations by employees on a daily basis. ethical behavior is the behavior companies seek to drive performance and success. organization is highly concerned about unethical behavior for a number of reasons; decreases in organizational performance, financial losses, reputational damage, safety concerns, and a loss of customers are all concerns that are connected with unethical behavior, unethical behaviors lead to damaging consequences for others through ignoring rules, standards, regulations, and company guidelines (kaptein, 2011). 2. statement of the problem the ethical dimension of public administration has engaged the attention of governments, scholars, donor agencies and public servants. according to the economic commission for africa (1996), there has been an increase of interest in improving ethics in the public service throughout the world in the last two decades. definitely, ethics in the public service has become a major concern in public administration and management in recent decades, with some intensification in the 1980s and 1990s (kernaghan, 1993; oecd, 1996 as cited in larbi, 2001). the preliminary survey taken by the researcher at addis ababa city road authority showed that managers and salaried employees have adequate technical qualifications, they lack the will and commitment to deal with uncertainties and conflicting interests constructively and to enable them to shape change processes. there also exist widespread perception that unethical practices are uncontrolled in the civil service including acceptance of gifts or favors; engaging in outside employment or activities that conflict with one’s official duties; disclosure of confidential information; not having a good attitude and care with regard to one’s work; using organization’s work time for conducting personal business; unauthorized use of organizational resources for personal gain; getting to work late and going out early; wanting less work, more fun, and quicker promotion; taking no initiative when one sees problems in the workplace; cheating with regard to leaves, absenteeism and others; stealing; and the like. there is a widespread conviction among the public that work ethic is declining in the country in general, and in the civil service in particular. ethics was identified by the ethiopian government as one of the areas requiring attention and was made an integral part of the ongoing civil service reform program since 1996. despite the reform efforts that have been going on for many years, no rigorous academic and empirical research has been conducted to understand the nature and depth of the problems. moreover, the theoretical discourses in the general literature and the national efforts made by the government and its development partners also emphasize on the structural and procedural issues of ethics, giving little focus to the behavioral components or dimensions of ethics of civil servants, there for realizing this, this study intended to fill the gap by considering the variables like organization structure and control, leadership, socio-cultural and recruitment selection and training effect on employee work ethics. this study aimed at finding out which factors are affecting employee’s work ethics in the organization in the case of addis ababa city road authority. 4. research questions 1. what is the effect of organizations structure and control on employee’s work ethics? 2. does leadership affect employee’s work ethics in organizations? 3. how does recruitment selection and training effect on employee’s work ethics? 5. objectives of the study factors affecting employees work ethical in organizations: the case of addis ababa city road authority 63 5.1. general objective of the study the main objective of the study was to assess factors affecting employee’s work ethics in organizations the case of addis ababa city road authority. 5.2. specific objective of the study  to examine the extent to which organizations structure and control affect employee’s work ethics in organizations.  to investigate how leadership factors affect employees work ethics in organizations.  to examine the extent to which recruitment selection and training affect employee’s work ethics in organizations. 6. research methodology the cross-sectional design with field work was used in the study. in this study, the descriptive and explanatory research design was used to fulfill the objectives of the research, descriptive method was used to investigate the major factors that affect employee’s work ethics in organizations the case of addis ababa city road authority while explanatory method was used to examine the relationship between independent variables and dependent variable and to determine effects of each factors on employee work ethics. the target population of the research paper was all permanent employee of the addis ababa city road authority their total number is 2612. to decide on sample respondents from the total study population, probability sampling specifically simple random sampling technique were used since it avoids biases and helps to generalize data gained from sample respondents and avoiding an error that could arise from sampling. according to kothari (2004) sample size should be optimum in which it fulfills the requirement of efficiency, representativeness, reliability, and flexibility. the number depends on the accuracy needed, the population size, population heterogeneity and resources available. so, the sample size should be determined by using a statistical formula. of course, different authors use different formulas to determine the sample size of the study. for this study, the formula set by (yamane, 1967)was used to determine the sample size, which is reliable when the population size is known and sample size of the study were 346 respondents.the study used primary and secondary source of data, primary data was collected by using questionnaires, the questionnaires were prepared thematically on the basis of the research objectives and secondary sources of data were books, magazines and the internet that involves; looking into already done materials, document analyses from various published and unpublished documents. validity refers to the extent to which an instrument measures what is supposed to measure, data need not only to be reliable but also true and accurate. if a measurement is valid, it is also reliable (mugenda and mugenda, 2003). in the study, the validity of instruments was pre-tested by potential experts and consultant. the reliability of the instrument was measured by usingcronbach’s alpha test. the internal consistency reliability results in the study were 0.912 that is classified under excellent categories. analysis of data was done in order to answer research questions of the study. data collected was sorted, classified and coded then tabulated for ease of analysis. the data was summarized and categorized according to common themes to analyze the data, different kinds of statistical methods including descriptive statistics and inferential statistics was used. furthermore, descriptive are applied for percentage standard devotion, and mean value was computed using spss (20). tomas tadesse & chalchissa amentie 7. results and discussions based on the sample size, questionnaires were prepared and distributed to the participants and from these, only 10 respondents did not return back the questionnaire, due to this reason 336 (97.1%) of the distributed questioners are collected. according to mugenda and mugenda(2003) a response rate of 70% and over is excellent; therefore, this response rate is adequate for analysis and reporting. the result of background of respondents indicated that majority of the respondents are male with total of 65.5% while the remaining 34.5% were female. with regarding to marital status of the respondent majority of respondent 76.8 % were married, with mention to age most of them are in the age range of 18-30 at 41% and education back ground majority of the employee sample group were first degree holders which represents 84.1% from the total employee participant, in addition majority of respondents have a working experience from 6-10 years which represent 44.5% from employee participant of research. descriptive statistics the analysis is based on the assumption zaidatol (2009) comparison bases of mean score for five point likert scale instruments to compare the mean value. according to zaidatol (2009), the mean score below 3.39 is considered as low; the mean score from 3.40 up to 3.79 is considered as moderate and the mean score above 3.8 is considered as high. table 1: effect of leadership on employees work ethical no effect of leadership on employees work ethical no mean stand. devotion 1. employees are oriented properly on ethical issues and how to handle ethical problems. 336 2.81 0.956 2. leaders motivate employees to work in an ethical behavior in achieving the set goals and objectives. 336 2.61 1.154 3. leaders involve employees in key decision making. 336 2.01 1.341 4. employees communicate their grievances to top manager without fear. 336 2.84 1.189 5. . leaders encourage employees to develop their skills in an ethical manner. 336 2.94 1.042 source: data obtained from respondents through questionnaire, 2019 according to the findings in table 1 employee are oriented properly on ethical issues and how to handle ethical problems, employees communicate their grievances to top manager without fear and leaders encourage employees to develop their skills in an ethical manner at grand mean score of 2.81, 2.61, 2.01, 2.84 and 2.94respectively. the findings in regards to the impact of leadership on ethical behavior showed that management did indeed play a crucial part in ensuring ethics behavior is practiced in the organization and that the relationship between managers and subordinates should be a positive one and encourage ethical behavior. it implies that ethical leadership and leader effectiveness negatively influences both work related stress and turnover intention, this indicates that a type of leadership which is both ethical and effective at the same time helps reduce both stress and turnover. these findings factors affecting employees work ethical in organizations: the case of addis ababa city road authority 65 and implications are mostly in line with van knippenberg et al, (2007) leader behavior has an important effect on employee behavior, such as job satisfaction and organizational commitment. table 2: effects of organizations structure and control on employees work ethical no effects of organization structure and control on employees work ethical no mean stand. devotion 1. organizations structure and control encourage employees work ethical. 336 2.745 1.213 2. the control of the organization promotes ethical behavior in the organization. 336 2.61 1.168 3. the organization has benefited from the measures put in place to ensure ethical behavior 336 2.541 1.378 4. the organization ensures auditing is done in accordance with the laid procedures and processes. 336 2.781 1.179 source: data obtained from respondents, 2019 as per table 2, organization structure and control encourage employees work ethical, the control of the organization promotes ethical behavior in the organization, the organization has benefited from the measures put in place to ensure ethical behavior and the organization ensures auditing is done in accordance with the laid procedures and processes at the grand mean score of2.745, 2.61, 2.541 and 2.781respectively. the finding implies that organizations structure and control affect employee work ethics. finding is consistent with finding ofrees and porter (2001), organizations structure and control facilitates clear communication and coordination of activities within the employees and customers, this intern leads to and ethical environment within the organization. effective controls are a guideline to any strategy the organization wants to realize. good controls ensure that laid out plans are followed and avoid deviating from what was intended to be realized. strategic controls do promote ethical behavior and give the organization a competitive advantage and a good public image. therefore in order to ensure ethical behavior is practiced proper control and procedures have to be established. table 3: effect of recruitment and training on employees on work ethical no effect of recruitment and training on employees on work ethical no mean stand. devotion 1. recruitment is done in a fair and open way, where skills match job description. 336 3.24 1021 2. employees are trained on ethical behavior and how to 336 2.261 1.324 tomas tadesse & chalchissa amentie carry themselves in an ethical manner. 3. compensation is used to rewards personnel and reduces employee dissatisfaction. 336 2.698 1.301 4. employees are motivated by the pay for their contribution in the organization. 336 2.94 1.09 5. unethical behavior is punished/unaccepted in the organization. 336 2.71 1.241 source: data obtained from respondents, 2019 according to the findings in table3; recruitment is done in a fair and open way, where skills match job description, employees are trained on ethical behavior and how to carry themselves in an ethical manner, compensation is used to rewards personnel and reduces employee dissatisfaction, employees are motivated by the pay for their contribution in the organization and unethical behavior is punished/unaccepted in the organization at mean score of 3.24, 2.261, 2.698, 2.94 and 2.71 respectively. the findings of the descriptive statistic indicated that recruitment and training have effect on employees on work ethical. this finding is steady with the finding of bentham (1996) notes that a focus on ethics in human resource management have been perhaps a response to employee dissatisfaction, lack of commitment, frustration, or growing distrust in the workforce among other things, the increasingly wider gap between mangers pay and lower cadre employees’ pay, inequalities that arise once individuals work along, like discrimination, favoritism, harassment, work-life balance, inconsistencies in discipline, or just how staff get at the side of managers. coefficient of determination the variation employee work ethics in organization needs to be explained by leadership, organization structure and control andrecruitment and training. table 4 coefficient of determination result model r r square adjusted r square std. error of the estimate 1 .841 a .707 .703 .65068 according to table 4, the independent variables that were studied explain only 70.7% of the employee work ethics in organizations presented by the r². this, therefore, means that the independent variables only contribute to about 70.7% to the employee work ethics in organization while the other factors not studied in this research contribute 29.3 % to the employee work ethics in organization hence there is a need to further study the other factors. multiple regression analysis multiple regression analysis was done to determine various factors that influence employee work ethics in organization factors affecting employees work ethical in organizations: the case of addis ababa city road authority 67 table 5 multiple regression analysis model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) .180 .109 2.581 .011 leadership .318 .052 .319 6.146 .000 organization structure and control .235 .072 .237 3.271 .001 recruitment and training .331 .059 .284 2.782 .007 dependent variable: employee work ethics according to table 5, taking all factors (leadership, organization structure and control and recruitment and training) constant at zero the employee work ethics in organization realized would be 0.180. the data findings analyzed also shows that taking all other independent variable at zero. a unit increase leadership at beta value .318, which implies that a 1% increase in leadership unit will cause a 31.8% increase in employee work ethics. organization structure and control at the beta value of .235 which implies that a 1% increase in organization structure and control unit will cause a 23.5% increase in employee work ethics; recruitment and trainingunit will cause a 33.1% increase in employee work ethics; the statically significance level of this variable is 0.000; this is at 95 percent confidence interval. 8. conclusion from the finding researcher revealed that ethical leadership is critical in ensuring ethical behavior in the organization and have a big influence on the ethical behavior as they set the standards in which the rest of the employees work under. ethical behavior should be nurtured in an organization and management encourages and motivates employees to realize the set goals and objectives in an ethical manner. the study established that the organizational structure and control does truly determine the level of employee work ethical in an organization. well laid down procedures, policies and open communication channels facilitate coordination of activities and realizing the main goals and objectives of an organization. employees and management should be keen in ensuring the procedures and processes are in check in order to encourage and ensure ethical behavior is practiced within the organization. management would also strengthen the structures and controls in place and constantly review the procedures which will enforce ethical behavior in the organization. the human resource has the main responsibility of ensuring recruitment is done in a fair and open way and that skills match the job description. human resource also ensures that training on ethical behavior is carried out. employees are greatly influenced and motivated by the rewards and compensation they receive in respect to their contributions to the organization; therefore good packages encourage employee work ethical in the organization. human resource is also responsible for ensuring the employees are aware of the ethical officers in an organization and their duties and tomas tadesse & chalchissa amentie responsibilities. unethical behavior should also be punished to bring forth the consequences of behaving in unethically. based on the correlation analysis the relationship between leadership, organization structure and control andrecruitment and training andemployee work ethics in organization were strong and positive relationship and the results of regression analysis observed that leadership, organization structure and control andrecruitment and training andemployee work ethics in organization has a significant positive effect on the employee work ethics. 9. recommendations based on the findings of study and conclusion made, the study recommends that addis ababa city road authority administrator be supposed to involve employees in key decision making and create a relationship where employees can be open and free and management should be effective by constantly seeking information that may lead to unethical behavior. it is significant to continuously review and ensure that the organizations structure and controls are up to date. make certain the organizations formal procedures, processes, governance, control mechanism is in line with the organizations strategy and is effective in the implementation of ethical behavior in the organization. finally the study recommends that recruitment should be done in a fair way and that the human resources department should ensure that proper vetting is done in order to hire staff with good ethical morals right from the beginning. employees should also be trained on how to carry out their duties in the most ethical manner and how to tackle ethical issues and dilemmas. human resources should also ensure that employees are compensated and rewarded according to their input to the organization, that way employees are most likely to be motivated and work in an ethical environment. punishment of unethical behavior is recommended that way unethical behavior will not be taken lightly. references bentham, j., (1996). an introduction to the principles of morals and of legislation, oxford: university press. çalışlar, a. (1983). ansiklopedikkültürsözlüğü [encyclopedic culture dictionary]. i̇stanbul: altın. dess, g. g., lumpkin, g. t., & eisner, a. b. (2010).strategic management.new york, ny: mcgraw hill. drucker, p. f. (1954). the practice of management (1st ed). harper: new york, ny. jones, g. r., & hill, c. w. (2013).theory of strategic management. washington, dc: erin oyner. rollinson, d., & broadfield, a. (2002). organizational behavior and analysis: an integrated approach (2nd ed.). gasport: ashford colour press. larbi, g. 2001. ‘assessing infrastructure for managing ethics in the public sector in ethiopia: challenges and lessons for reformers’.international review of administrative sciences, 67(2), 251-262. kaptein, m. (2011). toward effective codes: testing the relationship with unethical behavior. journal of business ethics, 99(2), 233-251. doi:10.1007/s10551-010-0652-5. kernaghan, k. 1996. ‘the ethics era in canadian public administration’. canadian centre for management development, research paper, no.19. kothari. (2004). research methodology methods and techniques, second revised edition. new age international publishers. van knippenberg et al., 2007 van knippenberg, d., de cremer, d. and van knippenberg, b.2007). leadership and fairness: the state of the art. european journal of work and organizational psychology, 16 (2), 113-140. factors affecting employees work ethical in organizations: the case of addis ababa city road authority 69 mugenda, o. m., &mugenda, a.g. (2003). research methods: qualitative and quantitative approaches. nairobi: acts press.mugenda, o. m., &mugenda, a. g. (1999).research methods: quantitative and qualitative approaches. nairobi: acts press. oecd. 2000. ‘building public thrust: ethics measures in oecd countries’. oecd public management policy brief no.7. rees, w. d., & porter, c. (2001).the skills of management. london, uk: thomson learning. zaidatol, a., (2009). entrepreneurship as a career choice: an analysis of entrepreneurial self efficacy and intention of university students. european journal of social sciences.vol. 9 no. 2, pp. 338-349. [accessed: 20th april 2017] international journal of commerce and finance, vol.6, issue 1, 2020, 50-60 50 human capital development and service delivery of public health facilities agnes kabithe chege, california miramar university, california, usa dominic mwenja, california miramar university, california, usa kellen kiambati, karatina university, nairobi kenya levi mbugua, 3the technical university of kenya, nairobi, kenya abstract healthcare provision stipulated by sustainable development goals (sdgs) is a relatively new concept in many developing countr ies subsaharan africa part of asia. therefore, this study examined the influence of human capital development on the service delivery of devolved county health facilities. the path coefficients were positive and significant at 0.05 level of significance. the path coefficient beta value was β = 0.50. these findings indicate that for every 1-unit increase in human capital development, service delivery is predicted to increase by 0.5 in public county health facilities in kenya. the study concluded that measures contributed to the positive relationship between human capital development and service delivery in these facilities. as the hospitals lacked funding of further training for their staff and also failed to pay competitive salaries and allowances, the study recommends that for improved service delivery within these facilities, promotions should be on performance, as well remuneration. most employees will work hard when they know that they get rewards for it. the hospitals should also promote staff and offer scholarships for training to the high performing staff. keywords: healthcare, human capital development, service delivery, public county health facilities 1. introduction the rationale for devolved healthcare is to allow county governments to design innovative models and interventions that suit the unique health needs in their contexts, encourage citizen participation and make autonomous and quick decisions on resource mobilization and the management of possible issues (kimathi, 2017). devolution is the substantial transfer of powers and authority and functions from higher or central government to local units, upon which the local governments subsequently acquire significant and autonomous financial and powers to function without reference to central government (hazell and rawlings, 2015). devolved healthcare is the transfer of the management of healthcare services to counties and other local governments. according to mohammed, north, and ashton (2016), devolved healthcare is a way to improve the efficiency in the delivery of health services and their responsiveness to community needs. in developing countries, for example, decentralization is seen as a means to improve access to healthcare. however, to realize these benefits, a localized decision space needs to be created in terms of finance, service organization, human resources, access rules, and governance rules. although devolved healthcare has been accepted globally as a means to improve the efficiency and responsiveness of the health system, each country adopts and implements this policy differently (stubbs, 2015). devolved healthcare in thailand is done through local administrative organizations (laos). the devolution of health services are focused on primary health centers and the transition of ownership from the ministry of health to laos. the ministry o f health of thailand continues to be responsible for the technical, policy, supervision and training aspect, and in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e human capital development and service delivery of public health facilities 51 regulation of health professionals (hawkins, 2009). according to jongudomsuk and srisasalux (2012), in thailand, health-care decentralization could not be implemented effectively without the support of the central government. also, local government staff needed to have their capacity strengthened to handle the new responsibilities. this is best done by the central ministry staff that was previously responsible for these. in ethiopia, the concept of healthcare devolution was introduced in 1996 and was the primary strategy to improve health service delivery. it formed part of a broader devolution strategy across different sectors. devolution first t ook place at the regional level and was further extended to the district in 2002 (el-saharty et al., 2009). through devolution, a four-tiered system of care facilities was created. national referral hospitals, regional referral hospitals, district hospitals, and primary healthcare facilities were created. the devolution mechanism entailed districts receiving block grants from the regional government. they, in turn, are entitled to set their priorities and determine further budget allocations to healthcare facilities based on local needs. as such, the district levels were responsible for human resources management, health facility construction, and supply chain processes (assfaw, 2010). elsaharty et al. (2009) report that impressive improvements in service delivery existed despite some challenges in the initial stages. in kenya, devolution provides an opportunity to rationalize the service delivery framework for increased efficiency and accountability. this is achieved by making counties the hub for organizing services at the local level (khaunya et al., 2015). a report by kpmg (2014) states that the success of the devolution of health care services in kenya depends to a great extent on the presence of an enabling environment, an environment that is marked by the will and commitment of all health stakeholders. previous studies on the subject of the devolution of healthcare have focused on the implementation of the devolution in healthcare and the factors that influence this implementation (kubai, 2015; omondi, 2016; miriti and keiyoro, 2017). as observed by gimoi (2017), the devolution significantly influences healthcare systems in kenya while muchomba (2015) posited a positive influence of the devolution on the performance of healthcare. therefore, the study examined the contribution of human capital development on the service delivery of public county health facilities in kenya. 2. method the study was based on the research philosophy of positivism. through this positivism research approach, the study came up with hypotheses based on existing empirical studies and theories. in hypotheses testing, the study translated human capital development into a measurable form. the study adopted the explanatory survey research design. saunders and lewis (2012) noted that a research design helps to foster a smooth research operation which is aimed at making the research efficient, cost-effective and timeeffective. this study used the research design to help conduct the research on the relationship between human capital development, and the dependent variable – service delivery of public county health facilities. the ideal target population in our study was comprised of doctors and clinical officers (cos) and nurses from the 1423 level 3, 4, and 5 hospitals in kenya (moh, 2014). therefore, the total target population was 15,160 among the medical staff. table 1 medical staff  level of hospital  doctors  cos  nurses  total  three (3)  47  112  456  767  four (4)  297  417  8,917  9,733  five (5)  234  389  4,291  4,926  total  578  918  13,664  15,160 agnes kabithe chege & dominic mwenja & kellen kiambati & levi mbugua in the study, the sampling frame constituted of 15,160 medical staff comprising of doctors, cos, and nurses (gok, 2018). the study employed a stratified sampling technique to select the respondents from the three levels of public hospitals in kenya. kothari (2004) argued that by use of strata, it is easier to choose participants if they can be classified into different groups. that is especially important in this study that focused on different cadres comprising doctors, clinical officers, and nurses. stratified sampling was, therefore, suitable since the research had different strata of respondents. the study adopted yamane's (1967) formula for simple random sampling of the medical officers following the nature and the characteristic of the target population to achieve the required sample. yamane (1967) formula where: n = target (total) population of medical officers (15,426) n = desired sample size d= confidence interval (0.05 testing at 5% significant level) n= 390 table 2 sample population level of hospital doctors sample cos sample nurses sample three (3) 47 1 112 3 456 12 four (4) 297 7 417 11 8,917 230 five (5) 234 6 389 10 4,291 110 total 578 14 918 24 13,664 352 the sample size for the study was 390 respondents from level 3, 4, and 5 public hospitals in kenya. that included 14 doctors, 24 cos, and 352 nurses. this study used primary data collected by administering questionnaires as an instrument to the respondents in all three levels of public hospitals. the instrument collected quantitative data using likert style questions. the researcher picked up the instruments after filling it by the participants. the researcher took 10% (n=39) of the population to participate in the pilot study test in the testing of the data collection instrument for internal consistency (reliability) and validity. the respondents for the pilot test were chosen from nairobi county which is suitable because it has a big number of the targeted levels 3, 4 and 5 hospitals and the county has diversified characteristics that could reflect the situation in the whole country. the questionnaire contained 47 items measuring the variables of the study. the study found an overall cronbach’s alpha of 0.797 for the 11 querries, which show the overall reliability of the instrument as shown in table 3. human capital development and service delivery of public health facilities 53 table 3 overall cronbach’s alpha cronbach's alpha n of items .797 11 the ability of a research instrument to be a measure of what it claims to measure is known as validity (bryman & cramer, 2012). in the content validity examination by the experts, they checked and identified the shortfall of the research instrument in anticipation of what it ought to be measured as per the research questions. the expert opinion was used to ensure the face validity by checking on its structure, grammar, alignment as per margin, and any other issue which may minimize the chances of the questionnaires being responded to or fall short of collecting the desired data. data analysis was executed using descriptive and inferential statistics. descriptive statistics adopted the mean, standard deviation, percentages, and frequency of response while inferential statistics used structural equation modeling (sem) using analysis of moment structures (amos) version 26 as the tool of analysis. 3. results the study assessed the influence of human capital development on the service delivery of public county health facilities in kenya. the study found that the hospital trained staff when they were in service (m = 3.46, sd = 0.930); hospital staff were given study leave (m = 3.21, sd = 1.248); the hospital endeavored to provide a conducive working environment for its workers (m = 3.73, sd = 1.033); the hospital offered permanent contracts to its workers (m = 3.35, sd = 1.163); and the hospital had a set out mechanism for dealing with the grievances of staff (m = 3.47, sd = 0.903). the participants, however, disagreed with the rest of the statements. table 4 descriptive statistics on human capital development mean sd my hospital trains staff when they are in service 3.46 .930 study leave 3.21 1.248 the hospital funds further training for its staff 2.74 1.276 the hospital pays competitive salaries and allowances 2.82 1.341 the hospital promotes staff who perform well 2.89 1.400 the hospital endeavors to provide a conducive working environment for its employees 3.73 1.033 the hospital that it is equipped so as to attract highly qualified employees 2.91 1.195 the hospital has a high turnover of staff 2.91 1.159 agnes kabithe chege & dominic mwenja & kellen kiambati & levi mbugua the hospital offers permanent contracts to its employees 3.35 1.163 the hospital has a set-out mechanism for dealing with the grievances of staff 3.47 .903 the hospital has a human resources officer who deals with staff welfare 2.87 1.219 factor analysis was conducted to reduce items of human capital development. the construct was measured using eleven questions thereby the construct was factor analyzed to come up with an appropriate measure. the study found a kmo value of 0.705 and bartlett's test, x2(55, n = 316) = 1927.262, p = .000 (table 5), showing that sampling was adequate for the human capital development. table 5 kmo and bartlett's test for human capital development kaiser-meyer-olkin measure of sampling adequacy. .705 bartlett's test of sphericity approx. chi-square 1927.262 df 55 sig. .000 the results for the scree plot indicated that two components had eigen value that was greater than one. this finding corroborates the total variance explained results for equipped health facilities (figure 1). figure 1 scree plot for human capital development construct human capital development and service delivery of public health facilities 55 the factor loadings for human capital development were obtained in the study as shown in table 6. the acceptable threshold was 0.6. all the queries exceeded 0.6, except for the last three components, therefore, the three questions were dropped for human capital development. table 6 component matrix for human capital development component 1 2 my hospital trains staff when they are in service .606 .173 study leave .786 -.162 the hospital funds further training for its staff .796 -.361 the hospital pays competitive salaries and allowances .783 -.306 the hospital promotes staff who perform well .863 -.195 the hospital endeavors to provide a conducive working environment for its employees .708 -.144 the hospital ensures highly qualified employees .710 -.041 the hospital has a high turnover of staff .607 .346 the hospital offers permanent contracts to its employees .432 .688 the hospital has a set-out mechanism for dealing with the grievances of staff .175 .760 the hospital has a human resources officer who deals with staff welfare .344 .607 extraction method: principal component analysis. a. 2 components extracted. hypothesis testing rh: human capital development has a positive influence on the service delivery of public county health facilities in kenya. before path coefficients, confirmatory factor analysis was conducted and subjected to maximum likelihood cfa. the study found that the relative normed chi-square value of 418.448 (p-value = 0.000) indicating an acceptable fit between the hypothesized model and the sample data. in addition, the nfi = .725, tli = .626, cfi = .733 indicated an acceptable fit as they were approximately 0.7. the analysis yielded the path diagram presented in figure 2 and table 7. agnes kabithe chege & dominic mwenja & kellen kiambati & levi mbugua figure 2 human capital development cfa table 7 baseline comparisons for human capital development model nfi delta1 rfi rho1 comparative fit index delta2 tli rho2 cfi default model .725 .614 .734 .626 .733 saturated model 1.000 1.000 1.000 independence model .000 .000 .000 .000 .000 the path coefficients obtained show that the path coefficient was positive and significant at 0.05 level of significance. the path coefficient beta value, β = 0.50. these findings indicate that for every 1-unit increase in human capital development, service delivery is predicted to increase by 0.5 in public county health facilities in kenya. additionally, all the factor loadings were well above 0.5 and, therefore, they were within the acceptable threshold (figure 3). human capital development and service delivery of public health facilities 57 figure 3 path coefficients for human capital development the overall table with path coefficients, standard errors, and p-value s was therefore summarized (table 8). as presented, all the p-value s for the paths in the model were less than 0.05 and thus significant at 0.05 level of significance. in particular, the cr value for human capital development and service delivery was 5.160, and its pvalue is 0.000, which is less than 0.05. this p-value tested the third hypothesis in the study at a 5% significance level. therefore, the null hypothesis that human capital development has no positive influence on the service delivery of public county health facilities in kenya stood. table 8 regression coefficients for human capital development and service delivery path standardized estimate unstandardized estimate s.e. c.r. p label sd <--hcd .384 .502 .097 5.160 *** hcd1 <--hcd .542 1.000 hcd2 <--hcd .594 1.472 .178 8.276 *** hcd3 <--hcd .874 2.214 .215 10.306 *** hcd4 <--hcd .842 2.240 .221 10.125 *** hcd5 <--hcd .912 2.535 .242 10.491 *** agnes kabithe chege & dominic mwenja & kellen kiambati & levi mbugua path standardized estimate unstandardized estimate s.e. c.r. p label hcd6 <--hcd .513 1.052 .141 7.473 *** hcd7 <--hcd .586 1.388 .169 8.197 *** hcd8 <--hcd .357 .848 .151 5.609 *** sd9 <--sd .584 1.000 sd8 <--sd .666 1.038 .112 9.287 *** sd7 <--sd .811 1.218 .116 10.525 *** sd6 <--sd .781 1.124 .109 10.296 *** sd5 <--sd .794 1.082 .104 10.403 *** sd4 <--sd .639 1.052 .117 9.022 *** sd3 <--sd .551 .950 .117 8.092 *** sd2 <--sd .500 1.013 .135 7.498 *** 5. discussions the findings obtained in the study agree with those of zinnen et al. (2012) that offering training opportunities to health workers would most likely improve the competence and performance of the health care workers. the interesting case scenario is from a study in tanzania, which revealed that upgrading opportunities and training were postulated to enrich the work performance of the health workers after decentralization even better than financial incentives. however, a hindrance cannot be ruled out in such a set-up due to the challenge of money to train staff and identifying those who qualify for the opportunities, as observed by kyaddondo and whyte (2013) as evident in the study. willis-shattuck et al. (2008) disagree with the findings of the study that healthcare workers were well motivated. the main themes regarding the motivation of health workers include finance in terms of salaries; career development, education, infrastructure; work environment; resource availability; and personal recognition or appreciation. mbindyo et al. (2009) and kruse et al. (2009), however, established that healthcare workers were not given motivation, as determined in the study. the study also found that human capital development has no positive influence on the service delivery of public county health facilities in kenya stood. similar findings are given by son (2010) and mathauer and imhoff (2012). 6. conclusion the study concluded that human capital development measures had been put in place in the hospitals such as training of the staff when they are in service, giving them study leave, and, offering permanent contracts to the employees. the study also concluded that measures contributed to the positive relationship between human capital development and service delivery in these facilities. as the hospitals lacked funding of further training for their staff and also failed to pay competitive salaries and allowances, the study recommends that for improved service delivery within these facilities, promotions should be on performance as well remuneration. most employees will work hard when they know that they get rewards for it. the hospitals should also promote staff who perform well and offer them scholarships for further training. the study examined the contribution of human capital development on the service delivery of public county health facilities in kenya. the study proposes studies the same subject area, especially in private and mission-based human capital development and service delivery of public health facilities 59 hospitals, for comparative results. also, other studies can focus on the other concerned parties in healthcare, such as the county government, national government, and even the hospitals' management. references assfaw, y. t. (2010) “determinants of antenatal care, institutional delivery and skilled birth attendant utilization in samre saharti district, tigray, ethiopia.” doctoral dissertation, umeå international school of public health. el-saharty, s., kebede, s., olango dubusho, p., & siadat, b. (2009), “ethiopia: improving health service delivery.” addis ababa, ethiopia. government of kenya (2018), “kenya health policy 2012-2030 revised.” nairobi: ministry of medical services and ministry of public health and sanitation. hawkins, l. (2009), “devolution of health centers and hospital autonomy in thailand: a rapid assessment.” washington dc: world bank. hazell, r., & rawlings, r. (2015), “devolution, law making and the constitution.” andrews uk limited. jongudomsuk, p., & srisasalux, j. (2012), “a decade of health-care decentralization in thailand: what lessons can be drawn.” who south-east asia journal of public health 1 (3): 347–56. khaunya, m. f., wawire, b. p., & chepng’eno, v. (2015), “devolved governance in kenya; is it a false start in democratic decentralization for development.” international journal of economics, finance and management, 4(1), 12-21. kimathi, l. (2017), “challenges of the devolved health sector in kenya: teething problems or systemic contradictions?” africa development, 42(1), 55-77. kothari, c. r. (2004), “research methodology: methods and techniques.” new age international. kpmg (2014), “devolution of healthcare services in kenya.” retrieved from kpmgafrica.com 27/11/2016. kruse, g. r., chapula, b. t., ikeda, s., nkhoma, m., quiterio, n., pankratz, d., ...& reid, s. e. (2009), “burnout and use of hiv services among health care workers in lusaka district, zambia: a cross-sectional study.” human resources for health, 7(1), 55-67. kubai, m. m. (2015), “factors influencing effective implementation of devolution: a case of meru county, kenya.” nairobi, kenya. mathauer, i., & imhoff, i. (2012), “health worker motivation in africa: the role of non-financial incentives and human resource management tools.” human resources for health, 4(1), 24. mbindyo, p., gilson, l., blaauw, d., & english, m. (2009), “contextual influences on health worker motivation in district hospitals in kenya.” implementation science, 4(1), 43-53. ministry of health. (2014), “kenya health policy 2012–2030.” nairobi: ministry of health. miriti, a. k., & keiyoro, p. (2017), “influence of devolution of government service delivery on provision of healthcare: a case of level five hospital in meru county, kenya.” international academic journal of information sciences and project management, 2(1), 316-334. mohammed, j., north, n., & ashton, t. (2016), “decentralization of health services in fiji: a decision space analysis.” international journal of health policy and management, 5(3), 173-179. muchomba, f. g. (2015), “influence of devolved governance and performance of the health sector in kenya.” strategic journal of business & change management, 2(2), 23-31. agnes kabithe chege & dominic mwenja & kellen kiambati & levi mbugua olang’o, c. o., nyamongo, i. k., & aagaard-hansen, j. (2010), “staff attrition among community health workers in home-based care programmes for people living with hiv and aids in western kenya.” health policy, 97(2), 232237. omondi, k. b. (2016), “factors influencing service delivery in public hospitals: a case of nairobi county, kenya.” mba thesis. university of nairobi. saunders, m. n., & lewis, p. (2012), “doing research in business & management: an essential guide to planning your project.” pearson. son, h. (2010), “human capital development.” asian development review, 27(2), 29-56. stubbs, e. (2015), “road to healthcare devolution.” civitas. willis-shattuck, m., bidwell, p., thomas, s., wyness, l., blaauw, d., & ditlopo, p. (2008), “motivation and retention of health workers in developing countries: a systematic review.” bmc health services research, 8(1), 247. yamane, t. (1967), “elementary sampling theory.” sage publications. new york: usa. zinnen, v., paul, e., mwisongo, a., nyato, d., & robert, a. (2012), “motivation of human resources for health: a case study at rural district level in tanzania.” the international journal of health planning and management, 27(4), 327-347. international journal of commerce and finance, vol. 8, issue 1, 2022, 43-62 *dr, ceo at innfinitive inc., istanbul, turkey, orcid:0000-0002-8272-180x, e-mail: harunkolukisa@yahoo.com ** prof. dr., istanbul ticaret university, faculty of business administration, finance and banking department, istanbul, turkey; orcid: 0000-0003-0230-5839, e-mail: ogurbuz@ticaret.edu.tr 43 the effects of investor behavior on market predictability harun kolukısa* ali osman gürbüz** submitted: 30.11.2021 accepted: 10.05.2022 published: 24.06.2022 abstract this study aimed to test the effects of investor behavior on the predictability of the market by testing capm estimation errors in negative growth period and growth period of the market. this study also aims to draw attention to the existence of some factors that may affect the capm estimation errors. negative growth period is the period in which irrational behavior is likely to occur. growth period is the period when irrational behaviors are less common. capm estimation errors calculated by jensen’s alpha, sharpe ratio, sortino ratio and treynor ratio were compared by t-test and mann-whitney u test during negative growth periods and growth periods. usa-s&p 500, germany-dax 100, england-ftse 100, france-cac all tradable, canada-s&p tsx, japan-nikkei 225 developed countries and their indices and india s&p bse 200, china-sse composite, south africa &-ftse jse african all share, turkeybist 100 developing countries and their indices included in the study. between january 31,2005 and december 31,2018 monthly closing prices of the indices, monthly closing prices of stocks listed in consumer staples sectors and consumer discretionary sectors were used. as a result of the study, it has been observed that capm estimation errors calculated by jensen’s alpha and treynor ratio in consumer staples and consumer discretionary sectors in developed and developing countries do not differ during negative growth periods and growth periods of the market. it cannot be said that capm is more reliable or unreliable in negative growth periods compared to growth periods. it has been determined that capm estimation errors calculated by sharpe ratio and sortino ratio differ during negative growth periods and growth periods. it can be said that capm is less reliable in negative growth periods compared to growth periods. keywords: capital asset pricing model, investor behavior, negative gowth period, consumer staples sector, consumer discretionary sector mailto:harunkolukisa@yahoo.com https://orcid.org/0000-0003-0230-5839 international journal of commerce and finance harun kolukısa & ali osman gürbüz 44 1.introduction the concept of investment, which is defined as giving up the value of today and making sacrifices by taking the risk to obtain a value that is expected to be obtained in the future, appears in every field of daily life. decision making is the most important stage of the investment process. having an expected return at the end of the investment is important for the investment decision. along with the expected return from the investment, the risk to be incurred is also an important factor in the investment decision. in traditional finance theory, it has been assumed that investors are rational and will choose the most appropriate option that will maximize their utility. emotional aspects of investors were not considered in the investment decision process. in economics and finance theories, human is described as rational, irrational, and limited rational. while it is assumed that investors are rational in traditional finance theory, the assumption that people in traditional finance theory are rational has been criticized in behavioral finance theory and it has been stated that people are irrational or limited rational. in behavioral finance theory, it is stated that investors may act irrationally and not rationally when making investment decisions. capm assumes that investors are essentially rational. however, the facts do not support this view of the capm. capm assumptions are often criticized as being unrealistic. despite all the criticisms, capm continues to be widely used by researchers and practitioners. in capm, it is assumed that investors are risk-averse, rational, and trying to maximize their returns (copeland and weston, 1988, p. 194). capm assumes that investors try to maximize their utility and are rational. it is also assumed that there is no tax, the investor expectations are homogeneous, and that there are no transaction costs. even if these assumptions do not match the facts, it is possible for these assumptions to be sound, but investors are irrational. in many experimental studies, it has been determined that investors move away from rationality and the prices of financial assets cause deviations from the theoretical models. this study aims to explain that investor behaviors affect the predictability of the market by testing the difference in the measurements of the capital asset pricing model (capm) in negative growth and growth periods of the market. international journal of commerce and finance harun kolukısa & ali osman gürbüz 45 2. literature review there are many academic studies that examine whether capm is a successful model for estimating asset prices, the effect of investor behavior on estimation errors of capm, how investors' rationality is affected in times of market turmoil, and whether investors' investment decisions are affected by adverse economic conditions and propose alternative models. shah, dars, and haroon (2015) tested capm on the karachi stock exchange between july 2004 and december 2012. according to the results of the research, it has been seen that capm is not sufficient to predict stock returns in periods when emerging markets have negative returns and high volatility. it has been determined that capm accurately predicts stock returns in periods when the market is positive and upwards. guerrero, stone and sundali (2012) examined how investors distribute their investments among financial assets under difficult conditions and how the collapse in asset prices affects the rationality of individual investors. in this study, which is based on the years of the economic crisis in 1929, it was investigated how investors distributed their investments between risk-free assets and risky assets while making their choices. investors are divided into two groups; those who experienced the returns of the market between 1925-1944 and those who experienced the returns of the market between 1929-1948. the risk-free asset returns, which are constantly 4%, and the returns of the dow jones industrial average (djia) index as a risky asset are discussed. with the results obtained in the study, it has been seen that investors tend to avoid risk due to fear and anxiety in negative market conditions and are risk sensitive. it has been observed that the investors acted with the fear that the market returns would decrease more than expected. it has been determined that investors do not act rationally in periods when the market is in significant negative growth. garcía (2012) aimed to measure the emotional reaction of investors to financial news in his study. in order to determine to what extent investors are affected by the published financial news, the relationship between the financial news published in new york times between 1905 and 2005 and the share returns was examined. as a result of the research, he said that news content can be used to predict share returns in general. it has been determined that the effect of financial news on investor behavior is more evident in the periods when the market is in negative growth, and investor behaviors differ in negative growth and growth periods of the market. in the research conducted using stocks in dow jones industrial average (djia) index, international journal of commerce and finance harun kolukısa & ali osman gürbüz 46 it has been observed that the effect of news on investor behavior is greater in negative growth periods of the market than in the growth periods of the market. in the study of yu and yuan (2011) examining the effect of investor sentiment on the relationship between mean and variance, it was found that the relationship between mean and variance was significantly positive in periods when investor sentiment was low. it has been observed that the relationship between the mean and the variance is close to zero in the periods when investor sensitivity is high. in times of low investor sentiment, irrational investors think that stocks are priced above their value, although stocks are priced below their value. for this reason, it has been determined that rational investors invest more in stocks than irrational investors in periods when investor sensitivity is low. in addition, it has been observed that the reaction of the market to volatility is not always homogeneous and varies according to periods when investor sentiment is high and low. it has been determined that the market considers volatility more in periods when investor sentiment is low than in periods with high investor sentiment. apergis and rehman (2018) investigated the effect of investor sentiment on financial asset prices by using daily data of s&p 500 firms between 1995 and 2005. the predictability of investor sentiment with residuals of capm is examined. according to the research, it has been determined that the residuals of capm can be explained by investor sentiment and investor sentiment is a factor in pricing the financial asset. marsh (2018), in his study, examined the estimation errors of capm in negative growth and growth periods of the market. sharpe ratio, jensen alfa and treynor ratio were used to determine the estimation errors of capm. in us russell 3000 index; 86 companies’ data which are located in the consumer discretionary sector and 36 companies’ data which are located in the consumer staples sector were used between 1994 and 2016. the estimation errors of the capm were determined for the companies in the consumer staples sector and consumer discretionary sector, with the sharpe ratio, jensen’s alpha and treynor ratio. whether the determined estimation errors differ in negative growth and growth periods of the market has been examined with the independent t-test. in the results obtained, it was seen that the estimation errors determined by the jensen’s alpha and sharpe ratio were different in negative growth and growth periods of the market. it was determined that there was no difference in the estimation errors determined by the treynor ratio in negative growth and growth periods of market. international journal of commerce and finance harun kolukısa & ali osman gürbüz 47 barberies, greenwood, jin, and shleifer (2015) conducted an empirical study using the us stock market data between 1947 and 2011 and the results of a survey with investors. they worked on a consumption based capm that included irrational investors who think that future prices in the stock market will follow past prices and investors who think completely rationally. it is examined how the irrational and rational investors react to the shocks caused by the positive and negative news in the stock market. it has been observed that the market generally reacted positively to positive cash flow news such as dividends and stock prices increased. the expectation of irrational investors is that past prices will affect future price formation. however, with the effect of the positive shock, it has been determined that the overreaction of irrational investors caused the price increase to be higher than normal. rational investors, on the other hand, did not overreact to the abnormal increase in the stock price caused by irrational investors. the rational investor is aware of the fact that the price of the stock has increased more than usual due to the impact of positive news about cash flow and the overreaction of irrational investors to the positive shock. irrational investors believe that future prices will follow past prices and are affected by recent price increases. they think that prices will continue to rise in the near future. therefore, they continue to place excessive demands on the stock. it has been determined that rational investors do not overreact because they know that irrational investors will behave in this way. a rational investor, who is aware of irrational investor behavior, slowly reduces his demand for the stock. it does not stop its reaction to the share certificate suddenly and continues its demand for the share certificate for a while. barberies, greenwood, jin and shleifer (2015) suggested xcapm (extrapolative capm) to price financial assets by including the behavior of irrational and rational investors in the model. 3.capital asset pricing model and criticisms 3.1. capital asset pricing model the capital asset pricing model (capm) was developed from the portfolio selection model developed by harry markowitz (1959). in markowitz's model, the investor creates a portfolio at t-1 and the related portfolio produces a return at t. the model assumes that the investor is risk-averse and will consider only the mean and variance of the single-period returns of the investments when choosing between investments. investors choose the asset that minimizes the risk at a certain return level or aims the maximum return at a certain risk level (fama and french, 2004, p. 26). international journal of commerce and finance harun kolukısa & ali osman gürbüz 48 sharpe (1964) states that there is no theory explaining that the price of risk arises from the fundamental effects of investor preferences and physical characteristics of financial assets. noting that due to the absence of such a theory, it is difficult to understand the relationship between the price and risk of a single asset, he developed capm, which considers the relationship between the price of an asset and the various components of its total risk, with inferences consistent with the claims of traditional finance theory. introduced by markowitz in the 1960s, modern portfolio theory (mpt) was developed by sharpe, lintner, and tobin, and the relationships between an asset’s risk and its return were placed on a more comprehensive scientific basis (karan, 2013, p. 199). capm is central to modern financial economics and estimates the relationship we must observe between an asset's risk and its expected return. this relationship between risk and return serves two especially important purposes. the first of these specifies the rate of return that we can use as a reference to evaluate possible investments. for example, with capm, we can observe whether the expected return for a stock is more or less than its “fair” return, given the risk we take. second, it allows us to estimate the expected return on financial assets that have not yet been traded in the market. for example, it is used to determine the price of a stock to be offered to the public or to measure how a new and large investment project affects the return that investors expect from the company's stock. although capm is not fully supported by empirical tests, it is widely used because its accuracy is considered acceptable for important applications ( bodie , kane, & marcus , 2014, p. 291). 3.2. comparison of investor behaviors in traditional and behavioral finance homo economicus is the first decision-making model formulated in the 19th century. according to this model, investors have full information about their investment options and the possible consequences of their investment decisions. according to homo economicus, investors are rational. the financial crisis in 2007-2008 provided an understanding of human behavior. researchers have found that the root cause of the financial crisis is the psychological distortion in investor’s judgments. excessive optimism and confirmation bias observed in investors have been the driving force behind the crisis (nair and antony, 2015, p. 1055). homo economicus is a simple model of economic behavior that assumes the principles of perfect self-interest, perfect rationality, and perfect information are used by individuals in making economic decisions. economists who support homos economicus postulate people as https://translate.google.com/translate?hl=en&prev=_t&sl=tr&tl=en&u=https://www.amazon.com/s/ref%3ddp_byline_sr_book_1%3fie%3dutf8%26text%3dzvi%2bbodie%26search-alias%3dbooks%26field-author%3dzvi%2bbodie%26sort%3drelevancerank https://translate.google.com/translate?hl=en&prev=_t&sl=tr&tl=en&u=https://www.amazon.com/alex-kane/e/b004ygnxo6/ref%3ddp_byline_cont_book_2 https://translate.google.com/translate?hl=en&prev=_t&sl=tr&tl=en&u=https://www.amazon.com/s/ref%3ddp_byline_sr_book_3%3fie%3dutf8%26text%3dalan%2bj.%2bmarcus%26search-alias%3dbooks%26field-author%3dalan%2bj.%2bmarcus%26sort%3drelevancerank international journal of commerce and finance harun kolukısa & ali osman gürbüz 49 rational maximizers who are concerned only with their own benefits and make perfectly rational decisions. most economists critical of homo economicus have challenged the assumptions of perfect rationality, perfect personal utility, and perfect information. (pompian, 2006, pp. 15-16) behavioral finance assumes that most people do not have all the information available and make choices using limited information. as a result, investor’s choices are not compatible with the expectation that rational individuals will maximize their utility. in fact, the choices of individuals whose rationality is limited by limited information and limited perception are satisfying themselves. the response and behavior of individuals in the economy to changes are different from those expected from rational individuals (estrada, 2001, p. 2). traditional finance is a source of information based on the arbitrage principles of miller and modigliani, the portfolio principles of markowitz, the capital asset pricing theory of sharpe, lintner, and black, and the option pricing theory of black, scholes, and merton. traditional finance is challenging because it uses minimal tools to construct a unified theory to explain financial questions (statman, 1999, p. 19). miller (1986) states in his study that market equilibrium models based on rationality are in good condition and not worse than other economic models (miller, 1986, p. 466). however, today it makes sense to reconstruct the theory of finance by considering the investor behavior due to the anomalies experienced (statman, 1999, p. 19). traditional finance tries to understand financial markets by developing models assuming that investors are rational. when rational investors reach new information, they update their beliefs according to the new information and make choices according to their beliefs updated with the new information. according to behavioral finance, investors cannot update their beliefs correctly with new information. the framework established by traditional finance is quite simple, and the predictions of traditional finance will be convincing when confirmed by the data. however, as a result of studies conducted over the years, it has been seen that the basic facts about the stock market, average return and individual investor behavior are not easily understood within the framework drawn by traditional finance. behavioral finance is a new approach that tries to explain the situations that traditional finance has difficulty in explaining. behavioral finance argues that financial markets can be better understood by developing models in which some investors in financial markets are not completely rational (barberis and thaler, 2003, p. 1053). international journal of commerce and finance harun kolukısa & ali osman gürbüz 50 4. research method 4.1. the purpose and scope of the analysis in this study, jensen’s alpha, sharpe ratio, treynor ratio and sortino ratio performance measurement methods were used to calculate the effect of irrational investor behavior on the estimation errors of capm. capm estimation errors calculated by performance measurement methods are analyzed separately in negative growth periods and growth periods of the market. negative growth periods are determined as the months in which the market loses value for a minimum of two consecutive months (diego garcía, 2013, p. 1270). negative growth periods of the market are included in the study as periods in which irrational investor behaviors will be seen more. the companies in the study were examined in two separate groups as “consumer staples sector” and “consumer discretionary sector”. since the companies in the consumer staples sector are less sensitive to economic cycles, the volatility of the stocks of the companies in this sector is lower than in other sectors. since consumer discretionary sector companies are extremely sensitive to economic cycles, the volatility of the stocks of companies in this sector is high. for this reason, the stocks of the companies included in the study were examined separately as consumer staples sector and consumer discretionary sector. as of 31 december 2018, companies included in the selected indices for countries and listed in consumer staples sector and consumer discretionary sector according to gics were included in the study. 4.2. the data a total of 395 shares were included in the study, 76 of which are in the consumer staples sector in developed countries, 131 in the consumer discretionary sector in developed countries, 59 in the consumer staples sector in developing countries, and 129 in the consumer discretionary sector in developing countries. the month-end return rates of the stocks between december 31,2005 and december 31,2018 and the 1-year treasury bill rate were used as the risk-free interest rate and converted to monthly values. developed countries; usa, germany, england, japan, france, canada respectively; firms in s&p 500, dax 100, ftse 100, nikkei 225, cac all tradable, s&p/tsx indices are included. developing countries; companies in the s&p bse 200, sse composite, ftse&jse african all share and bist 100 indices of india, china, south africa, and turkey, respectively, are included. for each stock, jensen’s alpha, sharpe ratio, treynor ratio, sortino ratio and capm estimation error were calculated. calculated international journal of commerce and finance harun kolukısa & ali osman gürbüz 51 estimation errors were compared by applying the “independent t-test” and “mann-whitney u” test in negative growth and growth periods of the market. when estimating the beta, the monthly returns of the companies for 24 months or 48 months are considered. (berk & demarzo, 2006, damodaran, 2002, ross, westerfield & jaffe, 2003). in this study, the monthly returns of the companies for 24 months were considered while estimating the beta. table 1. number of firms by country indices and sectors country group countries index name number of firms in consumer staples sector number of firms in consumer discretionary sector developed countries usa s&p 500 28 50 germany dax 100 2 8 france cac all tradable 13 27 england ftse 100 9 10 japan nikkei 225 15 27 canada s&p/tsx 9 9 developing countries china sse composite 33 90 south africa ftse&jse africa all share 11 11 india s&p bse 200 11 16 turkey bist 100 4 12 4.3. growth and negative growth periods growth period: it refers to any month in which the market has not lost consecutively, the general value of the market is in negative growth or in growth. investors feel happy and positive during the earnings periods of the market. a negative growth period refers to any month in which the market has lost value for two or more consecutive months. investors feel fear and anxiety during the market negative growth periods. the negative mood that affects investors in negative periods of the market changes the decision-making abilities of investors (diego garcía, 2013, p. 1270). international journal of commerce and finance harun kolukısa & ali osman gürbüz 52 4.4. variables used in analysis the dependent variables are the capm estimation errors calculated by jensen’s alpha, sharpe ratio, treynor ratio and sortino ratio. the market negative growth periods and the market growth periods are independent variables. in the analyzes, it is investigated whether the capm estimation errors differ in positive and negative periods. 4.5. t-test and mann-whitney test analysis the aim of this study is to investigate whether the capm estimation errors calculated by jensen’s alpha, sharpe ratio, sortino ratio and treynor ratio differ in negative growth and growth periods of the market for each stock. “independent t-test” was applied to investigate whether there is a statistically significant difference between the estimation errors determined for the growth and negative growth periods. one of the t-test assumptions is the normal distribution of data. “shapiro-wilks” normality test was applied for the “capm estimation error” time series calculated for each stock to investigate whether the normality assumption was met. according to the test results, capm estimation errors were determined that provided and did not provide the normality assumption. “independent t-test” was applied for the capm estimation errors, which provided the assumption of normality. for the capm estimation errors that do not satisfy the assumption of normality, the mann-whitney u test, which is used when the data is not normally distributed and can be used instead of the non-parametric t-test, was applied. before performing the t-test for the capm estimation errors found to be normally distributed, the homogeneity of the variances was examined with the bartlett f test. the t-test was applied according to the acceptance of homogeneous or heterogeneous variance according to the results of the bartlett f test. by applying the t-test for normally distributed data and mann-whitney u test for non-normally distributed data, it was examined whether there is a statistically significant difference between the capm estimation errors in the growth and negative growth periods. hypotheses: h0: there is no significant difference between the capm estimation errors in negative growth and growth periods of the market calculated for the stocks of the companies. ha: there is a significant difference between the capm estimation errors in negative growth and growth periods of the market calculated for the stocks of the companies. international journal of commerce and finance harun kolukısa & ali osman gürbüz 53 5. findings according to the t-test and mann-whitney u tests results for countries and indices; the number of stocks which have significant difference between capm estimation errors in negative growth and growth periods calculated by jensen’s alpha, sharpe ratio, sortino ratio and treynor ratio shown in "there is difference" column. the number of stocks which do not have significant difference shown in “no difference” column. numbers of stocks which has capm estimation errors average greater in negative growth period than growth period are shown in the "negative growth" column. numbers of stocks which has capm estimation errors average greater in growth period than negative growth period are shown in the "growth" column. 5.1. t-test and mann-whitney u test analysis for consumer staples sectors in developed countries table 2. t-test and mann-whitney u test analysis results for consumer staples sectors in developed countries country group measurement method negative growth growth there is difference there is no difference total developed countries jensen’s alpha 55 21 5 71 76 sharpe ratio 74 2 68 8 76 sortino ratio 73 3 65 11 76 treynor ratio 42 34 10 66 76 while there is no significant difference between the capm estimation errors calculated by jensen’s alpha and treynor ratio for the stocks in consumer staples sector of developed countries during the growth and negative growth periods of the market, there is a significant difference between the capm estimation errors calculated by sharpe ratio and sortino ratio. according to the results of the analysis of the capm estimation errors calculated by jensen’s alpha and treynor ratio, it cannot be said that the capm is more reliable or unreliable in negative growth periods of the market compared to the growth periods. according to the results of the analysis of the capm estimation errors calculated by the sharpe ratio and sortino ratio, international journal of commerce and finance harun kolukısa & ali osman gürbüz 54 it can be said that the capm is less reliable in negative growth periods of the market compared to the growth periods. 5.2. t-test and mann-whitney u test analysis for consumer staples sectors in developing countries table 3. t-test and mann-whitney u test analysis results for consumer staples sectors in developing countries country group measurement method negative growth growth there is difference there is no difference total developing countries jensen’s alpha 38 21 14 45 59 sharpe ratio 56 3 43 16 59 sortino ratio 53 6 35 24 59 treynor ratio 35 24 13 46 59 while there is no significant difference between capm estimation errors calculated by jensen’s alpha and treynor ratio for the stocks in the consumer staples sectors of the developing countries during growth and negative growth periods of the market, it is seen that there is a significant difference between capm estimation errors calculated by sharpe ratio and sortino ratio. according to the results of the analysis of the capm estimation errors calculated by jensen’s alpha and treynor ratio, it cannot be said that the capm is more reliable or unreliable in negative growth periods of the market compared to the growth periods. according to the results of the analysis of the capm estimation errors calculated by sharpe ratio and sortino ratio, it can be said that capm is less reliable in negative growth periods of the market compared to growth periods. international journal of commerce and finance harun kolukısa & ali osman gürbüz 55 5.3. t-test and mann-whitney u test analysis for consumer discretionary sectors in developed countries table 4. t-test and mann-whitney u test analysis results for consumer discretionary sectors in developed countries country group measurement method negative growth growth there is difference there is no difference total developing countries jensen’s alpha 96 35 6 12 131 sharpe ratio 120 11 109 22 131 sortino ratio 103 28 70 61 131 treynor ratio 79 52 6 125 131 while there is no significant difference between capm estimation errors calculated by jensen’s alpha and treynor ratio for the stocks in consumer discretionary sectors of developed countries during negative growth and growth periods of the market, there is a significant difference between the capm estimation errors calculated by sharpe ratio and sortino ratio. according to the results of the analysis of capm estimation errors calculated by jensen’s alpha and treynor ratio, it cannot be said that capm is more reliable or unreliable in negative growth periods of the market compared to the growth periods. according to the results of the analysis of capm estimation errors calculated by sharpe ratio and treynor ratio, it can be said that capm is less reliable in negative growth periods of the market compared to growth periods. international journal of commerce and finance harun kolukısa & ali osman gürbüz 56 5.4. t-test and mann-whitney u test analysis for consumer discretionary sectors in developing countries table 5. t-test and mann-whitney u test analysis results for consumer discretionary sectors in developing countries country group measurement method negative growth growth there is difference there is no difference total developing countries jensen’s alpha 65 64 11 118 129 sharpe ratio 123 6 101 28 129 sortino ratio 120 9 70 59 129 treynor ratio 67 62 12 117 129 while there is no significant difference between capm estimation errors calculated by jensen’s alpha and treynor ratio for the stocks in consumer discretionary sectors of the developing countries during negative growth and growth periods of the market, there is a significant difference between capm estimation errors calculated by sharpe ratio and sortino ratio. according to the results of the analysis of capm estimation errors calculated by jensen’s alpha and treynor ratio, it cannot be said that capm is more reliable or unreliable in negative growth periods of the market compared to growth periods. according to the results of the analysis of capm estimation errors calculated by sharpe ratio and treynor ratio, it can be said that capm is less reliable in negative growth periods of the market compared to growth periods. 6. conclusion although capm is the most widely used model for determining the prices of financial assets, it has also been subject to many criticisms. one of the most important of these criticisms is the assumption of capm that investors are rational. in this study, the estimation errors of capm are examined separately in developed countries and developing countries in negative growth and growth periods of the market. international journal of commerce and finance harun kolukısa & ali osman gürbüz 57 the purpose of including developed and developing countries in the study is to examine separately the estimation errors of capm in markets in different country groups with different development levels. thus, it is to investigate whether the estimation errors of capm in negative growth and growth periods of the market differ according to the development levels of the countries. according to the results obtained, similar results were obtained for both country groups. it has been observed that the estimation errors of capm calculated by sharpe ratio and sortino ratio in both country groups differ in negative growth and growth periods of the market. however, it has been observed that the estimation errors of capm calculated by jensen’s alpha and treynor ratios do not differ in negative growth and growth periods of the market. the estimation errors of capm were analyzed separately for the companies in consumer staples sector and consumer discretionary sector of the indices included in the study. by examining the estimation errors of capm in both sectors separately, it has been investigated whether the errors of capm differ in negative growth and growth periods of the market in companies with different sensitivities to economic cycles. according to the results of the research conducted on companies in consumer staples sector, it has been observed that the estimation errors of capm calculated by sharpe ratio and sortino ratio differ in negative growth and growth periods of the market. however, it has been observed that the estimation errors of capm calculated by jensen’s alpha and treynor ratios do not differ in negative growth and growth periods of the market. similarly, according to the results of the research conducted on companies in consumer discretionary sector, it has been observed that the estimation errors of capm calculated by sharpe ratio and sortino ratio differ in negative growth and growth periods of the market. however, it has been observed that the estimation errors of capm calculated by jensen’s alpha and treynor ratios do not differ in negative growth and growth periods of the market. there are many factors that can affect the rationality and predictability of investor behavior. these factors may affect the reliability of the estimation of capm. in this study, as factors affecting investor behavior, negative growth periods in which negativities occurred in the market and growth periods in which there were no negative effects in the market were examined. negative growth periods are periods when investors tend to act irrationally. capm assumes that investors are rational. irrational behavior of investors violates this assumption of capm. therefore, the irrational behavior of investors will adversely affect the reliability of capm. international journal of commerce and finance harun kolukısa & ali osman gürbüz 58 according to the studies conducted with the jensen’s alpha and treynor ratio, which are used to measure capm estimation errors, there are no results supporting that investor behavior differs in negative growth and growth periods of the market. in the light of the research made with jensen’s alpha and treynor ratio, there is no evidence that investors act rationally and exhibit irrational behaviors in negative growth periods of the market. it cannot be said that the capm is less reliable in negative growth periods of the market than in growth periods. according to the "independent t-test" and "mann-whitney u" test results, it was observed that capm estimation errors did not differ statistically from growth periods in negative growth periods which included in the study with a high probability of irrational behavior. according to the research made by sharpe ratio and sortino ratio, which are used to measure capm estimation errors, it has been determined that investor behaviors differ in negative growth and growth periods of the market. the results obtained support that investor behaviors differ in negative growth and growth periods of the market. investors are expected to exhibit irrational behaviors during negative growth periods of the market. therefore, capm estimation errors are expected to be larger in the market negative growth periods than in the growth periods. it has been observed that the averages of the capm estimation errors calculated with sharpe ratio and sortino ratio are larger in negative growth periods of the market than in the growth periods. according to “independent t-test” and “mann-whitney u” test results, it has been determined that capm estimation errors differ statistically in negative growth and growth periods of the market. it is observed that the behavior of investors during negative growth and growth periods of the market affects the reliability of capm. it can be said that capm is less reliable in negative growth periods than in growth periods. the same data set, including returns on stocks and risk-free interest rates, was used to calculate capm estimation errors calculated by jensen’s alpha, sharpe ratio, traynor ratio and sortino ratio. however, there are differences in the way of using the data between the measurement methods. jensen’s alpha and treynor ratio use beta to measure capm estimation error, while sharpe ratio and sortino ratio do not use beta. this can be said to be the reason why the test results of capm estimation errors calculated by jensen’s alpha and treynor ratios, and the test results of capm estimation errors calculated by sharpe ratio and sortino ratio differ. in this study, it is aimed to draw attention to the fact that investor behavior in negative growth and growth periods of the market may affect the reliability of capm. it is seen that the capm international journal of commerce and finance harun kolukısa & ali osman gürbüz 59 estimation errors calculated by sharpe ratio and sortino ratio are larger in negative growth periods of the market compared to the growth periods. one of the assumptions of behavioral finance theory that explains the change in investor behavior is that investors avoid negative growth. investors' tendency to behave irrationally may be high in negative growth periods of the market, where there are negativities that will cause changes in investor behaviors and cause investors to behave emotionally. for this reason, it will be more difficult to predict investor behavior in negative growth periods than in growth periods. capm users are advised to pay attention to this situation. the fact that capm estimation errors are small in growth periods of the market supports the assumption of capm that the investors are rational. it can be said that capm results are reliable when investors are rational. supporters of the efficient market hypothesis and capm state that price deviations caused by irrational investors will disappear with the intervention of rational investors. the results of tests with capm estimation errors calculated by jensen’s alpha and treynor ratio support this view. according to the test results with the capm estimation errors calculated by jensen’s alpha and treynor ratio, the h0 hypothesis cannot be rejected. this study is not aimed at rejecting capm or general acceptance of behavioral finance. the factors that cause irrationality in investor behavior and capm estimation errors were investigated. according to the results obtained in the study, although there are no findings proving that capm is not a reliable model, it is aimed to draw attention to the factors that those who use capm should pay attention to when using the model. according to the results obtained in the research, it is seen that capm is a more reliable model in the growth periods of the market compared to negative growth periods of the market. in future research, the effect of investor behavior on capm estimation errors can be investigated by increasing the number of companies covered in the research, by including all companies in the examined market, by including different countries and sectors in the research, by expanding the date range of the data used in the research. international journal of commerce and finance harun kolukısa & ali osman gürbüz 60 references apergis, n. & rehman, m. u. 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(2011). investor sentiment and the mean-variance relation. journal of financial economics, volume 100. available at https://www.efmaefm.org/0efmsymposium/2006/papers/33-efm06%20-%20yuanmeanvariance.pdf accessed july 6, 2019 https://www.efmaefm.org/0efmsymposium/2006/papers/33-efm06%20-%20yuan-meanvariance.pdf https://www.efmaefm.org/0efmsymposium/2006/papers/33-efm06%20-%20yuan-meanvariance.pdf international journal of commerce and finance, vol. 6, issue 1, 2020, 194-203 194 modeling the disposal of domestic drug waste through causal loop diagram mücahit abdullah orhan, istanbul commerce university, istanbul turkey nagehan candan uca, istanbul commerce university, istanbul turkey orcid 0000-0001-7438-8640 abstract the ease of access of the sick individuals to the drugs cause an increase in drug consumption with the development of the health sector. the incomplete information of the patients about the drug use causes the treatment to be incomplete and the drugs to become waste medicine. increasing and improper disposal of drugs that are not used at home threatens human health and the environment. there is an urgent need for the correct disposal process for drug waste in homes. in order to prevent the wrong disposal of these drugs, solutions are produced within the scope of reverse logistics and green supply chain activities. the aim of the study is to understand the system structure in the process of disposal of domestic pharmaceutical waste in istanbul and to establish a mental link between the structure of the system and the behavior obtained as a result of the system. in the study, the processes of reverse logistics activities in the turkish pharmaceutical industry in domestic drug waste were examined and a system dynamics model was created.. keywords: reverse logistics, system dynamics approach, domestic drug waste, causal loop diagrams 1. introduction today, it is known that people use natural resources uncontrollably to meet their needs. the most important of the resources that people provide uncontrolled use in this regard is natural resources. the fact that people use natural resources uncontrollably causes the loss of natural resources and the environmental order to deteriorate. for this reason, it is thought that people use natural resources without saving, it is thought that famines will be experienced and the natural resources will be depleted in the life process. it is stated by researchers that the shortage of natural resources and raw materials is on the way for future generations. for all these reasons, reverse logistics, recycling practices, separation of materials that do not have any benefit in nature and sending them for recycling have been an important step in the protection of natural resources. (keskin, 2008). with the effect of globalization, the population growing continuously, the increase in the level of welfare, the increase in urbanization rates, and an increase in waste types and waste amounts are observed. there is a need for waste management based on the waste problem in the country. various factors such as recycling waste, correct waste disposal, recycling energy, and a hierarchy of waste are at the core of the integrated waste management. in order to act more consciously as a citizen in waste management, we need to have knowledge about waste management and firstly apply the waste in our own homes and environment (ç.ş.b., 2019). wastes are examined in three parts. wastes are generally evaluated as medical waste, hazardous waste and nonhazardous waste. hazardous waste is generally industrial wastes that endanger the environment and human health caused by technological products. industrial wastes are hazardous and harmful. toy industries, pharmaceutical factories, some refineries and power plants generate hazardous waste. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e modeling the disposal of domestic drug waste through causal loop diagram 195 on the other hand nonhazardous wastes are radioactive or chemical originated wastes that have occurred due to biological events that do not pose a physical hazard. these wastes generally originate from hospitals or similar medical institutions. these wastes are dangerous in terms of causing some diseases. nonhazardous wastes are also examined in 3 groups; infectious wastes are expressed as breaker piercing wastes and pathological wastes. the issue of waste management has gained importance in terms of endangering human health and the environment due to the wastes occurring in hospitals and the drugs that patients do not use. hospital wastes have recently started to pose an important problem with the increasing number of populations and the tendency of people to the hospital. for this reason, it is possible to say that the amount of waste generated by the health institutions when it takes up less space, although it occupies less space. they coordinate the municipal and hospital management disciplines for waste management. these studies include the processes of collection and disposal of medical wastes in accordance with the rule. reverse logistics methods have become important for waste management in order to prevent medical waste or normal waste from being harmed by humans and the environment. general waste management regulations on medical waste, including its activities in 1991 were carried out in turkey. these arrangements were arranged in line with the european union legislation and in accordance with the conditions of the country. in this regard, wastes occurring in hospitals were put into practice by the ministry of environment and urbanization in 2005, under the medical waste control regulation. in 2008, the regulation on control of hazardous wastes came into effect with the waste management action plan. in the regulation on general management of waste, it is reported that in 2010 it covers articles related to the regular storage of waste. istanbul metropolitan municipality has undertaken waste management in istanbul. this institution generally works to eliminate medical wastes and wastes occurring in hospitals. disposal procedures are generally carried out using sterilization and incineration methods. the presence of drugs in the environment, especially in water resources, has been confirmed by various reports (epa, 2019). medicines and contaminated foods are suggested to affect living things through water. it proposes the incineration of domestic drug waste collected according to 2012 to the epa. medicines that are not used by domestic and expired should be put in the process of disposing of medical waste. however, end consumers dispose of their waste by either throwing them away or pouring them into the toilet. in a survey conducted with the participation of 398 people in ireland, 72% of respondents (281) stated that they disposed of the drugs. 72% (202) did this in an environmentally unsuitable manner. in the responses given to the questionnaire, it was shown that the unused drugs were disposed of 51% with domestic waste, 29% with a sink or 14% with a toilet (vellinga et al. 2014). in the families in a study conducted in the çukurova region, it was investigated for which reasons the drugs were out of use and it was stated that the drugs were not used because of the frequent expiration of the patients, the interruption of the treatment process of the patients, and the doctor recommending another drug (köse et al. 2013). in another study, it has been determined that the people of the villages in thailand have waste medicines in the houses and that they are thrown to the trash as the most common method (arkaravichien et al., 2014). trashed drugs pose a serious problem to the environment and human health. disposing of unused drugs with domestic waste can cause wastewater leakage and cause environmental problems (bound and voulvoulis, 2005). these harmful drug wastes, which are poured into the toilet and reach the sea from sewage, undoubtedly affect the sea creatures. there is also evidence that the presence of antibiotics in the waterways affects existing bacteria and can lead to antibiotic resistance (costanzo et al, 2005). in addition to the direct environmental effects of pharmaceuticals, the presence of antibiotics in wastewater has the potential to break down antibioticresistant organisms and disrupt wastewater treatment processes (bound et al., 2006). reverse logistics applications have gained importance in terms of medical waste management in order to reduce the harm of wastes and prevent their negative effects on the environment. metropolitan municipalities manage this process in a controlled manner for the proper collection and disposal of medical waste from public and private health institutions. in istanbul, this process is carried out by the metropolitan municipality waste management department. this institution eliminates the medical waste of private and public health institutions across istanbul in a controlled manner. this process is completed by sterilizing medical waste and by burning it. there are some studies to collect medications that are not used at home or that have expired. one of these is the study of using genetic mücahit abdullah orhan & nagehan candan uca algorithms to model the reverse logistics process in the project of collecting household drug waste. in the study, reverselogic network design was used in the disposal of domestic drug wastes (kırda, 2013) the research is to answer the question of how to dispose of household drug waste in a controlled way. the aim of this study is to determine the effects of domestic pharmaceutical waste in the process of disposal in istanbul. it is a methodology and computer technique used to identify and understand problems with complex system dynamics. in this study, a model proposal was developed with the help of the system dynamics approach, the vensim ple program, for the disposal of medical waste and domestic drug waste. the model was applied by considering the disposal process of domestic pharmaceutical waste in istanbul. 2. literature review t since many countries do not have standard drug disposal protocols, there is a lot of confusion about how drugs should be disposed of (tong et al, 2011). in lithuania, most people throw or burn unwanted drugs (krupiene and dvarioniene, 2007). research in countries such as the uk, sweden, and new zealand has shown that people dispose of drugs in ways that can harm the environment (braund et al. 2009). these studies have also shown that if patients are aware of the effect of drugs on the environment, it is more likely to return their medication for proper disposal and disposal (tong et al. 2011). in sweden, more than 50% of the population participated in a national and public system used to dispose of unused drugs through pharmacies (persson et al. 2009). in sweden, 73% of people have been shown to return unused drugs to the pharmacy if a formal and continuous system is available for the disposal of unused drugs (persson et al., 2009). pharmacies in lithuania are used as drug collection stores (krupiene and dvarioniene, 2007). in a study carried out in india, 65.5% of 145 people emphasized that the municipality should collect unused waste drugs and 88% of them discarded unused or expired drugs (loges et al, 2019). cork and kerry have worked to safely dispose of unwanted and unused medicines in the counties of ireland and to implement a structured system (council, 2011). in hong kong in 2015-16, 1865 people were researched on using and disposing of unused drugs at home. it was determined that three quarters of the population had unwanted medication at home and on average, 138.4 g of medication was stored in each household. the leading type of drug is cold medicine (chung & brooks, 2019). a system designed by the spanish national pharmaceutical industry association (farmaindustria) was designed in 2002. data published by the entegre packaging management and collection system (sigre) show an annual increase in the number of medicines that customers return to dispose of them in accordance with their local pharmacy. for example, more than 1,700 tons of packages were collected in 2004 (sigre, 2019). patients who are familiar with the effects of drugs on the environment were more likely to return drugs for proper disposal and disposal (tong, et al., 2011). municipalities may be more effective in the disposal of domestic drug waste. however, a survey conducted in kuwait found that municipalities are unlikely to collect domestic drug waste. it may be more costeffective to use pharmacies as collection points in reverse distribution (abahussain & ball, 2007). medicines in the home are handed over to the collectors by the public as a takeback day event in america. the application, which is carried out twice a year, allows safe disposal of unused drugs. the weight of the medicines collected in october 2019 as part of take back activities was 441.5 tons (t.b.d, 2020). in our country, there are currently certain studies to collect and dispose of household drug waste. these are generally the studies that pharmacists have taken steps by forming organizations in different cities. on the other hand, there is a working model that municipalities run together through public institutions. çekoop is an organization organized for the disposal and disposal of 'domestic waste drugs' by pharmacists who are directly responsible for the drug in 2010 in i̇zmir. it is the disposal of expired or unused domestic waste drug collected from the domestic through members who have been expired, broken or degraded in pharmacies and voluntary domestic, without harming the environment. it is destroyed by burning according to the practices determined by the world health organization. another study was launched in 2015 with the coordination of gaziantep provincial health directorate, "disposal of domestic waste drug project". during this study, gaziantep metropolitan municipality plays an important role in the social awareness study. with this study, which was initiated 4 years ago, awareness of public employees, relatives and the public was created in some districts. in this way, it is ensured that the medicines are collected and disposed modeling the disposal of domestic drug waste through causal loop diagram 197 of. during the study, awareness raising increased due to awareness raising activities. at the end of the training, questionnaires were made and the data of the questionnaire were compared among the drugs collected. the collected drugs are divided into pharmaceutical groups. it has been determined that the project is permanent with the training, survey and collection activities. it was determined that 46% of the collected drugs were discarded without any use (t.c.i̇.b., 2020). 3. conceptual framework reverse logistics is known as the retrieval and evaluation of used or unwanted products from users and disposal of products without added value. businesses also undertake various initiatives in this field for reasons such as reducing the costs of reverse logistics activities, respectability, legal obligations and environmental responsibility. reverse logistics draws a great deal of attention because of the potential for appreciation of used products. in addition, legislation and regulations, consumer awareness and social responsibility towards the environment are also important factors in the interest of logistics in reverse (pokharel & mutha, 2009). waste is expressed as low value, expiring and useless residues (öztürk et al, 2015). it is all of the items that appear at all stages from production to consumption and are no longer useful for the user (tdk, 2019). in another definition, waste is called any substance that is thrown into the environment or left by the producer or the person who actually owns it, or that must be disposed of (ç.ş.b., 2019). according to the world health organization, waste and byproducts cover a wide variety of materials. infectious waste; waste transmitted by blood and other body fluids, cultures and stocks of infectious agents from laboratory studies, or waste from infected patients are bandages and disposable medical devices. pathological waste is human tissues, organs or fluids, body parts and contaminated animal carcasses. cutting waste, syringes, needles, disposable scalpels and knives, etc. chemical waste are laboratory preparations, disinfectants, sterilates, and solvents and reagents for heavy metals found in medical preparations (such as mercury in broken thermometers). pharmaceutical waste is expired, unused, and contaminated drugs and vaccines. cyctotoxic waste is waste containing genotoxic properties (ie highly dangerous substances that are mutagenic, teratogenic or carcinogenic), such as cytotoxic drugs and their metabolites used in cancer treatment. radioactive waste is products contaminated by radionuclides, including radioactive diagnostic material or radiotherapeutic materials. nonhazardous or general waste is waste that does not pose a specific biological, chemical, radioactive or physical hazard. the main reason for the disposal of medical wastes is to get rid of the harmful effects of the wastes and to turn them into a nonhazardous state by protecting them from harm to human and environment. various methods are used for the disposal of medical waste. among these, methods such as chemical disinfection, microwave radiation, incineration, and autoclaving are used. for pathological wastes, disposal methods such as incineration and burial are used. disposal method varies according to the characteristics of medical wastes (who, 2018). 4. methodology system dynamics approach, while analyzing the structure of a system and developing the system, leads people to think critically about the problems they face. the most important one is that with a system dynamics approach, a person can establish a mental link between the structure of the system and the behavior achieved as a result of the system. the aim of this study is to understand the system structure in the process of disposal of domestic pharmaceutical waste in istanbul, and to establish a mental link between the structure of the system and the behavior obtained as a result of the system. the system is a set of interrelated elements whose boundaries are determined. the interaction of system elements with each other and the system environment leads to the unique behavior of the system (sezen & günal, 2009). the system can be defined as a series of interconnected components that are consistently organized to achieve something (meadows, 2008). system dynamics is an approach that aims to understand complex systems and develop policies that allow them to be changed in the desired direction. it deals with feedback and delayed responses that affect system behavior. system thinking is an approach that takes into account all aspects from a wide perspective and focuses on the relationships between different parts of the problem. in line with this approach, the group of physical mücahit abdullah orhan & nagehan candan uca and nonphysical elements, which are related to a specific purpose, is called "system". thanks to these relationships, the lower parts unite and form the whole. in this case, the system forms a whole with integral parts (tecim, 2004). it is a methodology and computer technique used to identify and understand problems with complex system dynamics. system dynamics approach, while analyzing the structure of a system and developing the system, leads people to think critically about the problems they face. the most important one is that with a system dynamics approach, a person can establish a mental link between the structure of the system and the behavior achieved as a result of the system. in this study, a model proposal was developed with the help of the system dynamics approach of disposal of medical wastes and domestic pharmaceutical wastes, with the help of the vensim ple program. 4. results and discussion causal loop diagrams are an effective tool to show the feedback structure of the system. loop diagrams consist of variables linked by arrows that show causal effects. arrows show the relationship between the variables. the arrows on the arrows indicate the direction of the relationship between the variables. 4.1. drug use stock and flow diagram according to the world health organization, the drug; it is defined as a substance or pharmaceutical product that can be used to alter or examine physiological systems or pathological conditions for the benefit of the area. (w.h.o., 2019). the use of the drug is a matter to be considered. unconscious use of drugs increases the amount of unused domestic drug. this increases drug use again. the drug use stock and flow diagram is shown in figure 1 below. figure 1. the drug use stock and flow diagram 4.2. unused domestic drug stock and flow diagram unused domestic drug stock and flow diagram in figure 2 is given below. domestic drug that are not used in homes become waste by expiring over time. drugs that become waste at home are disposed of by wrong methods. as a result, it has a negative effect on the marine life either by throwing it away or by pouring it into the toilet. the negative impact of marine life affects the environment and human health. as human health is adversely affected, the demand for health service will increase. thus, by increasing the production of drugs, it affects drug sales in the same direction. if drug sales increase, unconscious drug use increases. unconscious drug use will also increase the am ount of unused domestic drug. variables affected by the amount of domestic unused drugs ; the number of pharmacies, drug use, expired household drug waste and medical waste variables that affect the amount of domestic unused drugs are drugs with unconscious drug use and side effects. economy drug use drug amount? drug production drug sale unconscious use of drugs unused domestic drugs + + + + modeling the disposal of domestic drug waste through causal loop diagram 199 figure 2. unused domestic drug amount stock and flow diagram 4.3. unused domestic drug amount stock and flow diagram the suggestion proposal for the problem of disposal of domestic drug waste in our model is shown in figure 3 below. figure 3. proposed causal loop diagrams for the disposal of domestic drug waste unused domestic drug expired domestic drug d.drugs that disposed of by wrong metods marine life environment human health? demand for health service drug use unconscious drug use + + + + + + economy drug amount? drug production drugsale + + + expired domestic drug + pharmacy number pharmaceutical warehouses + partial storage areas the municipal medical waste collection unit medical waste disposal centres + + unused domestic drug amount l + mücahit abdullah orhan & nagehan candan uca unused domestic drugs quantity increase in over time. as a result, it increases domestic drug waste that has expired. the disposal process of unused drugs at home or whose use has expired is initiated by leaving them to pharmacies. they collect these drugs accumulated in pharmacies while the delivery vehicles of the pharmaceutical warehouses return to the warehouse. these drugs to be disposed by the pharmaceutical warehouses are stored in partial storage areas. disposal is terminated by taking the drugs that are kept in partial storage areas and the municipal medical waste collection unit to these waste drugs regularly to the medical waste disposal centres. thus, a positive contribution is made to both the environment and human health one of the variables that make up our model is the drug sales variable. as the amount of drug sales increased, it has a positive effect on the number of pharmacies, causing pharmacies to increase. increasing the number of pharmacies increases the waste generation as it will cause the drugs to be destroyed. waste causes an increase the amount of hazardous waste. this has a negative impact on human health. decreased human health leads to increased demand for health. as a result, health demand has a positive (+) effect on drug production. and so it increases the sales of drugs again. the system dynamics model of the study is shown in figure 4 below. unconscious drug use drug use number of people drug price health investments demand for health service personel hazardous waste municipalities medical waste collection unit partial storage areas pharmacy number pharmaceutical warehouses patient improper treatment practices side effects medical waste drug amount? number of hospitals unused domestics drug amount development of effective treatment metods expired domestic drug drugsale drug production waste generation + + + + + + + medical waste disposal centres number + + + + + + + + + + + + + + + + + health expenses + + + + modeling the disposal of domestic drug waste through causal loop diagram 201 5. conclusion there are various studies in the field of domestic drug waste collection and reverse logistics applications in the literature. but this study also theoretically contributes to the researches in this field as modelling the process by using the system dynamics model in order to understand the system structure in the process of disposal, and to establish a mental link between the structure of the system and the behaviour achieved as a result of the system. system dynamics approach, while analysing the structure of a system and developing the system, leads people to think critically about the problems they face. the most important one is that with a system dynamics approach, a person can establish a mental link between the structure of the system and the behaviour achieved as a result of the system. the purpose of this study is to understand the system structure in the process of disposal of domestic pharmaceutical waste in istanbul, and to establish a mental link between the structure of the system and the behaviour obtained as a result of the system. in this study, as a result of the causal cycle analysis revealed by the system dynamics model, the need to eliminate domestic drug wastes in a controlled manner through competent institutions and organizations has been introduced. in this way, it is envisaged to reduce the negative effects of drugs that are expired or not used on the environment and human health. thus, cooperation between private and public institutions in this process is ensured. we can say that the process will be managed correctly, fast, beneficial and effective for human health. by this model, it can be said that disposalal of domestic pharmaceutical waste throughout the country can be contributed to its solution through the contributions of municipalities, pharmacies and pharmaceutical warehouses and their work in a fully integrated system. the study only covers the process of disposal of household drug waste. medicine used in medical institutions and organizations are excluded. further research can be done by taking coverage in this regard. in the study, due to insufficient data, disposalal scenarios could not be created and further analyses could not be made. in future studies, scenario analysis can also be included in the study. references abahussain, e. a., & ball, d. e. 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(2019, 12 10). health-care waste. who: https://www.who.int/news-room/fact-sheets/detail/health-carewaste received from international journal of commerce and finance, vol. 6, issue 1, 2020, 41-49 41 effect of financial incentive scheme practice on employees’ motivation in case of commercial bank of ethiopia kibru kefay jimma university, ethiopia chalchissa amentiea kero jimma university, ethiopia lalise kumera jimma university, ethiopia abstract the purpose of this study was to investigate the effect of financial incentive scheme practice on employees’ motivation in the case of cbe jimma district. the study was descriptive as well as explanatory which used primary source of data. non-probability and probability sampling method were applied (cluster & purposive). accordingly, the major findings are, the overall perception of respondents about current financial incentive practice was shown as they are dissatisfied with salary and they are neither satisfied nor dissatisfied with fringe benefits pay. the result of regression analysis shows that; financial incentive variables (salary and fringe benefits pay) were not significant predictors of employees’ motivation. also of that, a significant portion of employees was at good motivation level to perform their job. also, it is advisable to the bank to reviews its salary scale & fringe benefits pay practice even so it had not significantly affect employee motivation it may be a cause for employees’ dissatisfaction. keywords: report financial incentives, salary, fringe benefit, motivation 1. introduction organizational theorists have generally acknowledged that the key quality that a corporation will ever have are its human resources, but the productive accomplishment of the goals of the organization are going to be subject to the correct readying of its human resources. moreover, organization success rests on its staff, so the necessity to worry on components that may impact on employees’ motivation and performance from the views of (liao et al., 2007). motivation is “a predisposition to behave in purposeful manner to realize specific, unmet wants and then to realize them, and also it is the inner force that drives people to accomplish personal and organizational goals” (williams 2010). motivation is that the increase within the employees’ work ethic so as to perform to a selected personal accomplishment (beardwell, et al, 2010). motivation is about of processes supported a force that produces the energized behavior and directs it towards some goal to realize (baron and linguist, 2008). the reward structure ought to encourage adept workers to remain long period in the organization similarly as increase the motivation and commitment to the organization and thus increase the productivity (brickley et al, 2002). according to mugaa, (2017) “despite, a number of incentives being given to employee, it was revealed that some incentives are more powerful than others in motivating workers. this is because some are more valued than others, cash incentives are more preferred than non-cash incentives. barongo, (2013) there is a significant positive relationship between salary and employees’ motivation. according to saira et al, (2014) money is ranked top as an influential factor in creating employee motivation because it satisfies the basic necessities along with attainment of power fulfills belongingness needs. according to biruk, (2017) the independent variables (payment/salary and benefit) are positively and significantly related to employee motivation as this variable changes directly affect employee motivation. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e kibru kefay & chalchissa amentiea & lalise kumera 1.1. statement of the problem increasing motivation, commitment and engagement levels are key organizational components nowadays. the improvement of compensation policies has an important role in motivating staff to supply high ranges of performance, discretionary effort and contribution (salanova and kirmanen, 2010). banks function under intense strain and in a competitive environment. they should justify their existence with the aid of making profits and customers require them to grant better service. this has made it crucial for banks to use fantastic administration control to make sure that their personnel are working hard to reach the organization’s objectives (magnusson & nyrenius, 2011). financial incentives can motivate worker to perform well on their occupation. the reason for financial incentives is to compensate workers for amazing occupation execution through cash. research demonstrates that pictured financial incentives vary for workers in view of profession stage and generation (osa, 2014). shaheen and farooqi, (2014) have presumed that for individuals with acceptable financial incentives, some nonfinancial helpers are more compelling than additional trade out building long hour worker engagement in most divisions, work capacities, and business connections. numerous monetary remunerates basically create short-lived supports of vitality, which can have harming unintended outcomes. as fact, most organizations provide only money or financial incentives to remunerate employees for the work they done for the organization by perceiving that people need only money to stay, motivated and work in their organization. moreover, initiation for the study was that the word motivation seems simple to call and collection of only ten letters but it is a key for everyone’s (individuals or organizations) success. it is a means for success even more than ability because people or employees can improve their ability by different meanness only if they have motivation for what they need to do. therefore, the above gap and the importance of the title initiated the researcher to conduct this research. hence, this study was undertaken to investigate the effect of financial incentives scheme practice on employees’ motivation in commercial bank of ethiopia jimma district. it would try to response the following research questions. what are the current perception of employees about financial incentives and their level of motivation? what is the employees’ motivation level in the bank? what is the relation between financial incentives and employees’ motivation? 1.2. objective of the study the main objective of the study was to investigate the effect of incentive scheme practice on employees’ motivation in commercial bank of ethiopia in jimma district. 1.2.1. specific objectives 1. to understand the perception of employees’ about non-financial incentives 2. to examine the motivation level of employees’ of the bank. 3. to identify the relation between non-financial incentives (promotion, recognition and training) and employees’ motivation. 1.2.2. hypothesis of the study h0: salary has no positive & significant effect on employee’s motivation h0: fringe benefit pay has no positive & significant effect on employee’s motivation 2. literature review 2.1 concept of motivation the study of motivation encompasses the science of perception ‘why people behave the way they do?’ (buelens et al, 2010). in easy phrases motivation can therefore be described as the will to perform (brooks, 2009). this definition paints motivation as a type of inner pressure or force that affect the actions and efforts of a person. motivation is concerned with the power and course of conduct and the factors that have an impact on people to behave in certain ways (armstrong, 2009). the term ‘motivation’ can refer variously to the goals persons have, the ways in which persons chose their dreams and the approaches in which others attempt to change their effect of financial incentive scheme practice on employees’ motivationş in case of commercial bank of ethiopia 43 conduct (armstrong, 2009). motivation is set of procedures based totally on a pressure that makes the behavior energized and directs it closer to some purpose to attain (baron and greenberg, 2008). 2.2. types of motivation 2.2.1. intrinsic motivation intrinsic motivation arises from a psychological reward that comes from inside and not as a result of exterior forces (buelens et al., 2010). intrinsic motivation is described as the motivation to execute the job in order to acquire pleasure and pleasure in the absence of financial reward (kuvaas &amp; dysvik, 2010). fang and gerhart (2012) defined intrinsic motivation as the motivation to perform work because the project is interesting and gratifying to the employee. 2.3. extrinsic motivation for an individual to be extrinsically influenced then an instrumentality between a recreation and some separate reward is required. this means that motivation is derived not from the activity itself, but instead from the extrinsic penalties to which the activity leads (gagné &amp; deci, 2005). when a character is extrinsically influenced the person is driven to perform his or her mission due to the fact it leads to some separate end result (deci and ryan, 2008). 2.4. theory of motivation 2.4.1. maslow’s hierarchy of needs theory probably one of the most known need theories, maslow’s hierarchy of needs theory, says there exists a hierarchy of 5 needs categorized into lower order and higher order needs, each of which must be satisfied before the next one becomes dominant. those needs are physiological (i.e. hunger, thirst, shelter, sex, health among other bodily needs) and safety needs are both categorized as lower order needs, which must be satisfied externally through salaries, type of contract (safety) and insurance policies among others. we can see those needs are extrinsic. on the upper half of the pyramid, social (i.e. affection, friendship, belongingness, acceptance), esteem (i.e. autonomy, self-respect, status and recognition) and self-actualization (i.e. growth, living up to one’s potential, self-fulfillment) are categorized as higher order needs, which must be satisfied intrinsically (judge and robbins 2009). 2.4.2. hertzberg’s two-factor theory according to herzberg (1966), intrinsic elements such as the work itself, achievement in the work, the possibilities of personal growth and recognition, and being charged with vital responsibilities, regarded to end result from the human capability to personally advance and grow. he called these elements motivators. on the other hand, extrinsic factors had been these elements that prevented job pride and employee growth. the extrinsic factors such as working conditions, salary, job security, and relationships with others are not phase of the work, but they refer to the environment, and prevent job dissatisfaction. herzberg calls these elements hygiene, dissatisfiers or upkeep factors (herzberg, 1966). 2.4.3. erg theory this theory was established by (alderfer, 1972), the theory ascertains three diverse stages of a concept which is somewhat related to maslow’s hierarchy of needs. mcshane et al. (2003), give details of alderfer’s erg concept as a satisfied stimulus theory that has three features of basic wants categorized in an ordered arrangement by which workers develop the direct significant want. as soon as the lower desire or need is achieved the next higher level want in the ranked-order yet to be accomplished turns to the lower level need. kibru kefay & chalchissa amentiea & lalise kumera 2.5. overview of financial incentives financial incentives are developed to satisfy basic human needs, encouraging and pushing people to do their best work performance, the recruitment of their capabilities and enhance their competencies level. financial incentives are also designed as a means of payment to increase productivity and improve employee work performance. therefore, the more employees produce the more they can get. whereas, decrease in quality or quantity of work might deprive employees’ from earning part or all of their incentive (jadallah, 1997). selected financial incentives for this study were basic pay and fringe benefits explained as follow. 2.6. base pay/ salary base pay is the core payment made through the organization for work performed and typically tends to mirror the organizational value of either the work that the employee undertakes or the value of skill and competency who is undertaking the work. it is directly related to time and the price is calculated in terms of quantity of hours, week or month that the employee carried out the project given (thorpe &amp; homan, 2000). 2.7. fringe benefits gupta (2014) states that key employee allowance advantages encompass residence hire allowance, travel allowance and any other extraordinary allowances given at a normal interval at a exact time by the organization. hina, et al (2014) has the same opinion that allowances are given to maintain the fine genius in the enterprise and scale as per the position of the employee in the organization. 3. research methodology this research paper adopts both descriptive & explanatory research approach since its purpose was to identify and describe the perception of employees about the financial incentive scheme practice of the bank; their motivation level and also it would identify the cause and effect relationship between financial incentive scheme practice and employees’ motivation. in addition to that the research was quantitative research. 3.1. population of the study the target population was the total 1355 professional employees’ of commercial bank of ethiopia jimma district. 3.2. sampling technique the study employs both probability and non-probability sampling techniques. four city clusters namely, jimma, bonga, bedelle, and mettu cities are selected through purposive sampling technique. from those cities totally 14 branches as well as respondents for the questioner were selected by simple random sampling technique and proportion of respondents for each branch was determined judgmentally by the researcher. 3.3. sample size yamani (1967) formula was used to determine the sample size of the study. n=n/ (1+ne2) n= 1355/ (1+1355(0.05)2 n= 1355/ (1+3.3875) n= 308 where; “n” is the sample size, “n” is the population size and “e” is the level of precision. at 95% confidence level, degree of variability=0.05 and level of precision/sampling error= 5%. 3.4. data sources and types effect of financial incentive scheme practice on employees’ motivationş in case of commercial bank of ethiopia 45 the only source of the data used was primary in order to determine the effect of incentive practices on employee motivation and to meet the study objectives and the type of the data was quantitative. 3.5. data processing and analysis techniques the data collected was analyzed through quantitative data analysis techniques. the numerical data analysis was done using spss (statistical packages for social science) software program. both descriptive (frequencies, percent, cumulative percentage, mean, standard deviation) and inferential statistics (correlation, regression and anova) would be used for data analysis. the pearson correlation coefficient was used to measure the linear relationship between dependent and independent variables. 4. data analysis and findings a total of 308 questionnaires were distributed to the sample respondents. from that only 284 questionnaires were returned out of which only 273 were usable. the response rate was 92%. 4.1. result of descriptive statistics table 1 frequency, mean and standard deviation for measures of basic pay iv variables frequency mean sd 1 2 3 4 5 1 my basic payment is reasonable with respect of my contribution 35 12.8% 115 42.2% 76 27.8% 45 16.5% 2 0.7% 2.50 .940 2 my salary is fair when compared with that of similar jobs in other companies. 31 11.4% 125 45.7% 66 24.2% 45 16.5% 6 2.2% 2.52 .970 3 my salary is enough to satisfy my needs. 39 14.3% 147 53.8% 53 19.5% 27 9.9% 7 2.5% 2.33 .927 4 salary increment is managed fairly. 55 20.1% 122 44.7% 71 26% 24 8.8% 1 0.4% 2.25 .888 5 salary adjustment is made according to the current market 36 13.2% 145 53.1% 67 24.5% 25 9.2% 2.30 .811 over all perception of employees towards the basic pay/salary 2.38 source: owen survey, 2019 1=strongly disagree, 2= disagree, 3= neutral, 4= agree, 5=strongly agree in the above table 1, out of the total respondents (62.26% in average) have negative feeling about the salary scale of the bank. in other way, the mean value for the salary was 2.38. so, depending up on the two figures we can say that majority of respondents were not satisfied by the basic pay/salary of the bank. table 2: frequency, mean and standard deviation of respondents for fringe benefits of bank. v variables frequency mean sd 1 2 3 4 5 1 my medical allowance is 36 34 66 121 16 3.17 1.142 kibru kefay & chalchissa amentiea & lalise kumera satisfactory. 13.2% 12.5% 24.2% 44.3% 5.9% 2 transportation benefit is fair with the current cost of transportation service. 32 11.7% 38 13.9% 58 21.2% 115 42.2% 30 11% 3.27 1.184 3 house allowance pay of the bank cover my house rent 25 9.2% 20 7.3% 76 27.8% 123 45.1% 29 10.6% 3.41 1.074 4 overtime pay is fair and reasonable 48 17.6% 38 13.9% 33 12.1% 127 46.5% 27 9.9% 3.17 1.296 5 fringe benefit scheme is fair when compared with similar companies 27 9.9% 22 8.1% 80 29.3% 101 37% 43 15.8 % 3.41 1.147 over all perception of employees towards the fringe benefit of bank 3.28 source: owen survey, 2019 1=strongly disagree, 2= disagree, 3= neutral, 4= agree, 5=strongly agree around half of the respondents (53.66% in average) have positive attitude for the fringe benefit practices of the bank. the results of overall perceptions of respondents towards the fringe benefit practice of the bank shows that the majority of respondents were at the position of indifference (neutral) feeling at the mean of 3.28. table 4. frequency, mean and standard deviation for measures of employee motivation iv variables frequency mean sd 1 2 3 4 5 1 i have opportunity to accomplish my objectives 28 10.3% 68 24.9% 150 54.9% 27 9.9% 3.64 .796 2 i have loyalty and belongings to my bank 27 9.9% 14 5.1% 42 15% 149 54.6% 41 15% 3.60 1.11 4 3 the bank provides me with challenging and meaningful jobs 29 10.6% 45 16.5% 32 11.7% 119 43.6% 48 17.6% 3.41 1.25 2 4 i have encouragement to improve my performance and to develop my skills 27 9.9% 30 11% 72 26.4% 130 47.6% 14 5.1% 3.27 1.05 7 5 i support and help each other with my coworkers or staff members 12 4.4% 27 9.9% 45 16.5% 151 55.3% 38 13.9% 3.64 .986 6 i am committed to my responsibility 14 5.1% 46 16.8% 59 21.6% 109 39.9% 45 16.5% 3.46 1.10 8 7 my accomplishments give me an important sense of self-respect 12 4.4% 53 19.4% 65 23.8% 113 41.4% 30 11% 3.35 1.05 1 over all perception of employees towards their motivation level 3.48 source: owen survey, 2019 1=strongly disagree, 2= disagree, 3= neutral, 4= agree, 5=strongly agree 4.2. correlation and regression analysis effect of financial incentive scheme practice on employees’ motivationş in case of commercial bank of ethiopia 47 from the result of pearson correlation, salary have a very weak positive relationship with employees’ work motivation but fringe benefit pay has moderate positive relationship with employees’ work motivation. the study used a multiple linear regression model and examined the effects and magnitudes of the independent variables on motivation level of employees. the regression result was presented and discussed as follow. mtv= α + β1pro + β2rec + β3tra + β4fri + β5bas + e where; mtv = motivation, α = the constant, or y intercept βi= the coefficient of the independent variables pro = promotion, rec = recognition, tra = training, fri = fringe benefit, bas = basic pay/salary e = the error term coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta (constant) fringe benefit pay basic pay/salary 3.605 .156 .047 1.655 .091 .085 .114 .025 2.178 1.715 .554 .030 .088 .580 source; spss results, 2019 a. dependent variable: employee motivation b. predictors: (constant), fringe benefits pay, basic pay/salary h0: fringe benefit has no positive & significant effect on employees’ motivation the null hypothesis was accepted since the statistical value’ in the above table shows the fringe benefit has no significant relationship with employee motivation at sig of .088 which is > p 0.05. the t-value is 1.715 which was less than +2 that make it not an important predictor and it was concluded as fringe benefit has no significant relationships with employee motivation. h0: basic pay/salary has no positive & significant effect on employee’s motivation the null hypothesis was accepted because the p-value was greater than 0.05 and the t-value was .554 which is less than +2 that make it not a useful predictor and it was concluded as basic pay/salary has no significant relationship with employee work motivation. this shows that basic pay/ salary would not determine the motivation level of employees in cbe jimma district. 5. conclusion the mean value of fringe benefit pay was neutral; therefore, the study concludes that employees’ of the bank were neither satisfied nor dissatisfied with the fringe benefits pay practices. also, mean value of basic pay/salary was low. so, the study concludes that the salary provided by the bank was not enough to satisfy its employees’ in other word employees’ are dissatisfied with salary amount paid to them. the finding of the study indicates that the mean value for motivation level was partially high or it can be said as good but not enough. therefore, it could be concluded as employees’ of the bank were at good motivation level. standing from the regression result, financial incentives (basic pay/salary & fringe benefit) haven’t been significantly affected employees’ motivation. so, it could be concluded as financial incentives are not significant incentives to motivate employees’ of the bank. this is because financial incentives may create short-lived satisfaction that may last in hours or for few days after they receive. kibru kefay & chalchissa amentiea & lalise kumera 6. recommendation the bank should not consider basic pay/salary and fringe benefit as a motivation factor rather it may go with herzberg’s motivation theory so, it may be a dissatisfaction (hygiene) factor rather than motivation factor. the finding of the study shows that salary & fringe benefit does not significantly affect employee motivation. depending up on the herzberg’s view of motivation theory it is recommendable to the bank to make salary adjustment according to the industry market and put cost of living in to consideration to avoid employees’ dissatisfaction; as well as it is advisable to the bank to make partial positive improvement on its current fringe benefit practice to turn employees’ from their neutral position. because, the employees’ dissatisfaction with those financial incentives may lead employees’ to feel uncomforted and that may directly or indirectly affects the organization performance. therefore, balanced view (not more & not low) consideration of the above financial incentives was advisable to the bank to keep its employees’ moral comfort even if those variables have no significant effect on employees’ motivation. references armstrong, m. 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(1967), statistics, an introductory analysis, 2nd edition, new york: harper and row. international journal of commerce and finance, vol. 9, issue 1, 2023, 21-39 21 analysis of the ideal sukuk structure from the perspective of maqasid sharia of wealth (indonesia case) shinta melzatia* mahroji mahroji** ickhsanto wahyudi*** lucky nugroho **** submitted: 24.10.2022 accepted: 24.04.2023 published: 06.07.2023 abstract: the purpose of this study is to analyze the existing sukuk structure in indonesia based on the perspective of maqasid sharia. furthermore, the method used in this study is the quality supported by secondary data, namely financial statements and prospectuses of companies that issue sukuk. the companies sampled for this study were companies that issued sukuk, a total of 33 companies. the result of this study is that there are several outstanding sukuk, namely (i) sukuk ijarah i angkasa pura i year 2016; (ii) sukuk mudharabah lontar papyrus pulp & paper industry i year 2018; (iii) sukuk ijarah i moratelindo phase ii 2020; (iv) sukuk wakalah medco power indonesia i year 2018; (v) sukuk ijarah berkelanjutan iii indosat phase i year 2019; (vi) sukuk mudharabah oki pulp & paper mills i year 2021; (vii) sukuk ijarah series iii pln phase i year 2018. this study concludes that the market, investors, sukuk issuers, regulators, and other parties in the issuance of sukuk, still consider that sukuk issuance is complex and not simple. in addition, community literacy over sukuk is also still lacking. keywords: sukuk, structure, maqasid sharia, maqasid syariah of wealth. jel classification: g1, g2 * * universitas mercu buana, indonesia, shinta_melzatia@mercubuana.ac.id **universitas esa unggul, indonesia, mahroji@esaunggul.ac.id ***universitas mercu buana, indonesia, ickhsanto.wahyudi@esaunggul.ac.id ****universitas mercu buana, indonesia, lucky.nugroho@mercubuana.ac.id mailto:shinta_melzatia@mercubuana.ac.id mailto:mahroji@esaunggul.ac.id mailto:ickhsanto.wahyudi@esaunggul.ac.id mailto:lucky.nugroho@mercubuana.ac.id international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 22 key words: tax knowledge, tax penalties, taxpayer compliance, religiosity. 1. background public funds can be allocated as working capital for those who need funds through savings or investments. currently, there are two possibilities for capital market investment in indonesia: the capital market with conventional principles and the capital market with sharia principles. a sharia capital market is necessary since the conventional capital market conducts trade operations in a manner incompatible with sharia principles (hulwati, 2009; nugroho et al., 2022). the issuance of mutual funds by pt danareksa investment management on july 3, 1997, marked the beginning of the sharia capital market in indonesia. this was followed by the establishment of the jakarta islamic index (jii) on july 3, 2000, which currently offers three types of sharia investment products: sharia mutual funds, sharia shares, and sukuk (fika, 2013; sukmadilaga et al., 2021). since the middle ages, muslims have historically employed sukuk in international trade as a document indicating financial responsibilities from trade transactions and other commercial activity (fatah, 2011; nasfi et al., 2022). however, the islamic notion of muamalah (relationships between humans) is not based solely on the fulfilment of sharia principles; there are sharia objectives (maqasid sharia) that must be addressed for muamalah to result in maslahah (nugroho et al., 2017; nugroho, 2022c). in terms of language, "maqashid al-shari'ah" comprises the phrase "maqashid" (origin of the word "qashada"), which indicates towards, aims, wishes, and is intentional, and the word "al shari'ah," which means spring or source of life (sharia) that must be considered so that muamalah brings maslahah (aziz et al., 2021; khatib, 2018). therefore, maqashid sharia can be understood as the purpose of allah swt in establishing laws against humans is to realize the benefit of humankind as a whole (sirat et al., 2016). the maqasid sharia concept of classical scholars, particularly imam al-ghazali, explained that to realize prosperity, human needs must be met from the most urgent, namely based on the level of dharuriyah, hajiyat, and tahsinat (nugroho & mariyanti, 2021; sahroni & karim, 2015). therefore, by upholding the five pillars of maqasid, the most urgent needs can be addressed and preserved by maintaining the 5 (five) pillars maqasid (kulliyatu alkhomsah), namely (a) hifdzu ad‐din/protection of religion; (b) hifdzu an‐nafs/protection of the soul; (c) hifdzu al‐ aql/ protection of intellect; (d) hifdzu an‐nasl/protection of descendants; and (e) hifdzu al‐ mal/protection of assets (maftukhatusolikhah, 2015; nugroho et al., 2019). notably, the international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 23 principle of maqasid sharia must be implemented in all elements of human life, including muamalah transactions (ihwanudin et al., 2020). sukuk is a muamalah product in the fields of finance and assets. until now, the maqashid sharia perspective on sukuk has focused primarily on the legal basis, product system, and other issues regarding the fulfillment of sharia laws (dewi et al., 2020; haerisma, 2017). as long as the transaction is safeguarded from usury, gharar, and maysir, and as long as syarik (perpetrator of syirkah), in this case, sukuk holder and sukuk issuer, agree on the terms in the sukuk issuance, sukuk can also be traded on the capital market (sahroni & karim, 2015; sudarsono, 2015). one of the factors that influence investors in investing is the structure of the sukuk, following the contract used, including buying and selling (murabahah sukuk), assets (ijarah sukuk), projects (istisna' sukuk), business (musyarakah sukuk), or investment (mudharabah sukuk) (mohd zin et al., 2011; nawawi, 2012). akad is a contract that binds both parties from the date of the contract's entry into effect until its expiration. the choice of the contract will rely on the level of risk and return that each party, particularly the investor and the business manager, is willing to assume (nugroho, 2022b; rachmawati & ab ghani, 2017). the contract involves assets, the right to use property, and the transfer of property ownership/property rights from one party to another. following muamalah fiqh, assets may be mobile or immovable, replaceable or irreplaceable, definite/'ayn (physical assets), or uncertain/dayn (financial assets: cash, gold, foreign currency, equity, and sukuk) (ayub, 2007). therefore, the determination of the contract in the issuance of sukuk in the capital market, which must comply with sharia provisions, is essential. extremely significant is the determination of the contract in issuing sukuk on the capital market, which must comply with sharia regulations. therefore, the concept of contract in the context of fiqh and how the contract is utilized in the issuance of sukuk must be clarified, particularly concerning the transfer of ownership of property/property benefits between the sukuk issuer and the investor (nugroho, 2022a; rachmawati & ab ghani, 2017). ijarah-structured sukuk has dominated the issuing of sukuk on the capital market in indonesia to date. therefore, table 1 pertains to sukuk issuance in indonesia over the past six years. ▪ table 1. sukuk issuance in indonesia (2016 – 2021) year accumulation of issuance accumulation of outstanding number total number total international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 24 (in trillion rp) (in trillion rp) 2016 100 20,425 53 11,878 2017 14 3,564 27 12,574 2018 12 9,905 34 14,031 2019 6 3,244 57 31,942 2020 16 5,123 57 32.900 2021 16 8,093 64 36,370 in 2017, 17 out of the total outstanding sukuk employed the ijarah structure, while 10 used the mudharabah structure. in addition, in 2018, 26 of the total outstanding sukuk utilized the ijarah structure, while 8 utilized the mudharabah structure. as a result, 32 sukuk issued in 2019 utilized the ijarah structure, 23 sukuk utilized the mudharabah structure, and 2 sukuk utilized the wakalah form. the following year, 36 outstanding sukuk utilized the ijarah structure, 20 outstanding sukuk utilized the mudharabah structure, and one outstanding sukuk utilized the wakalah structure. finally, in 2021, 45 outstanding sukuk utilized the ijarah structure, 17 outstanding sukuk utilized the mudharabah structure, and two outstanding sukuk utilized the wakalah structure. from the overall sukuk issuance in indonesia, it can be seen that the ijarah structure continues to predominate. sukuk ijarah is securities consisting of financing contracts based on sharia principles issued by corporations or governments, with the issuer having to repay the principal of the sukuk at maturity in the form of rewards collected from asset leasing. the emergence of islamic financial instruments, including sukuk, is motivated by the suitability of fundamental human rights in sharia maqashid. in this case, the sukuk, one of the islamic financial instruments, is allowed in islam because its implementation applies islamic principles, including aiming to achieve public benefit based on islamic values under the law of allah swt (akram et al., 2021). nonetheless, there is still uncertainty over the compatibility of sukuk with sharia, as the sukuk system is still viewed as equivalent to the conventional bond system. therefore, it is essential to examine how the structure of sukuk incorporates the maqasid of sharia, particularly the maqasid of sharia assets so that sukuk can become a reliable investment instrument and a means of maslahah. international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 25 2. literature review sukuk sukuk is derived from the plural form of the arabic word sakk, which means "sharia bond." however, the correct arabic term is 'sukukis,' which means islamic investment certificate. moreover, each holder of sukuk (investor) is separated into "sukuk assets" (haneef, 2009). the development of the idea of sukuk results from ijtihad and the interpretation of the laws in the qur'an and sunnah (mif rohim & shereeza, 2013). according to fatwa national sharia board indonesian council of ulama (dsn-mui) (2000) no.32/dsn-mui/ix/2002, sukuk (sharia bonds) are long-term securities based on sharia principles provided by issuers to sukuk holders with the profit-sharing basis, and repay when the sukuk matures. in addition, the decree of the chairman of the capital market and financial institution supervisory agency (bapepam) no. kep-130/bl/2006 dated 23 november 2006 regarding the issuance of sharia securities defines sukuk as "a certificate or certificate of ownership which has the same value and has an integral or undivided part of participation in (a) ownership of certain tangible assets; (b) the value of benefits and services for specific projects or particular investment a; and (c) ownership of specific financial instruments. several characteristics differ between sukuk and bonds, including the business of firms producing sukuk must be under sharia principles, and sukuk has a framework that distinguishes the different types of issuance; sukuk is not an interest bearing debt instrument, but rather a sharia-compliant investment product (sukmadilaga et al., 2021). as a guarantee that the issued sukuk has the same value as the accessible assets, issuing sukuk necessitates an underlying asset with economic worth. the roles of the underlying assets include (1) being usury-free, (2) being a requirement for trading sukuk on the capital market, and (3) determining the type of sukuk (kholis, 2010). in addition, to issue sukuk, the capital market sharia expert team must opine that the sukuk complies with sharia standards. contract in sukuk issuance 1. mudharabah contract. mudharabah can mean trading (az-zuhaili et al., 2011). mudharabah is a contract binding between two parties on the condition that one of them sends a particular amount of money to the other party for trading and the profits obtained are split in half as per the agreement (sabiq et al., 1981; rachmawati & ghani, 2015). 2. ijarah contract. according to the language, ijarah means renting or buying and selling benefits (az-zuhaili et al., 2011). the goal of an ijarah contract (lease) is to get benefits in exchange for payment. in other words, ijarah is a method of acquiring benefits through purchasing and selling assets (rachmawati & ghani, 2015). maqasid shariah international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 26 in simple terms, maqasid sharia refers to the objectives attained by the sharia provisions of all human laws established by allah swt. according to arafah & nugroho (2016), maqashid refers to the meanings, pearls of wisdom, and the like that allah wills in each shari'a, both general and specific, to assure human welfare in this world and the hereafter. imam al-ghazali stated that maqasid sharia is significant preservation for the welfare of society through self protection (hifdzu an-nafs), protection of faith (religion) (hifdzu ad-din), protection of wealth (hifdzu al-maal), protection of reason (hifdzu al-aql), and protection of offspring (hifdzu an nasl) (maikabara et al., 2020; nugroho & husnadi, 2014). the five protections in maqasid sharia allude to the benefit of humans because the interests and continued existence of humans depend heavily on these five protections (rizal & amin, 2017). fasa et al., (2020) argue that maslahah is a better concept to explain economic motives from an islamic economic perspective which is part of the objectives of sharia. therefore, any production activities that impact maslahah are crucial for humanity. maslahah is composed of values ingrained in the global system, particularly the economic system (choudhury, 2018). based on the sharia maqasid of property development by qaradawi (2010), the sharia objectives of property development are to uphold justice so that the strong do not oppress the weak and the rich do not oppress the poor; distribute wealth fairly in the hands of as many people as possible; empowering unemployed human resources; maintain brotherhood (ukhuwwah), and prevent hostility from cheating in a transaction. meanwhile, the sharia purpose of spending/consumption of assets (qaradawi, 2010) is to fulfill obligations as humans, namely worshipping allah swt, and to express gratitude for allah's gifts. as for the maqasid sharia of wealth acquisition, it is to strive for humans to work and walk on earth to acquire wealth, not to be lazy, and to eat from sound sustenance; to prosper the earth and run the government; so that humans meet their needs following sharia; and so that people appreciate work. 3. method this study was conducted in 2021-2022 using data collected in the same year. this study employs a qualitative research methodology to investigate the circumstances, conditions, or other matters related to the object of research, which will be presented in the form of a report on the findings of an analysis of the ideal sukuk structure from the perspective of maqasid sharia assets. napitupulu et al. (2020) and oktris et al. (2022)states that qualitative methods collect meaningful, in-depth data. this approach can be implemented by analyzing and drawing international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 27 conclusions based on data gathered using the relevant theory, with the authors collecting research data from the study's object. the analysis is conducted using secondary data that gives information about the structure of sukuk in indonesia, namely the prospectus for the issuance of sukuk, ojk regulations, dsn mui fatwas, and the annual report of the sukuk-issuing business. the research sample, consisting of enterprises with outstanding sukuk at the end of november 2021, included 33 companies. additionally, secondary data was acquired through perusing the literature, accounting rules, and sukuk issuing prospectus. as a result, there are 33 potential corporate sukuk issuances, comprising 15 issuers of ijarah sukuk, 17 of mudharabah sukuk, and one issuer of wakalah sukuk. other secondary data sources include ojk regulation no.3/pojk.04/2018 on sukuk issuance and requirements, fatwa no.32/dsn-mui/ix/2002 on sharia bonds, and the annual reports of 33 sukuk-issuing businesses. the author used the method of data analysis in the field model (miles et al., 2020) . in this model, data analysis is done both while collecting data and after it is done within a certain amount of time. this is done through the stages of data reduction, data display, and conclusion/verification. in essence, conclusions were made at the time of data reduction, and when conclusions were made, they were always based on reduced data or data that had been reduced, as well as display data. 4. results and discussion in this study, 33 sukuk issuance as research samples. however, due to the similarity of the schemes used in the issuance of the sukuk, only 7 (seven) sukuk were analyzed in depth. the seven sukuk consist of 4 (four) ijarah sukuk, 2 (two) mudharabah sukuk, and 1 (one) wakalah sukuk. results and discussion of the seven sukuk from the perspective of maqasid sharia, especially maqasid sharia treasures of thought of yusuf qaradawi. a. data analysis results 1. ijarah sukuk angkasa pura ijarah sukuk angkasa pura is issued with the following scheme: international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 28 muwakkil wakkil wakalah contract ijarah sukuk fund (at maturity) issuer as lessor lesse/musta’jir ijarah contract lessor/mu’jir ijarah sukuk fund investors issuer as lessor airport service benefits sukuk public offering moratelindo (as a representative for leasing) wakalah contract ijarah sukuk holder (represented by the deputy commissioner) ijarah contract moratelindo (as issuer and owner of ijarah objects) submission of sukuk funds end user pays rent moratelindo leases ijarah objects to end users transfer of benefit rights on ijarah objects from moratelindo to ijarah sukuk holders ijarah object last user (third party as tenant) fee ijarah (quartenly) investor fund ijarah sukuk services juanda airport services juanda airport figure 1 scheme of ijarah sukuk angkasa pura sukuk funds are utilized to develop five airports owned by a sukuk issuer. during the tenure of ijarah sukuk, the sukuk issuer passes to sukuk holder (represented by the trustee) the benefits of the services provided to passengers at the airport terminal operated by the company. regarding the ijarah object, the trustee agreement stipulates that the sukuk issuer will replace the ijarah object with a value proportional to the transfer of the benefits of the ijarah object. if the ijarah object cannot be utilized, the transfer of the ijarah object from the sukuk issuer to the sukuk holder is impeded, and the ijarah object's value decreases. the sukuk issuer and the sukuk holder also enter into a wakalah agreement, where the sukuk holder as muwakkil (beneficiary of the ijarah object) grants the sukuk issuer the authority to: (i) provide services to passengers at the airport terminal managed by the sukuk issuer, as the representatives of sukuk holders; and (ii) represent all interests of muwakkil, including collecting and receiving all proceeds from the use of the ijarah object. 2. ijarah sukuk moratelindo ijarah sukuk moratelindo is issued with the following scheme: moratelindo forwards ujrah to ijarah sukuk holders and remaining ijarah returns. international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 29 use of telecommunication equipment assets wakalah contract trustee representing investors ijarah contract company as lessor investors company as lessor figure 2 scheme of ijarah sukuk moratelindo sukuk funds are utilized for backbone and access investment needs and the building of inland cable and ducting, which includes passive and active infrastructure-supporting devices. following ijarah agreement between the sukuk issuer and sukuk holder (represented by the trustee), moratelindo (sukuk issuer) transfers the beneficial rights of the ijarah object to sukuk holder in the form of the sukuk issuer's backbone and access. in the meantime, sukuk holder (as muwakkil) allows the sukuk issuer (as representative) to lease the ijarah object to end users, including himself, following wakalah agreement. moratelindo, as the beneficiary (wakil) of sukuk holder, also acts as mu'jir (lessor), leasing the ijarah object to the end user as musta'jir (lessee). for the rented ijarah object, the end user pays moratelindo rental fees. moratelindo transfers the rental payments from end users to sukuk holders, per the agreed-upon timetable, and repays the sukuk funds at maturity. 3. ijarah sukuk indosat ijarah sukuk is issued with the following scheme: fee ijarah (quarterly) dan ijarah sukuk fund (at maturity) investors fund ijarah sukuk ijarah sukuk fund figure 3 scheme of ijarah sukuk indosat based on ijarah agreement between sukuk issuer and sukuk holder (represented by the trustee), sukuk issuer has transferred the rights to a portion of the network capacity benefits used by the sukuk issuer to provide midi services. sukuk issuer guarantees the functionality of the midi network whose benefits become the ijarah object, protects against the risk of damage/depreciation to the transferred benefits, and ensures the availability of substitute ijarah objects in specific circumstances. furthermore, based on the wakalah agreement, the sukuk holder as muwakkil (the recipient of the ijarah object), grants special powers to the sukuk issuer as representative to a. create and maintain and extend agreements/contracts with third parties (midi network users); b. representing all interests of muwakkil in implementing company owned telecommunication equipment assets international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 30 fee ijarah and sukuk ijarah pln (as fund the owner of the power grid) electricity payment by customer contract with customer electricity bills wakalah contract submission of ijarah sukuk pln (as the owner of the power grid) issuance of ijarah sukuk funds ijarah object ijarah contract investors (represent by trustee) transfer of ijarah objects agreements with third parties, including collecting and receiving all midi network utilization results from third parties; and c. this represents muwakkil's interest in finding third-party substitutes to take advantage of the midi network. network infrastructure in the form of access network infrastructure (radio & transport), core network (packet core & gateway), and it infrastructure will be purchased with sukuk money to boost capacity and expand the company's network coverage. 4. ijarah sukuk pln ijarah sukuk pln is issued with the following scheme: figure 4 scheme of ijarah sukuk pln based on the ijarah contract signed by the sukuk issuer and sukuk holder (represented by the trustee), the sukuk issuer intends to transfer the beneficial rights to the ijarah object, namely the electricity network owned by the sukuk issuer along with sales contracts with third parties/customers, which are transferred to sukuk holders through an ijarah contract. the ijarah object is the electric network in the form of installed distribution equipment in a particular area. the sukuk holder (represented by the trustee) and sukuk issuer then sign the wakalah agreement. as the beneficiary of the sukuk holder's power of attorney, the sukuk issuer rents ijarah object to enter into and carry out agreements/contracts with third parties and for their extension. sukuk funds will be used for investment activities for power plants, transmission networks, interconnections, and electricity distribution networks. 5. mudharabah sukuk lontar papyrus pulp & paper industry mudharabah sukuk lontar papyrus pulp & paper industry is issued with the following scheme: international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 31 investors provide sukuk mudharabah funds investors (shahibul maal) finance business activities payment return of the sukuk mudharabah fund at the end of the period issuer (mudharib) profit sharing ratio x% profit sharing ratio y% income from contract business activities pulp production (pulp) .mudharabah sukuk funds financing business activities (production contracts) investors (shahibul maal) sukuk issuer (mudharib) profit sharing ratio x% profit sharing ratio y% revenue cmi income distribution for investors and companies issuance of mudharabah sukuk figure 5 scheme of mudharabah sukuk lontar papyrus pulp & paper industry through the mudharabah contract between the sukuk issuer and sukuk holder (represented by the trustee), the sukuk holder, as the owner of the funds (shahib al-maal), provides sukuk funds (ra'sul maal) to the sukuk issuer (mudharib) to be managed. shared revenue basis is the gross profit created by the company's sales under the sales contract. periodically, the company distributes revenue sharing based on the profit sharing ratio. sukuk issuers employ sukuk funds to fund capital expenditures related to pulp production, such as the purchase of wood processing, pulp processing, chemical plants, water treatment facilities, and power plants. cmi purchases production results based on a sales contract with the sukuk issuer. 6. mudharabah sukuk oki pulp & paper mills mudharabah sukuk oki pulp & paper mills is issued with the following scheme: the company issues sukuk mudharabah selling produce income distribution for investors and companies figure 6 scheme of mudharabah sukuk oki pulp & paper mills through the mudharabah contract, the sukuk holder, as the owner of the funds (shahib al maal), provides sukuk funds (ra'sul maal) to the sukuk issuer (mudharib) to be managed. shared revenue basis is the gross profit created by the company's sales under the sales contract. periodically, the company distributes revenue sharing based on the profit sharing customer international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 32 investors (muwakkil) wakalah contract proceeds repayment of profit sukuk sharing investment capital funds wakalah contract sukuk asset sales trustee pt medco power indonesia (sukuk issuer & wakil bil istithmar) subsidiary trustee payment for the agreement purchase of sukuk assets proceeds investment activities investment profit subsidiary sukuk asset ratio. sukuk issuers utilize sukuk funds to finance capital expenditures associated with pulp manufacturing, such as the acquisition of machinery and equipment for the pulp, tissue, and chemical manufacture, as well as civil works and infrastructure. in executing sales contracts with third parties, pulp production is a business activity. 7. wakalah sukuk medco power indonesia wakalah sukuk medco power indonesia is issued with the following scheme: figure 7 scheme of wakalah sukuk medco power indonesia wakalah contracts are unique compared to ijarah and mudharabah contracts. through a wakalah contract, pt medco power indonesia, as a sukuk issuer, declares itself to act as a representative of the sukuk holder (represented by the trustee) to manage the proceeds from the sukuk issuance in the context of profit-making activities by 1) sukuk issuer will submit to the sukuk holder regarding the planned use of funds in various investment activities to be carried out; 2) the sukuk issuer then discloses the investment activities conducted, including the type of activity, the composition of activities, the profit calculation for each activity, and the calculation of composites; 3) if the sukuk are to be traded on a secondary market, sukuk issuer must keep at least 51% of the use of funds as tangible assets. the sukuk issuer intends to utilize the sukuk funds as the company's capital expenditures for the pltp ijen and pltgu riau projects. b. analysis of the ideal sukuk structure from the perspective of wealth maqasid syariah (hifz al-mal) based on the corporate sukuk scheme outlined above, which includes ijarah sukuk, mudharabah, and wakalah, it is possible to assess the issuance of sukuk from the standpoint of maqasid sharia to benefit the larger society. 1. ijarah sukuk a. the existence of a contract between the sukuk issuer and the sukuk holder can fulfill the maqasid sharia in upholding justice so that the strong do not oppress the weak and the international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 33 rich do not oppress the poor where the issuance of sukuk carried out by the company is carried out using an ijarah contract with the number of underlying sukuk stipulated at the beginning of the issuance. applying sharia aspects in these transactions is also carried out carefully by sticking to the agreement between the parties. b. following sharia principles, one of the requirements for issuing ijarah sukuk is the existence of an underlying asset in the form of an ijarah object. the existence of an underlying sukuk can satisfy the maqasid sharia, preserve brotherhood (ukhuwwah), and minimize fraud-related enmity during transactions. therefore, the transactions have a concrete basis in the form of assets, and there is an agreement that if the ijarah object is damaged and poses a risk to the sukuk holder, the company will give compensation by replacing it with another ijarah object of equal economic and legal value. c. the company uses the sukuk funds to 1) finance airport development; 2) finance backbone and access investment, including passive and active equipment and infrastructure; 3) finance network infrastructure in the form of access network infrastructure (radio & transport), core network (packet core & gateway) and it infrastructure which aims to increase capacity and expand the company's network coverage; 4) finance investment activities for power plants, transmission networks, and interconnection of power distribution networks on the islands of sumatra, java, bali, nusa tenggara, kalimantan, sulawesi, maluku, papua. combining the usage of already owned assets allows for the expansion of the business. this activity satisfies the maqasid sharia requirement of spreading equitable wealth to as many people as feasible. in this activity, the distribution of assets is accomplished by converting immovable assets into cash for developing assets and as a new source of wealth/income for the company, which will then be distributed to sukuk holders. d. in the issuance of sukuk ijarah, the new assets developed are: 1) airports; 2) company infrastructure; 3) electricity generation and network; 4) network infrastructure in the form of access network infrastructure (radio & transport), core network (packet core & gateway), and it infrastructure. these asset developments can empower unemployed human resources by employing them in infrastructure projects. this is following the word of allah qs. al-maidah verse 2 commands humans to help each other and work together in goodness so that no human being is unemployed or unproductive. 2. mudharabah sukuk a. by purchasing paper-making equipment, sukuk funds are used to enhance the company's production process. the company intends to acquire and develop its wealth by expanding international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 34 its business by acquiring paper-making equipment to boost its output volume. this practice can fulfill maqasid sharia duties to worship allah swt, to work and traverse the earth to obtain money, not to be idle, and to consume nutritious food. b. the company asserts in its sustainability report that it manages its resources carefully and responsibly, adopting the precautionary principle in identifying and controlling negative environmental impacts. this activity is by maqasid sharia to express gratitude for the blessings allah swt has bestowed upon humanity, in the hope that humans will not destroy what allah swt has created, use all things on earth to taste without excess, and preserve the environment for the survival of living things. c. profits will be generated from the selling of paper. thus, it is anticipated that the company will continue to operate. from the company's inception, employees can get salaries/wages. the income will subsequently be used to satisfy basic needs. this money will assist the worker as well as others. this fulfills the maqasid aspect of sharia so that humans meet their needs in a way that is under sharia. 3. wakalah sukuk a. the existence of a contract between the sukuk issuer and holder can meet the maqasid of sharia to protect justice so that the powerful do not oppress the weak and the wealthy do not oppress the poor where a corporation issues sukuk using a wakalah contract with an exact set wealth amount at the start of the issuance term. the sharia portion of this transaction is meticulously applied by adhering to the agreement between the parties concerned. b. the company utilizes the sukuk funds to finance the pltp ijen and riau pltgu projects, explicitly assisting the indonesian government's social and economic development programs and building the gas to power business portfolio. this activity satisfies the maqasid sharia requirement of spreading equitable wealth to as many people as feasible. in this activity, the distribution of assets is accomplished by converting immovable assets into cash for developing assets and as a new source of wealth/income for the company, which will then be distributed to sukuk holders. according to the examination of sukuk issuers, several sukuk issuers are organizations whose businesses have positive social consequences on society, such as pln, which supplies electricity to the community, telecommunications companies, and others. every part of human existence requires electricity. this objective is consistent with the millennium development goals (mdgs) but is more social. therefore, firms whose goods impact maslahah may encourage sharia investors to invest in sharia-compliant securities so that they can contribute to international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 35 the community's welfare and give benefits. however, the development of sukuk in indonesia continues to face obstacles. initially, the parties involved in the issuing of sukuk acknowledge that sukuk is more complicated. second, market players' comprehension of sukuk is inadequate. therefore, when they do not comprehend, they are lethargic and do not want to study. they feel more comfortable with the usual, which is more familiar. third, in addition to seeking scale, parties involved in issuing sukuk should also consider the sectors being financed, such as those related to the sustainable development goals or those that benefit the community. the argument is that it can contribute to people's well-being and sustainability, or sustainability. 5. conclusions and recommendations investors, sukuk issuers, regulators, and other parties involved in the issuance of sukuk continue to view the issuing of sukuk as complex and not straightforward. in addition, the popular understanding of sukuk is limited. due to the interrelationship between these two elements, the issue of sukuk in indonesia is still unable to compete with the issuance of bonds. furthermore, due to investor protection, risk, and supervision issues, sukuk issuance is currently limited in the capital market; nonetheless, sukuk can flourish outside the capital market. even if the issuance of sukuk is relatively limited compared to bonds, sukuk as a sharia financial instrument should be able to help the larger community provided it takes maqasid sharia considerations into account. based on an analysis of several corporate sukuk utilizing ijarah contracts, mudharabah contracts, and wakalah bi al-istitsmar contracts, it is possible to conclude that all of them have evidence of the existence of a sharia purpose to protect assets (maqashid sharia hifdzul maal) related to expenditure, circulation, and development of assets. the sukuk-issuing firms surveyed for this study utilize contracts to issue sukuk and sukuk funds to develop and construct new assets. businesses can expand their operations by employing sukuk funds to acquire assets as the underlying sukuk. in addition to financing sectors connected to the social development goals (sdgs), sukuk monies can be used to create new employment possibilities. companies can develop their assets by issuing sukuk and utilizing their assets. on the other hand, corporations that issue sukuk likewise manage their resources with care and responsibility to prevent any adverse environmental repercussions. this is done as an expression of gratitude for his blessings and to maintain the environment for the continued existence of living things. the parties involved in the issuance of sukuk must collaborate to enhance the amount of sukuk international journal of commerce and finance shinta melzatia & mahroji mahroji & ickhsanto wahyudi & lucky nugroho 36 issued by corporations. however, due to its jurisdiction as a regulator and policymaker, ojk, as a regulator, is a party involved in a significant conflict. although market participants like sukuk issuers and investors want to issue and participate in sukuk, they lack the policy and regulatory authority to do so. therefore, authorities such as ojk and other parties such as dsn mui and kneks play a significant role in the development of sukuk through legislation, strategic plans, and sukuk schemes made available to market players. and it becomes crucial for these parties to ensure that sukuk, one of the islamic financial 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(2021). priority factor analysis on cash waqf linked sukuk (cwls) utilization in indonesian shariah capital market. academy of accounting and financial studies journal, 25(5), 1-14. international journal of commerce and finance, vol. 3, issue 2, 2017, 48-52 48 can reverse innovation accelerate the growth of global companies? ahu tuğba karabulut, (prof. dr.) istanbul commerce university, turkey abstract: the purpose of this paper is to explain the importance of reverse innovation for the growth of global companies. according to literature review, reverse innovation affects the growth of global companies both in developing and developed countries. thus, it is suggested that global companies should open r&d centers in developing countries to conduct researches to tailor new products for their needs. when these products succeed, they can offer them to other developing and developed countries to continue to grow in the long run. they c an fill out market niches which represent unmet demands of price sensitive and not wealthy customers in developing countries. it can be concluded that reverse innovation can accelerate the growth of global companies. keywords: reverse innovation, global company, r&d 1. introduction the purpose of this paper is to explain the importance of reverse innovation for the growth of global companies. the literature review related to reverse innovation concept will be explained first. then, reverse innovation process in global companies will be acknowledged. conclusion will summarize the benefits of reverse innovation for global companies. reverse innovation is still considered as a new concept in the innovation literature. it leads global companies to establish r&d centers in developing countries to tailor new products for their needs. after global companies have accomplished new achievements in designing and offering new products in developing countries, they could also offer them to other developing countries and even they could launch these new products in developed countries and their home countries. 2. reverse innovation concept reverse innovation is still a new and a popular concept. although, global companies originated in developed countries have applied reverse innovation worldwide for a while, global companies originated in developing countries have started the process. reverse innovation can be considered as a triggering factor which accelerates the growth of global companies. reverse innovation is the process to define and foster a successful innovation in a developing country which highlights unmet needs in a developed country, adapt and spread the innovation from a developing country to a developed country. it focuses on learning from and investing in developing countries to tackle problems in developed countries which requires unusual solutions (depasse and lee, 2013, pp. 1-2). the reverse innovation term was popularized by harvard business review article (2009) describing the development of ge’s handheld electrocardiogram machine (immelt, govindarajan, and trimble 2009), but the concept was inspired by earlier work on global knowledge flows (frost and zhou 2005) and innovation in emerging economies (prahalad 2004). research on reverse innovation is prominent in consumer packaged goods (corsi, di minin, and piccaluga 2014) and healthcare sectors (bottles, 2012; bhattacharyya et al., 2017). academic research has focused on defining prerequisites for successful reverse innovation, as well as its organizational and managerial attributes in global companies (zeschky, widenmayer, and gassmann, 2014; borini et al., 2012). according to the current literature review on 350 publications, 60 companies have been practicing reverse innovation (hadengue et all., 2017, p. 41). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e can reverse innovation accelerate the growth of global companies? 49 a reverse innovation is an innovation which is adopted first in developing countries and then transferred to developed countries. global companies first tailor products in developing countries and then distribute them globally (sinha, 2013, p. 71). the idea of reverse innovation is applying frugal innovations in a developed country where there are already existing customers who prefer not to pay for extra features. the reverse innovation concept was first developed by immelt et al. (2009, pp. 56-65) who explain that reverse innovation is low-cost innovation which diffuses from developing countries into developed countries. govindarajan and ramamurti (2011, pp. 191-205) believe that reverse innovation indicates cases where innovations are adopted in low-income developing countries before they ‘trickle up’ to developed countries. according to lindegaard (2001, pp. 160-163), whether products are developed in developing countries by companies of the developed countries or companies of developing countries and eventually come to developed countries, these low-price products will disrupt price structures that companies of developed countries have enjoyed. govindarajan and trimble (2013) acknowledge that the reverse innovation focuses on low-price innovations from developing countries to potential markets among developed countries. they (2013) add that reverse innovation is required for developed countries to serve rich customers for different reasons (simula, hossain and halme, 2015, p. 1569). immelt et al. (2009) acknowledge that reverse innovation develops market-oriented products in and for developing countries through globalized innovation teams to sell in the world from the beginning. singhal (2011) states that reverse innovation is the challenge for western global companies because r&d is important in developing countries whereas competition takes place worldwide (brem and björn ivens, 2013, pp. 36-37). 3. reverse innovation applications of global companies reverse innovation applications provide growth opportunities to global companies both in developing and developed countries. nowadays, r&d centers and subsidiaries of global companies in developing countries, tailor products for their own countries and then launch these products there. when these products succeed, they spread them in other developing and developed countries. nowadays, global companies invest more in developing countries than in developed countries (unctad 2015) and many of them build r&d centers in developing countries. these centers have provided local-for-local innovation, some of them have become lead centers for certain applications and technologies as they have matured. also, some of them have sent their technology back to their home countries. as market growth has slowed down in some of the developing countries, they have searched growth opportunities in other countries including their home countries. on the other hand, growing subsidiaries are looking for global expansion opportunities. they are attracted by higher price margins in developed countries, use their increased innovation capability and quality to attack developed countries (hadengue et all., 2017, p. 40). brown and hagel (2005) used “innovation blowback” term to warn global companies in developed countries about disruptive management practices flowing from asia which could diffuse to developed countries and harm current value networks. global companies can target lower-income customers in developing countries and take innovative products from there to home to use them in new categories. immelt (2009) coined reverse innovation term to explain disruptive medical devices of ge which were developed for india and china before they were diffused to the us. govindarajan and ramamurti (2011, p. 191) explained cases “where an innovation is adopted first in poor economies before ‘trickling up’ to rich countries”. reverse innovation is the diffusion path from less to more developed countries conducted by global companies. govindarajan and trimble (2012, p. 4) define reverse innovation which is a path of diffusion as “any innovation that is adopted first in the developing world” (radojevic, 2015, p. 71). a.tuğba karabulut 50 most of the global companies target the top of the pyramid (wealthiest top 10% of the customers). however, as prahalad (2006) suggests in his book “fortune at the bottom of the pyramid”, there is a market potential for the rest of the customers (90%). prahalad acknowledges that poor countries incubate new business models and innovative technology to transform the competitive landscape of global industries in the next decade. govindarajan explains that a reverse innovation is an innovation adopted in the developing countries for the first time. global companies can develop products by focusing on the constraints of developing countries instead of developing high-end products at home and adapting them for developing countries. they need to deliver high value products at an affordable price. govindarajan adds that reverse innovation leads to a radical thinking shift when it starts with different ground rules (sinha, 2013, p. 71). the classical value creation approach of global companies turns upside down, with a high competitive future competition level. economist (2010) acknowledges that reverse innovation is not redesigning current products, but it is rethinking the product development process from the scratch for a global company (brem and björn ivens, 2013, pp. 36-37). global companies traditionally empower headquarters to innovate at home and send their products abroad. they should decentralize power and resources in developing countries for reverse innovation. developing countries are attractive with large number of customers. however, they ask for products which require out-of-box thinking, reverse reengineering and abandoning current practices. reverse innovation can initiate double digit growth rate for a global company. if a global company of a developed country does not venture in developing countries, it may not survive in the long run (sinha, 2013, pp. 71-72). reverse innovation causes a change in classical studies’ direction on technology transfer. two ideas emerge: (1) reverse innovation means that western global companies in developing countries may learn from local businesses; (2) reverse innovation implies that old global companies can learn from new global companies from developing countries. reverse technology transfer happens as govindarajan and ramamurti (2011) described: there is an opportunity for western global companies in developing countries to gather knowledge, learn new management practices, adapt technologies and business models from their local stakeholders. most studies have a similar assumption that technology transfer occurs from the north to the south because technology and productivity levels are higher in the north. unfortunately, it reflects that northern companies can’t learn anything from the south (govindarajan and ramamurti, 2011). the reverse innovation concept, r&d capacity building by global companies and collaborations between local companies and global companies in developing countries changed this belief. south-north spillovers occur through observation and the recruitment of qualified employees who work in global companies in developing countries. they can be generated by the provision of new technologies, knowledge, management techniques and processes, marketing through partnerships and collaborations (hadengue, de marcelliswarin and warin, 2015, p. 52). reverse innovation which is the opposite of the traditional innovation challenges the common belief that innovation is originated from developed countries and flow to developing countries in a stripped-down version. developing countries are not innovation recipients from developed countries. companies in developing countries make innovations for their needs with low costs. these innovations are diffused into neighbor countries which have similar socio-economic levels before they flow to similar markets in faraway countries. developed countries adopt some of these innovations since they meet certain customers’ needs (zeschky, widenmayer, and gassmann, 2014, pp. 255-275). collaboration between headquarters and subsidiaries is required for western global companies to succeed in reverse innovation (corsi, di minin, and piccaluga, 2014, pp. 28-34) (simula, hossain and halme, 2015, pp. 1569-1570). can reverse innovation accelerate the growth of global companies? 51 reverse innovation can be considered as a strategic approach for global companies in developed countries when their markets are saturated (osenton, 2004); besides, developing countries constitute two-thirds of gdp growth of the world (govindarajan and trimble, 2012, p. 8). therefore, global companies in developed countries should innovate for developing countries by considering their product environment instead of substituting and de-featuring products. global companies should recombine the most novel technologies to offer products with %15 of price but %50 of performance (khanna and palepu, 2006). laperche and lefebvre (2012) consider this strategic approach to include a new stage of globalization of r&d activities performed in developing countries (radojevic, 2015, pp. 7172). companies which offer quality at low costs need to change their business models (govindarajan and ramamurti, 2011; govindarajan and trimble, 2012; prahalad and hart, 2002). prahalad and mashelkar (2010, p. 134) believe that they should learn to do more with less for more customers. prahalad and hart (2002) state that companies which want to serve low and middle income customers should develop new business models (bezerra, borini, mclennan, 2015, p. 3). global companies of developed countries have established innovation and r&d centers since 2000 in developing countries (jaruzelski and dehoff, 2008; unctad, 2005) (von zedtwitz et al., 2015, p. 16). developing countries have become key innovation centers consistent with a global trend in r&d internationalization. when global companies establish r&d centers in developing countries, they conduct reverse innovation and reverse technology transfer by collaborating with local companies to get the advantage of their knowledge. r&d employees should be located in developing countries and have local skills to tailor products for the needs of these countries. according to immelt, govindarajan, and trimble (2009) and govindarajan and ramamurti (2011) reverse innovation concept is the extension of reverse technology transfer. global companies make a new strategic move by establishing r&d centers in developing countries as reverse innovation and reverse technology transfer concepts. according to immelt, govindarajan, and trimble (2009), reverse innovation is in opposition to glocalization. govindarajan and trimble (2012) propose management techniques to promote reverse innovation: (1) giving power to local teams to act as new companies in their innovation searches; (2) enabling local teams to take advantage of local partnerships to enhance company resources; (3) managing reverse innovation initiatives as willing disciplined experiments to find solutions to critical issues at low costs (hadengue, de marcellis-warin and warin, 2015, pp. 50-52). immelt, govindarajan and trimble (2009) show how ge benefits being in developing countries to develop breakthrough innovations that are introduced in developing countries for the first time and developed countries after succeeding. they show ge healthcare’s products in china (immelt, govindarajan and trimble, 2009) and india (govindarajan and trimble, 2012) as examples. these products are sold in china and india first and then they are sold in developed countries. they highlight local growth teams’ importance as independent new units formed in developing countries. these units develop and commercialize new products by leveraging headquarters’ technology for local market requirements. i.e.:esaote’s r&d laboratory in shenzhen develop product ideas for global markets (corsi and di minin, 2014, p. 82). several us based global companies innovated for china, diffused the outcome in china first and then in us. china which was the secondary market for innovation has become the primary market whereas us which was the primary market for innovation has become the secondary market. the reverse innovation is switching of roles between the primary and the secondary innovation markets. ge’s medical devices and tata’s nano car are examples of diffused paths from india to developed countries. managerial applications for reverse innovation can be different. ge diffuses medical devices from a previously secondary market for innovation to the previously primary market whereas tata diffuses nano from its primary market to its secondary market (cunha et al, 2014, p. 206). traditional a.tuğba karabulut 52 assumption that the old primary market is a whole country has turned into a falsifiable idea. global companies can seize niche market opportunities and make innovation for these market niches. then, the previously developing market becomes the new primary market for global company’s innovation and the origin of further diffusion. the reverse innovation means that the primary and the secondary markets of a global company switch their roles (radojevic, 2015, pp. 76-77). 4. conclusion this paper has tried to highlight the importance of reverse innovation as a new growth approach for global companies. it is expected that it will make a contribution to the literature. global companies traditionally target high or middle-class customers in developed countries. however, the number of customers don’t increase in these countries. most of the customers are rich and aging so global companies can’t grow further with their standardized product lines. they can’t benefit from market niches which have price sensitive customers. however, reverse innovation can open paths for global companies to continue to expand in the world. it accelerates their growth both in developing and developed countries. global companies can learn new skills and gain new experiences by tailoring new products for developing countries. then, they can offer successful products tailored for developing countries to developed countries. they can fill out market niches which are not filled before. they can lengthen life cycles of their products; increase their sales, profits, market shares and competitive advantages. thus, they can get the advantage of growth opportunities both in developing and developed countries. 5. references bezerra, m.a., borini, f.m., & maclennan, m.l.f. (2015). reverse transfers of innovation and national development: evidence from brazilian subsidiaries. journal of technology management and innovation, 10(4), pp. 1-8. issn: 0718-2724. (http://jotmi.org) brem, a., & ivens, b. (2013). do frugal and reverse innovation foster sustainability? introduction of a conceptual framework. journal of technology management for growing economies, 4(2), pp. 31-50. corsi, s., & di minin, a. (2014). disruptive innovation . . . in reverse: adding a geographical dimension to disruptive innovation theory. creativity and innovation management, 23(1), pp. 76-90. depasse, j.w., & lee, p.t. (2013). a model for ‘reverse innovation’ in health care. globalization and health, 9(40), pp. 1-7. hadengue, m., de marcellis-warin, n., & warin, t. (2015). reverse innovation and reverse technology transfer: from made in china to discovered in china in the pharmaceutical sector. management international, montréal , 19(4), pp. 49-69. hadengue, m., de marcellis-warin, n., von zedtwitz, m., & warin, t. (2017). avoiding the pitfalls of reverse innovation. research-technology management, 60(3), pp. 40-47. radojevic, n. (2015). reverse innovation reconceptualised: much geo-economic ado about primary market shift. management international, 19(4), pp. 70-82. simula, h., hossain, m., & halme, m. (2015). frugal and reverse innovations–quo vadis?, special section: design for well-being. current science, 109(9), pp. 1567-1572. sinha, r. (2013). reverse innovation: a gift from developing economy to developed economy. business perspectives and research, 2(1), july-december, pp. 69-78. von zedtwitz, m., corsi, s., søberg, p.v., & frega, r. (2015). a typology of reverse innovation. journal of product innovation management, 32(1), pp. 12-28. doi: 10.1111/jpim.12181 international journal of commerce and finance, vol. 6, issue 1, 2020, 143-154 143 motives of foreign direct investment (fdi) in ethiopia: an empirical analysis abdu seid ali istanbul university, turkey abstract the central aim of this paper is to investigate the major motives of inward fdi to ethiopia from 1992-2015. various economic and financial variables were taken into consideration to assess the relationship between fdi and its motivational factors. ordinary least square method was applied to estimate the association, while johansen’s co-integration test was employed to examine the combination, and vector auto-regressive (var) model was used to check whether there is a long run relationship between fdi and explanatory variables. the statistical results show that there is positive and significant relationship between fdi and market size, trade openness, exchange rate and financial freedom whereas inflation had negative and significant association with fdi. however, investment freedom and economic globalization indicated an insignificant relation. even though all variables jointly affect fdi in the long run, the var result didn’t reveal any long term relationship between fdi and its motivational factors individually. keywords: fdi, motives, ethiopia, var model, ols regression method jel classification: f21, c32 1. introduction one of the indispensable constituent of the movement vis-à-vis economic globalization is international capital flows, in which portfolio investment and fdi figure outstandingly. fdi entails that the investor exercises a considerable degree of authority on the management of the enterprise dwelling in the other economy. such investment engages mutually the original business deals among the two entities and the entire succeeding transactions between them and amongst foreign associates, incorporated and unincorporated. both individuals as well as business entities can be the important actors in fdi process (unctad 2007). such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates. fdi has innumerable effects on the host country’s economy. it influences the income, production, prices, employment, economic growth, development and general welfare of the recipient country. fdi creates significant channels for the dissemination of modern technology (blomstrom and wang 1992). therefore, we can say that fdi plays a key role in development of emerging economy because the very essence of economic development is the rapid and efficient transfer and adoption of “best practice” across borders. currently, the issue of fdis is being paid more attention, both at national and international level and playing an important role in improving and modernizing the productive structure of emerging economies. however, the driving forces for investment abroad are inconclusive as different factors might motivate investors to undertake investments on various sectors of the host countries' economy. investing entities or individuals’ characteristics, capacities and strategies on one hand and the political, social cultural and economic situations of the host and investing countries on the other hand can be taken into account when we think of the desire in fdi. over the past decades, fdi (fdi) became a major source of funding for capital projects in the majority of world economies. theories and existing literature have given incompatible outcomes about the association between fdi and its determinants. some researchers affirmed that fdi inflows could trigger technological change through the implementation of foreign technology, essential capital and skills to speed up huge levels of output. in the region, fdi inflows to a dozen beneficiaries dropped, and vigorous gains were documented in only two countries: ethiopia (an increase of 26 per cent to $1.2 billion) and zambia (up 37 per cent to $2.5 billion). the intensifying textile sector remained to catch the attention of fdi in ethiopia with its stumpy wages and inexpensive in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e abdu seid ali power. ethiopia set foot in the top five fdi flows to landlocked developing countries for the first time, in terms of worth of inflows, joining zambia, kazakhstan, turkmenistan and azerbaijan. the role of fdi in the global economy is becoming progressively imperative, leading to ever greater emphasis on the drivers of fdi in the recent two decades. ethiopia’s recent enormous achievement in creating a centre of attention in fdi in terms of joining the top five fdi flows to landlocked developing countries for the first time creates some sort of curiosity about what attracts those foreign direct investors to ethiopia. it is clearly shown on figure 1 that the amount of fdi flow to ethiopia dramatically surged following the year 2012. there are several potential factors which make ethiopia a preferred investment destination from both developed and developing countries like the general political trade and investment agreements with the main investor countries in addition to cheap unskilled labour, market attractions, investment guarantee, tax exemptions and other incentives. therefore, the central aim of this paper is to examine the major motivations of fdi in ethiopia taking into considerations various economic and financial variables. figure 1: fdi flow to ethiopia from 1992-2015 source: world bank and author’s computation 2. literature review several empirical studies have been conducted concerning the motives and determinants of inward and outward fdi on developing and developed countries employing various methods. larimo & arslan (2013) examined the determinants of fdi in four nordic countries in central and eastern europe region for the period of 1990-2007. superior r&d strength of the industry of the investment, insignificant host country risk, enormous economic size and extraordinary economic progress in the target country enhance likelihood of the creation of wholly-owned subsidiary. for fdis that took place in 1990s, additional thorough analysis discovered that product variety, transnational experience and supremacy of market compatible standards in the host country were substantial elements of ownership mode preference for nordic fdis. likewise, villaverde & maza (2015) argued that competitiveness, economic potential, technological progress and labour market characteristics were the chief location-specific determinants of fdi in the region. nevertheless, the remaining factors such as labour regulation and market size reveal insignificant effect on the above mentioned location-specific variables. a conference paper by castro, et al. (2013) uncover that trade openness and gross domestic product play a crucial role in drawing fdi to brazil whereas trade liberalization became a significant element for mexico. focusing on fdi investments of two countries, tahir & weijing (2011) pointed out that anz manufacturing firms will engage in efficiency-seeking ownership structures, market-seeking and/or wholly owned subsidiary fdi due to low levels of motives of foreign direct investment (fdi) in ethiopia: an empirical analysis 145 cultural gap and huge market potential. on the other hand, low exchange rate variation intensifies the likelihood that anz manufacturing firms will embark on wholly owned subsidiary-type risk reduction-seeking fdi. according to the panel data analysis of ranjan & agrawal (2011), trade openness, macroeconomic stability, market size, growth prospects, infrastructure facilities and probable labour cost stimulated fdi inflow in brazil, russia federation, india and china. however, labour force and gross capital formation remained trivial even though the effect of growth prospects and macroeconomic stability is slightly low. the other region which attracts foreign direct investors is sun-saharan africa. several studies focused on motives fdi in sub-saharan african (ssa) countries. as stated by asiedu (2002) trade openness stimulates fdi to ssa countries whereas enhanced infrastructure and considerable return on investment don’t show substantial result in attracting fdi. the paper argues that nonssa countries are in advantageous position in terms of trade liberation and geographical location as compared to ssa countries. a study based on a sample of 45 african countries from 1980-2009 indicated that real gdp growth, natural resources, agglomeration economies and worldwide investment arrangements are some of the critical factors to attract inward fdi to the continent (sichei and kinyondo 2012). in the same way, olatunji & shahid (2015) mentions that effective implementation of privatization; foreseeable and reliable policy and macroeconomic atmosphere efforts at regional integration, wide-ranging human resource development; adequate infrastructural amenities and diligent investment campaign. furthermore, a sequence of panel data models is utilized by ross, (2015) to evaluate the determinants of chinese ofdi into eight african countries: nigeria, egypt, kenya, zambia, sudan, south africa, algeria, and ghana. the outcome of the study emphasized that infrastructure superiority, regulatory environment imposed by host governments and access to natural resources are the main factors which motivate chinese investment in african countries. wafure & nurudeen (2010) scrutinizes the driving factors of fdi in nigeria. the results disclose that the scope of the market in the target country, political uncertainty, deregulation, and depreciation of exchange rate are the chief contributing factors of fdi in nigeria. in addition, bekhet & al-smadi (2015) observed long-run and short-run links between fdi and financial market development, money supply, gross domestic product, stock market index, consumer price and index economic openness. the empirical findings of tang, et al., (2014) show that real exchange rate, financial development, gdp, and macroeconomic instability are positively associated with inward fdi in electronic and electrical industry in malaysia in the long term. nevertheless, social uncertainty and corporate income tax registered an adverse effect on inward fdi in the industry. additionally, the granger causality outcomes point out that, in the long run, all the above variables granger-cause fdi; however, social and macroeconomic uncertainties merely granger-cause fdi in the short-run. when we come to ethiopian case, some studies shed light on motives and determinants of inward fdi at different times. the empirical study made by getinet & hirut (2006) from 1974 to 2001 illustrates that export orientation, growth rate of real gdp and economic liberalization brings a positive significant effect on fdi. conversely, inadequate infrastructural facilities and uncertain macroeconomic variables entail adverse effect on fdi. another study supports the previous findings that the recent substantial fdi growth is unswervingly linked with the enormous development of infrastructure such as road access, telecommunication, electricity, and outstanding airline facility in the country (atlaw, teklemariam and dong-geun 2014). in addition to that, amanuel’s (2015) study based on time-series data demonstrates that inflation rate and trade openness level have had a compelling influence on the movement of fdis to ethiopia. however, infrastructural growth, human capital and market size remained insignificant for the study period. to sum up, there are number of studies which focused on fdi vis-à-vis its motives and/or determinants but this study took the tip of the iceberg emphasizing on the most recent ones. though the above studies focused on different countries and regions, employed a variety of models and methodologies, covered diverse time periods, it seems possible to summarize that macroeconomic and political stability, infrastructural development, cheap labour, trade openness and effective regulatory environment are significant to attract fdi to countries. abdu seid ali 3. variables and hypothesis based on the theoretical and empirical evidences that were discussed in the previous parts of the paper, the following hypothesizes are proposed. 3.1. dependent variable 3.1.1. fdi (fdi) fdi can be expressed either fdi values in monetary terms or fdi as a percentage of gdp. in this study, the later was employed as endogenous variable to assess the major driving forces of inward fdi in ethiopia. 3.2. independent variables 3.2.1. market size the size of the recipient country’s market is customarily intended to be one of the most chief contributing factors, particularly for market-seeking fdi. a larger market is an indication of superior demand for goods and services and, consequently, makes the host country more eye-catching for fdi. numerous empirical studies have supported the significance of market size, and the association between fdi and market size has been evidenced to be positive and unambiguous in many of these studies. h1 larger market size/growth is positively associated with fdi inflows 3.2.2. openness to trade the relationship between fdi inflows and trade openness of the host country is subject to primarily on the motives of fdi in the recipient country. for instance, in market-seeking fdi, the intention of the investing firm is to serve the domestic market. it is anticipated that the more the trade permitted and/or accessible with a country, the more opportunities it brings for the investors and improved incentives for foreign investors to involve in the countries’ business and economic development. h2. the expected effect of openness to international trade on fdi is to be positive. 3.2.3. exchange rate currency devaluation measured by the exchange rate is likely to encourage inward fdi in the host country as it makes the host country's assets undervalued, reduces the unit cost of the host country's factor of production and increases the relative wealth position of foreign investors. however, the counter argument also holds that as foreign investors might take a depreciating domestic currency as a signal of future depreciation and thus reduce investment. h3. exchange rate is expected to have an impact on inward fdi 3.2.4. inflation rate high and volatile inflation increases uncertainty and thus, leads to higher investment risk. therefore, fdi will be discouraged by such conditions. moreover, high inflation rate increases the user cost of capital in the host country and negatively influences profitability of fdi. h4. high and volatile inflation affects fdi inflow negatively 3.2.5. business, financial and investment freedoms the us based heritage foundation publishes countries’ business, financial, investment and other freedom scores annually. business freedom measures individuals’ choices to form and manage a business without government intervention whereas financial freedom deals with the accessibility of varied savings, credit, payment and investment facilities in the country and investment freedom shows the independence of individuals/firms to decide on where and how to invest. motives of foreign direct investment (fdi) in ethiopia: an empirical analysis 147 h5. business, financial and investment freedoms affect fdi flow positively 3.2.6. economic globalization kof globalization index which is issued by swiss economic institute constitutes economic, political and social globalization scores. the economic globalization takes into consideration universal trade, investment and revenue flows corresponding to gdp along with the impact of limitations on trade and capital dealings to gauge economic globalization of countries. h6. economic globalization will have a positive effect on fdi flow 3.2.7. infrastructure the accessibility of improved quality infrastructure in the host country is believed to be vital for the process of production as it smooths the development of supply and circulation of production factors. foreign investors favour to place their investment in countries that have a full-figured physical infrastructure such as unswerving telecommunication facilitates (e.g. mobile, fixed telephones and internet), railways, paved roads, sea, a power supply and air ports. h7. infrastructure development is a positive determinant of fdi inflows 3.2.8. country risks political instability and corruption are supposed to measure countries’ risk level in the current study. the two components are presumed to affect fdi inflow unfavourably. corruption impedes investment directly and indirectly although the relationship between political instability and fdi is not unresolved. several countries in this analysis are characterized by a high degree of instability, such as frequent military interventions and religious and ethnic conflicts. h8. there is a negative relationship between country risks (corruption and political instability) and fdi inflows 3.2.9. human capital an educated workforce has been recognized as an important determinant of fdi especially when firms are efficiency seeking. some studies argued that a higher level of education in the workforce can lead to higher flows of fdi. over the last few years, great attention has been given to education as it is one of the central tenets of the millennium development goals. also, quality of labour is important and raising the levels of human capital through education leads to skill acquisition h9. human capital accumulation has a positive impact on fdi inflows 4. data and methodology in order to examine motives of inward fdi in ethiopia, time series data from 1992-2015 were collected from secondary sources. these data were collected from both domestic (i.e. ethiopia) sources like national bank of ethiopia and central statistical agency and international data sources such as world bank and imf as well as specific indices from the heritage foundation and swiss economic institute. the study employed a quantitative approach to assess the relationship between fdi and the above mentioned explanatory variables to document the real motivational factors of inward fdi in ethiopia. therefore, using the above variables, the following model can be formed to explain the short and long run association between fdi and the expected motivational variables: abdu seid ali fdi = β0+β1gdp +β2trade +β3exra+β4infla+β5invfre +β6finfre +β7ecoglo+ β8infras+ β9cor+ β10humcap+ et (1) where gdp stands for market size, trade is openness of trade, infl is inflation rate, ex is exchange rate, finfr is financial freedom, invfr is investment freedom, ecgl signifies economic globalization, infras is infrastructure cor stands for corruption and humcap indicates human capital. ordinary least square regression method was used to determine the estimation of the relationship between fdi and the explanatory variables whereas the var model was employed to check whether there is a long run relationship. the time series data were analysed using eviews 8.0 software package. 5. results and discussion 5.1. multi-collinearity test various testes were made in order to determine both short and long run relationships among variables accurately. the first is multi-collinearity test which occurs when two or more of the explanatory variables in a regression model are reasonably or extremely interrelated. when this happens, it can adversely affect our analysis and inferences we make. therefore, the result of the multi-collinearity test shows that human capital, labour force, infrastructure and country risk are highly correlated with each other and with other explanatory variables and are removed from the study. 5.2. unit root test numerous economic and financial time series data reveal trending behaviour or nonstationarity in the mean. a series is supposed stationary if the mean and auto-covariances of the series do not depend on time and an alteration in time doesn’t affect a variation in the form of the distribution. it is inaccurate to perform hypothesis tests concerning the regression parameters if the variables in the regression model are not stationary. hence, unit root tests are used to test for stationarity in these time series data. as it shown in table 1, we reject the null hypothesis because the unit root test of adf shows that fdi, infla and trade are stationary at level whereas exra, finfre, invfre and ecoglo are stationary at first difference. besides, gdp per capita became stationary at second difference. therefore, it is plausible to undertake a regression test since the result implies that all variables are stationary. 5.3.co-integration tests economic theory often recommends that some sets of economic or financial variables ought to be interrelated by a long-run economic association. two time series variables xt and yt are assumed to be co-integrated if there occurs a parameter α; ut = yt − αxt (2) table 1: unit root test result based of augmented dickey-fuller (adf) variable level first difference second difference lnfdipers -5.076 *** lntrade -3.139 ** lninfla -4.926 *** lnexra 0.787 -8.213 *** lnfinfre 0.821 -4.690 *** motives of foreign direct investment (fdi) in ethiopia: an empirical analysis 149 lninvfre -2.046 -4.393 *** lngdppergr -1.039 -0.795 -8.462 *** lnecoglo -2.353 -2.830 * *** significant at 1% level, ** significant at 5% level and * significant at 10% level source: author’s calculation the above formula follows a stationary process as it appears that plenty of economic series tracks that approach and because this is often anticipated by theory. table 2 demonstrates that h0 of no co-integration among the variables in the invfre, gdp and ecoglo models are rejected at 1% level of significance which indicates that there is a cointegration between fdi and the three variables. similarly, trade and finfre are co-integrated with fdi at 5% significance level. conversely, infl and exra did not show any co-integration among the variables. a regression analysis which indicates the relationship between our dependent variable fdi and the independent variables stated below displayed in table 3. in addition, the regression equation enables us to forecast or predict the relation between variables. three variables namely exra, finfre and gdp became significant at 1% level while trade and infla are significant at 5% with positive and negative coefficients respectively. however, the other independent variables invfre and ecoglo turn out to be insignificant. r2 which gauges the success of the regression in forecasting the values of the dependent variable within the sample is 94% that is quite high and supports appropriateness of the regression model. the p-value just below the fstatistics signifies the marginal significance level of the f-test. the value is 0.0000 which is fundamentally zero that shows all the independent variables jointly affect the dependent variable. the market size represented by gdp growth draws the attention of investors since it is an indication of the ethiopia’s potential to produce goods and services. this finding is supported by omar & anil (2015); chan et.al (2014); castro (2013) and mangir et.al (2012). investment freedom is essential for the development of fdi in countries like ethiopia because the existence of it may encourage foreign investors to invest more. comparable results were found in the studies of fofana (2014); sinha et.al (2007). economic globalization is noteworthy for the smooth movement of trade, investment and capital in the country and this statement is backed by the empirical findings of neto & veiga (2009) and leitão (2012). table 2: johansen’s co-integration test result h0 trace statistics critical value probability trade r=0 15.533 * 15.494 0.0493 r ≤ 1 2.271 3.841 0.1318 infl r=0 14.318 15.494 0.0746 r ≤ 1 2.209 3.841 0.1372 exra r=0 12.245 15.494 0.1455 r ≤ 1 0.599 3.841 0.4387 finfre r=0 15.543 * 15.494 0.0492 r ≤ 1 1.156 3.841 0.2822 invfre r=0 35.437 * 15.494 0.0000 abdu seid ali r ≤ 1 3.532 3.841 0.0602 gdp r=0 21.711 * 15.494 0.0051 r ≤ 1 9.735 3.841 0.0018 ecoglo r=0 24.182 * 15.494 0.0019 r ≤ 1 7.701 3.841 0.0055 * denotes significance at 5% level source: author’s calculation trade openness is an imperative determinant of fdi for ethiopia. the more the country allows trade openness the more it boosts investors’ confidence favouring productivity surge of transnational firms by means of importing capital goods and innovative technologies. rogmans & ebbers (2013), assefa, et al. (2013) and vijayakumar, et al. (2010) found identical results emphasizing the significance of trade openness. like the investment freedom, financial freedom plays a vital role for the improvement of fdi flows to ethiopia. the accessibility of varied loans, payment and investment facilities in the country can be a catalyst to enhance fdi. the research results of matallah & ghazi (2015) and ajide (2014) strengthens the finding. concerning exchange rate, one of the two outcomes was expected which supports the literature. the ethiopian birr, which is known for devaluation and depreciation, encouraged foreign investors to invest more probably due to boosting their relative wealth position. tang et.al (2014), bilawal, et al. (2014) and omankhanlen (2011) found positive relation between fdi and exchange rate. like anticipated the coefficient of inflation was negative which indicates that skyrocketed and volatile inflation exacerbates uncertainty and brings about higher investment risk in ethiopia. the inquiries of demirhan & masca (2008) and bekhet and al-smadi (2015) illustrated the same outcome. table 3: regression results variable coefficient std. error t-statistic prob. c -38.52405 8.437083 -4.566038 0.0003 lntrade 2.288860 0.922883 2.480119 0.0246 ** lninfla -0.409517 0.160085 -2.558126 0.0211 ** lnexra 2.761572 0.859337 3.213607 0.0054 * lnfinfre 4.590394 1.217472 3.770431 0.0017 * lninvfre 0.352702 0.420885 0.838000 0.4144 lngdppergr 0.365058 0.100309 3.639325 0.0022 * lnecoglo 2.974410 2.044748 1.454658 0.1651 r 2 0.942 f-statisitcs 37.141 prob(f-statisitcs) 0.000000 * *significant at 1% ** significant at 5% *** significant at 10% source: author’s calculation the var model is a generalization of the univariate autoregressive model for predicting a pool of variables; that is to say, a vector of time series. it encompasses one equation per variable measured in the system (hyndman and athana motives of foreign direct investment (fdi) in ethiopia: an empirical analysis 151 sopoulos 2013). a constant and lags of all the variables in the system is incorporated in the right hand side of each equation. y =c+a1 yt-1 +......... ap yt-p +et (3) a var model was used to check whether there is a long run relationship between fdi and its motivational variables. as it is indicated in table 4, even though the model elucidates all the variability of the response data around its mean (r2= 89%), the statistical result didn’t reveal any long term relationship between fdi and its motives individually. table 4: var model result source: author’s calculation in the same way, wald test was carried out to show the effect of two or more variables together on independent variables. here the results found confirm chi square value with probability of above 1%, 5% and 10% level of significance signifying that the variables jointly cannot influence the dependent variable. therefore, there is no coefficient std. error t-statistic prob. c(1) -0.156045 0.694880 -0.224564 0.8235 c(2) -0.409910 0.639143 -0.641343 0.5250 c(3) -0.227505 3.634674 -0.062593 0.9504 c(4) -0.024379 2.524838 -0.009656 0.9923 c(5) -0.179777 0.509827 -0.352623 0.7262 c(6) -0.205026 0.509865 -0.402119 0.6897 c(7) 2.090154 8.809459 0.237262 0.8137 c(8) 3.494414 6.898746 0.506529 0.6153 c(9) 2.912830 3.144400 0.926355 0.3598 c(10) -0.471326 4.293347 -0.109781 0.9131 c(11) 1.815790 1.797713 1.010055 0.3185 c(12) -0.294549 1.869495 -0.157555 0.8756 c(13) -0.057391 0.603190 -0.095146 0.9247 c(14) 0.010464 0.374173 0.027965 0.9778 c(15) -0.027134 11.57848 -0.002344 0.9981 c(16) 1.437435 10.44722 0.137590 0.8913 c(17) 1.590414 27.25607 0.058351 0.9538 r-squared 0.893571 adjusted r-squared 0.552999 abdu seid ali statistical evidence for the considerable fdi investments into ethiopia greatly inspired by the trends in the explanatory variables used in this study. 6. conclusion the study assessed the major motives of inward fdi in ethiopia employing time series data from 1992-2015. ols regression method, johansen’s co-integration test and var model were used to predict, check combinations and examine long run relationship between fdi and the explanatory variables during the stated period of time. the statistical results show that there is significant and positive relationship between fdi and market size, trade openness exchange rate and financial freedom whereas inflation had negative and significant link with fdi. the remaining variables which are investment freedom and economic globalization indices were found positive but insignificant. this shows that ethiopia’s double digit growth for the last decade, impressive performance in trade, devaluations and depreciations of birr and the availability of credit and investment facilities for foreign investors play a substantial role to attract inward investments to the country. however, high and volatile inflation rate became one of the challenges for investors in form of escalating uncertainty and aggravating investment risk. therefore, ethiopian government should take appropriate macroeconomic policy measures to tackle this and other investment related impediments in order to attract and motivate investors. references akhtaruddin, m., hossain, ma, hossain, m., & yao, l. 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"corporate governance committee-investment and finance definition," https://onlinelibrary.wiley.com/doi/full/10.1111/corg.12143 international journal of commerce and finance, vol. 4, issue 2, 2018, 40-45 40 challenges regarding the electronic bill of lading (ebol) vasileios ziakas greece abstract the electronic bill of lading (ebol) has not been into practice up to the present despite the fact that digitalization gains ground at a rapid pace. there are a few reasons why there is such disbelief as regards the substitution of the paper bill of lading. generally speaking, a great debate has been raging all these years. advantages as well as disadvantages are to be found on both sides. on the one hand, d efenders of the idea that the electronic bill is realizable in near future even though there are a few drawbacks to be overcome, collide with the reluctance and hesitation of those who controvert the concept of the ebol. but on which basis are the objections and oppositions exactly based. significant steps in the right direction are to be pointed out, but it seems that there are still crucial practical hindrances at the front. keywords: ebol, document of title, negotiability, pledge, edi 1. an overview the disadvantages of the paper-based seaborne trade drew the attention of the international community, which acted on the new challenges by trying to introduce the electronic bill of lading. in the context of universal digitalisation as a fundamental characteristic of the modern era, where computers play a great role in transactions (electronic commerce), it is pointless to stay attached to the traditional shipping documents, including of course the paper bill of lading. however, as it turned out, the reaction of the community could be described as perfunctory and facile rather than coordinate and prosperous. moreover, trade community seems to adhere to the idiom ‘do not rock the boat’ and is reluctant to accept any new idea and practice. this stand is partly justifiable, considering also that there are functional aspects that make practically difficult or even impossible the usage of the electronic bill of lading. indeed, the major reason of the unsuccessful institution of the electronic bill of lading is to be found in the inherent features of the traditional bill as document of title. these features and mainly the negotiability of the bill of lading are not attributable to the electronic bill. although the electronic bill of lading has definitely many advantages in comparison with the paper bill, the former cannot substitute the latter. as it will be analysed below, in terms of practicality, there are some impediments that the electronic bill of lading is still not capable of overcoming. in the course of the time, this may change, although there are well-founded and sound reasons for believing that the present situation is unlikely to alter at least in near future. of course, it is a long shot, but simultaneously it is more necessary than ever. 2. electronic bill of lading although the majority opinion may assume that the electronic bill of lading constitutes simply the electronic form of the traditional bill of lading, just a few remarks need to be noted. of course, the above view is partly right, since the electronic bill of lading shall be identical to the paper bill, but the former has an additional fundamental component, which lies within the transmission of the electronic messages among all parties that are involved. 3. pros and cons of the electronic bill of lading on the one hand, the advantages of the electronic bill of lading are not to be disregarded at all, especially in the modern digitalised age. considering that the velocity of the vessels has been significantly increased, the major problem of the paper bill of lading is that it arrives at the consignee after the arrival of the goods. in that sense, it is self-evident that the paper bill inflames the problematic situation and consequently, its displacement is essential for moving forward and successfully overcoming that quite awkward situation. in addition, the use of electronic bills of in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e challenges regarding the electronic bill of lading (ebol) 41 lading would result in a significant decrease in transactional costs, and in a rise of the transactions’ rapidity. all these indispensable advantages are also highlighted under the pioneering scheme named as electronic data interchange (edi). regarding the security, advocates of the international transactions conducted by electronic means, here by electronic bills of lading, contend that the latter is not so vulnerable to fraud compared to the paper bill. as it well known, the paper bill of lading is, due to its substance, more assailable to frauds compared to the electronic bill, which is less possible to be counterfeited. according to todd, the electronic bill of lading provides ‘’a far higher level of security than will ever be possible with paper and thus, the risks of some types of maritime fraud are reduced’’. however, even though the electronic bill of lading minimises dramatically the risk of possible frauds, maritime industry has an overall negative attitude towards its use, considering it unsecure. this view is also reinforced by the fact that the legal regime governing the use of the electronic bill of lading is quite ambiguous, deficient and inadequate. an additional advantage of the electronic bill of lading is that a huge amount of paper is saved and, under an ecologically conscious view, this is not to be undermined at all. paper sheets need also to be kept and stored, which actually means further expenses and expenditures (civelek, uca, çemberci, 2015). 4. the ebol in an international convention context it is undeniable that the united nations convention on contracts for the international carriage of goods wholly or partly by sea 2009 (rotterdam rules) constitutes the most ideal and appropriate legal framework in light of the contemporary transactional digitalised environment. nevertheless, the first and even premature steps in that direction had already been made during the decade of 1970, when the united nations convention on the carriage of goods by sea 1978 (hamburg rules) was enacted. the hamburg rules made for first time provision for the prospective introduction of electronic procedures in transport sea operations and were followed by the rotterdam rules in 2009, which adopted the term ‘electronic shipping document’ defined under article 1(18). in particular, article 14(3) of the hamburg rules impliedly envisage the electronic bill of lading by affirming that ‘’the signature on the bill of lading may be in handwriting ( ... ) or made by any other mechanical or electronic means, if not inconsistent with the law of the country where the bill of lading is issued’’. indeed, by recognising the validity of the electronic signature, this provision could be viewed as the first step towards the gradual introduction of the electronic bill of lading. noteworthy is also that the hamburg rules provide that ‘‘writing’’ encompasses, among others, telegram and telex (article 1(8)). after almost thirty years, the enactment of the rotterdam rules could be considered revolutionary, even though they were not welcomed by the global community. article 8(b) of the rotterdam rules, which provides for the maintenance of the feature of negotiability, even though the transport record is in electronic form, is very illuminating of the great change that this set of rules aimed at bringing upon. it is generally admitted that an international convention which would regard the electronic bill of lading as an analogous document of title compared to the conventional bill of lading, could result in the wide endorsement of the negotiability of the electronic bill of lading, as well. the lack of uniformity through an international convention that will have in view two main types of bill of lading equivalent to each other has as a consequence the reluctance of the traders to embrace the use of the electronic bill of lading. the necessity of a broad agreement imprinted in an international convention that would regulate the use of both the traditional and the electronic bill of lading is absolutely imperative. moreover, that convention should deal with the additional issues that would arise as corollary of the equal legal status of the electronic and the paper bill of lading. just to name a few indicative issues that would probably spring up as a result of an alleged equalisation; how exactly the transfer of the property and possession is addressed under an electronic bill? furthermore, how the electronic bill will carry out the security function of the traditional bill and how priorities will be determined in case of the purchaser’s or vendor’s insolvency? these questions have already concerned the international community, but the corresponding answers were, admittedly, not so satisfactory. nevertheless, it is to be noted that although an international convention would surely foster the idea of the electronic bill of lading, it is not exclusively up to the international community. in the contrary, vasileios ziakas 42 domestic law can play an important role in bringing into being and materializing the idea of the electronic bill of lading. 5. had cogsa 1992 foreseen beyond paper? attempts towards the transformation of the traditional bill of lading to an electronic format are also noticed at a national level. as far as english law is concerned, the use of the telecommunications and computerized systems was already envisaged in cogsa 1992. specifically, section 1(5) cogsa 1992 envisages that the specific act applies ‘to cases where an electronic communications network or any other information technology is used for effecting transactions corresponding to: (a) the issue of a document to which this act applies; (b) the indorsement, delivery or other transfer of such a document; or (c) the doing of anything else in relation to such a document. moreover, in order to make few terms more comprehensible and penetrable, section 5 gogsa 1992 provides their definition, including, inter alia, the definition of the term ‘information technology’. accordingly, information technology includes any computer or other technology by means of which information or other matter may be recorded or communicated without being reduced to documentary form’. from all the above, it follows that cogsa 1992 had not ruled out the possibility of an electronic document. in contrast, cogsa 1992 recognised straight away that the documentary form is not necessarily a prerequisite for what is traditionally known as document, since the latter can also be electronically formulated. it is evident therefore that, in the absence of an international convention, it is at the discretion of the national law to provide for regulation related to the electronic bill of lading. indeed, for the time being it seems that it depends on the national courts whether the words, such as ‘writing’, ‘document’ etc., should be viewed under a strictly conformist viewpoint or in a liberal manner. in other words, national courts can freely decide on that issue pursuant to the interpretation rule, in favour of which they stand, and taking into account general principles. 6. the major defect of the electronic bill of lading in terms of practicability, it is well known that the most cardinal drawback of the electronic bill of lading is the lack of negotiability. in contrast to the traditional bill of lading, whose negotiability is of great significance, the electronic bill is devoid of the particular feature on the ground that it is intangible. at common law, the fact that the electronic bill is intangible means automatically that it is not negotiable, since negotiability derives from the bill’s qualification as a document of title. but, what is actually a document of title? first and foremost, documents of title are immediately relevant with the management of legal rights over the good s, including of course the possession of the goods as well as the entitlement of their delivery, which emanates from the actual possession of a genuine official paper, i.e. bill of lading. therefore, it follows that physical possession and electronic bill of lading are two concepts absolutely incompatible and discordant. indeed, it is strongly believed that the electronic bill of lading and notions, such as ‘indorsement’, ‘delivery’ or ‘possession’, do not fit together. moreover, the electronic bill does not match adequately with the word ‘holder’, since the electronic bill of lading is intangible. finally, in respect of possession, it has to be noted that, in the case of the paper bill of lading, its transfe r confers possession to the consignee, while the transferor forfeits mandatorily any right over the goods. however, it is debatable whether the transfer of the electronic message would effectuate the loss of any possession of the goods by the transferor of the bill. notwithstanding the practical issues stemming from the use of the ebol, such as the inherent risk of the electronic data to get lost in case of malfunction or a collapse of the computer’s system or the risk of creating copies that are identical to the genuine bill of lading, legal issues are also of great significance. in light of the lack of an ambiguous legal status of the electronic bill of lading, it is at the court’s discretion to decide whether an electronic bill of lading is equivalent to the paper one. in other words, it depends exclusively on the court’s approach, since most national legal systems do not contain an explicit definition of the term ‘‘document’’ and its features. for instance, the question whether the document is required to be in written form is open to debate. solely a few vague thoughts and abstractive concepts are to be found scattered in case law and several legislations. for example, in ireland, the challenges regarding the electronic bill of lading (ebol) 43 interpretation act, 2005 defines writing as including "printing, typewriting, lithography, photography and other modes of representing or reproducing words in a visible form". on the contrary, when it comes to electronic documents, special terminology in lieu of the word ‘’document’’ is frequently used. for example, the un model law on electronic commerce makes reference to the term ‘’data message’’ , which is interpreted as follows: ‘information generated, sent, received or stored by electronic, optical or similar means including but not limited to electronic document interchange (edi), electronic mail, telegram, telex or telecopy’. likewise, the wording in the bolero rulebook stays away from the term ‘document of title’. in particular, it says that the electronic bill’s possessor ‘shall be deemed to have all the same rights and privileges under and in relation to the contract of carriage (....) and in respect of the goods to which the (electronic bill of lading) relates as he would have enjoyed had he been the holder of a conventional paper bill of lading in respect of those goods’ (rule 8.2.). to sum up, it is implausible that the electronic bill of lading will ever be regarded as document of title under the strict standpoint of common law that requires the physical substance of the bill of lading. generally, the majority opinion inclines to accept that the electronic bill of lading is not capable of conveying property over the goods as well as entitlements and obligations stemming from the contract of carriage, because it is not included in the exclusive enumeration of the negotiable documents of title. moreover, it must be noted that, in the absence of a statutory definition of the electronic bill of lading and of a relevant ‘merchandise custom’, it is uncertain if cogsa 1971 could ever have had a so broad scope of application. it appears that the bill of lading in cogsa 1971 does not encompass the electronic message or record. 7. can the electronic signature pave the way for the electronic bill of lading? once the major issue was whether the manual signature that various official documents require, can be replaced by the electronic signature. nowadays this problem is obsolete, since both forms of signature are equally effective. of course, the enactment of germane legislation, including the statute on electronic commerce, has played a decisive role in going over the difficulties. for instance, under common law, every document of title has to be signed manually in order to be legally valid. in terms of authentication, this is indispensable because it manifests that the document is genuine. on the other hand, in the event of electronic signature, authentication is sufficiently performed through the so-called digital key. the great breakthrough was the enactment of the electronic signatures act 2000, which embodied the electronic signatures directive. according to section 7 of the electronic communications act 2000, ‘an electronic signature is admissible evidence in relation to the authenticity or integrity of the data or communication concerned’. as soon as the joint legislative initiative of the european parliament and the council was transposed into domestic law, most countries get familiarised with the idea of the electronic signature, which was legally tantamount to the handwritten signature. 8. negotiability and electronic bill of lading undoubtedly, the most challenging task is the electronic replication of the negotiability of the traditional bill of lading. the rest two functions of the bill of lading, namely as evidence of the contract of carriage and as receipt of the shipment, can easily be performed in a digital environment. by contrary, the electronic reproduction of the bill’s nature as document of title is hard to be carried out. furthermore, the particular feature has further legal implications. specifically, by virtue of the fact that it signifies the possession of the goods as well as the title to them, it is capable of constituting the legal basis for security purposes, such as the creation of a pledge. since the electronic bill of lading is not considered a document of title under common law, the question whether the creation of pledge based on such a bill of lading is feasible, seems to arise. considering the present situation, one certainly concludes that the creation of a pledge over the goods through an electronic bill is fictional rather than vasileios ziakas 44 realizable. from the lender’s point of view, only a document of title can satisfy his purpose of securing his interests. however, the concept of creating a collateral security through the electronic bill of lading is not so far away. uncitral has already got started on a plan focusing on proposals how the transactions schemes shall be technologically updated. in other words, working group vi in security interests moves forwards and proceeds on securing the digitalised transactional environment by creating credits in exchange for assets, which are negotiable regardless of their nature. further attempts of dealing with the issue whether the electronic bill of lading can constitute the legal basis from which collateral results, are to be found in the uniform commercial code (ucc) under article 9, which encompasses not only the negotiable but also the non-negotiable documents. 9. risks of the electronic bill of lading one of the most fundamental risks attributable to the electronic format of the bill of lading is its vulnerability against fraudulent practices. although protection measures are always feasible and they may even improve in future, there is always the latent risk of being hacked in. notably, decryption systems can provide a considerably significant degree of security, but, complete and absolute protection is considered utopia. moreover, traders are not ready to trust the use of the electronic bill of lading, believing reasonably that at the end of the day the risks outweigh the benefits. however, one might counter-argue that, in terms of electronic bills of lading, frauds are extremely rare, since the alleged crooker is required to have expertise in computerised systems. put simply, hackers may have access to data, albeit an encryption-decryption system, on the condition that they have accomplished to hack the system in. to make matters worse, although creating a fake or counterfeit copy of the original bill of lading entails special knowledge, the created copy is indistinguishable from the genuine. by contrast, the forgery in case of a conventional bill of lading is quite easily discoverable compared to the forged copy produced via computer. the reason is that the precise duplicate of the traditional bill of lading is especially difficult because of its written form. on the other hand, as counterargument, it could be alleged that there are many more potential culprits than hackers, given that the forgery of a paper bill of lading does not demand the crook to be expert on computerized systems. it sounds as if there is no alternative rather than the electronic bill of lading. indeed, according to many scholars (paul todd), there is no choice other than welcoming the use of electronic bills of lading. they argue that, notwithstanding the massive use of sea waybills, there is a limited degree of leeway when it comes to their usage in commercial practice. indeed, the invaluable utility of the bill of lading is apparently noticed in the event of successive transactions while the goods are still in transit. oil carriage is admittedly an illuminating example of the bill’s usefulness by virtue of the fact that possession of the oil itself is usually transferred many times during the voyage. in this regard, it is the negotiability of the bill of lading that renders it absolutely essential. currently, owing to recent technological advancements the use of the electronic bill of lading in lieu of the conventional one, seems to be more possible than ever, provided that the requirements enlisted below are fulfilled. firstly, the electronic bill of lading shall enable the transfer of proprietary rights over the goods, secondly everyone shall have access to make use of it and, last but not least, it must be able ‘not only to transfer but also to chec k the documentation electronically’. however, as it was stated before, the basic impediment regarding the evolution and the massive spread of the electronic bill of lading is the inexistence of a stable legal context regulating the use of such document and, at the same time, taking into consideration all the parties’ involved in international transactions (civelek, uca, çemberci, 2015). the lack of a systematized and uniform framework is the basic obstacle to the adoption of the bill of lading in its electronic format ((civelek, çemberci, uca, çelebi, & özalp, 2017). 10. conclusion to sum up, it seems that for the time being the substitution of the traditional bill of lading by the electronic is not possible. in terms of some practical aspects, the latter is deemed to have significant weaknesses that set impediments in its further development and establishment. especially, as regards the potential security provided by the electronic bill of lading, it is extremely deficient and inferior compared to the security provided by the traditional bill of lading. challenges regarding the electronic bill of lading (ebol) 45 notwithstanding the ambitious efforts of uncitral and, sporadically, a few creative examples, such as article 9 ucc, it seems that present situation is unlikely to change, at least in near future. references books aikens,r.,.lord, r., bools, m., bills of lading, 1st edn. informa law, 2006. todd, p., maritime fraud and piracy, 2nd edn. informa law, 2010. treitel, g.h., reynolds, f.m.b., carver, t.g., carver on bills of lading, 1st edn, sweet & maxwell, 2001. wilson, j.f., carriage of goods by sea, 7th edn, longman, 2010. journals bassindale, j., ‘fraud and bills of lading’, journal of financial crime, 4(1), 1996, pp. 33-36. beecher, s., ‘can the electronic bill of lading go paperless’, the international lawyer, 40, 2006, pp. 627-647. dubovec, m., ‘the problems and possibilities for using electronic bills of lading as collateral’, arizona journal of international & comparative law, 23 (2), 2006, pp.437-466. mcgowan, k., ‘the dematerialisation of the bill of lading’, hibernian law journal, 7, 2007, pp. 68-104. civelek, mustafa emre, özalp, a. (2018). blockchain technology and final challenge for paperless trade. eurasian business & economics journal, 15, pp. 1-8. civelek, m. e., çemberci, m., uca, n., çelebi, ü., özalp, a. (2017). challenges of paperless trade: redesign of the foreign trade processes and bundling functions of traditional documents. international business research, 10 (2), pp. 74-81. civelek, m. e., uca, n., çemberci, m. (2015). eucp and electronic commerce investments: e-signature and paperless foreign trade, eurasian business & economics journal, 3, pp. 60-70. pejovic, c. ‘documents of title in carriage of goods by sea: present status and possible future directions’, journal of business law, 2001, pp.461488. todd, p., ‘dematerialisation of shipping documents’, journal of international banking law, 9(10), 1994, pp. 410-418. van boom, w.h., ‘certain legal aspects of electronic bills of lading’, european transport law, 1997, pp. 9-24. whitaker, d. (1991) ‘electronic documentary credits’, business lawyer (aba), 46 (4), pp. 1781-1786. international journal of commerce and finance, vol. 2, issue 1, 2016, 25-35 cost of poor quality in energy sector özlem aras, (msc) kocaeli university industrial engineering programme burcu özcan, (ph.d.) kocaeli university industrial engineering programme abstract: companies need to produce their product and services with lower cost in order to survive in the competitive global market. that is why; firstly they need to define the visible and invisible cost of poor quality factors and then need to eliminate these poor quality costs by utilizing the various improvement methodologies. in order to define the poor quality, firstly the project team members need to be assigned between the cross functional departments. then, the current status needs to be defined step by step by utilizing the various methodologies such as pareto analyze etc. as a second step, root cause analyze is performed, and lastly the actions and action plan are defined. all these steps are systematized with some methodologies such as pdac, practical problem solving (pps), six sigma dmaic & 8d. in this study, it is aimed to decrease the warranty cost which is a factor of the cost of poor quality in a factory in the energy sector. at the same time, it is aimed to decrease the customer complaints as well as to increase the customer satisfaction. the factors that cause the warranty cost have been defined in the current status analyze. pareto analyze, brainstorming, fish bone analyze, process mapping, 5 why analyze etc. methodologies have been utilized in this study. key words: key performance index (kpi), pareto analysis, cost of poor quality (copq), fish bone, 5 why 1. introduction at the present century, companies strive to continuously develop and expand their actuality. consequently, they try to define what their customers expect and how they can meet the customer expectations with a minimum cost. (anderson,1993) to achieve this; they need to understand their customers properly; need to produce or service in a high quality on time with a low cost (karaulova et al., 2008). a company that succeeds these requirements have loyal customer who make repeat orders (jones and sasser, 1995). thus, the company guarantees to have great return on investment ( roi ) (karaulova and shevtshenko, 2009). today companies need to be reliable and stable at their processes so that they can pr oduce the quality with lower costs. the reliability and stability affect the performance of the company in its sector. for that reason each company needs to describe some metrics; key performance index (kpi) to measure their performance. thus, these kpi metrics measure the real status of the company at the certain time (kaganski, 2013). for example cost of poor quality / revenue which is a kpi metric of a company. this kpi metric includes; scrap cost, rework cost, warranty cost which consumes recourses, time and money (karaulova et al.,2012). therefore, in order to survive in the market, companies should increase the product and service quality as well as decrease the cost by utilizing various quality improvement methodologies. particularly, in the today’s competitive market, cost of poor quality cannot be disregarded within the cost management. however, in the classical system, it was assumed that high quality was met with high cost. however, at the present day, it was understood that this approach was not true. it was accepted that the highest cost of a company is not to produce high quality product or service, it is to produce lower quality product and service ( karabınar and geyik, 2001). efil stated in his book that "the cheapest way of doing a work is to do it true for the first time” (efil, 1990). the influence of the poor quality production can be handled in two ways; losses for the companies and also for the customers. companies are faced with decreasing of the sales, loss of image, decreasing of the competitiveness and loss of the productivity. in point of customers ; the health and safety run a risk, the customers do not satisfy with the product, the customer dissatisfaction is increased, the trust of the customer is decreased, customer complaint and returns are increased (sale, 2001). as a result, both companies and customers suffer with the poor quality of design, production and sales. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 126 özlem aras & burcu özcan http://ijcf.ticaret.edu.tr there are two kind of aims of the quality systems and improvement processes; to increase the customer satisfaction and to decrease the costs which are occurred because of non-conformities. companies want to increase the customer satisfaction in order to sell more products. this means that they make more profit. the best way of decreasing the costs which are occurred because of non-conformities is to prevent before the cost occurs. if it is not possible, the companies need to define and solve the non-conformities in the sub-process of the production as soon as possible. the cost of the non-conformities increases when the defining of the non-conformities is late. this point of view should not be forgotten; the additional cost of the non-conformed product is because of the poor quality not because of the quality (özkan, 2001). in the recent years, while the customer expectations and production systems are continuously changed, the description of the quality costs are same in the last 50 years (moen,1998). in the past, companies were thinking differently regarding how their product specifications should be. product specifications were being designed based on designer's desire or based on how company wants to provide the product to their customers. henry ford’s quotation is an example for this way of thinking ‘customers can choose a car which color they want with black being conditions’. as can be seen, at the beginning of the 1900, the products were produced just in defined specific conditions, the customer expectation was not being considered. in the other word, companies focused on just conformity of the standards (hitcher,1993). at the present, this way of thinking was changed as ‘conformity to the requirements’. companies started to produce product or service based on the customer requirements with this new approach. at the recent years, big companies started to respond the latent requirements of their customers. these latent requirements are the requirements that the customers have not thought over it or haven’t realized it so far. according to bland; the cost of poor quality is equal to the variation between the actual operational cost and operational cost standard (bland, 1998). besides, customer dissatisfaction which is occurred due to this poor quality and also the cost which the customer has to bear should be added into the company copq. according to the sörqvist; the non value added cost should be called as copq and copq is the best way to increase the profitability and competitive capacity of a company. in summary; poor quality firstly causes customer dissatisfaction then, loss of sale and loss of image. in actual fact, this is the main difference between the quality cost and cost of poor quality. even though the customer dissatisfaction cost and loss of company image cost called as latent cost are disregarded in the classical quality cost system, they are very important in the copq system. because recent studies showed that these latent costs are very important that they can’t be ignored. the aim of the copq is to provide required data to the management and the employees in order to define the improvement opportunities and to measure the continuous improvements in a company. copq system also helps a company to control itself in its own process. 2. cost of poor quality there are numerous ways to define and measure the cost of quality, in this study we use asq cost of quality definition. there are two different variables in the cost of quality equation: cost of good quality ( cogq) and cost of poor quality ( copq). essentially, the cogq relates to costs incurred to assure the quality in products and prevent poor quality. the copq is a measurement of the non–conformities (failure) costs incurred in producing the product. this can be understood in the following formula: coq = cogq + copq (1) each of these variables has more specific dimensions. the copq accounts for internal and external failure costs, while the cogq encompasses appraisal and prevention costs. the copq quantifies the traditional quality costs companies measure. these include scrap, rework, and returned materials. as these costs emerge from production line issues as well as external services employed by companies, such as the use of the supply-chain, it is important to identify their origin in the calculation. the copq formula can be extended to show internal failure costs (ifc) and external failure costs (efc), giving us the following equation: copq = ifc + exc, where: (2) cost of poor quality in energy sector 27 http://ijcf.ticaret.edu.tr ifc = scrap costs + rework costs (3) efc = returned product costs + warranty costs + product recall costs (4) costs incurred internally and externally are caused not only by defects in products, but also by inefficiencies in production and processes. a more in-depth list of factors affecting ifc and efc is below: factors affecting ifc factors affecting efc · weaknesses in quality resolution (capa/fmea) · delayed work schedules · poor materials planning · materials shortages · equipment downtime · materials review · reengineering/redesigning products · poor service management · unresolved customer complaints · weak enterprise communication · environmental/sustainability nonconformance · adverse reputation events 3. application this study is carried out in a factory which trades in energy sector and has 662k$ cost of poor quality. this amount of copq was occurred in 2015 which is shown on the below table 1. in this analyze, copq/revenue which is the non-financial key performance index of the company has been analyzed and targeted to decrease copq/revenue from 1, 25% to 0, 68% until the end of the 2016 and to decrease the copq in the ratio of 45%, and additionally to decrease the customer complaint quantity in the ratio of 83%. table 1. total copq, warranty cost, copq/revenue, targets total copq 662k$ warranty cost 300k$ target decreasing ratio from copq 45% revenue 52.920k$ copq/revenue 1,25% target copq/revenue 0,68% in this study, team members are gathered from design department, planning & purchasing department, and dispatching department based on the cross functional team requirement. a cross functional team should have members from all the functions needed to diagnose the root cause, develop and implement solutions. the methodologies used in this study are process mapping, pareto analyze, brainstorming, fish bone, 5why. in order to analyze the copq / revenue; the analyze steps were divided into four steps which are modeled from deming’s pdca cycle. analyze steps are defined as below: define & measure: any process, sub process or financial performance metric that is measured and planned for improvement. 128 özlem aras & burcu özcan http://ijcf.ticaret.edu.tr analyze: this is a step where, the performance metric that needs to be improved is analyzed. improve : actions that are necessary to create the change as per analysis completed in the earlier step. sustain: this is where process changes are effected and standardized to create a sustained performance after confirmation of achievement of the goal. the analyze steps; define & measure, analyze, improve & sustain are determined in table 2 as project plan. table 2. project plan define & measure: project set up ( team members), data collection: define opportunity. investigate to understand the current state in detail. action target date 1 analyze current warranty cost q1/2016 classification of the cost type & customer complaints pareto analyses; define the highest costs & customer complaints 2 process mapping: review the process flow to see the nonconformities occurred in the flow. q1/2016 analyze : analyzing the data: identify and confirm root causes of the problem & develop, pilot, and implement solutions that eliminate root causes. action target date 1 brainstorming methodology q2/2016 fish bone (ishkawa ) methodology 5 why methodology for defining the root cause 2 solutions defined in order to eliminate the root causes. q2/2016 improve: developing & implementing long term solutions action target date 1 actions planned with smart targets: when & who? q2/2016 sustain: new work methods and processes standardized. issue closed action target date 1 checking & standardization of the actions taken. q4/2016 cost of poor quality in energy sector 29 http://ijcf.ticaret.edu.tr 3.1. define & measure: first of all, warranty cost has been calculated within the cost of poor quality. afterwards, warranty cost has been classified based on the complaint type and thus, customer return quantity and customer return cost which come from the field have been obtained. analyze has been resulted as below: there has been 662,47k$ cost of poor quality which was occurred because of the non-conformity activities in the company during 2015. 45% of this cost is because of the warranty complaints came from the customer return from the field as shown in the table 1. the warranty cost classified based on complaint type has been analyzed by utilizing pareto analyze given in figure 1. as can be seen from the below graphic, the most important problem is the missing delivery to the latest customers which is occurred 83% of the customer complaints. then technical failure comes from behind, service support problems and damage. figure 1. pareto analyze for the customer complaint quantity when the analysis is proceeded based on the cost, as can be seen from the figure 2, missing part/delivery to customers has been occurred the 67% of the warranty cost. figure 2. pareto analyze for the warranty cost distribution secondly, in order to define the current status of the issue, an as-is flowchart has been utilized to understand how the process currently flows. it will be helpful to compare this as-is flowchart with a diagram. in the as-is flowchart diagram, the process steps of the design and dispatching department were reviewed because these departments are directly responsible from the missing delivery complaints. in figure 3, process flow has been analyzed step by step. all the traces which can cause the missing delivery were noted down on the 130 özlem aras & burcu özcan http://ijcf.ticaret.edu.tr process flow in order not to overlook the details. this will help the team members to find the root cause. this method should not be omitted during current status analyze. based on above explanation, all the steps summarized and charted as below: design department prepares the bill of material (bom). after preparing bom, material resource planning (mrp) is run. then, purchase order is released to the planning department and project data table is prepared by design engineer. after the preparation of the project data table, accessory packing list is determined by the design engineer. accessory packing list cannot be transferred automatically from sap bom so it is prepared manually. then, packing list is sent to dispatching department just before the shipment and accordingly accessories are prepared by dispatching department. finally packing and loading steps are completed. figure 3. process flow chart for missing delivery issue 3.2. analyze at the analyze stage of this study, fish bone diagram has been utilized. fish bone diagram is a tool that helps to identify, sort, and display possible causes of a specific problem or quality characteristic. it graphically illustrates the relationship between a given outcome and all the factors that influence the outcome. this type of diagram is sometimes called an "ishikawa diagram" because it was invented by kaoru ishikawa, or a "fishbone diagram" because of the way it looks or cause & effect diagram. a cause-and-effect diagram is a tool that is useful for identifying and organizing the known or possible causes of quality, or the lack of it. the structure provided by the diagram helps team members think in a very systematic way. in this analyze, as defined above in figure 4, all possible main causes of the issue have been determined by the cross functional team by utilizing brainstorming methodology and possible causes were placed into fish bone diagram. the main causes which affect the missing delivery issue; policies, design, procedures, people, cost of poor quality in energy sector 31 http://ijcf.ticaret.edu.tr production&planning ve plant have been determined and all the possible sub-causes have been defined and have been placed under the main causes. figure 4. cause-and-effect diagram after placing the all possible sub-causes, most likely root causes of the issue should be found by the team members by utilizing the process flow chart and their experiences. for the root causes of the issue, 5 why analyse has been used in this study. 5 why analyze is a method in order to reach the root cause of the issue. in this method, the team members always ask ‘why this happens? ‘until they can’t reply the question ‘why’. when they cannot proceed with the question why, that means they reach the root cause of the issue. the team members of the study have reached root causes of the missing delivery to customers as shown in the table 3. table 3. five why analyze 132 özlem aras & burcu özcan http://ijcf.ticaret.edu.tr 3.3. improve after defining of the root causes, the team members should define actions to eliminate the root causes. these actions need to be planned by smart targets such as ‘what’s the target, who is the responsible and when will it be completed ‘. based on the above explanation, the countermeasures have been defined for the each root causes and shown in the table 4. the actions for first root cause are that the packing list of the project will be determined in design meetings and the preparation of the packing list will be reminded by mail to the related design engineer by the dispatching engineer when the project work order released and project starts to be produced. the actions for second root cause are the accessories which can be assembled during production will be assembled at the assembly line and these accessories will be removed from accessory list and the accessories will be obtained automatically from sap bom, it will not be prepared manually. the actions for the third root cause are mrp system will be used for the accessories and canban system will not be used. table 4. root causes and actions cost of poor quality in energy sector 33 http://ijcf.ticaret.edu.tr root cause and actions r o o t c a u s e 1. it is not the first priority of the work order for design engineer. a c ti o n s 1. the packing list of the project will be determined in design meeting. who : design engineer / when : in the first coming project. 2. the preparation of the packing list will be reminded by mail to the related design engineer by the dispatching engineer when the project work order released and project starts to be produced in the production. who : dispatching engineer / when : in the first coming project r o o t c a u s e 2. the draft packing list cannot be transferred automatically from sap bom. a c ti o n s 1. the accessories which can be assembled during production will be assembled at the assembly line and these accessories will be removed from accessory list. for instance: bars, screws, washers, gas ducts will be assembled during the production. these parts will not be considered as accessories. who : production department & design department / when : q3 /2016 2. the accessories will be obtained automatically from sap bom, it will not be prepared manually. who : design department with it department / when : q3/2016 r o o t c a u s e production planning method ( canban system) is not suitable for the planning of the accessories. a c ti o n s mrp system will be used for the accessories and canban system will not be used. who : design department & dispatching department / when : q3 /2016 3.4. standardization when all actions are taken, it should be concluded as dramatic improvement in the customer complaints and warranty cost. this can be observed by measuring the kpi. if the improvement is clearly related to the actions, we need to sustain the gains by standardization of these actions taken. it shall be done by changing work instructions, method provisions, check lists, sigma cards etc. this is very critical step and if not done immediately then the problems will keep repeating. this shall be supported by appropriate training as necessary. 134 özlem aras & burcu özcan http://ijcf.ticaret.edu.tr as can be seen from below actions, some standardization has been applied in this study in order to keep the latest status. sap system was revised & accessories are planned in the system automatically. accessory list was revised & some parts; bars, screws, washers, gas ducts are assembled in the production line, not in the dispatching area. mrp system is used for the planning of the accessories. at the beginning of the following year (2017), the kpi metric ; copq / revenue, customer complaint rate, warranty cost will be measured and the achievement of the study will be observed by the company management. 4. conclusion: in recent days, with regard to the companies, while the quality is a strategical concept, it is one of the main factors which defines the choices with regard to the consumers. when the quality is defined with the traditional approaches, it is handled as conformity of the standards or conformity of the purpose. however, today the quality concept has gained a new dimension which does not fit into these definitions. quality concept has been rescued from the narrow definition case and has been placed into the flexible and dynamic case. based on this flexibility and multidimensionality of the quality, numerous quality definitions have been defined related to the quality concept and each definition has been used in different places. as a result, with the most common definition, quality can be defined as a strategic management tool which is used for satisfaction of the customer expectation, improvement of the operational performances, decreasing the costs. productivity is an indispensable item for the companies. the companies which work efficiently, achieve minimization of the costs and accordingly get profitable results. the companies which apply the six sigma approach, define the non-value added actions, remove the unnecessary actions from the company processes and thus, they provide profitable works with the minimization of the costs. in this paper, warranty cost which is the factor of the copq, has been analyzed by utilizing some methodologies such as; pareto analyze, process mapping, brainstorming, fishbone analyze and 5 why analyze. then it has been targeted decreasing of the warranty costs with the actions taken for the warranty root causes. in the current status analyze stage, copq / revenue which is the non-financial key performance index (kpi) is determined as 1,25% . then this kpi has been targeted to decrease until the 0,68%. during the current status analyze stage, missing delivery to customer issue which is the 67% of the warranty cost has been emphasized by utilizing the pareto analysis methodology. at the same time, it is aimed to decrease the customer complaint in ratio of 83% and accordingly to increase the customer satisfaction. after the current status analyze, root cause analyze has been performed. in the root cause analyze stage, the main causes which affect the missing delivery issue; policies, design, procedures, people, production & planning and plant have been determined and all the possible sub-causes have been defined by utilizing the brainstorming methodology and these sub-causes have been placed under the main causes. the direct causes which were chosen by the team members within the possible causes are determined as mistakes & missings in the packing list, insufficient canban system at the dispatching department, late releasing of the packing list. then, the root causes of the missing delivery have been determined as priority of the design engineer, poor sap system for the bill of material, insufficient planning by utilizing the 5 why analyze methodology. based on the root causes defined some actions have been taken such as; packing list needs to be defined in the design meeting and when the work order of the project released and the project is started to be produced in production line, design engineers should be informed regarding the packing list of the project, accessory packing list has been revised and some accessory parts have been removed from the accessory packing list, accessory parts needs to be taken from sap bom module automatically and utilizing from mrp system instead of canban system for the planning. references anderson, e. w. and mary w. s. the antecedents and consequences of customer satisfaction for firms. marketing science, 1993, 125-143. cost of poor quality in energy sector 35 http://ijcf.ticaret.edu.tr bland, f. merle, john maynard and david w. herbert. “quality costing of an administrative process”, the tqm magazine. vol.10, no.5, 1998, p.367. efil, i̇smail. toplam kalite yönetimi ve toplam kaliteye ulasmada önemli bir araç-iso 9000 kalite güvencesi sistemi. bursa:uludag üniversitesi basımevi, 1990. harrington, h. james. “performance improvement: a total poor-quality cost system”, the tqm magazine. vol.11, iss. 4, 1999, p.221-230. hitchner, earle, “quality works”, national productivity review. vol.12, iss.2, 1993, p.285-290. jones, t. o. and sasser, w. e. why satisfied customers defect. harvard business review, 1995, 88. kaganski, t., snatkin, a., paavel, m. and karjust, k. selecting the right kpis for smes production with the support of pms and plm. international journal of research in social sciences, 2013, 69 76. kangilaski, t. challenges for smes partner network. proceedings of the 7th international conference of daaam baltic industrial engineering, 2010. karabınar, selahattin ve faruk geyik, “toplam kalite yönetiminde parayla ifade edilemeyen maliyet kalemleri üzerine öneriler”, üretim sempozyumu,gaziantep üniversitesi, 2001, http://www.lnsresearch.com/ accessed 12.03.2016 karaulova, t. and shevtshenko, e. reorganisation of production system on sme enterprises. annals of daaam & proceedings, 2009. karaulova, t., kostina, m. and sahno, j. framework of reliability estimation for manufacturing processes. mechanika 2012, 18.6. karaulova, t., kramarenko, s. and shevtshenko, e. risk factors in project management life cycle. 6th international conference of daaam baltic industrial engineering, tallinn, estonia, 24-26, 2008. moen, m. rune. “new quality cost model used as a top management tool”, the tqm magazine. vol.10, no.5, 1998, p.334-341. özkan, yılmaz. toplam kalite. birinci basım, sakarya: sakarya kitapevi, 2001. sale, i̇smail. adım adım toplam kalite uygulamaları. birinci basım, ankara: seçkin yayıncılık, 2001. torbica, z. m. and robert c. s. customer satisfaction in home building. journal of construction engineering and management, 2001, 82-86. http://www.lnsresearch.com/ international journal of commerce and finance, vol. 6, issue 2, 2020, 117-124 117 corporate bonds and stock prices: a coherency analysis in europe arif buda, near east university, cyprus hüseyin özdeşer, near east university, cyprus andisheh saliminezhad near east university, cyprus received: may 18, 2020 accepted: june 18, 2020 published: oct 02, 2020 abstract this paper aims to find a coherent relationship between stock prices and bond yields on the day of issue. we show that stock prices seem to have a weak positive relationship with yields as investors seem to consider the underlying health of a firm before investing their money in either security. this contrasts with earlier research and falls in line with later research. the findings show that one percentage increase in share price on date of issue has the potential to raise yields by 0.20% given the near-zero interest environment of the euro. keywords: corporate bonds, stock market, european market 1. introduction as stocks’ overlooked cousin, corporate bond issues do not get much academic attention. yet, as a business’ way of raising funds issuing corporate bonds stands as the most popular option with the us bond market, the world’s biggest by a far margin, valued at a $9.3 trillion , to the institutional investor bonds remain profitable and popular investment vehicles. therefore, us corporate bond yields, studied plainly as securities, have been perhaps the only example of a wellresearched academic topic. earlier research tried to explain the variation in yields solely based on the risk of a particular issue. (sharpe, 1964) (ross, 1976) later research however, contradicts these earlier findings entirely as risk seems to have no impact on yields, and past stock return performance seems to explain the variation of excess returns more. (fama & french, 1992) yet, any comprehensive paper that seems to link corporate bond yields with stock prices seems to lacking in all nonus markets. a great deal of this can be explained by the sheer unavailability of data for underdeveloped financial markets – this seems to incentivise researchers to study the us. this captures our interest. the eu bond market, valued at $410.8 billion during q3 2019 , while small compared to its us counterpart, is the second choice for investors globally. since there is no indication that these two markets would behave in the same way due to the different makeup of investors investing in them, this area seems ripe for fresh research producing fresh insights. we will also take a moment here to note the differences between the money markets of us and eu. the current us federal funds rate stands at %1.75 whereas the eu equivalent base rate stands at a negative %0.50 . these different rates have different impacts on the excess returns of papers in their respective markets, presenting us with another unanswered question that this paper will seek to shed some light upon. we are especially interested in the impact of stock prices, especially the opening stock price on the date of the issue on yields – as both types of investors essentially wager on the fundamentals of a company. yet bond yields are predetermined, meaning positive news will not impact their returns unlike shareholders. it will be interesting to see if these differences will mean that stocks and bonds are not substitutes of each other – perhaps even complements. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e arif buda & hüseyin özdeşer & andisheh saliminezhad 118 bonds are also graded according to their risk by major ratings agencies. for our research purposes, we will be taking moody’s grading system into account and try to observe its impact on yields as our measure of risk. we believe this in itself will be adequate without delving into more complicated ways of measuring this risk associated with corporate bonds unlike some modern research. (de jong & drissen, 2006) without digressing, our paper will be as follows. section 2 will include a significantly more comprehensive literature review in which we compare and contrast research findings. section 3, our methodology section, will include our econometric model and the paper we took inspiration from to construct it. section 4, we will be discussing our data, how we collected it and where from, and how it was filtered for our purposes. section 5, as you might expect, will include our results, findings and discussion on the limitations of our aforementioned findings and finally, in section 6, we will be recapping all we have discovered and concluding. 2. literature review while retained earnings present themselves as a source of potential funds for such projects most of the times they remain insufficient for massive undertakings and have been shown to be generate less return as opposed to external financing. (whittington, 1972). stock prices and bonds can essentially be seen as betting on the company’s future. therefore, it is not a stretch of imagination to think these two instruments are substitutes. there is some evidence that seems to suggest that this is indeed the case. empirically, one can observe that as corporations issue new bonds, their market value, and therefore their share price, goes down. (huberman, 1984) it has been observed that as, the risk premium on its corporate bonds, and therefore, it’s corporate bond yield would increase, as it’s share prices fell. (davydenko, 2012) however, movements in prices do not always seem to fit this counter-pattern that theory dictates we should observe. sometimes prices seem to be sticky (dichev & piotroski, 2001) and sluggish to move, and more complicated factors at play might complicate what should be this ‘straight forward’ price relationship. (amihud, et al., 2005) drawing on the pricing model outlined by their predecessor to price corporate debt (merton, 1974), recent papers have indeed found correlation that despite this substitution effect in prices, as both securities draw their value from the underlying ‘inherent’ value of the firm in question, prices seem to have a tendency to move in the same direction. (bao & hou, 2013) recent papers have a tendency to find that, these two indicators do indeed move in the same direction. (shiller & beltratti, 1990) the same relationship also seems to extend beyond corporate bonds, with government bonds also exhibiting a similar relationship. (baker & wurgler, 2012). the best metric for the risk of default, is of course, a rating from a ratings agency such as moody’s or standard & poor’s. these ratings announcements impact both equity prices and bond yields. (kliger & sarig, 2000) it has been observed that positive ratings changes by these major agencies has the potential to create abnormal returns. (grier & katz, 1976) these impacts can be observed even in municipal bond markets. (ingram, et al., 1983) it is again here that the research consensus breaks down. while a downgrade in ratings is definitely warrants an increase in corporate yields, we observe a negative downwards pressure in prices just as theory predicts as these investment vehicles are substitutes. sometimes, a downgrade in ratings is widely expected in the market consensus and cannot be observed as impacting common stock prices and therefore common stock holders as (goh & ederington, 1993) finds. this lends credibility to common stock being a substitute to corporate bonds as they can be seen as more robust in terms of earnings to rating changes. both (holthausen & leftwich, 1986) and (zaima & mccarthy, 1988) find similar results, while also casting doubt on the idea that bond rating changes actually convey any new information to investors at all or argues that these changes are priced in, more of than not. another drawback of previous research is that the vast majority of papers, including the ones cited and will be cited in this paper are very us-centric. as financial centres grow more integrated in the world, they have been wide varying impact on all real sectors of the economy, from consumption (smith, et al., 1994) to government spending. (hasan & taghavi, 2002) as such, we note the lack of research into other markets, something we hope to remedy in our more european-centric paper. however, we digress. while research does lack in less studied markets, it is not completely absent. stocks are seen to be impacted in the uk corresponding to ratings changes for their respectively companies, as well as both shortand corporate bonds and stock prices: a coherency analysis in europe 119 long-term corporate bonds. (barron, et al., 1997) it seems, regardless, that mainly stock purchasing investors seem to interpret the ratings as a source of information about the firm’s health in itself – this does not seem to project itself onto a stronger co-movement in yields and stock prices. (ohmi & okimoto, 2006) (campbell & ammer, 1993) 3. methodology our approach is rather simple. we consider a potential investor who has a lump sum to invest, and has to pick between a stock of a publicly traded company and its corresponding bonds. therefore, our analysis is restricted to the date of issue – we compare the yield to maturity and the respective ecb with the closest matching maturity to calculate excess returns. our econometric approach draws heavy inspiration from previous research, especially the two-term model laid out in (gebhardt, et al., 2004) – we modified it to fit our approach as we hope to capture the impact of stock prices. therefore, we will outline our model as follows; r_cb-r_f=z+β_1 p_i+β_2 t_i+β_3 g_i+u_i where r_cb-r_f represents excess returns on our selected corporate bonds, p_i being the opening stock price of the company issuing the bond on the date of issue, t_i as the number of days until the bond matures, and g_i representing the moody’s ratings for that specific paper. the moody’s ratings and the maturity date should represent adequate controls for the illiquidity and risk associated with purchasing these papers. with three independent variables, we also have the added benefit of being able to work with limited points of data – as is the case with the european bond market, for which data is scarce. 4. data we have obtained assorted corporate bond data, courtesy of bloomberg llc, – all denominated in euros. then we proceeded to filter our results to fit the needs of our research. firstly, any bond with a moody’s rating below b was eliminated – and the rest was divided into 5 categories, each receiving a score from 1 to 5 – from the junk bonds to the pristine investment grade bonds. secondly, we screened the listed corporate entities. for our model to make sense, the company needed to be traded on a public exchange denominated in euros such as the frankfurt or vienna stock exchange on the date of issue. for example, the corporate bonds of gazprom – which were included in our dataset, were eliminated on the account that gazprom is a publicly traded company. another notable example is while the initial pre-filtered data set included tesla inc. bonds, we filtered these out – while tesla is indeed a publicly traded company, it is traded out of the new york stock exchange with prices quoted in usd, and therefore, not applicable for our purposes. we end up with 148 points of data – each with a matching rating grade, excess return and stock price. in this section, we will also display scatter plots to observe a visual relationship between each of our independent variables and dependent variables individually. these are shown below. arif buda & hüseyin özdeşer & andisheh saliminezhad 120 0 40 80 120 160 -8 -4 0 4 8 12 excessreturns st oc kp r figure 1: scatter plot showing the relationship between share price and excess returns here, we can observe a positive relationship exist between the series. one interesting thing to note is that the vast majority of excess returns are actually zero – meaning there are none excess returns for most of the papers in our dataset, which is to be expected given both the efficient market theorem and the extremely low interest environment of contemporary european financial markets. 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 -16 -12 -8 -4 0 4 8 excessreturns da ys m at ur ity figure 2: scatter plot showing the relationship between days until maturity and excess returns here, it is again extremely difficult to make out a visual relationship between our liquidity measure, the lifetime of the bond and our excess returns. this in itself is interesting – theory predicts that as a financial instrument becomes less liquid, excess returns should increase to compensate for the increased market risk the investor is undertaking. table 1. the ratings makeup of our dataset. moody's rating grade score frequency aaa investment 5 5 a investment 4 22 baa investment 3 0 corporate bonds and stock prices: a coherency analysis in europe 121 ba junk 2 40 b junk 1 81 source: own calculations. finally, here we can observe the moody’s grade makeup of our dataset. we see that the vast majority of our corporate bonds are graded as junk and only a small minority are what we would term investment grade bonds. this table also shows the scoring system we have used to control our dataset as our risk measure. 5. discussion in this section, we display the results of our regressions and discuss our findings, and how they fit in with previous research, whether there are any surprises and the limitations arising from the nature of our methodology and data. table 2. estimation results variables dep. var ( dep. var ( constant 0.98*** 4.55*** stock price 0.01 0.02* days until maturity -0.01 -0.02* ratings score -0.17*** -0.25** r-squared 0.01 0.40 notes: robust standard errors are shown in parentheses. * p < 0.05, ** p < 0.01, *** p < 0.001. table 2 displays the results of a standard multivariate ordinary-least-squares analysis that we run with our dataset. the first column stands for the estimation results when the dependent variables is considered as r_cb-r_f while the second column shows the results of the estimation with the r_cb as a dependent variable. as shown in table 2, the results of the first estimation are somewhat disappointing. the predictive and explanatory power of our model as it stands is low – our r-squared shows us that the model explains less than 2% of the variation between excess returns. this is extremely low, and casts doubt over our methodology. rating score is found to be significant at 1% level while the other explanatory variables are insignificant. moreover, looking at our coefficients, we can see that our liquidity measure and share price variable have coefficients close to zero, meaning they do not seem to impact excess returns at all. this can be partly explained due to the fact that in europe’s near-zero-to-negative interest rate environment, we just do not observe excess returns. finally, the coefficient for our rating grade is one that is expected. as the rating grade increases, (1 being b-grade, 5 being aaa grade), we see that there is a downward pressure on excess returns. this is, of course, in line with what theory predicts. it is at this point that we decide to take things a little further and tweak our econometric model a little more – and end up with the following model below. we remove the corresponding risk-free yield term we were using to calculate excess returns – and just leave the yield to maturity (ytm) as our dependent variable. we justify this choice in two ways – first, by far and large, efficient market theorem predicts that excess returns are not consistently possible for any investor. and secondly, the zerointerest rate environment of the euro should mean that yields to maturity present an adequate measure of the returns arif buda & hüseyin özdeşer & andisheh saliminezhad 122 associated with this corporate bond. however, we still suspect that our analysis suffers from misspecification errors. to remedy this issue, we log both our dependent variable and our first independent variable, the stock price – as it is the focal point of our study, the other two variables merely being there as control measures. as some of our corporate bond entries have negative yields, we cannot outright transform them into log values. for this purpose, we rebased both our stock prices and our bond yields with a base of +100, allowing us to transform them both into logs and perform our regression again, whose results will be shown below. having the new dependent variable in hand, the findings sound better and more realistic. the predictive power of our model has been increased as the r squared jumped up to 40%. the right-hand side variables are now becoming significant given the provided robust standard errors. the coefficient of our stock price has also become more meaningful, with a 1% increase in the share price on the date of issue increasing yields by 0.20% not a meagre amount considering the monetary state of the eurozone. however, we still suspect that our research is plagued with misspecification errors. we have no reason to suspect that our variables have a linear relationship with the dependent. as a way of coping, we utilise ramsay’s reset test on our secondary regression, the one displayed in table 3. the results are shown below. table 3. ramsay reset test value probability ramsey test 1.47 0.23 it seems that our ramsay reset test fails to show evidence for any non-linear relationship between our independent variables and dependent variable. by and large, our findings in this section seem more in line with later research – as we also found evidence that stock prices and yields commove in the same direction. there is not any evidence of a substitution effect, which is surprising. it seems that investors do not consider stocks and bonds to be substitutes. this can be due to a variety of factors – stocks being significantly more liquid than bonds while at the same time presenting more risk and earning opportunities seem more suited to the individual investor whereas bonds might end up in the hands of large institutional investors such as pension funds and retail banks, meaning these two markets are segmented and serve two different customer bases with different needs, eroding the substitution effect that we had hoped to observe. 6. conclusion in this paper, we looked at examining the relationship between stock prices and bond yields with and without controlling for excess returns. it was our hope to find a relationship that could be identified as substitutory but instead we found that instead, these two markets were most likely segmented and served the different needs of two different customer bases. we also found that while stock prices were impactful, liquidity, as measured by the lifetime of the bond were not. by and large, the most impactful determinant of bond yields in our model turned out to be ratings – for our purposes, we used moody’s which usually moves in tandem with s&p and other major rating agencies’ ratings. this result seems to lend credibility to the idea that bond holders are only concerned with the risk of default when purchasing a bond, and do not pay much attention to anything else. this provides evidence that bond buyers in the eurozone care about risk – and perhaps risk alone due to the memory of the greek sovereign debt crisis. in further research, we would augment our research to include several measures of different types of risk such as liquidity, market, etc while discarding the other terms. we obtained our data for corporate bonds denominated in euros – trying to contribute to filling the gap caused by the lack of research into the european financial market. we observed all throughout the literature review that the vast majority of research, both seminal and contemporary, 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smith, p. n., wallis, k. f. & church, k. b., 1994. econometric evaluation of consumers' expenditure equations. oxford review of economic policy, volume 10, issue 2, pp. 71-85. whittington, g., 1972. the profitability of retained earnings. the review of economics and statistics,vol. 54, no. 2, pp. 152-160. zaima, k. j. & mccarthy, j., 1988. the impact of bond rating changes on common stocks and bonds: tests of wealth redistribution hypothesis. the finacial review, volume 23, issue 4, pp. 483-498. international journal of commerce and finance, vol. 6, issue 1, 2020, 181-193 181 the effects of green product innovation and green process innovation on company performance tuğba karabulut, istanbul commerce university, turkey hümeyra n. hati̇poğlu istanbul commerce university, turkey abstract this paper aims to investigate effects of green product innovation and green process innovation on the performances of companies. it presents in-depth interviews with alarko carrier a.ş. and cenal elektrik üretim a.ş. which are companies of alarko holding in turkey. alarko carrier a.ş. produces, sells, exports, imports, makes marketing activities and after sales services of cooling, heating and water pressurization systems. cenal elektrik üretim a.ş. is an electric plant which produces electricity from coal by conducting environmentally friendly innovation activities in their business processes. the in-depth interviews were conducted with middle level managers from these companies to find out their green product innovation and green process innovation practices and their effects on t heir company performances. it is found out that these companies have corporate cultures supporting their green product innovation and gree n process innovation practices which affect their financial performance and stakeholder performance. additional in-depth interviews can be conducted with companies from other sectors for further studies. keywords: green product innovation; green process innovation; company performance 1. introduction green product innovation and green process innovation are becoming more important for company performance. although numerous studies have focused on this issue in the world, there are limited number of studies in turkey. this paper aims to investigate effects of green product innovation and green process innovation on the performances of companies. in-depth interviews were conducted to measure the effects of green product innovation and green process innovation practices on the company performances of alarko carrier a.ş. and cenal elektrik üretim a.ş in turkey. the sections of this paper are as follows: (1) the concept of green product innovation; (2) the concept of green process innovation; (3) company performance; (4) the effects of green product innovation and green process innovation on company performance; (5) in-dept interviews with alarko carrier a.ş. and cenal elektrik üretim a.ş. environmental legitimacy pressure leads companies use all of their resources, enhance production processes, recycle wastes, and minimize energy usage (li et al., 2018, p. 1092). green product innovation is essential for sustainability of a company (song et al., 2020, p. 224). 2. the concept of green product innovation conducting green product innovation practices is a relatively new approach for companies. improvement of environmental awarenesses among stakeholders lead companies to conduct greem product innovation to have competitive advantages and reach high performances by gaining the support of their stakeholders. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e tuğba karabulut & hümeyra n. hati̇poğlu green product innovation competitiveness figure 1. a conceptual framework for green product innovation reference: the figure was adapted from r. m. dangelico and d. pujari (2010). mainstreaming green product innovation: why and how companies integrate environmental sustainability. journal of business ethics, 95, p. 472. doi:10.1007/s10551-010-0434-0 as observed in figure 1, green product innovation has multiple processes where energy, material, and pollution-are highlighted based on the effect of the environment at different product life cycle stages-manufacturing process, product use, and disposal. radical green innovation introduction in the stages of product’s life cycle addresses dimensions such as pollution prevention, energy use, and material selection which may create product competitiveness and differentiation for products. introducing innovation will need an improved level of corporate environmental responsibility and sustained level of the organizational environmental policy implementation to convert green product ideas into practices and get rid of risks and challenges (dangelico and pujari, 2010, p. 472). green product innovation is the application of innovative ideas which lead to the design, production and marketing of new products whose greenness and newness outperform competitive products (baumann, boons and bragd, 2002; soylu and dumville, 2011; wagner, 2009) (wong, 2012, p. 471). material pollution energy legitimacy energy efficiency in production and usage of products products and production techniques using renewable energy sources products and production processes reducing/ preventing pollution recycled/recyclable products/ packaging products/packaging of renewable materials biodegradable packaging/products environmental policies of a company responsibility manufa cturing disposal product use the effects of green product innovation and green process innovation on company performance 183 green product innovation protects the natural environment and makes contributions to environmental benefits more than competitive products (reinhardt, 1998) (lin, 2013, pp. 101-103). since, environmental concerns has become more important in the business world, green product innovation has been crucial among manufacturing companies. many companies make investments in sustainability initiatives for risk mitigation, cost savings, and revenue generation (http://fortune.com/2015/08/27/green-giants-freya-williams/) (dangelico et al., 2017, p. 491). 3. the concept of green process innovation an essential mission of green process innovation is performing organizational processes in a environmentally friendly manner not to harm the nature. if a company aims to apply green process innovation, it has to redesign its production infrastructure compatible to conduct green innovation practices. its machineries, materials, supply chain choices, waste disposal systems and other infrastructure systems should facilitate its green process innovation practices. companies conduct green process innovation in their production processes to decrease production time and costs (lambertini and mantovani, 2009) (calza et al., 2017, p. 1303). green process innovation requires reorganizing manufacturing processes of companies to develop new products or improve the current ones. the management approach of the company and its manufacturing facilities should be updated to implement green process innovation effectively. green process innovation is the enhancement of current manufacturing processes and use of environmentally friendly technologies to manufacture products and provide services which have reduced or no negative effects on the environment (wong et al., 2012) (tang et al, 2018, pp. 4041). green process innovation focuses on implemention of new and innovative processes to reach goals. the green process innovation focuses on processes for saving energy during manufacturing and other processes (dai and zhang, 2017). green process innovation leads companies to recycle their wastes to protect the environment. implementing green process innovation decreases waste and toxic materials (geffen and rothenberg, 2000). it affects economic and environmental performances because less waste decreases production costs (jakobsen and clausen, 2016). green process innovation affects organizational performance through these aspects: (1) companies should adopt green process during production. companies should reduce toxic material emmission during production (lee and min, 2015); (2) companies should reuse and recycle their products to decrease waste and emmission of hazard (chen et al., 2006); (3) companies should consume less water, electricity, and oil and coal resources (jakobsen and clausen, 2016); (4) companies should develop policies to decrease raw materials during production. companies can adopt green process innovation to improve their organizational performances by implementing these four factors (zailani et al., 2015) (shafique et al., 2017, p. 98). green process innovation highlights ability of companies to enhance current processes and develop new processes for saving energy, preventing pollution, leaving less toxicity and recycling waste in innovation processes (chen et al., 2006; chen, 2008; huang and li, 2017, pp. 311-316) (karabulut, 2019, p. 187). 4. company performance green product innovation and green process innovation practices have effects on company performance especially on financial performance and stakeholder performance. if a company conducts green innovation practices, its financial performance and stakeholder performance increase. performance is a flexible and continuous process which involves managers and managing partners within a framework which shows how they should work together to achieve the expected results (armstrong, 2006). performance is an activity endresult which includes outcomes of the strategic management process. the strategic management practices are adjusted in terms of their ability to enhance performance of the company (wheelen and hunger, 2010) (agha et al., 2012, p. 195). company performance is determined by how efficiently and effectively the business strategy of the company is implemented (galbraith and kazanjian, 1986; walker and ruekert, 1987) (olson et al., 2005, p. 49). tuğba karabulut & hümeyra n. hati̇poğlu there are several critrias of enterprise performance measurement namely financial performance, non-financial performance, quantitative performance, qualitative performance (bemowski and stratton, 1995; coulambidou and dale, 1995; conti, 1997; lascelles and peacock, 1996; hakes, 1998) (chin et al., 2003, p. 443). iai (2007) claims that financial performance is the organizational ability to manage and control its resources. financial statement analysis using financial ratios measure financial performance. harahap (2008, p. 303) states that performance achievement measurement results are the basis for improving performance in the following period and be used for punishment and reward (mahrani and soewarno, 2018, p. 43). stakeholders are instruments affecting corporate ecological responsiveness (bansal and roth, 2000, 717-736) and environmental strategies (neu, warsame, and pedwell, 1998, pp. 265-282; buysse and verbeke, 2003, pp. 453-470). the government, pressures of competitors and employee affect green innovation practices positively and significantly if government, employees, suppliers competitors, and customers are considered as stakeholders. companies should adopt environmental management issues while they are formulating company strategies, setting company structures and rules, offering training courses, etc. it is essential for companies to provide clear guidelines and appropriate monitoring mechanisms for their employees (weng et. al., 2015, pp. 4999-5019). employee performance is what an employee does and what he doesn’t do. employee performance reflects presence at work, quantity and quality of output, accommodative and helpful nature, and timeliness of output. yang (2008) presented that on individual performance highlighted that employee performance cannot be verified. altough companies try to satisfy their customers a lot, they don’t pay attention to satisfy their employees. however, customers will not be satisfied if employees are satisfied. if employees are satisfied, they will work harders so customers will be satisfied (ahmad, 2012). motivation affects employee performance. if employees are motivated, they will work harder and their performances will improve (azar and shafighi, 2013) (shahzadi et. al., 2014, p. 161). 5. the effects of green product innovation and green process innovation on company performance green product innovation is product oriented whereas green process innovation is process-oriented, so implementing these innovations will lead a greater organizational competitive advantage to companies which apply both innovation types (xie et al., 2019, p. 704). the measurement of green product innovation performance is composed of the following items: (1) the company chooses materials which produce the least amount of pollution for the product design and development; (2) the company chooses materials which consume the least amount of resources and energy for the product design and development; (3) the company uses the smallest amount of materials for the product design and development; (4) the company plans whether its products are easy to reuse, decompose, and recycle for the product design and development (chen et al., 2006; chang, 2011) (chang, 2016, p. 71). if a company uses environmental technologies, green product innovation performance will be excellent. companies should focus on environmental management due to environmental pressures (chen et al., 2006). companies should focus on effects of stakeholders on their activities to conduct environmental management (hoffman, 2001; qi et al., 2013). green product innovation leads companies to provide awesome green products and reduce environmental effects. green product innovation can facilitate companies to search green opportunities and to enter into the green emerging market. green product innovation succeses can create sustainable organizational competitive advantage (chang, 2016, pp. 68-75). according to a study conducted on 2181 firms and nine green process innovation types found that two of nine positively affect company performance (doran and ryan, 2016). charlo et al. (2015) reveal that socially responsible companies in spain have higher profits for the same level of risk. porter and van der linde’s hypothesis points out environmental regulation effects on economic performance and innovation. it highlights that innovation offsets can happen with technological change “partially or more than fully offseting the costs of complying with environmental regulation” (porter and van der linde, 1995, p. 98) (tang et al., 2018, p. 41). green product innovation leads companies improve their economic performances by finding new markets, conducting product differentiations, increasing sales and improving their competitive advantages and corporate images (dangelico, 2016; noci and verganti, 1999) (melander, 2017, p. 1096). from financial performance perspective, when companies increase their resource productivity by doing green innovation, they can have earnings as much as their environmental costs (porter and van der linde, 1995, pp. 120 the effects of green product innovation and green process innovation on company performance 185 134; de burgos-jiménez et all., 2013, pp. 981-1018). on the other hand, when they initiate environmental practices, they can develop new markets and increase their market shares (chen, lai, and wen, 2006, pp. 331-339; berry and rondinelli, 1998, pp. 38-50). from non-financial performance perspective, companies can increase the number of new customers, customer loyalty and enhance their reputations and images by doing green innovation practices (chen, tsou, and huang, 2009, pp. 36-55; de burgos-jiménez et al., 2013, pp. 981-1018; blazevic and lievens, 2004, pp. 374-391). chen (2008, pp. 531-543; 2008, pp. 271-286) highlighted that companies which play pioneer roles in green innovation will have first-mover advantages in terms of new market opportunities, higher product prices, more competitive advantages and improved corporate images. reducing environmentally hazardous substances, pollution emissions and waste at the source, including recyclable materials in products and improving energy efficiency reflect environmental performance (lindell and karagozoglu, 2001, pp. 38-52; zhu, 2010, pp. 380-392). according to previous studies, manufacturing process and productivity improvements will enhance environmental performance (montabon, sroufe, narasimhan, 2007, pp. 998-1014). stakeholders affect choices of german manufacturing companies for environmental response patterns (murillo-luna, garcés-ayerbe, and rivera-torres, 2008, pp. 12251240). they are positively related to patented environmental innovations (wagner, 2007, pp. 1587-1602) (weng et. al., 2015, pp. 4999-5003). table 1. the effects of green product innovation and green process innovation on company performance author/ year purpose sample conclusion chen et. al. (2006) the purpose of this study is to examine the effect of the performance of the green innovation on competitive advantage. manufacturing, marketing, r&d, environmental protection department managers of companies in ‘‘2003 business directory of taiwan’’ of business express co., ltd. it is found out that the performances of the green product innovation and green process innovation are positively correlated to the competitive advantage. lin et al. (2013) the purpose of this study is to examine market demand effects on green product innovation and company performance in the motorcycle industry. it tries to answer two questions: (a) how does market demand affect a company’s green product innovation? and (b) how can green product innovation affect company performance? 208 responses from four leading foreign motorcycle firms in vietnam. it is found out that market demand is correlated to green product innovation and company performance; and green product innovation performance is correlated to company performance. it categorizes three types of green product innovation and reveals their effects on market demand and company performance. weng at al. (2015) the main purpose of this study is to examine the moderating effect of green produt innovation and green process innovation on the relationship between stakeholders and environmental performance and company performance. it also tries to discover the moderating effect of innovation orientation in 202 responses from taiwanese manufacturing and service companies. it is found out that employee conduct, government and competitor pressures affect green innovation practices. also, there is a moderating effect of innovation orientation in the relationship between employee conduct and green product innovation practices. tuğba karabulut & hümeyra n. hati̇poğlu the relationship between stakeholders and green product innovation and green process innovation. chen et. al. (2016) this study points out the relationships between proactive and reactive green innovations and green product development performance, and the mediating effect of green creativity. members and leaders of green product development projects, managers of manufacturing, r&d, marketing, environmental protection departments of companies in ‘‘2003 business directory of taiwan’’ of business express co., ltd. it is found out that proactive green innovation has positive effects on green creativity and green product development performance, and green creativitiy has positive effects on green product development performance. it is also found that green creativity partially mediates the relationship between proactive green innovation and green product development performance. chang (2016) the purposes of this study are to examine the effects of corporate environmental commitment and green human capital on green product innovation performance and to discuss the mediation effect of green adaptive ability. this study was conducted on 136 of manufacturing companies in taiwan it is found out that corporate environmental commitment has positive direct effects on green product innovation performance and positive indirect effects on green adaptive ability. xie et. al. (2016) the purpose of this study is to highlight the effects of green process innovation on the financial performance of manufacturing companies by focusing on the moderating effects of government subsidies versus absorptive capability of industries. a panel sample of 28 manufacturing industries from 2001 to 2010, and the dynamic panel model based on the literature. the results reveal that end-of pipe technologies and clean technologies are positively related to financial performance. strong absorptive capacity enhances this relationship, but green subsidies decrease this relationship. chang (2018) the purposes of this study are to verify the framework to examine the effects of inward and outward capabilities on competitive advantage with green service innovation or green product innovation performance as the mediator and to compare the antecedents of green service innovation or green product innovation performance in service and manufacturing companies. 161 and 202 valid questionnaires were returned from manufacturing and service companies respectively. the sample of manufacturing and service industries in taiwan from the 2014 factory operation census of ministry of economic affairs. it is found out that when a company wants to improve its green product innovation performance, it should increase locus of planning and environmental scanning capability in a service industry. on the other hand, when a company wants to improve its green product innovation performance, it should only enhance environmental scanning capability in a manufacturing industry. xie et al. (2019) the purposes of this study are to examine the relationships between green process innovation, green product innovation, and 209 listed companies in heavily polluting manufacturing industries. it is found out that green process innovation has a positive effect on green product innovation, and green process the effects of green product innovation and green process innovation on company performance 187 company's financial performance and contingent factors which affect the relationship between green product innovation and company's financial performance. innovation and green product innovation can increase a company’s financial performance. it is also found out that the relationship between green process innovation and financial performance of a company is mediated by green product innovation, and the relationship between green product innovation and financial performance is moderated by green image. resource: this table was prepared by authors. 6. in-depth interviews alarko sanayi ve ticaret a.ş. has operations in the fields of cooling, heating, water pressurization, and air conditioning since 1954. it established an equal partnership with carrier in 1988. this new company is called as alarko carrier sanayi ve ticaret a.ş. and improved its technology, increased its foreign market expansion opportunities and competitive advantages (https://www.alarko-carrier.com.tr/tr/kurumsal/genel-bakis/tarihce, 3.8.2020). alarko carrier sanayi ve ticaret a.ş. has 10.800.000 tl registered capital and 16.394.930 tl net profit in 2019. it has 366 white-collar and 240 blue-collar employees (alarko carrier sanayi ve ticaret a. ş. faaliyet raporu, 2019, p.10, 17 and 27, http://www.intranet.alarko.com.tr/dosya/yatirimci_iliskileri_pdf/acst_pdf/faaliyet/2019/ alarko%20carrier%20tr.pdf, 3.6.2020). alarko carrier sanayi ve ticaret a.ş. has the following certificates: iso 9001 tse quality management system certificate, iso 14001 environmental management system certificate, iso 27001 information security management system certificate, iso 50001 energy management system certificate, iso 45001 occupational health and safety management system certificate, sa 8000 social responsibility management system certificate (https://www.alarko-carrier.com.tr/en/corporate/ company-overview/quality-certificates, 3.7.2020). cenal elektrik üretim a.ş. is a jont venture company established by alarko holding a.ş. and cengiz holding a.ş. with equal partnerships in biga, çanakkale in 2011. it has 454.518m² facility for a power plant which produces electricity by using imported coal, a pier, an ash storage area and a deep sea discharge project. it has 1320 mw (2x660 mw)/1380 mwm/2926 mwt installed daily electricity production capacity, 7500 hours annual planned operation time and 9.900.000 mwh annual planned electricity production. it plays an important role in meeting turkey's growing electricity needs. it produces reliable and high quality electricity for an economic growth of the country, creating new business opportunities and increasing gdp per capita (http://www.cenal.com.tr/about.html, 3.4.2020). quality, environment, energy efficiency and occupational health and safety (ohs) policy of cenal elektrik üretim a.ş. within the framework of legal and other requirements is as follows to serve its country and sector and improve its success (http://www.cenal.com.tr/uploads/kcei.pdf, 3.5.2020): 1. to have environmental and occupational safety awareness to prevent pollution at its source in our production and post-production services. 2. performing high quality, environmentally friendly, standard and timely productions in compliance with the requirements of quality, environment, energy efficiency and ohs management system by closely following technological developments and legislations. 3. to eliminate process hazards and determine the quality, environment, energy efficiency and ohs risks to conduct necessary studies to reduce high risks. 4. to consider the energy performance in the design and modification of our production and processes. tuğba karabulut & hümeyra n. hati̇poğlu 5. we are committed to increase awareness of employees and the society in the efficient use of energy and natural resources in our products and processes. 6.1. in-depth interview with alarko carrier sanayi ve ticaret a.ş. 1. do you have a green innovation strategy? if you do, is your green innovation strategy consistent to other company strategies? although the green innovation strategy is not included in our strategic plan, the principle of green innovation is adopted by our founders and included in our holding philosophy. these principles are included in our company’s ethical rules and social responsibility guidelines and we work by following them: “to take care of protecting nature in all our activities”, “to ensure the prevention of pollution by protecting the natural environment in all our activities, to increase the efficiency by reducing natural waste by controlling the use of natural resources”, “ensuring the use of energy” by monitoring every situation and process, developing projects which reduce its use, increasing productivity by researching alternative sources ”. 2. would you like to talk about green innovation practices of your company? our company emphasizes environmental awareness in its activities. even if green innovation practices increase its costs, it does not compromise from them. it is the member of sectoral associations such as dosi̇der and i̇ski̇d. however, our company does not compromise on environmentally friendly innovation practices even if it increases its costs. some companies continue to use old technologies for a long time to decrease their costs and increase their sales. however, our company switches to technological improvements earlier because it wants to decrease its energy usage and energy costs, use less energy for our country and reduce environmental harms. when we move to more expensive, more technological and more efficient devices which pollute the environment less, we support the transition to new technology but the market becomes 10-20% smaller. alarko carrier sanayi ve ticaret a.ş. is a more environmently conscious company than its competitors. it makes investments in its factory to increase its productivity, energy efficiency and recycled wastes. there is a unit called the facilities management which works on cooling and heating of the building, producing water, solid, liquid chemical wastes which comply with environmental regulations. the audit of the activities carried out in turkey is delayed. some competitors which do not comply with the environmental regulations in the sector reach unfair high profits, but our company does not compromise on doing activities which comply with the environmental regulations. when the materials used for production exceed their expiry dates, it does not keep them in the stock. if there is a warning that any product will not be produced after a certain date, it will definitely not be produced after that date. as a philosophy, our company does not compromise on complying with environmental regulations. we use materials that do not harm health at all (e.g. machine oil, paint, thinner, etc.). we organized a painting contest across turkey to increase the environmental awareness about the harms of global climate change. a table calendar was prepared consisting of 13 awarded pictures at the end of the contest. we created a forest themed trade show stand to increase an awareness to climate change. however, we cannot allocate additional marketing budget for our environmental awareness activities. organizational activities are carried out to use energy efficiently in order to reduce the damage to the environment. the automation systems in our company are designed to be environmentally friendly even the lights are set automatically based on sunlight. in addition, thanks to the sensors, the heating system is adjusted automatically in our factory based on the outside temperatures. thus, excess energy consumption is prevented. as a company, we have an environmental awareness, but we are modest in this matter and do not present it as a public relations activity. 3. what are the factors which lead your company to green innovation practices? our goals are to reduce our energy costs, consume energy of our country consciously, contribute to energy saving and leave a more livable environment to future generations. 4. when and how did you start green innovation practices? alarko carrier sanayi ve ticaret a.ş. has already been doing green innovation practices. we do these practices with the aim of increasing productivity and giving less harm to the environment. however, we did not label and present this under the name of green innovation. because we perceive an innovation as making something from scratch, but we , but we generally import components from europe and produce adopted european products for turkey and export market. however, we are pioneer to produce these products in turkey. 5. what are the effects of green innovation practices on your company performance? there are applications in our facility which provide more efficient and faster production and shipment, especially in manufacturing. these applications which are called “5s” are similar to japanese kanban. reporting scores are the effects of green product innovation and green process innovation on company performance 189 checked at meetings held in certain periods. important issues are paid attention such as waste reduction. carrier has studies which are based on two pillars about them. one of the pillar is products. studies in the field of energy efficiency are carried out due to regulations in product pressures for water pressurization products. circulation pumps have started to be produced with high energy class. a huge investment which was millions dollars was made for water pressurization product category. our company is the only producer for high energy class pumps in turkey. we are working very hard with our dealers to convert current pumps into high efficiency pumps. we give training to our dealers about energy saving. we are the leader in energy-saving products in the water pressurization sector in turkey. alarko carrier has a brand awareness in the boiler sector, but we are not a market leader because cheaper products are generally sold more than our high quality and specification products and cheaper product manufacturers unfortunately have higher market shares. however, our company never ceases to add the most efficient and environmentally friendly products to its product range and pioneer in this. even if we can not reach a higher market share. nevertheless, our company launched a high condensing combi boiler which was a very risky project and required a large amount of investment. its sales expectations were not estimated but our company took a risk to make this investment. although, some european manufacturers produce higher quality and more expensive products in their countries, they don't always launch them in turkish market. first, they launch medium quality products in turkish market and want to launch higher quality products gradually. but alarko carrier always launches higher quality products to turkish market although we are not the market leader. these products have not reached higher sales figures yet. for example, our company achieved to produce double condensing boiler which requires innovation and has the best hot water efficiency in a boiler system. we demonstrated this achievement in advertising campaigns and magazine articles. some important european manufacturers have launched the same products to turkish market after we launched. we were making an advertising as “we have the first and the only double condensing combination boiler in turkey”. this example shows us although we are not the leader of sales in the market, we are the leader of innovation and environmentalism. 6. which products do you manufacture? which products do you import? alarko carrier a.ş. produces and outsources its products. if we are looking at the partnership's structure, alarko holding a.ş has 42%, carrier hvacr investments b.v. has 42% share and 16% of the share is publicly traded in the stock exchange. alarko holding a.ş. has a heating and water group, and carrier hvacr investments b.v. has individual and central air conditioning products. additionally, toshiba is a carrier hvacr investments b.v. brand. if a product is innovative, requires advanced technology and is not suitable for manufacturing in the factories of alarko holding a.ş and carrier hvacr investments b.v., we buy it from turkey or abroad. if turkey has these products, we provide it from our country. shortly, we are outsourcing production from both turkey and abroad but our priority is outsourcing production from turkey. our outsourced products mostly include the side equipment of the heating devices, expansion tank, domestic hot water tank, and radiator valve. for example, our company produces panel radiator but it outsources the radiator valve. likewise, we produce condensing boiler, but outsource hydraulic header, domestic hot water tank and expansion vessel which are used in condensing boiler systems and boiler rooms. we generally prefer outsourcing hauxiliarry heating equipments from turkey because there are many important turkish high quality heating equipment manufacturers in turkey. however, we prefer china for outsourcing the water group support products. 6.2. in-depth interview with cenal elektrik üretim a.ş. 1. do you have a green innovation strategy? if you do, is your green innovation strategy consistent to other company strategies? our company does not have a green innovation strategy but there are green innovation practices in the company processes. the main goal of our company is to use the most efficient and the best techniques in the world and to search the better alternatives. we have a responsibility to be an example for our industry. however, we are conscious to prioritize human health and environmental protection. thus, we do high cost innovations even if it contradicts with our economic survival expectations. 2. would you like to talk about green innovation practices of your company? tuğba karabulut & hümeyra n. hati̇poğlu cenal elektrik üretim a.ş. generates electricity as its main product due its organizational structure. the main input of our production is coal. from this point of view, our company has environmental awareness to carry out the production stages to convert coal to the electricity without harming the environment. coal-fired power plant management has several globally standardized practices. it is not easy not to apply these standards for economic reasons and competitiveness. however, when it comes to environmental sensitivity, cenal elektrik üretim a.ş. can apply these standards to have innovative and feasible systems. it has reflected this approach in the design phase of its new facility. our company has made environmental investments and created series of precautions starting from the design stage to make contributions for a livable world for tomorrow. the cenal elektrik üretim a.ş. is the first and only ultra-supercritical coal-fired power plant of turkey. shortly, cenal elektrik üretim a.ş. has the most efficient power plant model which can convert coal sources into energy. this results less fuel consumption and waste creation in equivalent energy production compared to other power plants. the chosen boiler type provides high-efficiency combustion and minimizes the waste gases with its infrastructure. the company can use its resources most efficiently at the maximum level by designing generator systems which can produce electricity from cooled steam. it can utilize the used steam for a longer time by recycling and reheating in the system. all of the coal lines in the power plant are designed closed to the atmosphere. thus, resource loss and environmental impacts are reduced. apart from this, the coal dust generated by dust collectors located at 54 different points along all production lines is collected and reincluded in the system. this practice is important in terms of reducing the environmental impact of resources and using resources efficiently. our company has sea water sulfur removal system (seawater flue gas desulfurization). this system exists in one more company in turkey and few companies in the world. although the investment cost is higher; flue gas treatment applications are preferred by our company because of their high so2 retention efficiency, lower waste generation (almost zero waste) and sustainable environmental effects. electrostatic filters with the capacity to hold the ash in the flue gas 99.9% are planned and put into practice in the plant design. all ash transfer lines are pneumatic and closed to the atmosphere. thus, almost all of the ash in the flue gas is kept in the system and its effects in the atmosphere are prevented. ash is not a waste, it is a byproduct in our power plant. we have not sent ash waste to ash storage areas for 1.5 years. the entire ash released as a result of the activities at the power plant is sold to domestic and international markets as a byproduct. additionally, the efficiency of all these systems is monitored and controlled continuously (7/24). 3. what are the factors which lead your company to green innovation practices? cenal elektrik üretim a.ş. believes in the importance of being in a better tomorrow fiction and taking the right steps for tomorrow. it tries to be a positive example in its sector by trying to use the technological infrastructure at the highest level while doing this. energy is an essential need for the modern and livable world in the future. main motivations of our company are to produce an energy which is the raw material of the future and establish the optimum balance in reducing environmental impacts for a sustainable and livable world. our company works with the desire to stay one step ahead of other sectoral stakeholders in terms of environmental sensitivities. 4. when and how did you start green innovation practices? cenal elektrik üretim a.ş. tries to be the cleanest and the most efficient power plant especially in the project design and production processes for motivating group companies to prefer the most technological value added products and reflect their environmental sensitivity and deep-rooted history to the future. this process starts from the plant design stage. being one of the newest plant affects this as well. it will not be economically sustainable to keep the entire system up-to-date, most efficient and environmentally friendly all the time in the power plants which have been operating for many years. 5. what were your expectations from green innovation practices? what kind of results did you get? the basis for taking environmentally friendly approaches is to reduce the total amount of waste as much as possible in our company. not generating waste is naturally possible by using the resources efficiently. main goal of our company is owning the high efficieny and low waste generating power plant. we progress as we planned so far. we would like to be in the right position in terms of environmental responsibilities to the national legal authorities. there are debates in our sector that many power plants don’t have flue gas emission systems or don’t operate them properly. our company operates in 1/5th of 1/10th of the legal limits in national flue gas emission parameters permitted by national legislations. the reasons for this are our ability to work at such a low level of the atmosphere emission values for our sector and our efficient and environmentalist ideas which we never compromised starting from the design stage. cenal elektrik üretim a.ş. is happy with the results received from its practices in order to the effects of green product innovation and green process innovation on company performance 191 become a sustainable business. however, it will not hesitate to take steps when opportunities exist to improve its performance in the future. 6. what are the effects of green innovation practices on your company performance? green innovation practices positively affected cenal elektrik üretim a.ş. when it is aimed to use the limited world resources, every step is planned accordingly. environmentalist approaches are realized spontaneously when operations are achieved successfully. the most accurate operations can be achieved with the most effective management of resources. the highest profitability is obtained when resources are used efficiently with the least loss and waste level. as a result of our operations, ash is released. most of our competitors stock this ash as waste in huge dam structures. we made it a byproduct to sell to the world. but of course this did not happen in one day. in order to achieve this, many issues are effectively designed, from choosing the right boiler in the operations to using the flue gas treatment systems efficiently. r&d and investment costs for each innovation decreases profits. however, being a pioneer, producing high quality products, creating a positive corporate image in our environment increases motivations of our employees and stakeholders. when we evaluate our total earnings, innovation creates value-added and profits to our company. most of our employees are residents of this region. residents of this region had negative ideas about our company at the beginning due to the media and their previous power plant experiences. however, employees experiencing our environmental sensitivity and residents in this region have better impressions about company now. there is also a positive trend towards ngos' reactions. we owe these to our production models which respect the nature. our practices contribute to have a positive impression on legal authorities as well. we can comply legislations for permissions and licencing processes earlier than permitted periods. positive and encouraging feedbacks from legal authorities about our practices after they get briefs during company visits and when they conduct company controls become sources of our motivation. cenal elektrik üretim a.ş. aims to set an example of a good environmental practice in a heavy industry sector. we are pleased to create a conviction in the minds of our social, official and individual visitors that “this work could be done so clean and environmentally friendly”. we think that our stakeholders are also satisfied with the positive feedback they receive about us. 7. would you like the conduct other green innovation practices in the future? we are satisfied with cenal elektrik üretim a.ş.'s image, performance and sustainable resource management. we will not hesitate to follow the new world in which technologies and innovative approaches will evolve in the future. as we mentioned at the beginning, coal-fired power plant management includes globally standardized practices. we will continue to push the limits of these standards just we do today. 7. conclusion as it is learned from indepth interviews of alarko carrier sanayi ve ticaret a.ş., although it does not have a green innovation strategy, it conducts both green product innovation and green process innovation activies. the company has an environmental awareness. thus, it complies to environmental regulations, reduces its energy costs, consumes energy of our country consciously and contributes to energy savings. it uses environmentally friendly raw materials, applies environmentally friendly processes and manufactures environmentally friendly products to satisfy its stakeholders. on the other hand, although cenal elektrik üretim a.ş. does not have a green innovation strategy, it conducts green process innovation activies. it uses the highest technologies to comply with environmental regulations, inceases efficiency and productivity and decreases energy usage, costs and wastes. employees and other stakeholders of this company are satisfied with its environmental sensitivity. as a result of both in-depth interviews, it is found out that these companies have corporate cultures supporting their green product innovation and green process innovation practices which affect their financial performance and stakeholder performance. additional indepth interviews can be conducted with companies from the same sectors and other sectors for further studies. references agha, s., alrubaiee, l., and jamhour, m. 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(2019). “green process innovation, green product innovation, and corporate financial performance: a content analysis method”, journal of business research, 101, 697-706. http://www.intranet.alarko.com.tr/dosya/yatirimci_iliskileri_pdf/acst_pdf/faaliyet/2019/alarko%20carrier%20t r.pdf, 3.6.2020 https://www.alarko-carrier.com.tr/en/corporate/company-overview/quality-certificates, 3.7.2020 https://www.alarko-carrier.com.tr/tr/kurumsal/genel-bakis/tarihce, 3.8.2020 http://www.cenal.com.tr/about.html, 3.4.2020 http://www.cenal.com.tr/uploads/kcei.pdf, 3.5.2020 international journal of commerce and finance, vol. 6, issue 2, 2020, 72-80 72 effect of corporate governance on tax planning & firm value giovan bhagiawan atma jaya university, indonesia mukhlasin mukhlasin atma jaya university, indonesia received: june 16, 2020 accepted: sept 09, 2020 published: oct 02, 2020 abstract the objectives of this study are to examine the effect of tax planning on firm value with the moderating influence of corporate governance, including board size, board independence, audit quality, board gender diversity, and audit committee size. this research was conducted on manufacturing companies listed on the indonesia stock exchange (idx) during 2016-2018, with 266 observational data. having different from previous study, this study uses more diverse moderating variables with empirical evidence from indonesian companies. the results of the regression analysis prove that tax planning has a positive effect on firm value where these results are in line with traditional theories. other regression analysis results, gender diversity board of directors and audit committee size weakens the relationship between tax planning and firm value. however, board size, board independence, and audit quality do not affect the tax planning relation on firm value. keywords: tax planning, firm value, corporate governance, audit quality, audit committee. jel codes: g32, h26, and g34 1. introduction one of the goals to be achieved by the firm is a high after-tax income so the value of the firm increases. increasing firm value is the owner’s expectation and the management acts on behalf of the owner become the basis for creating profitability. therefore, the company is trying to cut tax liabilities in line with firm’s wealth maximization purpose and corporate tax managers are responsible for the strategy of minimizing overall corporate tax liabilities (ilaboya et al., 2016; oyeyemi and babatunde, 2016). tax planning provides more benefits for companies in addition to increasing firm value, tax planning is also effective in increasing company liquidity (nwaobia and jayeoba, 2016). however, corporate tax planning activities have the potential to incur large costs and overly aggressive practices that allow for an increase in the rent diversion by company managers (khaoula and moez, 2019). in the context of corporate tax behavior, the mechanism of corporate governance works to monitor managerial behavior and in this case the board of directors is responsible for select corporate tax management strategies (wahab et al., 2017). this study will discuss more completely corporate governance factors by dividing it into several variable such as board size, board gender diversity, board independence, audit quality, audit committee size different with earlier studies (khaoula and moez, 2019). previous literature, state that the analysis of the relationship of tax planning on firm value produced a positive effect (lestari and wardhani, 2015). however, khaoula & moez (2019) mentioned that there is no influence between tax planning and firm value, so that there are differences in results which became the basis of this research. an analysis of board size’ effect on the relationship between tax planning and firm value has been investigated by lestari & wardhani (2015) which states that board size has a negative effect on the relationship between tax planning and firm value, whereas khaoula & moez (2019) stated that there was no significant effect on board size on the relationship between tax planning and corporate value. thus, this study will bridge the differences in the results obtained from previous research. analysis of board independence influenced on the relationship between tax planning and firm value has been investigated by khaoula & moez (2019) shows the negative influence of board independence on the relationship between tax planning and firm value. while similar research states there is a no effect of board independence on corporate tax planning (khaoula and ali, 2012), so this research is expected to provide the latest results to reassert the effect of board independence on the relationship between tax planning and firm value. analysis in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e effect of corporate governance on tax planning & firm value 73 of the influence of audit quality on the relationship between tax planning and firm value has been investigated by tarmidi & murwaningsari (2019) where audit quality does not significantly influence the relationship between tax planning and firm value and differs from zemzem & ftouhi (2016) which says that external auditors included in external monitor variable has a positive moderating effect (strengthens) the relationship between tax planning and firm performance. therefore, this research was conducted to produce the expected latest results. analysis of the influence of board gender diversity on the relationship between tax planning and firm value has been investigated by khaoula & moez (2019) where the gender diversity of directors has a positive effect on the relationship between tax planning and firm value and there is a similar study which shows different results, states that gender diversity of directors has a negative effect on tax aggressiveness zemzem & ftouhi (2013). so, this study are expected to provide new results with relevant arguments. khaoula & moez (2019) shows audit committee size does not significantly influence the relationship between tax planning and firm value. similar research states that the results are not the same where the number of audit committees has a positive effect on tax avoidance (tjondro and olivia, 2018). according to prior result, this study expected has another result. 2. literature review and hypothesis development agency theory provides a different perspective or view of the relationship between tax planning and corporate value. desai and dharmapala (2009) stated that tax avoidance activity increase management opportunities to divert rents. management does not avoid taxes aimed at increasing profits and management shareholders' profits get personal benefits from tax avoidance (mukhlasin and annisa, 2018). chen et al. (2014) support by proposing the traditional agency theory, free cash flow from tax avoidance will lead to payments paid by companies and the construction of a "private empire", which will reduce future cash flows and increase firm value. therefore, agency relationship between shareholders and management can lead to information asymmetries such as moral hazard and adverse selection (caselli and negri, 2018). under signaling theory, financial statements become more accurate when audited by competent and independent auditors so the market reaction will send a positive signal and investors receive positive signals from the company in the hope of getting a large dividend if the company's profits increase (increase in firm value) but if the company avoids tax than the party externally will send a negative signal that causes the firm value to decline (putri and hudiwinarsih, 2018). wang (2010) also added that tax avoidance activities cause a negative signal if tax avoidance causes additional costs such as planning costs and penalty fees. fadhilah et al., (2018) supported that companies listed on the stock exchange avoiding taxes are in the interests of investors to invest in the company because according to investors the company can generate higher after-tax profits. 2.1 tax planning and firm value there are two perspectives on tax planning according to some previous research. the first perspective states that large-scale companies feel that corporate tax is a significant cost that causes an increased tax burden and decreased profit after tax, called the traditional theory which, according to chen et al. (2014) tax planning will reduce the transfer of wealth owned by shareholders to the government so that through the tax planning activities of shareholder wealth is expected to increase. tax planning considers an important investment for investors because it reduces the tax burden on the company (khaoula and moez, 2019). different from the first perspective, the second perspective is closely related to agency theory where tax planning is seen as a complex activity and makes it possible to create managerial opportunism (lestari and wardhani, 2015). tax planning activities can cause a decrease in the company value if management has the opportunity to manipulate earnings in the financial statements and the incentive is to reduce income tax liability by reducing taxable income and reducing the transparency (wahab and holland, 2012). ftouhi et al. (2015) stated that tax planning activities are steps taken by taxpayers (companies) to reduce tax liability to increase tax saving benefits in other words tax planning activities can increase firm value. the research also mentions information asymmetry related to tax planning can produce moral hazards and related risks, for example tax planning is known to be illegal by tax authorities. these results are consistent with agency cost theory. desai & dharmapala (2009) states that the quality of better governance leads to the effect of greater avoidance on firm value, this indicates that agency problems must be minimized so that the quality of corporate governance becomes better. based on the description, the hypotheses proposed in this study are as follows: h1: tax planning has positive effect on firm value giovan bhagiawan & mukhlasin mukhlasin 74 2.2. board size, tax planning, and firm value florackis (2008) said that board of director size will affect the functions of coordination, communication, and decision making where if the board is too large, it will be difficult to carry out these functions effectively. khaoula & moez (2019) in their research said that the small size of the board can improve the quality of overall company performance so that a small board of directors can reduce the level of tax rates in other words increase tax planning. beasley (1996) says that the probability of financial statement fraud decreases if the board of directors is small. wahab et al. (2017) argued that board size has negatively affected tax aggressiveness. based on the description, it can be concluded that the small board is expected to work effectively and reduce fraud in order to increase the firm value by reducing tax planning activities, so the hypotheses proposed in this study are as follows: h2: board size has negatively (weakens) effect the relationship between tax planning and firm value 2.3. board independence, tax planning, and firm value adams et al. (2010) mention an independent board the most important corporate governance mechanism that has an influence on company performance. in relation to the relationship between tax planning and firm value, khaoula & moez (2019) mentions that board independence has a negative effect on the relationship between tax planning and firm value because tax planning activities have small restrictions with the practice of tax evasion that can cause significant risks and even scandals. the study added that an independent board becomes a mediator between the company's internal and shareholders so that the appointment of an independent board will increase the efficiency and compliance of the company. based on the description, role of independent board would avoid tax planning activities in other words, the firm value would decrease because the independent board would uphold their independence more than the potential losses that might arise due to tax planning. therefore, the hypotheses proposed are as follows: h3: board independence has negatively (weakens) effect the relationship between tax planning and firm value 2.4. audit quality, tax planning, and firm value zemzem & ftouhi (2016) states that external auditors focus more on opportunistic applications of accounting principles, including tax evasion (excessive and unlawful tax planning), the study believes that the quality of external auditors plays an important role in monitoring the company's strategic activities including tax planning. putri & hudiwinarsih (2018) argued that good audit quality is only produced by independent and competent auditors and therefore large public accounting firms are expected to produce accurate financial information. the higher audit quality will increase company compliance in paying taxes, including paying tax penalties which causes lower tax planning so the firm value also decreases (tarmidi and murwaningsari, 2019). pratama (2017) supports that audit quality has a negative effect on tax avoidance. based on the explanation, it can be summarized that good audit quality by big4 audit firm, can reduce tax planning activities otherwise increase firm value. consequently, the hypotheses proposed in this study are as follows: h4: audit quality has negatively (weakens) effect the relationship between tax planning and firm value 2.5. board gender diversity, tax planning, and firm value in ethical differences, the psychological literature based on gender suggests that men and women have differences in various aspects and their characteristics affect their attitudes in the work environment (lakhal et al., 2015). the difference on making strategies related to risk preference in motivational theory, states that women will choose low risks when they have strong desires for security reasons while men will tend to choose high risks when they have strong desires for profit reasons (powell and ansic, 1997). the presence of women on board shows higher tax compliance than men who carry out a strategic plan in paying taxes (kastlunger et al., 2010). zemzem & ftouhi (2013) supports that diversity in the board of directors can reduce tax aggressiveness or the presence of a woman on board negatively affects tax aggressiveness. ethical standards will be built to conduct tighter monitoring of corporate tax strategies if the presence of women directors is higher so that the presence of women can reduce the possibility of tax aggressiveness (richardson et al., 2016). the presence of women directors, increasing supervision and effect of corporate governance on tax planning & firm value 75 lowering risk in corporate governance so tax planning activity tightened. so, the hypotheses proposed in this study are as follows: h5: board gender diversity has negatively (weakens) effect the relationship between tax planning and firm value 2.6. audit committee size, tax planning, and firm value khaoula & moez (2019) mentions that the audit committee is the only party can identify and evaluate risky tax strategies, the audit committee is expected to be able to solve problems related to the complexity of financial information, assessment of subjective accounting policies, understanding auditor decisions, and the quality of financial statements. the study added that the audit committee is an important monitoring mechanism and is responsible for monitoring and disclosing financial information, including oversight of financial reporting, disclosure of accounting information, following accounting policy choices and principles. robinson et al. (2012) mentioned that the audit committee acts as an advisor and supervisor of tax planning activities. regarding signaling theory, shareholders, investors, and corporate tax consultants receive signals from audit committees regarding potential corporate risks associated with aggressive tax planning activities (deslandes et al., 2019). thus, the presence of the audit committee can increase the effectiveness of tax planning because through the authority of the audit committee that oversees financial information, especially tax planning activities so that the firm value can increase. based on the description, the hypotheses proposed in this study are as follows: h6: audit committee size has negatively (weakens) effect the relationship between tax planning and firm value 3. research methods 3.1. research samples and data secondary data sourced from indonesia stock exchange (idx) website, www.idx.co.id specifically taking financial information of manufacturing companies during 2016-2018. financial data is collected from audited financial statements and annual report that brings information needed in this study. the sampling method used in this study was purposive sampling with specified criteria, including manufacturing companies listed on the indonesia stock exchange during 2016-2018, having financial statement components & audited annual reports, using the rupiah currency. criteria for selecting observational data are manufacturing companies during the listed period (2016-2018) on the idx, excluding 1) company data before the company was officially listed on the idx, 2) data of manufacturing companies that are subject to suspension or temporary termination, 3) data of manufacturing companies that have a negative etr value or no etr value. 3.2. variable measurement previous studies used tobin's q as a measure of firm value (tarmidi and murwaningsari, 2019; ftouhi et al., 2017). tobin's q can represent the firm value because it is considered to show the value in monetary units (khaoula and moez, 2019). therefore, tobin's q formula show the market price of shares plus the total value of debt divided by the total value of assets. this study uses a number of director member as a proxy for board size (bsize). the number obtained from the board of director’s profile presented in annual report and counting the number of director members in the company. board independence (binde) is measured by counting the number of independent commissioners in other words, the percentage of independent commissioners out of the total members of commissioners. previous research also used the same measurement to identify board independence (mulyadi and anwar, 2015; septiya and novita, 2018). the percentage of women on board (bdiver) are reflected by the number of women directors divided by the total number of director members, in line with prior study (zemzem and ftouhi, 2013). this study uses the terms big4 auditor and non-big4 auditor as a measure of audit quality (auditq). companies that use big4 auditor services will get a value of 1 while companies that use non-big4 auditor services will get a value of 0, in line with previous research (putri and hudiwinarsih, 2018; tarmidi and murwaningsari, 2019). the number of audit committee as a measurement of the audit committee size (auditc) variables is obtained by counting the audit committee members in the company, in accordance with previous studies (khaoula & moez. 2019). firm size (tasset) is reflected by company’ total assets, whereas, the leverage (der) variable calculated by debt to equity ratio. firm profitability (roa) is used return on asset ratio. giovan bhagiawan & mukhlasin mukhlasin 76 4. results and discussion 4.1. moderated regression analysis moderated regression analysis is performed after the data has been tested with classical assumptions, in other words, these data are free from problems of normality, multicollinearity, autocorrelation, and heteroscedasticity. the moderation regression analysis result is described in the table below: table 1. moderated regression analysis result model unstandardized coefficients standardized coefficients t sig. b std. error beta (constant) taxpl taxpl*bsize taxpl*binde taxpl*auditq taxpl*bdiver taxpl*auditc tasset der roa 0.085 0.067 1.267 0.206 2.626 0.665 11.623 3.950 0.000 -0.055 0.044 -0.982 1.250 0.212 -0.570 0.652 -0.843 0.875 0.383 -0.227 0.213 -0.090 1.068 0.287 -0.804 0.302 -1.786 2.662 0.008 -0.610 0.194 -8.097 3.150 0.002 1.828e-15 0.000 0.114 1.872 0.062 -0.006 0.028 -0.013 -0.222 0.825 2.724 0.777 0.216 3.508 0.001 r-squared 0.160 adjusted r-squared 0.130 f-statistic 5.414 probability (f-statistic) 0.000 a.dependent variable: lnfvtobinsq. all variable significant at α = 0.05 (5%). source: secondary data processed (2020) 4.2. discussion based on the results in table 1, shows the tax planning variable (taxpl) has a significance value (0,000), smaller than 0.05, in other words h1 is accepted. tax planning activities are expected to reduce the obligation to pay corporate taxes so cash can be diverted for investment. these results are in line with previous research by lestari & wardhani (2015) and tarmidi & murwaningsari (2019) where tax planning activities can reduce the transfer of company wealth to the government, which is the basis of traditional theories and shareholder awareness of the importance of knowing tax regulations so that tax activity can be considered effectively with the aim of increasing the firm value. board size (taxpl*bsize) has a significance value (0.212) greater than 0.05, in other words h2 is rejected. the board of directors is considered not involved in the company's taxation strategy so that the presence of the board of directors has not had a significant influence on the relationship between tax planning and firm value. board size is considered not to describe the performance of the board, thus requires other variables such as expertise or effect of corporate governance on tax planning & firm value 77 experience (khaoula and ali, 2012; khaoula and moez, 2019). the results of this study indicate that the board of directors in the company held by people who have a family relationship or family ownership, therefore board size is less relevant to see the increases or decreases in the firm value through tax planning activities. in fact, bhatt & bhattacharya (2017) said that the board of directors filled by family members tends to neglect corporate profit maximization activities. other result state that board independence (taxpl*binde) has a significance value (0.383) greater than 0.05, which indicates h3 is not accepted. although the independent board of commissioners is expected to oversee the management performance, the independent commissioner does not see the risk posed by tax planning activities. in addition, the independence and supervision functions are not carried out properly by the independent commissioners so that the board independence does not have a significant effect in line with khaoula & ali (2012) and tandean & winnie (2016). the table also show that audit quality (taxpl*auditq) has a significance value (0.287) greater than 0.05, thus h4 is not accepted. this result proves that audit quality cannot reduce information asymmetry and indications of regulations being tightened by indonesian capital market supervisory agency that there are different service scopes between audit services and tax advisory services (putri and hudiwinarsih, 2018; septiya and novita, 2018). for companies with good governance, audit quality also does not affect tax planning activities on the company value because the company has been running according to the correct corridor (pratiwi et al., 2019). gender diversity of board (taxpl*bdiver) has a significance value (0.008) smaller than 0.05, showing h5 is not rejected. the presence of women on board makes tax planning activities more effective accordingly increasing the firm value through its supervisory role. previous study shows that the role of women on board will increase ethical standards so as to reduce agency problems that are considered risk of tax planning because women have risk preferences to avoid risk (hoseini et al., 2018; lakhal et al., 2015; richardson et al., 2016). audit committee size (taxpl*auditc) has a significance value (0.002) smaller than 0.05, in other words h6 is accepted. through its supervisory role, the presence of the audit committee can reduce the opportunistic behavior of management by suppressing tax planning activities conversely increasing the firm value. the efficiency of audit committee's performance will increase when the audit committee has fewer members so that it will increase the audit committee's focus on overseeing tax planning activities (ali and amir, 2018; marselawati et al., 2018). 5. conclusion the purpose of this study is to investigate the effect of tax planning on firm value with some moderating variables affect the relationship between tax planning and firm value. the first result state that there is a positive effect on tax planning on the firm value where these results support previous studies which is consistent with traditional theory. then, second result shows that board size has no effect on the relationship between tax planning and firm value, the existence of family ownership in the board of directors is the basis of these results. the third results also found that board independence has no influence the relationship between tax planning and firm value because the role of independent commissioners is not well implemented. furthermore, the fourth result states that audit quality has no effect on the relationship between tax planning and firm value, in line with previous research due to limited services provided by audit firms and improved corporate governance. conversely, the fifth result mentioned that board gender diversity weakens the effect of tax planning on firm value because the presence of women triggers an increase of ethical standards so tax planning activities gradually reduced. the last result indicates that audit committee size also negatively influences tax planning relation on firm value, support similar research related to the effectiveness of audit committee’s performance. some alternative ways can be done by developing new variables such as expertise and experience of board (board of director and board of commissioners) in order to improve study’ result. future studies can explore tax planning’ measurement, it can be done by changing the measurement of variables with new measurement such as cash etr or book-tax differences. giovan bhagiawan & mukhlasin mukhlasin 78 references abdul wahab, n. s. and holland, k. 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(2016), "external corporate governance, tax planning, and firm performance", corporate ownership and control, 13(3), pp. 523–532. international journal of commerce and finance, vol. 6, issue 2, 2020, 170-178 170 comprehensive performance measurement for microfinance institutions in ethiopia eyerusalem kebede refera kotebe metropolitan university, addis ababa, ethiopia received: sept 03, 2020 accepted: sept 26, 2020 published: oct 02, 2020 abstract this study develops comprehensive performance measurement for microfinance institutions which incorporate both financial and nonfinancial metrics using balanced score card approach (bsc). the bsc framework of the study developed using a total of 20 performance indicators categorized under the 4 bsc perspectives (financial, customer, internal business process and learning and growth). the performance measurement model is developed based on reviewed literatures and after the comprehensive performance measurement descriptive model developed, 10 microfinance experts of national bank of ethiopia (nbe) and association of ethiopian microfinance institutions (aemfi) gives weight for each bsc perspective and for each twenty performance indicators. furthermore since fina ncial performance are commonly measured using ratios and numbers to measure a comprehensive performance and to make financial and nonfinancial performance parameters comparable the experts asked to develop a bench mark to convert financial performance parameters in to 5 point likert scales. finally the study provide a bsc based performance measurement framework that will give a comprehensive view on the financial and non-financial performance. keywords: microfinance, performance, balanced score card (bsc) 1. introduction microfinance has obtained a universal avowal as an important tool for poverty alleviation in many developing countries. the basic purpose of the microfinance institutions (mfis) is to provide basic financial service the poor. the mfis had remained with government and not for profit organizations because of primacy of social objective in a mission. however the potential profits and sustainability of lending to the poor, if done skillfully, had attracted conventional commercial banks and private investors. this triggered an optimal balance between social and business objective in the sector. literature on the need for balancing outreach and sustainability has been growing (abrar, 2019; schmied, 2012; c. bartual sanfeliu et al, 2013; efendic & hadziahmetovic, 2017), but few have been done on applying performance management techniques facilitating balancing multiple and conflicting objectives such as the balanced score card (bsc) in mfis, especially in ethiopia context literature on the need for balancing outreach and sustainability has been growing (abrar, 2019; schmied, 2012; c. bartual sanfeliu et al, 2013; efendic & hadziahmetovic, 2017), but few have been done on applying performance management techniques facilitating balancing multiple and conflicting objectives such as the balanced score card (bsc) in mfis, especially in ethiopia context.to date to explore the possibility of applying performance management techniques which help in measuring and managing the multiple and sometimes conflicting performance indicators peculiar to mfis. the purpose of the current study is to explore possibility of using bsc in ethiopia mfis. current research, hence aimed at examining the possibility of using a balanced score card (bsc) approach as a comprehensive measure of performance and maintaining optimum balance between the social and business objectives peculiar in the sector in the context of mfis in ethiopia. credit facilities on affordable interest rates. this industry has a dual mission that is to expand its social outreach and at the same time maintain its financial sustainability (abrar, 2019; schmied, 2012; c. bartual sanfeliu et al, 2013; efendic & hadziahmetovic, 2017). the mfis has been growing and reached an estimated 139 million low-income and underserved clients with a loan totaling an estimated $ 114 million. the growth in mfis has attracted conventional commercial banks and other financial institutions which raised a challenge of creating optimal balance between the initial social objectives to the needs of return by private investors taking part in the sector. previous studies in the performance of mfis focused on identifying the possibility of balancing conflicting objectives the balanced score card (bsc) approach which is developed by robert kaplan and david norton in 1992g.c is a comprehensive approach to analyze overall performance of an organization. in addition to the traditional financial in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e comprehensive performance measurement for microfinance institutions in ethiopia 171 performance measures which only provides information about how well the organization did prior to the assessment, the bsc approach create an opportunity to integrate additional performance dimensions related to how the organization respond to the needs of the customer, and employees as well as explore opportunities to improving internal business process and capitalized on the organizational learning and growth opportunities. the adoption of bsc in the measurement of performance in mfis is expected to observe how far performance measures are linked to its strategic goal and mission. the current study; hence, contribute to literature on microfinance performance in ethiopia and other developing countries by categorizing existing and newly introduced performance measures and indicators under the four dimension of bsc. the study benefits management and policy makers of mfis by providing compressive view of organizational performance and its adherence to overall strategy. the specific addressed the following specific objectives of the study are as follows: 1. to study existing literature on microfinance performance and categorize the social and business objectives under the four perspectives of bsc 2. to study the existing literature on balanced scorecard and explore the possibility of adopting bsc in the measurement and management of performance in ethiopian mfis 3. to develop a bsc approach applicable to the measurement and management of performance in ethiopian mfis 2. literature review 2.1 performance measurement in mfis robinson (2001) define microfinance as all types of financial services (savings, credit, funds transfer, insurance, pension remittances, etc.) offered to low-income households and enterprises in both urban and rural areas, including employees in the public and private sectors and the self-employed. churchill & frankiewicz (2006) articulated that mfis are associated with small, working capital loans that are invested in microenterprises or income-generating activities. this is similar with the case in ethiopia, defined by dejene (1998) in terms of the following characteristics: targeting the poor (especially the poor women); promoting small businesses; building capacity of the poor; extending small loans without collaterals; combining credit with savings; and charging commercial interest rates and also they are often innovative and flexible in their design and implementation. the science of organizational performance management showed a pragmatic shift from only financial performance to multiple performances which called for modern approaches such as the balanced score card (bsc), developed by robert kaplan and david norton in 1992 to connect performance and strategy. bsc have been experimented in various sectors, but few work available in mfis. the review of performance measures on mfis, discussed in the below section, has been conducted to identify performance measures of mfis and categorized them under indicators of bsc so to develop a bsc framework for mfis. consultative group to assist the poor (cgap), an international organization with a basic objective of supporting the development of micro financing around the world, has recommended to five performance dimensions to be considered in mfis. these are financial sustainability, outreach, and depth of outreach, portfolio quality, and efficiency. i. sustainability and profitability: sustainability measures the ability of mfis to stay with productive efficiency and generate sufficient profits in ordinary business without subsidies. sustainability and profitability are directly related in commercial organizations. yet, sustainability of mfis had been viewed differently. profitability is considered as source of sustainability when mfis are more profit oriented whereas external grants and concessional funds from donors can be in case of greater importance of social objective. the observed changes in microfinance sector, namely the growing interest of private investors and declining external grants and concessional funds suggested the need for ensuring operational efficiency and profitability in the sector without significantly hampering social objective of serving the poor or the outreach. ii. breadth and depth of outreach (bdo): outreach refers to the efforts of mfis in increasingly satisfy the finical service demand of poor, marginalized by mainstream financial institution. it is measured in terms of breadth and depth. according to lafourcade et al. (2005), depth of outreach measures how far mfis had targeted and served client the most vulnerable groups of client such as women and other with very low eyerusalem kebede refera 172 income. on the other hand, breadth of outreach measures the number of clients served by the mfis. it is thus; evident that outreach is related with social objectives of mfis. iii. portfolio quality (pq): portfolio quality is a crucial area of performance indicator for the fact that the largest source of risk for any financial institution resides in its loan portfolio. the loan portfolio quality affect mfi’s largest asset and the quality of that asset which poses risk on the institution is a serious issue. especially for microfinance institutions, whose loans are typically not backed by bankable collateral, the quality of the portfolio is absolutely crucial. the most widely used measure of portfolio quality in the microfinance industry is portfolio at risk (par), which measures the portion of the loan portfolio “contaminated” by amount overdue as a percentage of the total portfolio. iv. efficiency and productivity (ep): efficiency and productivity indicators are performance measures that show how well the institution is streamlining its operations. productivity indicators reflect the amount of output per unit of input, while efficiency indicators also take into account the cost of the inputs and/or the price of outputs. tor jansson et al. (2003) explains that mfis have much lower rates of efficiency than commercial banks because on a dollar per dollar basis microcredit is highly labor intensive and a hundreddollar loan requires about as much administrative effort as a loan a thousand times larger. in addition economies of scale have much less impact on efficiency in mfis than is usually believed because of the high variable costs of the microcredit system. 2.2. balanced score card (bsc) balanced scorecard (bsc) is strategic formulation and performance measurement technique developed by r.s kaplan and d.p norton in 1996. as stated by knapp (2001) the balanced scorecard management approach developed by kaplan & norton is based upon several foundational management theories. bsc translates an organization’s mission and strategy in to a set of performance measures that provides the framework for implementation. bsc does not focus solely on achieving short run financial objective. it also highlights the nonfinancial objective that an organization must achieve to meet and sustain its financial objectives. the tool is called balanced scorecard because it balance the use of financial and non-financial performance measures to evaluate short run and long run performance. the bsc approach sees the performances of any organization or association from four perspectives, namely: financial perspective, customer perspective, internal business process, learning and growth. 3. materials and methods the study is an exploratory study and conducted using both secondary and primary data. the secondary data including literature related to microfinance performance and balanced score card (bsc), annual reports, and relevant documents of selected mfis in ethiopia were used to develop a study framework. primary data collected from selected employees and management of mfis, association of ethiopian mfis, and the national bank of ethiopia (nbe) were analyzed to examine the relative importance of microfinance performance measures categorized under the four dimension of the proposed bsc for ethiopian mfis. the data analysis was carried out using qualitative and descriptive statistical analysis techniques. the results are presented using diagrams, tables and narrative descriptions. 4. results and discussion 4.1. development of microfinance bsc framework the proposed bsc framework attempted to club several financial and non-financial measures of performance under the four performance perspectives in bsc theory of northon and kaplan, which intends to link performance measures and strategic objectives of mfis. based on the review of literature and researchers personal judgment five measures of performance have been categorized under each of the four bsc dimensions based on the review of literature and researchers judgment. comprehensive performance measurement for microfinance institutions in ethiopia 173 bsc perspectives financial perspective adjusted return on asset adjusted return on equity -operating self sufficiency portfolio at risk > 30 days -ratio of operating expense to loan portfolio customer perspective percentage change of number of clients percentages of women borrowers percentage change of voluntary saving -customer satisfaction clear social objective learning and growth employee satisfaction employee training performance feedback investment on information system innovation internal business process borrowers per loan officers -clear institutional strategy duration of loan application processing -research & development report to aemfi, nbe mix. market inc. performance dimensions -sustainability and profitability -breadth and depth of outreach -portfolio quality -efficiency and productivity figure 1: proposed comprehensive performance measurement framework source: author constructed based the review and analysis of literatures 4.2. evaluating the proposed bsc for mfis in ethiopia to evaluate whether the proposed bsc framework is suitable to the context of mfis in ethiopia and their relative importance in linking performance measures with organizational strategy and dual objective of sustainability and outreach, a questionnaire were distributed to managers of mfis, and other experts from association of ethiopian mfis and the national bank of ethiopia, supervisory agency. as shown in the above framework 20 variables/ indicators of microfinance performance have been categorized under the 4 perspective of bsc. weights have also been assigned to each measures of performance categorized under each perspectives of bsc each in order to construct overall indicators of each perspective which finally enables the significance of the suggested performance measures and indicators by managers and experts in ethiopian mfis. the experts participated in the survey were asked to indicate, in their view, how much weights should mfis should give to financial and non-financial performance, for each bsc perspectives and also for each performance indicator. beside in order to convert the ratio or numbers in to likert 5 scale they were asked to set a scale or benchmarks for some indicators which nbe didn’t set a scale namely pcnc, pwb, pcvs, bplo. based upon their responses the average weights of each perspective were developed that enable to comprise financial and non-financial performance using identical unit of measurement. the weights assigned to performance indicators under each perspective are summarized on table 1 below. eyerusalem kebede refera 174 table 1 performance metrics and average weights bsc perspective performance indicator sub-weight financial performance (58 %) adjusted return on asset (aroa) 19% adjusted return on asset (aroe) 15% operating self sufficiency (oss) 30% portfolio at risk > 30 days (par) 18% lone loss rate(llr) 18% non-financial performance (42%) customer perspective (16%) percentage change of number of clients (pcnc) 26% percentages of women borrowers(pwb) 17% percentage change of voluntary saving (pcvs) 25% customer satisfaction(cs) 17% clear social objective (cso) 15% internal business process (15%) ratio of operating expense to loan portfolio (roel) 34% borrowers per loan officers (bplo) 19% clear institutional strategy (cis) 25% duration of loan application processing (dlap) 14% report to aemfi, nbe….. (re) 8% learning and growth (11 %) employee satisfaction (es) 23% employee training (et) 19% performance feedback(pf) 10% investment in information system (iis) 33% innovation(i) 15% source: survey result and own computation the result of the survey seen on table 1, above, showed that most respondents, both from nbe and aemfis placed higher weights to financial performance and their indicators, unlike the previous study kipesha (2013) who employed the same approach in the tanzanian mfis and found that, experts in his study gave higher weights for non-financial performances. the other study that could mediate the differences between kipesha (2013) and the current study is (nanayakkara and iselin, 2012) which says mfis, in their performance reporting, give the most emphasis to the financial perspective of the bsc. beside kipesha used opinion of the studied mfis mangers in tanzania unlike the current study which used independent experts in supervisory institution and industry association might explain the difference of weight assigned to financial and non-financial performance measures in this two study. for the fact the opinion of independent professionals were used in determining weight to be assigned in the current study, the management comprehensive performance measurement for microfinance institutions in ethiopia 175 biases in identifying higher weights to performances measures and dimensions is believed to be minimum in this study. it could also be observed from the results on table 1, profitability and sustainability of ethiopian mfis, categorized under financial perspective in the bsc model in this study, should the major area of concern as per the opinion of experts at mfis supervision division of nbe and aemfis. previous studies on performance of ethiopian mfis (kereta, 2007; yisraw, 2008; letena, 2009; abate, borzaga & getnet, 2013) consistently found encouraging performance with respect to sustainability and profitability though variation across institutions of different size. taking the findings of previous studies, it could be inferred that, the need for better profitability and sustainability of mfis in ethiopia is given a higher emphasis. so far, as it couldn’t diverse outreach objective, profitability and sustainability are desirable. in this regard as well, previous studies showed ethiopian mfis had been performing well in terms of outreach indicators. (bamlaku, 2006 & kereta, 2007) and a study by kereta (2007) reported there was no tradeoff between sustainability and outreach. nevertheless, to this low performance in depth of outreach reported by letena (2009), may raise a doubt on possible negative consequence of high emphasis for financial performance. further, the trade of between sustainability and outreach on letena (2009) and the concern of yesraw (2008) on the sustainability of small sized mfis that had a better outreach is also be the underpinning for high emphasis on financial performance in ethiopian mfis. 4.3. weight assignment for performance indicators in bsc perspectives based on a 100%, the expert participated in the survey provided a higher weight to financial performance (52%). five major financial performance measures were presented for the experts to divide total weight of 100% to each of these five measures. as shown on table 1 above, on average operating self-sufficiency (oss) received the highest percentage (30%) followed by adjusted rate of return on asset (19%). portfolio at risk and loan loss rate each received 18% each. the lowest weight, 15% was assigned to adjusted rate of return on asset. though high emphasis given to overall financial performance, the specific weight to each measure provided favorable view, for the fact that the more weight to oss compared to profitability measure (aroa, aroe) may explain more interest on covering operational costs from operating revenue, which ensures independency of donation and subsidy that could make the mfis to have sustainable business models. this can be strengthening by the lowest weight given to aroe compared with even indicators of portfolio quality. based the opinion of managers and experts the non-financial perspectives was given to account for 42% of the overall weight assigned to financial and non-financial dimensions of bsc. the weight assigned for various components of nfp are as follows: of the total of 42 % weight assigned to nfps, customer perspectives (cp) received the highest weight (16%). experts were also asked to allocate a total of 100% to five measures of customer perspective. as shown on table 4.1, above, on average pcnc received the highest percentage (26%) followed by pcnc (25%), pwb and cs receive 17%. the lowest weight, 15% was assigned to cso. internal business process: the second nfp, learning and growth were given 15% out of a 100 % that experts provided with respect to the three nfp. five internal business process measures were also presented for the experts to divide a total weight of 100% to each. as shown on table 4.1, above, on average roel received the highest percentage (34%), followed by cis (25%). bplo and dlap were also received 19 % and 14% respectively. yet the lowest weight, 8% was assigned to re. learning and growth under the non-financial perspective based on a 42%, the expert participated in the survey provided (11%) to learning and growth. five major internal business process measures were presented for the experts to divide total weight of 100% to each of these five measures. observed from table 4.1, on average iis received the highest percentage (33%) followed by es (23%). whereas, et, i and received 19 %, 15%, and 10% respectively. 4.5. evaluating financial performance measure using after a weighting given to performance dimensions and parameters since some financial and non-financial performance are measured using different parameters converting numbers and ratios in to likert scale is relevant to make it comparable. with the exception of pcnc, pwb, pcvs, bplo financial parameters already have an eyerusalem kebede refera 176 equivalent scale developed by national bank of ethiopia. based on the opinion of experts from the mfis, association of ethiopian mfis and nbes the ratios have been rated using a five point likert scale, as shown in table 2. table 2: benchmarks to change ratios and numbers in to five point likert scale fp indicators 5 4 3 2 1 aroa >3% 2% to3% 1% to1.9% 0% to 0.99% < 0% aroe >20% 15%-20% 10% to14% 0% to9% < 0% oss >130% 120% to129% 100% to 119% 90% to99% 0% to 89% roel 0% to20% 21% to25% 26% to30% 31% to 40% >41% par > 30 days 0% to3% 3.1% to 6% 6.1% to 9 % 9.1% to12% >12% pcnc/b 20% to 30% 15% to 19% 10% to14% 5% to9% <5% pwb ‟> 45% 45% to 40% 39% to35% 34% to30% < 30% pcvs 35% to 30% 29% to 25% 24% to15% 4% to14% <4% bplo 800 to 700 699 to 600 599 to 500 499 to 400 <400 source: survey result and own computation, secondary data from nbe 5. conclusion bsc is capable of giving comprehensive or holistic picture of performances of mfis. therefore, the government (through the regulatory organ) should introduce a system that will enable mfis operating in the country to use different dimensions of bsc performance measures together with financial performance measures. aemfi should support and build the capacity of mfis towards using bsc in measuring their performance, for example through revising their performance reporting content. the use of bsc will give the management of any organization a comprehensive view on the financial and non-financial performance. so, the management of mfis should introduce and study the use of bsc in measuring their respective performance. references abate g. t., borzaga c., & getnet k. 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(2012). financial performance and social goals of microfinance institutions, potsdam economic paper 2, potsdam university press [online] athttp://verlag.ub.uni-potsdam.de/ international journal of commerce and finance, vol. 6, issue 2, 2020, 62-71 62 are fiscal deficits really inflationary? an investigation into ethiopian experience minyahil alemu haile jimma university, ethiopia received: june 11, 2020 accepted: oct 01, 2020 published: oct 02, 2020 abstract ethiopian macroeconomy has been characterized by enormous disequilibria explained by galloping inflation, increasing unemployment, inadequate balance of payments, mounting burden of debt and fluctuating output. only recently the country’s income growth is reported to register relatively stable rate, leaving other indicators unsteady. this study establishes long-run relation between budget deficits and inflation while controlling for money supply, owing to the justified links between deficits and money supply especially across developing countries. the study employed time series data with temporal coverage of 1980-2018. augmented dickey fuller has tested nonstationary for all series, but with all stationary at first difference. engle-granger (1981) approach tested long-run relation between budget deficits, money supply and inflation. due to laney and willet (1983) the conventional least squares method was adopted to establish long-run relation among the three variables. the long-run results evidenced that fiscal deficits and money supply have been at the root of galloping inflation in ethiopia. there is also evidence that, budget deficits have been the root cause of money supply growth in ethiopia; while giving support to a view that, governments of less developing countries resort to monetize large portion of their deficits. there is need to reform the fiscal aspect of the government, if the mounting rate of deficits has to be lessened. budgetary imbalances can be rectified through enhancement of domestic capital market and setting limits on central bank borrowing. besides, it could be vital to expand the tax base as well as intensify efficiency of the existing tax system in the country. keywords: cointegration, ethiopia, fiscal deficits, inflation, money supply, stationarity 1. introduction monetarists demonstrate one-to-one relationship between money and price, as clarified in the conventional quantity theory (milton, 1971; keynes, 1936; snowdon and vane, 2005); where neutrality of money is a key contemplation. the cambridge schools portrayed vibrant distinction between demand for and supply of money. money demand is basically associated to transactions, having positive relation to aggregate money expenditure. in the national income identity the expenditure and income approaches are interchangeable; hence, the cambridge version of qtm for long-run money demand can be given by the identity (md = kpy), where k is the portion of value of national income (py) that agents wish to hold. we should be aware here that, k could change in the short run (laidler, 1993); but, in the above equation k is fixed. if we assume money supply is exogenous, equilibrium in the money market satisfy the condition m = md. this conceptualization modifies our model as m = kpy. with k and y constant, any change in m proportionately changes p. a lesson could follow that; the long-run process of inflation could be understood as response to growth of money supply in the system. as long as the supply of goods and services is constrained by presumed full employment output level, disequilibrium in the goods market (gd > gs) gives rise to general price at a rate of initial growth in money supply (snowdon and vane, 2005; olson, 2010). with k and y fixed (especially in the long-run) budget deficits become an issue. we have seen above that money have no long-run effect on real variables. if so, any addition to the existing balance could only aggravate the cost of inflation. to afford livelihood at a new price, agents could resort to borrow elsewhere alternatives are there. at macro level, the same scenario could be reflected in the form of budget deficits. when money supply growth exceeds the demand for cash balances at the prevailing level of price, an excess purchasing power of goods and services in the economy could result in higher price level. hence, budget deficits become inflationary since money supply grows in excessive rate than required to maintain the normal operation of the system. that means, central banks tend to inject more money to finance initial deficits, and this additional balance could further aggravate inflationary pressure in the system. budget deficits, money growth and inflation oscillate with only neutral effect on real variables in the long-run (see romer, 1993; yamaguchi, 2013; mankiw, 2010). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e are fiscal deficits really inflationary? an investigation into ethiopian experience 63 empirically, the linkages among money supply, inflation and budget deficit remain inconclusive. in their practical work some used to evidence the causality in reverse. for example (hoang, 2014; abizadeh and yousefi, 1998; mukhtar and zakaria, 2010) confirmed insignificant relation between budget deficit and inflation; while (yemane, 2008; minyahil et al, 2016; yamaguchi, 2013; nurmadihah et al, 2011; habtamu, 2013; rebecca, 2014; kenneth and anthony, 2015) presented that high and persistent budget deficits would give rise to persistent inflation, via its initial impulse on money supply. this indicates that, the dynamics of macroeconomic variables is indeterminate despite several theoretical foundations with them most; thus, there is a need to have empirical updates of their behavior across time and countries. budgetary imbalances can be redressed by borrowing (external or domestic) or money printing, the latter being only inflationary in the long run as explained by the qtm (milton, 1971; rebecca, 2014; abate and rao, 2015). a country can finance its deficits through foreign borrowings, domestic borrowings (non-bank and the banking sector) and money creation. developing countries resort to monetary financing as it is not easy for them to access external borrowing. in support of this argument, shahin shown that, developing countries used to finance about 72.8 per cent of their deficits through money creation (see shahin, 1992). as a result, most of the inflationary cases in these countries have reported to have monetary base. this scenario also gives farther support to the hypothesis of classical economists, on their proposition through qtm. it is a general belief that since developing countries can’t borrow as easily as developed countries, they resort more to monetize deficits. deficit financing is viewed inflationary when it is monetized compared to debt financing (shahin, 1992; saleh and harvie, 2005; sargent and wallace, 1981). the justification for the later approach follows that, debt financing can impose only short-lived inflationary pressure if the government temporarily borrows from the central bank (domestic source) but does not repay the loan in a moment such that it could let money supply grow in unjustifiable rate and level. in short, the loan should be paid back considering the time and trend in the development of money supply, as well as the general macroeconomy. as external borrowings are usually absent or costly, developing countries tend to borrow from domestic sources especially the banking sector. we, therefore, expect budget deficit to associate positively with inflation in ethiopia; given that deficits being more of monetized in the country. nonetheless, there is a need to recognize the opportunity for ethiopia to access funds from multilateral organizations like, international monetary fund (imf) and the world bank (wb), in the form of external financing. if the borrowed fund is properly utilized for the intended purpose, deficits will be less inflationary. a problem with developing countries is that, foreign borrowings are diverted towards unintended purpose and usually embezzled by the officials close to them. consequently, these foreign borrowings serve nothing towards the national wellbeing, except their inadequate pressure on the economy in the form of income inequality, rising government debt, increasing money supply, rising inflation and decline in the welfare of the poor (yamaguchi, 2013; rebecca, 2014; kenneth and anthony, 2015). given that those multilateral loans to ethiopia have been properly addressed, then we expect only part of the budget deficits to be mitigated by money creation. in this case, the relation between budget deficits and money supply couldn’t be proportional. with ethiopia’s multidimensional poverty and depraved corruption profile, we however, suspect the effective use of multilateral loans; while forming one-to-one relation between deficits and money supply. for the past ten to fifteen years growth in reserve money and budget deficits was dramatic in ethiopia. this is due to the government’s commitment to rehabilitate the lagging economy from war and inadequate policies with previous regime (world bank, 2004; tadesse and guttormsen, 2008). yet, relatively better economic environments for private sector participation gave rise to money velocity, and hence persistent inflation during after the death of command system. one advantage for the coming administration could be the paused war, which has an important implication with the fiscal position whereby reducing military expenditures. however, the lost receipts from bilateral relations, particularly from soviet union, left fiscal position the same. for instance, gross public expenditures during 1991/92 decreased by about 24 per cent; and that, the government revenue declined by around 21 per cent. it is obvious that; changes in both fiscal components were almost equal with null net value. consequently, the new government has aggressively used central bank borrowing and money creation to finance deficits; this has long been at the root of galloping inflation (alemayehu and kibrom, 2008; shibeshi, 1994; leaning et al, 2009; abate and rao, 2015; habtamu, 2013). ethiopia is not an exception to the features of developing economies with reference to fiscal hypothesis. the country’s extreme reliance on monetary financing of deficits, due to lacking access to foreign borrowing, might manifest long lasting costly inflation. because of sustained legacy of economic commitments through budgetary minyahil alemu haile 64 growth in ethiopia, examining the long run dynamics of fiscal deficits with other macroeconomic variables would be inevitable. this study employs time series of yearly data from ethiopia to determine whether budget deficits are inflationary. the temporal coverage was from fiscal year 1980/81 and 2019/20. it establishes the long run relation between budget deficit, money growth and inflation to ethiopian context. 2. research methodology 2.1 the data the study used annual time series data for government budget deficit, money supply (m2 + quasi-money) and cpi accounted inflation. the world bank data catalogue was our source. the temporal coverage ranges between 1980/81 and 2019/20. all variables were converted to natural logarithmic form for the purpose of coefficient efficiency based on (yamaguchi, 2013; minyahil et al., 2016; humphrey, 1998). therefore, the series of temporal observation totals 38; which is fairly sufficient to determine the long-run dynamics from a developing nation, such as, ethiopia. 2.2. model specification 2.2.1. the theoretical model monetization of deficit is the practice by which a rise in government deficits could give rise to money growth, and which in turn is reflected in the form of high inflation in the long-run (rita, 2012; keynes, 1936; milton, 1971; shahin, 1992). fiscal shortfalls may cause money creation following political pressures to mitigate government financing gaps, which is hypothesized to be common across less developed countries. literatures contend that, there are often political pressures in favor of money creation to financing deficits on the part of the monetary policy across developing countries. central banks (government banker) operate to the will of the government, and are tremendously responsive to the political demands of monetizing deficits. government policy affects monetary policy when monetary policy makers respond to an increase in the rate of interest following an initial upswing in government central bank borrowing. for the purpose of interest rate targeting, monetary policy tends to raise money growth buying government securities. moreover, fiscal deficits can influence money supply if countries borrow from abroad making the international element of high-powered money high, which in turn, raises the monetary base without comprehensive sterilization (haan and zelhorst, 1990; shahin, 1992; kenneth and anthony, 2015; humphrey, 1998; minyahil et al., 2016). fiscal policy may also influence monetary policy because of time inconsistency problem monetary authorities could face; i.e., if interest rate (nominal) on government debt is fixed, authorities will have an incentive to produce an unanticipated inflation. this has an important implication to the government, capital gain by the government following reductions in the real value of debt. note however that, this helps only if the government debt is denominated in domestic currency (ibid). shahin (1992) links budget deficits to inflation in two important channels. he motivated his demonstration based on the classical hypothesis that inflation is largely resulted from fiscal incompetence leading to monetization of deficits. besides, he explained in relation to the bop, in which deficits are believed to cause deficits in current account balance farther causing shocks in the exchange rate. the later event appear to depress the value of domestic currency whereby leading to high inflationary expectation. inflation would occur as a result. this study, however, uses the first hypothesis linking budget deficits to inflation through money growth as it would be particular to developing countries. 2.2.2. an empirical model based on the above theoretical foundation, this study adopts an empirical model to establish the long run relations between budget deficits, money supply and inflation from ethiopia. following (rita, 2012; laney and willet, 1983; niskanen, 1978; egwaikhide et al., 1994) the below long-run model has been adopted in this study. a major improvement rests on the extension of the number of observations and variables definition. uncommon with them all, cpi accounted inflation was taken in the current analysis. besides, our definition of money supply was extended to include quasi-money capturing the effect of actually circulating balance. the relationship is specified as follows; inft = β0 + βi t-i + βj t-j + ut ……………………………….. (1) are fiscal deficits really inflationary? an investigation into ethiopian experience 65 where inf stands for inflation rate measured as annual percentage change in consumer price index, ms represents money supply (broad and quasi money); and bd is budget deficit. ut is white noise error term normally independently and identically distributed; ut  iid (0,  2). 2.3. the unit-root test the unit root properties of individual series were examined using the augmented dickey-fuller (adf) approach (dickey and fuller, 1979). adf requires regressing the first difference of the response variable (δyt) on a constant, a time trend (yt-1) and lags of the dependent variable, specified as follows; yt = α0 + t + yt-1 + yt-i + t…………………………… (2) where  is first difference operator; α0 is a constant; γ represents trend coefficient; t stands for time/trend term; and k are the lag size. null hypothesis is, h0:  = 0. rejection of the null implies that, a time series under consideration contains a unit root problem. the adf test is based on the t-ratio of the yt-1. if it exceeds the adf critical at any one of the three benchmarks (1%, 5% or 10%), hence the null will be rejected, and yt is said to be stationary. nevertheless, if yt is tested non-stationary, the first difference δyt should then be tested for stationarity using the same procedure; and the procedure will continue until it is stationary. but, in most of the cases economic and financial data are stationary at first differences. the size of k is often determined empirically, to take sufficient size so that the error term is indeed serially uncorrelated such that we obtain unbiased estimate of ). the appropriate lag is set, for instance, based on minimizing akaike information criterion (see gujarati, 2004; wooldridge, 2013; maddala, 1992). 2.4. the cointegration test as long as the monetarists’ demonstration focuses on the long-term, we first need to examine whether the variables exhibit long-run equilibrium stable relationship. if no cointegration is tested in advance, the analysis must break with no need of moving ahead. for cointegration purpose, the engle-granger (1987) method was employed to test a null of no cointegration, against the alternative. the null hypothesis depicts that, the ols residual obtained from level form regression contains a unit root, examined through adf test. if the null hypothesis is true, then the variables couldn’t exhibit common long-run path. thus, we conclude the series are not cointegrated. engle-granger examines if residuals of the equilibrium relationship are stationary. details for this approach can be understood using the below static model; yt = 0 + 1xt + t……………………………….. (3) a primary requirement with eg method is all variables integrated of order one; yt, xt  i(1). given this condition is satisfied, we run ols regression using equation (3) to obtain ols residuals. we, then, run adf regression on the residual at level to determine if it is stationary. if the residual is non-stationary, conclude that there is no cointegration between the dependent and independent variables (engle-granger, 1987; gujarati, 2004). note that, stata statistical software package version 14 was used for every regression analysis throughout this study. 3. analysis results and discussion 3.1. stationarity test results inflation, money supply and the fiscal deficit variables were all subjected to adf unit root test to determine if they are stationary at level. the aic minimizing lag for three of the individual series was suggested one. in none of the three level cases is the null hypothesis rejected, while the first differenced terms revealed stationarity. minyahil alemu haile 66 table (1): the adf stationarity test results: temporal coverage (1980-2018) level form first difference variable t-stat. critical at: variable t-stat. critical at: 0.001 0.005 0.1 0.01 0.05 0.1 lninft-1 1.562 -3.668 -2.966 -2.616 lninft-1 -4.839** -3.675 -2.969 -2.617 lnmst-1 -2.017 -3.675 -2.969 -2.617 lnmst-1 -6.732** -3.682 -2.972 -2.618 lnbdt-1 1.065 -3.668 -2.966 -2.616 lnbdt-1 -4.680** -3.675 -2.969 -2.617 **rejection of the null hypothesis at 1 per cent source: own computation using stata 14 (2020) evident from table (1) is all series with unit root problem in level form, demonstrating difference stationarity with first order. hence, all are integrated of order one, hence eg method. 3.2. engle-granger cointegration test result after examining unit root properties, the eg approach for cointegration was used to test the null of no cointegration. the adf test was again employed to examine the unit root property of residuals obtained from estimation of conventional ls model in level form. as discussed so far, stationarity in the residuals will reject the null hypothesis. table (2): engle-granger (1987) cointegration test for ols residuals variable t-stat. critical value at: decision 0.01 0.05 0.1 ectt-1 -7.666*** -3.675 -2.969 -2.617 reject the null hypothesis dependent variable: ectt null hypothesis: ect is nonstationary *** rejection of the null at 1 per cent significance level source: own computation using stata 14 (2020) evident from table above is significant t-stat of the ecm, rejecting the null hypothesis of no cointegration at 1 per cent. hence, there is evidence for the existence of cointegrating equation among the series under consideration. inflation, money supply and budget deficit variables of ethiopia have stable and long-term equilibrium relationship. now it’s time to modify our basic model (equation 1) since the variables are all nonstationary; i.e., since they have unit root problem in the level form. in contrast, the specification in equation (1) is in level form, which is subject to the problem of spurious regression. thus, equation (1) is remodeled in first difference as follows: δlninft = β0 + βi t-i + βj t-j + β3ectt-1 + ut………………. (4) ect stands for error correction term, whereas ut is the residual. note that, an auxiliary ec term in equation (4) is due to the evidence of cointegration among the series. evidence from table (2) reveals the variables are cointegrated at 1 per cent level of significance; consequently, the use of error correction term. 3.3. evidence from the long-run model the conventional least squares method was employed to determine if budget deficits in ethiopia is inflationary, while controlling for the effect of money supply. the validity and reliability of issues were addressed in line with ols assumptions, and none has failed the pass test. residuals normality, homoscedasticity, residual independence, omitted variables bias and multicollinearity issues were satisfied with individual test. after passing through the are fiscal deficits really inflationary? an investigation into ethiopian experience 67 necessary pre-estimation examinations, ols was directly estimated with all variables differenced once. table (3) below reports the result: table (3): the long-run regression result (1980–2018) regressors coef. std. err. t-stat. lninft-1 -0.1890 0.0667 -2.83*** lnmst-1 0.5857 0.0416 14.06*** lnbdt-1 0.1179 0.0243 4.85*** ectt-1 -0.9516 0.0591 -16.09*** response variable: lninft null hypothesis: h0: βj = 0 f(4, 33) = 1798.25[0.0000] r2= 0.9954, = 0.9949 lag length (aic): 1 t0.05, 33 = 2.042 obs.= 38 *** rejection of the null at 1 per cent level of significance source: own computation using stata 14 (2020) with all precautions noted regarding the applicability of r2 (spurious regression and large but irrelevant regressors in the model), the reported (r ̅^2=0.9949) grants the strength of money supply and fiscal deficits in explaining the long-run process of inflation in ethiopia. a unit lag used to estimate model (4) was suggested by aic. parameter stability test was conducted viz cusum and cusumq, and the presence of stable relation over the sample period was confirmed. besides, the reported probability for f-stat was significant, demonstrating an overall relevance. in none of the cases (table 3) was the null hypothesis (h0: βj=0) accepted, while indicating the importance of all regressors in the long run process of inflation. all were reported significant at 1 per cent. a significant negative sign for ect is suitable as required for vigorous stability of the system. an implication with the estimated coefficient of error correction term is that, there is stable equilibrium relationship between inflation, budget deficit and money supply in ethiopia. the reported coefficient of ect(-0.9516) indicates the speed of adjustment towards the longterm equilibrium point. inflation adjusts about 95 per cent of previous changes in money supply and budget deficit this year. thus, a year is not sufficient to restore complete stability in the system. the remaining 5 per cent will be restored back within 26 days of the next year. an interesting thing is that, the time period required for complete adjustment is short, as it takes less than 13 months. current inflation seems to associate inversely with previous year inflation in ethiopia. several arguments exist for such inflationary experience; (alemayehu and kibrom, 2008; lozano, 2008; kenneth and anthony, 2015; demeke, 2007; kibritçioğlu, 2002; kflindo, 1997; hoang, 2014) explain it in relation to the role of price in determining the extent of investment. when falling prices tend to dampen production at any instance, the level of products will certainly fall the next period. missing or incomplete information coupled with prevalent uncertainties, most commonly in food sector, investors lose their confidence. how long it takes the price falling? in ldcs, responding to this question is not such an easy task; firms in these countries become unable to predict price movement (humphrey, 1998; kenneth and anthony, 2015). the cumulative effect of persistent fall in general price leads to the shortage of goods and services; hence rise in price level. such a negative association between current and previous inflation is also subjected to agents’ expectation of inflation. in this case, people consider current price collapse due to demand fall; and consequently assume that, the government will be working towards intensifying aggregate demand. it might involve expansionary fiscal and monetary policies that could inject additional money into the system. with this expectation agents’ act today in a way to protect them from higher prices tomorrow. this involves hoarding of foods stuffs and other basics, while leaving pressure on tomorrow’s market and the economy at large. minyahil alemu haile 68 all this leads to price surge next period given that supply side is not responding in parallel (loening et al., 2009; alemayehu and kibrom, 2008; hoang, 2014; mukhtar and zakaria, 2010) neither fiscal deficits nor money supply is estimated insignificant in explaining the long-run process of inflation in ethiopia (table 3). besides, both series exhibited the right sign towards validating the monetarists’ hypothesis to ethiopian context. the positive coefficient of budget deficits manifest the government’s practice to monetary financing of deficits, which as explained by qtm is extremely inflationary. the finding is consistent to notable arguments with ldcs that since with less opportunity to external borrowings, they are more likely to borrow from the central bank, and print money to finance deficits (shahin, 1992; yemane, 2008; rita, 2012); and due to its obvious effect on money supply (keeping full employment output) could give rise to inflation in the long-run. indeed, the results of the current study provide evidences that the qtm is still alive in ethiopia. empirically, this finding is similar to previous works by yemane (2008) for ethiopia; minyahil et al. (2016) for ethiopia; sajid and riaz (2016) for pakistan; yamaguchi (2011) for japan; and hoang (2014) for vietnam. 3.4. long-run response of money supply to changes in budget deficits conceptually, the effect of budget deficits on inflation is explained in terms of duration (time horizon) and the way it is mitigated. according to (mishkin, 2004; sargent and wallace, 1981), if government deficit is permanent and is monetized, it will give rise to high inflation. similar argument holds that, if deficits are financed by issuing government securities (bonds and treasury) that are purchased by non-bank entities and hold them until their maturity, fiscal deficits do not give rise to money growth and inflation rates. money is, thus, the conceived channel through which the effect of deficits transmits to inflation in the long-run. the conjectural pathway from deficits to inflation places money supply in between. hence, we need to test whether money is a right channel to price surge following government’s budgetary shortfalls. for this purpose, we have regressed money supply on budget deficits while controlling for inflation using the conventional least squares method. below is the result: table (4): the long-run regression result (1980–2018) regressors coef. std. err. t-stat. lnmst-1 0.0466 0.0342 1.36 lnbdt-1 lninft-1 1.0188 -0.0587 0.0509 0.0783 20.01*** -0.75 ectt-1 -0.0911 0.0456 -2.00** response variable: lnmst null hypothesis: h0: βj = 0 f(4, 33) = 3526.42[0.0000] r2= 0.9977, = 0.9974 lag length (aic): 1 t0.05, 33 = 2.042 obs.= 38 note that, *** and **, respectively, are rejection of the null at 1 and 5 percent. source: own computation using stata 14 (2020) the reported sign for the coefficient of the ec term is appropriate and significant, demonstrating the existence of long-run equilibrium relation in the new system. towards validating the sargent and wallace (1981) hypothesis, a positive and strongly significant coefficient of budget deficits was estimated. besides its appropriate sign, the relationship between money supply and budget deficits suggested is one-to-one. this finding provides important implication to fiscal hypothesis; the whole of budget deficits in ethiopia have been being monetized. to be clear, the goe has been mitigating its budgetary gaps only by borrowing from the national bank of ethiopia, or else by printing new currency. e the past ten years ethiopia has been busy running the great renaissance electric dam (gred) project, which absolutely is based on domestic funds due to the country’s restricted access to international borrowings against hydro are fiscal deficits really inflationary? an investigation into ethiopian experience 69 political tensions. we, thus, suspect the project has been at the root of huge budgetary discrepancies the country was experiencing. the estimated strong coefficient of budget deficit variable tells us the inadequacy in home side voluntary contribution relative to the projected cost of the gred project. consequently, the only practical tool for the goe to finance the project could be to create money. the finding seems to expose the hidden, but factual, economic and financial events in the country. hence, there is evidence for ethiopia that, increase in deficits would give rise to inflation through its impulse on money supply. this finding gives empirical support to (shahin, 1992) and consistent with (minyahil et al., 2016; keho, 2016; yemane, 2008; tsegay and rao, 2013; sajid, 2000; kflindo; 1997; shibeshi, 1994; loening et al., 2009). 4. summary, conclusion and policy implications this study was aimed to establish the long-run relation between budget deficits and inflation from ethiopian economy, while controlling for the obvious role of money supply. money supply was visited by recognizing the theoretical implication of deficits with monetary bases of the system, more often across developing economies. the temporal coverage of the study ranges between the fiscal years 1980/81 and 2018/19. the adf test has indicated that; money supply, inflation and budget deficits variables are all integrated of order one. the suggested order of stationarity for all has permitted the use of engle-granger (1981) cointegration test, and that the existence of longrun relation among the variables has been confirmed too. the conventional least squares regression was employed to establish the long-run relation among the series entered the inflation and money supply model. several tests have supported various statistical requirements for ols models, and the result for every assumption underlying the model was robust. there is evidence that, the long-run relation among budget deficits, money growth and inflation is strong in ethiopia. the long-run results show strong and significant impact of previous government deficits and money supply on current inflation. the finding proves the hypothesis demonstrating the large intensity for monetary financing of deficits across developing countries; which is elucidated to surge the rate of inflation. the hypothesis could be farther trusted realizing the positive and strongly significant coefficient of budget deficit, where money supply was a response variable. the implication is that, a positive impulse from budget deficits to inflation transmit through the vacuum of money supply. thus, evidence from ethiopia validate the argument that, ldcs resort to monetize large proportion of their budgetary deficits. consequently, the findings of this study evidence that the goe has been mitigating its budgetary gaps by central bank borrowing or creating money. the results of this study have important policy implications. firstly, there is need to appreciate a large response of long-run inflation to budget deficits and money supply. secondly, it would be important to acknowledge money supply being an important channel through which the effect of budget deficits transmits to inflation. it would be helpful to restrict the growth of money supply by tightening monetary policy towards ensuring steady growth in money supply at rate of real output. this is due to the evidence of high pressure from money supply in both dimensions; i.e., in self-contained dynamics and through its strong relation to budget deficits. besides, there is also a need to limit government central bank borrowing to mitigate its fiscal gaps. government reliance on central bank borrowing could be reduced by enhancing the development of domestic capital market; which is, either missing or weak in ethiopia. with regard to fiscal issues, it is essential to limit government’s general economic intervention to reduce the expenditure side of the fiscal target. the declining share of the government could be moderated by enhancing private sector participation through various incentives; which is acknowledged for its multidimensional efficiency in the general economic system. enhancement of the joint ventures and private investments would be wiser approach to reduce government spending. from the revenue aspect, several restructurings need to be commenced in the revenue system of the country. expanding tax base (introducing new source of tax income), intensifying efficiency in the tax collection system (involving digitizing tax scheme, awareness creation and regular audit) and investing in business projects would help. minyahil alemu haile 70 references abate and rao (2015): “cointegration analysis of money supply and price in ethiopia”, research article, 16(3) pp.72-79. abizadeh and m. yousefi (1998): “deficits and inflation: open economy model of the united states”, applied economic research, pp.107-316. alemayehu g. and kibrom t. 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(2008): “budget deficits, money and inflation: a case of ethiopia”, research article, 42(1), pp.18-199. international journal of commerce and finance, vol. 4, issue 1, 2018, 52-65 52 delivery terms in transport process of export trade and their effect on the risk of discrepancy in documentary letters of credit; evidence from estonia hamed alavi, (phd candidate) estonian business school abstract: documentary letters of credit (dlcs) are method of payment developed to facilitate the process of international trade by replacing the payment risk of importer with irrevocable payment guarantee of a bank to exporter. instead, the exporter is supposed to prese nt fully compliant set of documents required by the credit. documentary nature of dlcs make them vulnerable to the risk of discrepancy. this risk is will affect exporter’s business as he is the one who should absorb it. therefore, it will be recommended to exporters to negotiate the minimum number of required documents while closing the underlying contract of sales with importer. since different delivery terms (incoterms) require presentation of different documents, this paper studies the correlation between using different terms of delivery with existence of discrepancy in export dlcs in estonia. for this purpose, author takes empirical approach to answer following research questions: what is the relation between documentary discrepancy and choice of delivery terms and third party documents? and what is the correlation between above mentioned factors and documentary discrepancy in process of dlc operation in estonian export landscape? the paper is divided into four parts: after the introductory section, the literature review will briefly analyses process of international dlc operation and latest version of incoterms plus their role as delivery terms in international trade. next section will discuss methodology and results of empirical study done on choice of delivery terms and third party produced documents on discrepancy rate in dlc operation in estonian export trade. last but not the least, final section will provide conclusions of the study. 1. introduction international traders deal with more tangible and intangible risks that their counterparts who only trade in local markers. such risks (from pre-order placement stage till final delivery of goods) are mostly relevant to the complex process of international trade and need for considering plenty of steps for successfully closing a single deal overseas. among others, financial risks are considered as a significant concern for exporting parties in international sales contracts. there are different ways to mitigate the financial or payment risk for exporters, however, documentary letters of credit are an appealing payment method among others (alavi 2017, 29), while being considered as “the life blood of international trade”, dlcs are in fact a complex method developed by traders in the course of time to reduce the risk of payment by buyers (alavi 2016b,5). accordingly, a bank guarantees the payment of shipped goods to the exporter in return for presentation of fully compliant documents with terms and conditions of the credit. in this way, a guarantee of payment by bank as a financial institution has been replaced by payment obligation of importer with much less credit standing. as a result, dlcs have mainly application in cases of international trade between parties with no solid information from each other’s financial background or parties from riskier regions (alavi2016a ,118). there is no public data on amount of dlc transactions annually (bergami 2006, 54). however, in 2003 the turnover in the usa was approximately usd 51,648 million (documentary letter of credit world 2003). total amount of trade in the usa at the same period of time was about usd 1,922,724. (the us international trade commission 2004) therefore, it is possible to conclude that dlcs stand as a method of payment for 4% of international trade. there is no public information about amount of dlc transactions in estonia. interviews with trade finance officers of estonian banks offering export dlc service to their clients did not result in any meaningful result. the reason can be high level of confidentiality established between banks and their clients as a prerequisite for offering such service. the process of dlc operation is subject to uniform customs and practices for documentary letters of credit (currently ucp 600) promulgated by international chamber of commerce. ucp subjects the operation upon two in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e delivery terms in transport process of export trade and their effect on the risk of discrepancy in documentary letters of credit; evidence from estonia 53 principles of autonomy and strict compliance. article 4 of the ucp separates the dlc from underlying contract of sales by providing: “a. a credit by its nature is a separate transaction from the sale or other contract on which it may be based. banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary. a beneficiary can in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank.” further, article 5 emphasises that in the process of dlc operation, banks do not consider goods and only pay attention on compliance of documents: “banks deal with documents and not with goods, services or performance to which the documents may relate." the sole dependency of dlc operation on documents is known as principle of strict compliance. accordingly , the beneficiary exporter is eligible to receive payment only in case of full compliance of its presentation with terms and conditions of the credit. however, not all documents required in the credit are produced by exporter. the bill of lading, document of insurance and certificate of origin are famous documents which their production is not under the control of exporter. to make the situation even more complicated, choice of different delivery terms (incoterms) directly affects the process of documentary presentation as different terms require different documents to be presented. the totality of complex process of dlc operation leads to high rate of rejection of exporters presentations by bank. the result of global study done by icc shows that 60-70% of presentations are rejected by banks due to non-compliance (icc bankok 2002). these results are confirmed in a study done by mann in the united states . on the other hand, magnitude of non-compliance does not have any effect of bank’s decision to dishonour the presentation (any single discrepancy is sufficient for rejection). as a result, exporters are facing risk of rejection due to need for presentation of documents which they have no control over their production. outcome of dishonouring a presentation by bank can differ from late payment and extra costs for rectification of documents to imposing bad debts on exports due to documentary discrepancy. in this paper, author tried to study role of delivery terms and third party documents in process of documentary presentation in dlc operation within the context of estonian export trade. for this purpose, research questions are formulated as what is the relation between documentary discrepancy and choice of delivery terms and third party documents? and what is the correlation between above mentioned factors and documentary discrepancy in process of dlc operation in dlc in estonian export landscape? for this purpose, paper is divided into four parts: after the introductory section, the literature review will briefly analyse process of international dlc operation and latest version of incoterms plus their role as delivery terms in international trade. next section will discuss methodology and results of empirical study done on choice of delivery terms and third party produced documents on discrepancy rate in dlc operation in estonian export trade. last but not the least, final section will provide conclusions of the study. 2. literature review 2.1. the process of international dlc operation choice of dlc as a method of payment for an international sales contract will itself lead to a complex web of additional contacts (bergami,2006, 50). in this process, after signing the contract of sales between importer and exporter, the importer will ask her bank to open a dlc in favor of exporter. the issuing bank will inform the exporter about request for issuing a dlc via using her correspondent bank is exporter’s country (advising bank). at this stage, exporter should check all terms and conditions of the credit and ask for amendment in case of facing with any problems. after accepting terms and conditions of the credit, issuing bank will sign a contract with exporter and guarantee payment for goods shipped to importer in return for compliant presentation of documents stipulated in hamed alavi 54 the credit by issuing it officially. exporter might ask for further guarantee which will lead to involvement of confirming bank and additional contracts between exporter and issuing bank with it. next step will be shipping goods to importer and collection of documents to be presented to bank. after presentation of documents, bank will examine documents and pay exporter in case of their strict compliance with terms and conditions of the credit. in case of detecting and discrepancy in documents, payment process will be delayed until its rectification or receiving a waiver from importer. it is worth to mention that postponement of delay is depending on examination of documents before the expiry date of the credit and existence of time for taking corrective action. in case of approaching the expiry date of the credit, payment will be canceled and exporter should bear the full lose. figure 1 illustrates the complex process of dlc operation. in this process, contract between the exporter (beneficiary) and bank is the main obligation for payment against presentation of compliant documents. as it is clearly visible, importer (applicant) is not a party to contract between the bank and beneficiary. as a result, and with reference to principle of autonomy (explained earlier) the bank is not concerned with performance of underlying contract of sales between importer and exporter. mere presentation of compliant documents by beneficiary will make him eligible to receive payment from bank. however, different factors affect the number and level of complexity of documents required in presentation. among others, choice of deliver terms will affect the number and complexity of documents required in presentation. figure 1 : process of dlc operation (civelek et al 2015, 64) delivery terms in transport process of export trade and their effect on the risk of discrepancy in documentary letters of credit; evidence from estonia 55 2.2. incoterms internationally recognized delivery terms applied to dlcs are incoterms which stand for international commercial terms. in the same manner to ucp, incoterms are product of international chamber of commerce and first version of them was published in 1936,(bergami 2013b,328). incoterms divide the rights and responsibility of seller and buyer in accordance chosen term of delivery by parties to the contract of sales (mudrić, 2013,410). accordingly, they indicate the moment which risk of goods in transit will pass from the seller to the buyer. (susmus& baslangic, 2015,322) currently, incoterms 2010 are in latest available version and consist 11 delivery terms which are divided into four main groups: figure 2: incoterms 2010 the minimum documentary requirement for lc would be under e group which consists of ex work( paliu-popa 2012,100). in case parties to the sales contract agree on delivery of goods under ex work, seller does not have any obligation to clear goods from customs of exporting country, arrange for carriage or insurance of goods during the carriage as delivery either takes place at seller’s premise of business or an agreed upon place in exporting country. such arrangement would obviously affect the number of documents required under lc and minimize them to the internally issued documents by seller ( stapleton et al 2014,228) there is no doubt the reducing the number of stipulated documents to ones internally produced by exporter will reduce the risk of discrepancy drastically. the exw is a risk factor in l/cs from the point of view of issuing bank. because issuing bank request the transport docs should be “issued to the order of” or “consigned to name of” their selves. but exw legally means directly delivery of the goods to the importer. this situation contradicts with logic of l/c. on the other hand, delivery duty paid (ddp) is the delivery term which will impose highest level of responsibility on the exporter as it requires the passage of risk of goods in transit from seller to the buyer after clearing goods from customs of importing hamed alavi 56 country. each of other terms in between ex work and ddp have their own characteristics and documentary requirements in letter of credit operation. group f includes fca (free carrier suitable for multimodal transport), fas (free alongside ship) and fob (free on board together suitable for maritime transport). in this group, exporter is only obliged to provide custom clearance and deliver goods at agreed point before commencement of international transport (ramberg, 2010). while under f group exporter is in need of providing further documents , there is no obligation to get inside the contract of carriage . however, he can offer such option on importers cost and responsibility which means need for presentation of transport document. group c includes cfr (cost and freight), cpt (carriage paid to), cif (cost, insurance and freight) cip (carriage and insurance paid to). entering an agreement with importer to deliver goods under group c terms will oblige exporter to present contract of carriage. additionally under the cif (maritime transport) and cip(multimodal transport) , exporter is obliged to present the document of insurance therefore, increasing number of third party produced documents would definitely effect the compliance of presentation (bergami 2006b,54). group d includes dat (delivery at terminal), dap (delivery at place) and ddp (delivery duty paid). under this group of delivery terms, exporter is obliged to place the goods at the agreed point of delivery, mainly country of the importer (bergami 2013a,37). since exporter holds the risk of delivery, insurance document is not required when group d terms are agreed upon is the underlying sales contract between parties. the proof of delivery also depends on type of documents agreed upon by parties. as it was explained, the choice of delivery term affects required documents under the dlc substantially. since some documents will not be produced by exporter, he will not have any control of their production process which might lead to existence of discrepancy because of possible mistakes made by respective producer. 3. research design due to absence of public data on estonian export trade finance and methods used by estonian exporter ting firms in reducing their payment risk, this research took an empirical approach and collected data by using bank interviews, and exporters’ survey questioners. the exporters’ survey followed the goal of measuring the correlation between the variables describing documentary discrepancies, incoterms used in estonian export dlcs and third party issued documents. data collected from the survey then supplemented with semi structured interviews with trade finance officers in three estonian banks offering export trade finance services. due to small number of banks offering export dlcs in the country, the semi structured interview method was chosen over survey method. the results of interviews were used as a complementary data providing explanation to the exporters’ survey results. 3.1. data collection and analysis after taking sampling test of three companies, survey questionnaires were administered among estonian exporting companies. the respondents to test were not included in the main sample. data collection took place between june and september 2016 while transactions done in fiscal year of 2014-15 were questioned. the interviews with the banks trade finance officers took place at the same period. number of distributed questionnaires totaled 1200 in accordance to the data in the estonian export directory (www.estonianexport.ee ). based on collected data from trade finance officer’s interviews, approximately 100 to 150 estonian exporting companies apply dlc as a method of payment in their trade. collected number of responses in september 2016, reached 41, which equals 27.3 percent of total companies. as a result, the collected data are sufficient for this research, despite of comprising a small proportion of distributed questionnaires (3.41%). among collected data one response was not valid, therefore, only 26% of the total population were responding which can be considered representative. data analysis took place by using the spearman correlation rank method in order to find the correlation between discrepancies evidenced in the exporter’s survey with selected variables. descriptive statistics, was also used to provide explanation of the correlation analysis results. the data were analyzed using the spss statistics 24. statistical significance of the results was estimated on the 95% confidence level. delivery terms in transport process of export trade and their effect on the risk of discrepancy in documentary letters of credit; evidence from estonia 57 3.2. discussion analyzing the data from figure 3 shows that cif is the most used incoterm by estonian exporters. therefore, it would be expectable that exporters are supposed to tender insurance and transport documents in addition to internal documents prepared by their own staff. fob is the second ranked delivery term which is mostly involve exporter in tendering the transport documents. despite the moderate use of multimodal transport terms, it is interesting that 70% of estonian exporters use exw which has the minimum documentary requirement and more than 90% of them do not use dat, dap and ddp with maximum documentary requirements. the other reason for lack of interest among estonian exporters to apply d terms can be traced to time factor. generally, delivery of goods to buyer under d terms will be evidenced by a delivery receipt signed by the buyer. this will impose additional risk of delivery time to exporter as transport and custom clearance process in the importing country might take more that expiry date of the credit. the outcome of the survey administered to estonian export companies shows main types of documentary discrepancies and discrepancy factors as following: errors in bill of exchange, commercial invoice, packing list, transport documents, inspection corticated, movement certificate. factors for discrepancy where identified as: late shipment, missed consignment, late presentation, missing documents, incorrect shipment, and others. figure 3 indicates frequency and types of discrepancy. number type of discrepancy frequency 1 bill of exchange 22 2 commercial invoice 36 3 packing list 32 4 transport document 30 5 inspection certificate 24 6 certificate of origin 25 7 government certificate 8 8 late shipment 19 9 missed consignment 12 10 delivery schedule 16 11 presentation after expiry of dlc 26 12 missing documents 21 13 incorrect of partial 14 hamed alavi 58 shipment 14 total 285 as it can be traced in the table, commercial invoice has highest rate of discrepancy, followed by packing list and then transport document. figure 4 : usage of incoterms 2010 in estonian trade according to above mentioned explanation, choice of some incoterms like cpt, cip, cfr and cif as well as fob will face exporter with necessity to ask for third party documents which he has no control over their production process. although, third party will issue required documents on the basis of the exporter’s information, but different factors (non controllable by exporter) might increase risk of documentary discrepancy which exporter should bear its loss. therefore, current section is devoted to analysis of data collected from survey regarding most important incoterms and their role in documentary discrepancy during lc presentation. delivery terms in transport process of export trade and their effect on the risk of discrepancy in documentary letters of credit; evidence from estonia 59 figure 5 : use of incoterms by percentage result of applying spearman’s rank coefficient in analyzing the data collected from survey is in accordance with above mentioned statements. first of all, there is no meaningful correlation between use of exw and discrepancy in any of surveyed documents. this proves that adherence to minimum documentary obligations will reduce the level of discrepancy. cif as the most frequently used incoterm shows a positive relation with discrepancy in transport documents, insurance document, government certificate and missing deliveries. interestingly, fob does not show any correlation with occurrence of documentary discrepancy. there is no explanation for such finding, however, lack of insurance document and responsibility of arranging the vessel by buyer can clearly explain the not existence of correlation with relevant document. carriage and insurance paid to (cip) is the equal of cif in multimodal transport for and using it has positive correlation with discrepancies in insurance document, certificate of origin and government certificate. this is a meaningful outcome as relevant document are all external documents which none of them will be produced under control of exporter. however, the use of cip shows negative correlation with discrepancies in bill of exchange. carriage paid to shows positive correlation with discrepancies in government certificate and certificate of origin. free carrier shows positive correlation with discrepancies in packing list, transport document and late presentations. cost and fright which indicates payment of shipping freight by exporter also shows positive correlation with transport document and packing list. b of e ci pl td id ic co gc ls mc lp md is exw c c -.119 -.057 .114 .187 -.047 -.278 -.165 -.338 .001 .286 -.031 .286 -.149 sig. (2tailed) .508 .761 .535 .306 .797 .123 .367 .059 .996 .125 .868 .113 .415 n 33 31 32 32 32 32 32 32 32 30 31 32 32 fca c c -.126 .013 .092 .235 .318 .441* .376* .242 .151 .115 .368* .097 hamed alavi 60 sig. (2tailed) .508 .949 .634 .211 .087 .015 .040 .198 .426 .559 .050 .609 .492 n 30 28 29 30 30 30 30 30 30 28 29 30 30 cpt c c -.071 .000 .224 -.003 .187 .481 .467** .370* .207 .233 .318 .196 .142 sig. (2tailed) .709 1.000 .244 .987 .322 .057 .009 .044 .271 .232 .093 .299 .455 n 30 28 29 30 30 30 30 30 30 28 29 30 30 cip c c -.420* -.277 .160 .127 .235 .312 .460* .371* -.060 -.005 .366 .039 -.181 sig. (2tailed) .023 .162 .416 .512 .219 .049 .012 .048 .757 .979 .055 .839 .347 n 29 27 28 29 29 29 29 29 29 27 28 29 29 fac c c -.319 .012 .484** .444* -.001 .050 -.090 .053 .027 .137 .444* -.103 .037 sig. (2tailed) .080 .950 .007 .012 .995 .788 .630 .777 .884 .479 .014 .580 .845 n 31 29 30 31 31 31 31 31 31 29 30 31 31 fob cc -.058 .019 -.271 -.105 -.159 -.083 -.105 .110 -.134 -.341 -.136 -.168 -.225 sig. (2tailed) .750 .921 .133 .562 .376 .648 .559 .543 .457 .061 .459 .351 .208 n 33 31 32 33 33 33 33 33 33 31 32 33 33 cfr cc .041 -.025 .637** .395* .123 .320 .225 .190 -.031 .355 .345 -.072 -.020 sig. (2tailed) .830 .898 .000 .034 .525 .091 .241 .325 .874 .069 .072 .709 .918 n 30 28 29 29 29 29 29 29 29 27 28 29 29 cif c c .095 .085 .342 .460** .359* .049 .207 .361* .338 .109 .014 .361* .310 sig. (2tailed) .592 .645 .051 .007 .040 .787 .248 .039 .054 .560 .941 .039 .079 n 34 32 33 33 33 33 33 33 33 31 32 33 33 dat cc -.007 -.093 .373* .215 .021 .147 .221 .247 .334 .045 -.215 .190 .371* sig. (2tailed) .970 .639 .046 .253 .913 .437 .240 .189 .072 .819 .262 .313 .044 n 30 28 29 30 30 30 30 30 30 28 29 30 30 dap cc .048 -.347 .118 -.062 .181 .072 .384* .306 .188 -.123 -.274 .410* .287 sig. (2tailed) .802 .070 .541 .743 .340 .706 .036 .100 .320 .532 .150 .024 .124 n 30 28 29 30 30 30 30 30 30 28 29 30 30 ddp cc -.017 -.083 .185 .070 .346 .137 .420* -.037 -.126 -.235 -.370* .370* .355 delivery terms in transport process of export trade and their effect on the risk of discrepancy in documentary letters of credit; evidence from estonia 61 sig. (2tailed) .927 .673 .336 .712 .061 .471 .021 .844 .506 .228 .048 .044 .054 n 30 28 29 30 30 30 30 30 30 28 29 30 30 figure 6 : correlation between use of incoterms 2010 and lc documentary discrepancy delivery at terminal, delivery at place and delivery duty paid are terms which show the highest risk for exporter as risk will pass from him to buyer after passing the custom of importer’s country. accordingly, use of delivery terms from this group have positive correlation with missing deliveries, late personation incorrect or partial shipment. additionally, delivery at terminal shows positive correlation with discrepancies in packing list. however, due to nominal use of these terms by estonian exporters, importance of discrepancies resulted from their use in international lc transaction is under question. stipulation of third party documents in lc is directly relevant to agreement of parties and incoterm used in the underlying sales contract. among others, bill of lading, non negotiable see waybill , air waybill , certificate of origin , inspection certificate and government certificate are studied. among externally produced documents, each one has a particular purpose and relevant risk in their production process differs from one to the other. among popular externally produced documents, certificate of origin and government certificate are documents generally issued by public authorities. inspection certificate can be issued by public or private authority and transport documents including bill of lading, nnswb and airway bill are documents which are issued (in general) upon dispatch of contracted goods by carrier. figure 7 : use of third party documents in estonian export trade certificate of origin is a document produced by national or local chamber of commerce. mostly, it follows the intention of proving the original source of producing exported goods. different reason can be involved for requiring such document including: preferential duty treatment available for importers, regulatory issues in importing country or simply buyer’s requirement. government certificate, however, is issued for the purpose of meeting import regulations of destination country. it is low risk of discrepancy involved in production of above mentioned documents as most of involved national authorities are familiar with international regulations, and they use standard hamed alavi 62 templates for production of such documents. additionally, all parties to the credit are familiar with documentary requirement of doing trade with a particular country. despite the fact that existence of standard requirements and familiarity of parties with such requirements plays a significant role in reduction of risk of discrepancy, but they do not eliminate this risk completely. in fact, human errors can play a significant role in discrepancy of government certificate and/or certificate of origin. although, relevant forms to quarantine permits are filled in by the exporter’s staff which will reduce the risk of human errors , but public agencies do not require a copy of lc in order to issue certificate of origin or government certificate. therefore, there is always a portion of risk remains that lack of access to the credit and knowledge from its requirements will create problem on the way of producing a compliant document by public agencies. inspection certificates are “carried out prior to the shipment of the goods [pre-shipment inspections] and most preshipment inspections are voluntarily requested by the private sector” (jeker & balchin 2005,575). the main purpose of conducting such inspections are “assure the importer that the goods conform to the technical specifications and the quality standards laid down in the contract and that the quantities exported are accurate” (international trade centre unctad/wto and commonwealth secretariat 1999, 72) via “through an independent agent such as an inspection company” (johnson,1997). in contrary with public agencies, buyer who is responsible for hiring the inspection agency provides it with a copy of the credit. as a result, goods will be tested “at the place of manufacture or assembly prior to dispatch” with outcome of issuing “a clean report” where goods comply with requirements of the credit and “discrepancy report” when they don’t. despite the fact that reason for presentation of inspection certificate under the credit is not known, it is possible to consider it in current study relevant to commercial purpose of parties. this is further emphasized by article 4 and 5 of the ucp 600 which clarify that in letter of credit transaction, bank does not have anything to do with goods. it only deals with documents. further, the principle objective of letter of credit operation implies that bank procures the goods from seller instead of buyer. therefore, in case of buyer’s bankruptcy before paying his relevant debt to goods in transit, bank should have security on goods and be able to turn them into cash with no problem. since bank is not a party to the underlying contract of sales, existence of a certificate of inspection will reduce the possibility of fraud or shipping low quality goods by seller and making bank stocked in non-favorable of situation in which it cannot either get the money paid to seller from the buyer or exchange shipped goods for a fair value of money. since both inspection agency and exporter have a copy of the credit, there is low risk of facing with discrepancy in inspection certificate (this hypothesis is in accordance with results of survey which show 35% of participants never faced such discrepancy and other 35% faced with it in a less than 25% of occasions). another important document is insurance document. however, majority of exporters issue the insurance policy which enables them to issue the insurance document internally. almost 70 percent of estonian exporters participated . in current study confirmed their use of open policy for insurance of shipped goods. such practice enables to mitigate the risk of discrepancy in insurance document. despite the fact that issuing party of the transport document are not always the carrier, but it is an always externally issued document. if not the carrier, generally, freight forwarders are the ones who are responsible for issuing the transport document. as middle men, their responsibility it to provide common business services for the exporter and at the same time prepare goods to be shipped by carrier. they might issue the “received for shipment” bill of lading or even the main document of transport as agent of carrier in case of air transport. freight forwarders receive instructions from the exporter via shipper’s letter of instruction. empirical data from the survey shows that all respondents use services of freight forwarders. although not clear, but due to use of ex work by substantial group of estonian exporters (15%) use of freight forwarders services cannot be equal among respondents. the application of spearman rank coefficient shows the positive correlation between use of bill of lading and discrepancy in commercial invoice and negative correlation with certificate of origin. reason for positive correlation can be explained based on application of strict compliance principle which requires compliance in data available in each document with terms of credit as well as consistency in data in different documents. therefore, inconsistency delivery terms in transport process of export trade and their effect on the risk of discrepancy in documentary letters of credit; evidence from estonia 63 between data in commercial invoice and bill of lading can result in dishonoring presentation by bank due to discrepancy in commercial invoice. the reason for negative correlation with discrepancy in certificate of origin is not known and it can be a topic for further research. nnsw shows positive correlation with discrepancies in commercial invoice and negative correlation with discrepancies in insurance document and certificate of origin. again similar line of reasoning can be used for explanation of positive and negative correlations. air waybill and government certificate are the least used third party documents. among them, use of air waybill does not show any correlation with discrepancy in different document, but government certificate shows correlation with late presentation . this can be explained as getting stock in official process for getting the certificate may result in late presentation after the expiry of the credit. certificate of origin shows positive correlation with inspection certificate and inspection certificate shows negative meaningful correlation with incorrect or partial shipments. reason is not known and can be an element for further research. be ci pl td id ic co gc ms lc lp md is bill of laing cc -.017 .499** .119 .004 -.176 -.231 -.476** -.211 .087 .045 .012 .109 -.167 sig. (2tailed) .923 .004 .508 .984 .328 .196 .005 .239 .629 .811 .948 .545 .352 n 34 32 33 33 33 33 33 33 33 31 32 33 33 nnsw c c .104 .372* -.005 .164 -.350* -.162 -.431* -.137 .052 .012 .104 -.167 .102 sig. (2tailed) .560 .036 .978 .361 .046 .368 .012 .446 .774 .947 .573 .354 .572 n 34 32 33 33 33 33 33 33 33 31 32 33 33 air waybill c c .095 .080 .247 .111 -.035 .204 -.009 .176 .026 -.132 -.194 -.187 .318 sig. (2tailed) .600 .669 .173 .540 .845 .254 .960 .327 .887 .479 .287 .296 .071 n 33 31 32 33 33 33 33 33 33 31 32 33 33 certificate of origin cc .245 -.159 .214 .002 .269 .347* .201 .110 .134 .110 -.159 .259 .190 sig. (2tailed) .169 .393 .240 .993 .130 .048 .262 .542 .458 .556 .385 .145 .290 n 33 31 32 33 33 33 33 33 33 31 32 33 33 inspection certificate c c -.244 -.257 -.231 .046 -.177 -.192 -.264 -.017 .052 .241 .325 -.204 -.466** sig. (2tailed) .172 .162 .204 .802 .332 .293 .144 .924 .778 .199 .075 .264 .007 n 33 31 32 32 32 32 32 32 32 30 31 32 32 government certificate c c -.327 .123 -.073 .121 -.154 .060 -.004 .015 .092 .015 .363* -.136 -.332 sig. (2tailed) .063 .511 .693 .511 .400 .746 .983 .936 .615 .938 .044 .457 .064 n 33 31 32 32 32 32 32 32 32 30 31 32 32 figure 8: use of third party documents and lc documentary discrepancy 4. conclusions documentary letters of credit (dlcs) are method of payment used between international traders. using dlcs will help parties with little understanding from each other’s financial standing to close a deal. this is the main advantage of using dlcs as they promoted the flow of international trade by replacing the guarantee of bank to pay exporter instead of importer’s obligation. in this way, exporter is assured that he will be paid either before or immediately after parting from shipped goods. however, application of principle of strict compliance in operation of dlcs make exporters vulnerable to risk of dishonoring the presentation by bank due to documentary discrepancy. since dishonoring the presentation may create significant problems for exporters, they need to be aware to minimize this risk as much as possible. hamed alavi 64 by analyzing role of delivery terms and third party documents in process of dlc operation within the context of estonian export landscape, this paper showed importance of choosing suitable delivery terms at the time of concluding underlying contract of sales between importer and exporter. since different incoterms require different documentary supplement , it is recommended for exporters to minimize the risk of discrepancy by negotiating the exw as delivery term of choice. at the same time, it is important for exporter not to expose himself to risk of delivery due to need for complicated third party issued documents. incoterms like cif and cip require presentation of a bundle of documents which some of them including insurance and transport documents are not issued under exporter’s supervision. this is a huge risk which might create substantial delay in payment process due to existence of discrepancy because of a simple mistake done by third party employees. as a result, exporters are strongly advised to take maximum advantage of dlc operation by mitigating the risk of discrepancy and negotiating most favorable delivery term at the time of closing the underling contract of sales with importer rather than looking for legal and financial solutions after facing with rejection of presentation by bank. 5. bibliography alavi, h. (2016a). documentary letters of credit, legal nature and sources of law. journal of legal studies, 17(31),106-121. alavi, h. (2016b). documentary letters of credit, principle of strict compliance and risk of documentary discrepancy. kor. ul rev., 19, 3. 3-25 alavi, h. (2017), risk analysis in documentary letter of credit operation. financial law review, 1(2), 27-45 bergami, r. (2013 a) incoterms 2010: the newest revision of delivery terms. acta universitatis bohemiae meridionalis, 15(2), 33-40 bergami, r. (2013 b). managing incoterms 2010 risks: tension with trade and banking practices. international journal of economics and business research, 6(3), 324-338. bergami, r (2006a), international trade: a practical introduction, 2nd edn, eruditions publishing, melbourne, australia bergami, r. (2006b). the link between incoterms 2000 and letter of credit documentation requirement and payment risk. journal of business systems, governance and ethics, 1(4), 49-58. civelek, m. e., uca, n., & çemberci, m. (2015). eucp and electronic commerce investments:e-signature and paperless foreign trade. eurasian acadeny of sciences eurasian business & economics journal, 3(1), 60-70 documentary letter of credit world (2003) https://image.slidesharecdn.com/priyankajadhavincoterms130203205948-phpapp02/95/priyanka-jadhav-incoterms4-638.jpg?cb=1359925251 (visited on 24 oct 2017) icc bankok 2002: “i would say that probably 70 per cent of our documents at the moment are okay on first presentation and 30 percent would probably have to go back to them and try and get the documentation corrected” international trade centre unctad/wto and commonwealth secretariat 1999, 72 jeker, r, m. and balchin, n, v. (2005), 'the agreement on pre shipment inspection', in p macrory, f., a appleton,e. and m plummer, g. (eds), the world trade organization: legal, economic and political analysis, springer, new york, ny, usa, vol. 1, p.575 johnson, t, e. (1997), export/import procedures and coumentation, american management association, newyork, ny, usa mann, r. j. (2000). the role of letters of credit in payment transactions. michigan law review,98 (8), 2494-2536. delivery terms in transport process of export trade and their effect on the risk of discrepancy in documentary letters of credit; evidence from estonia 65 mudrić, m. (2013). incoterms® 2010: risks and costs defined. zbornik kopaoničke škole prirodnog prava, 60(11),407-416. paliu-popa, l. (2012). development of the international trade in terms of incoterms 2010 rules. annals of“dunarea de jos” university of galati fascicle i. economics and applied informatics, 16 (1),99-106 ramberg, j. (2010). the icc guide to 2000 incoterms stapleton, d. m., pande, v., & o'brien, d. (2014). exw, fob or fca? choosing the right incoterm and why itmatters to maritime shippers. journal of transportation law, logistics, and policy, 81(3), 227. susmus, t., & baslangic, s. o. (2015). the new payment term bpo and its effects on turkishinternational business. procedia economics and finance, 33, 321-330 the us international trade commission 2004 international journal of commerce and finance, vol. 2, issue 1, 2016, 55-65 clarifying the management role in dealing with employees personal issues in the lebanese organizations abdallah kamal eldine isg university, lebanon abstract: the majority of workers have many occasional difficulties that sometimes become a problem affecting the worker’s performance. when this will repeatedly fail to meet expectations, a serious problem may become the main reason which contributes to the job decline. therefore, a pattern of reduced performance indicates the need for a supervisory action from managers. poor performance could be reflected under three main categories, such as employee availability, employee productivity, and employee conduct. the reasons and causes of this poor performance could be a personal issue related to the employee. many types of personal problems are affecting the job performance in organizations, such as marital strife, financial difficulties and child care complication. more serious difficulties and the abuse of these problems-if not resolved-may cause unending issues at work. this problem is highly important especially that it can affect the job performance and the company income. moreover, it can simply result in the failure of the employee to meet the performance standards, which kills productivity. the purpose of this qualitative exploratory phenomenological study is to clarify the management role in dealing with employees personal issues in the lebanese organizations as perceived by the lived experience of managers. the research instrument which will be used is a faceto-face structured interview with six managers of the major functions in different lebanese organizations. the sample type will be by convenience. keywords: conflict , job performance , performance, productivity, personal issues 1. introduction many managers believe that employees’ personal issues are irrelevant to job performance. they consider that employees should leave behind all their personal problems when they walk through the office door. therefore, managers, with this belief, consider employees like robots. they ignore their personal problems by treating them all the same way and just focus on the work (harwell, 2011). managers seeking to improve the quality of their employees should pay attention to their employees’ personal problems and stimulate the internal continuous communication. employee motivation is considered critical to maintain productivity. managers should understand the role of communication in employees motivation and the relationship with co-workers. therefore, maintaining strong relationships in the workplace helps employees achieve a high level of production and will support staff motivation (werbler, 2009). communication between managers and employees is essential in developing and improving the employees’ job skills and to motivate them to succeed. communication in the workplace can improve the overall organizational culture. a solid organizational communication can eliminate barriers and is able to resolve problems (berger, 2008). an employee with personal problems affecting his behavior may not respond to management orders and techniques that might otherwise be effective. therefore, the manager may feel frustrated, angry, guilty, inadequate, and even fearful for the employee personal welfare. so, it is essential for the manager to acknowledge these things and then consider how much these cases may affect the objective assessment and the monitoring of this critical problem. problem statement according to (harwell ,2011), as organizations continue to diversify, the risk for workplace problems will be intensified. small business managers typically face an important problem related to employees’ issues. individual employee problems can be related to many factors such as personal conflicts, supervisor issues, personal distress, or company structure oriented. management should study the cause of the problem and the factors that keep fueling the fire. according to (azouri ,2012), lebanese employees are facing increase demand in the workplace in addition to having many problems in their personal lives, the fact which is putting greater pressures by forcing them to tell how they should cope and try to maintain a balance. when pain and stress enter into the employees personal lives, it can spill over the workplace. the result can be a disagreeable attitude which reduces productivity and creates a lack of in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 56 abdallah kamal eldine http://ijcf.ticaret.edu.tr cooperation and a lack of focus. when an employee has a major personal problem, it would not be possible for him to focus on work. moreover, the majority of the lebanese organizations are facing many problems related to low employees morale. the high morale is associated with high productivity (azouri, 2012). this low morale among the lebanese employees is affecting the organizations for not achieving their desired result. at the end and in order to clarify the management role in dealing with employees personal issues in the lebanese organizations, the following research question has been formulated: how can the management role in dealing with employees personal issues be understood as perceived by managers of companies in lebanon? purpose the purpose of this qualitative exploratory phenomenological study is to clarify the management role in dealing with employees personal issues in the lebanese organizations as perceived by the lived experience of managers in different lebanese organizations. the research instruments that will be used in this research is a face-to-face structured interview with the managers responsible of the major functions in companies in lebanon. the population will include the managers of the major functions in different lebanese organizations in lebanon. the sample size will be six managers or more from these companies depending on to the data saturation principle, and the sample type will be by convenience. research questions every employee is considered as an individual with his own personal strengths and issues. managers cannot expect to take advantage of an employee’s strengths without taking into consideration some personal issues. in order to clarify the management role in dealing with employees’ personal problems in the lebanese organizations and to study what improvement can be done while dealing with employees’ personal issues, the following research question will be formulated: how can the management role in dealing with employees personal issues be understood as perceived by managers of companies in lebanon? significance of the study studying the management role in dealing with employees personal problems in the lebanese organizations is very important as it will shed the light for managers to focus on the importance and the necessity to take into consideration the employees’ personal issues and not just to focus on work. moreover, it helps managers to rethink how they should help employees with their personal problems in order to improve the company performance. this study will also clarify some tips on how to help employees to deal with their personal problems in such as it is sometimes enough to listen to the employee, to be sympathetic and to say to him some words of encouragement. moreover, this study would assist managers on how to deal with employees’ personal issues in order to deal with their personal quality of work. therefore, good managers know how personal problems can make productive employees useless and they also know that many have potential that will never be realized because of increasing personal issues (deal, 2008). definitions a conflict a conflict is a disagreement or friction through which the parties who are involved perceive a threat to their need or interest (toomey, 1998). job performance job performance refers to whether an employee performs his job well. it is considered an extremely important criterion related to the success and organizational outcomes (campbell, 1990). performance standards performance standards provide employees with specific performance expectations necessary for each major duty. it explains how the job should be done plus the results that are expected for satisfactory job performance (barye, 2011). 2. literature review work motivation clarifying the management role in dealing with employees personal issues in the lebanese organizations 57 http://ijcf.ticaret.edu.tr motivation is important for employees in the workplace. if a person is not driven to do the job, then, the work will not be successfully accomplished. it is necessary to feel happy about going to work in the morning. yet, every individual does not experience this feeling. employees are motivated to work by many ways; it can be everything from cash money to a flexible schedule, or to a good employees-managers relationships. therefore, the employees personal life situation and external circumstance are the main decisive factors. this shows that motivation is extremely personal; even if two individuals are exposed to one same situation they will react in different ways and be motivated by using totally different factors (gudmundson, 2009). motivational theories many theories were formulated in order to explain motivation. in this research, i will summarize the three classical need theories; maslow’s hierachy of needs, hezberg’s two–factor theory and lawrence’s four-factor theory. these theories are still very popular even though they are quite old in the field of work motivation. these theories are linked to one another in some way and can be applied and used in real life situations. according to (molander,1996), need theories explained that it is possible to identify human needs, and according to these needs it is possible to find out what motivates employees and, moreover, how their needs can be fulfilled. aabraham harold maslow bfrederik herzberg cpaul lawrence tips to motivate employees employees are considered as the building blocks of an organization. the success of any enterprise depends on the collective efforts of all the employees. therefore, when they are motivated, they will collaborate ensuring the organizational growth. managers should do a self-evaluation of themselves. it is highly important for a manager to understand, encourage and control his own behavior before motivating, encouraging and controlling his staff behavior. managers should be well familiar with their staff in order to invite staff commitment and loyalty. therefore, a cordial superior-subordinate relationship is a main point in job satisfaction. managers should give their employees some financial and other benefits such as vacation, insurance and holidays. managers should provide feedback to the staff constantly. staff should know how they are performing by giving them a regular and constructive feedback. feedback should be based on facts and on personal observations not assumptions. managers should ensure effective time management by having control over time to ensure that tasks are doing in the right ways. staff should have closed times like few hours with no interruption in order to focus on performing their task. also, they should have open hours in order to freely interact, express and communicate. how managers should deal with employees personal issues many managers, all around the world, believed that employees’ personal problems are irrelevant to the job improvement and at the end managers may ignore this fact. they considered that employees should forget all their personal life while they are working and focus only on the job at hand. but, in fact, people are not like robots and they cannot leave behind their personal problems when they walk through the office door. therefore, managers cannot ignore the effects of personal life on a person’s work (harwell, 2011). managers could not consider that employee’s personal life is part of their business, but performance is considered under their responsibilities. managers’ job is to get the best work of their employees by keeping them motivated in order to contribute for the long term. managers should treat employees as individuals by helping and supporting them through some of their personal issues that influence their ability to their work in the best way. according to (harwell, 2011), there are eight ways to deal with employees personal issues: 58 abdallah kamal eldine http://ijcf.ticaret.edu.tr 1listen: managers should be sympathetic with their employees, listen to them and offer them kind encouragement words. it is extremely crucial to pay close attention to the difference that exists between listening to an employee and solving his personal problems. the employee should solve his personal problems without the intervention of managers. managers should only listen and should not be a part of getting in charge of the solution. 2refer employees to appropriate resources: managers should steer employees toward professional counselors. for example, managers can take advantage of their personal experience with a similar problem and describe it to them with the solution they got. managers should not forget that this case is about employees not them and they should keep focusing on their employees. moreover, they should gently push employees to find their own personal solution not to force their own solution on the employee or try to give them advice. 3accommodate short-term needs: managers are required to be flexible as much as they can in making temporary accommodations to help the employee who is facing personal troubles. but managers should inform the employee clearly that these changes are in reality temporary. 4be flexible in working hours or working location: managers can give the employee a short time off, vacation or sick time. how managers should counsel employees with personal issues at any moment, employees may face many personal problems that delay their job performance. sometimes, these problems are not serious and employees can sooner go back to the normal productivity. but in other situations, deeper employees’ personal problems can cause ineffective long time performance and productivity. according to the hr specialist and to the u.s. labor department (2013) six steps should be used by managers to maintain an effective interaction: 1managers should stay alert to signs in order to determine if this is a personal problem, a bad attitude or a skill deficit. 2mangers should document the performance problem as it can help alert the troubled employee to the harm his problem is impacting on the organization. moreover, these notes may help the manager to defend himself in case of certain or probable complaint. 3managers are required to invite employees for an informal interview in order to discuss the poor performance and the policy violation, if any. (moore, 2008). 4managers should focus on the work related facts as the main issue is the work performance. as managers, they should avoid focusing on employees’ personal problems, and kindly remind employees that they are responsible of the work regardless of what they are doing at home. managers should respect their employees and do not embarrass them with emotional comments such as “you seem drunk” or “why you are depressed”. 3. research method and findings the triangulation method was also explained in detail which will help to analyze the data collected. the assumptions, limitations and delimitations were also listed. finally, the ethical assurance principle was ensured such as protecting the respondent from any harm. right to privacy and the informed consent were also discussed in details. in order to clarify the management role in dealing with employees’ personal issues in the lebanese organizations as perceived by the lived experience of managers, face-toface structured interviews were made with managers of the major functions in different organizations in lebanon. the sample size was six managers from these companies depending on to the data saturation principle, and the sample type was by convenience. clarifying the management role in dealing with employees personal issues in the lebanese organizations 59 http://ijcf.ticaret.edu.tr first, brief information about the companies’ names, the position and educational background of the interviewees will be given, and then the results of the interview questions will be separately presented for each company. the interview questions were open-ended, all in all seventeen questions. the major purpose of this study was to explore the importance of management role in dealing with the personal problems of employees. therefore, only relevant information to the areas needed to be covered will be discussed. question one was asked to collect background information about the participants. many of the respondents have higher educational background within the field of management, human resources, finance, marketing and sales. all of them started to work at lebanese organizations directly after graduation and have worked there since then. it is also noticeable that a couple of the managers have had various tasks during their employment, which has to do with the size of the organizations where there is opportunity for work in several employment posts. question two helps to find what motivates managers of different functions in the lebanese organizations. here, it is helpful to get most of the answers to support the study. question three was asked to see how much managers rely on employees’ motivation in their organization. they all reinforced the need of motivation as it is essential to increase productivity, lead to a greater revenue and create more challenges and ambitions in the workplace. it helps employees to be more creative. question four described how the organization employee structure is built up. all respondents gave similar answers as people are working as a teamwork following a clear structure to maintain order and resolve problems. a clear framework is established within which all the group members are organized. in question five, when discussing the importance for an organization to have motivated staff, the interviewees agreed that the majority of the staff needs to be motivated in order to drive the organization forward. some respond ents believed that motivation is important in the daily work. in question six, the participants gave their suggestions on how to increase motivation among employees such as giving one common target to be attained by group, assigning practical assumptions to be worked by a group of employees and to start a project from the beginning to the end. these motivation ways have impacted positively on the organization revenue. moreover, maintaining a good internal relationship is also essential. in question seven, all respondents agreed that relationship between supervisors and employees must be a team whole relationship. a healthy relationship should be based on a teamwork and be more informal than formal as well as honest. in question eight, they added that they always maintain a perfect, strong, and very close manager-employee relationship. in question nine, they all listed common types of personal problems affecting their employees’ short term job performance such as personality conflicts, marital issues, couple personal problems and child care complication. some added personal trauma or organization structure and team problems. all agreed on financial difficulties and family problems. in question ten, all respondents described in the same way how they manage employees’ personal problems. they refer to the employee assistance department to discuss their case. in question eleven, they all reinforced the idea to encourage the troubled employee to refer to the employee assistance program and to benefit from its available support. it is essential to listening to him and giving valuable advices. question twelve elaborated what supervisors should know upon facing employees with personal problems affecting their behavior. they all agreed that managers should be aware and prepared to any change in behavior because the employee is passing through a difficult time. the employee may refuse to abide by management rules and decisions. managers may feel guilty and frustrated about his employee case. they should be prepared on how to monitor the situation as it is sometimes difficult to expect the employee reaction. in question thirteen, managers explained when confrontation is necessary with the troubled employee. all respondents agreed that the managers’ job is to confront the undesirable employees’ job behaviors. moreover, they should not postpone the confrontation as it should be done immediately when the problem is discovered. 60 abdallah kamal eldine http://ijcf.ticaret.edu.tr question fourteen explained how managers are conducting the corrective interview with their troubled employees affecting their performance. all respondents are following the main steps while planning the corrective interview as follows: comparing job performance in terms of standards and expectations in identifying the problem checking the employee file fixing a meeting with the employee in question fifteen, managers explained how they perform the corrective interview. they will start by creating an open relaxing atmosphere, reminding the employee about the objective of the meeting which is to improve the job performance. also, they all provide supporting documents revealing the effects of the problem on performance. they all confirmed to have a 100% listening and at the end they will put a plan to be followed in the near future. in question sixteen, managers explained in the same way how they do carry out the follow-up of the corrective interview with the troubled employee by controlling the performance and comparing it all the time with the problem on hand. they all agreed on the importance of controlling the execution of the main points fixed on the interview. they should keep reminding the employee about the performance. if he didn’t succeed he will be transferred to the employee assistance program. in the question seventeen, all respondents suggested to maintain an effective communication process and good relationships with their employees. they should support their employees when they have personal problems affecting their performance. comparing the interview results with the literature review: on the basis of the previous interviews, i have come to the conclusion of the following model including all points that have been seen in the theoretical framework. the model has been compiled on the basis of my understanding and the empirical findings of previous researcher wiley (1997), beside other researchers mentioned in the literature review which was intended to identify key factors which influence motivation at work. the results in figure 1 present the most important matters for employee’s motivation, communication and personal issues: figure 1: most important matters for employee: motivation, communication and personal issues clarifying the management role in dealing with employees personal issues in the lebanese organizations 61 http://ijcf.ticaret.edu.tr the table 4.1 presents the most important steps to be followed by managers to deal with employees personal issues based on the results of the interviews and matched the ones of other researchers discussed in chapter two. by doing the triangulation between the findings and the literature review concerning the motivational factors, table 1 illustrates a summary of the common results: table 1: summary of motivational factors interviewees results other previous researchers results (literature review) good working conditions good working environment (herzberg, 1959) respect, recognition appreciation (wiley, 1997) healthy relationship with supervisor and colleagues strong relationships in the work place (werbler, 2009) having a flexible work schedule gudmundson (2009) individual growth and career development individual growth and development (deal, 2008) opportunity to do creative and challenging work the drive to learn and to defend (berggren, gustavsson & johnsson, 2009) financial benefits high salary (wiley, 1997) (moore, 2013) this research gives the following conclusion: motivational factors are dependent on which situation the individual is in. if an employee has a high salary, he/she will focus mostly on the job itself. in the opposite situation, an employee with low salary will consider things more important, such as working condition climate or having a good relationship with colleagues. an interpretation of findings supports the propositions in the literature. the first proposition suggests that employees’ motivation depends on personal circumstances. results in this research imply that the proposition is correct; employees are motivated differently depending on many factors such as family situation and others. a comparison between the results of findings and the literature review concerning how managers should deal with employees personal issues is illustrated in the table 2. 62 abdallah kamal eldine http://ijcf.ticaret.edu.tr table 2: the literature review concerning how managers should deal with employees personal issues is illustrated interviews results other researchers (literature review) (harwell, 2011) 100% listening, motivation listen, encouragement advise him to the employee assistance program push employees to professional counselors give him short term benefits short term needs change the work schedule flexible working hours change or give him less harder work assign different work keep reminding him that these modifications are for short term make it clear that these accommodation are short term managers should support their employees not forcing them to solve the problem provide support motivate them on career development and keep reminding him to focus on job performance career advancement and focus on job finally, table 3 summarizes the findings obtained and compared with the literature review concerning the role and the process to be followed by managers in monitoring the troubled employees: table 3 summarizes the findings obtained and compared with the literature review findings analysis literature review informing the employee about a private meeting planning the corrective interview performing the meeting performing the corrective interview controlling the execution of points suggested in the previous interview following up the corrective interview 4. implications, recommendations, and conclusions employees personal issues cannot be ignored by managers, especially that they can affect the job performance and managers should be aware as how to deal with these issues. this research was done and results were concluded according to the information collected from managers of major functions in the lebanese organizations who accepted to participate in the interview. i greatly hope that the results of this research may serve readers, managers and decision makers so that they can care more about dealing with employees personal issues in order to avoid the decline in job performance. data was collected mainly through the interviews and results were presented in tables which were high enough to be supportable to the findings after being analyzed. the main research question was: how can the role of management in dealing with employees personal issues are understood as perceived by managers of companies in lebanon? the sample included six managers of major functions in different lebanese organizations and since a qualitative methodology with a convenience sampling type was applied, the purpose was not to generalize the results. however, since the research reached the data saturation, it is possible to generalize the findings. clarifying the management role in dealing with employees personal issues in the lebanese organizations 63 http://ijcf.ticaret.edu.tr also, in consideration to the interviews, the presence of the researchers might have affected the choice of respondents as being one of convenience. recommendations &future studies during the last six months of working on this research, i have gathered a lot of information and knowledge about what motivates employees in the lebanese organizations and the effect of internal communication on employees’ motivation. the main focus was to show how managers should deal with employees personal issues. i suggest conducting a further quantitative study on the same topic to test the linkage between the management of employees’ personal issues and job performance in the lebanese organizations. conclusions the purpose of this qualitative exploratory phenomenological study was to explore the management role in dealing with employees personal issues in the lebanese organizations as perceived by the lived experience of managers in different lebanese organizations. in order to do so, the motivational factors in organizations were identified and analyzed and the following conclusion is drawn in that motivation is highly personal and differs from individual to individual. work motivation is not consistent over time. the factor which motivates an individual today will most likely not be the same one a year before or after. this depends on the situation of the employee as a special motivation can be offered in case the employee is facing personal problems affecting his job performance. a common denominator between all the interviewees is that what motivates employees depends on personal circumstances, where the family and personal conditions play a significant role. the results in the lebanese organizations showed that the propositions discussed in the literature review appeared to be correct and identical. therefore, it is essential for managers in the lebanese organizations to consider that employees’ personal lives may affect the job performance which is under their responsibilities and to understand what motivates employees. through this understanding, organizations have the ability to adopt motivational techniques and good internal communication process which can lead to competitive advantage and ensure the success of the enterprise. managers are required to exert more effort to communicate with troubled employees and should counsel them. references azouri m. (2012), effective communication on employees motivation, koumeh publishers. barye, g.p. (2011) , work motivation; history, theory, research, and practice, thousand oaks: sage publications, inc. berggren, m., gustavsson, j. & johnsson, e. (2009) ,motivation at work. bachelor dissertation, lund university, 2009. bruce, k. berger (2008), employee organizational communications, institute for public relations. deal,, c.c. (2008), work motivation; theory, issues, and applications, glenview: scott foresman and company. gudmundson w. (2009), motivate and reward: performance appraisal and incentive systems for business success, norwich: curran publishing services. gudmundson, f. (2009), work in the twenty first century, boston: mcgraw-hill. harwell (2011), 8 ways to deal with employees personal problems, oaks, ca: sage publications. herzberg, f., (1959), the motivation to work. london: chapman & hall limited. john wiley & sons, s. (1997), how to retain high-performance employees. john wiley & sons, inc, vol.2 pp. 291-298. molander, c. (1996), human resources at work. lund: student literature. moore claude (2013), managing the troubled employees. health science library. university of verginia toomey, s. (1998.) , intercultural conflict styles, theories in intercultural communication pp. 213-235. newbury park: sage. 64 abdallah kamal eldine http://ijcf.ticaret.edu.tr us labor department. human resources specialists (2013), how to counsel employees who have personal problems, mcafee secure. werbler, c. (2009), effective communication positively impacts employee motivation levels, london library limited. clarifying the management role in dealing with employees personal issues in the lebanese organizations 65 http://ijcf.ticaret.edu.tr appendix a: interview interview questions: company:---------------------------------------------------------------------------------date:--------------------------- employment status:-------------------------------------------------------------------- age: ------------------------------------------ gender: female ----------male------------- 1can you tell me a little about your background – education and work experience? employees’ motivation and communication questions: 2what motivates you in your work? 3do you believe employee motivation is important for the organization? in what way? 4how is the company’s employee structure built up? 5do you believe employee motivation is important for your organization? in what way? 6how can the organization increase the motivation among employees? suggestions for improvement? 7how can you describe the healthy relationship of employees with supervisors and colleagues as an important factor in work motivation? 8how does the relationship between you as a manager and your employees look like? employee’s personal issues questions: 9what types of personal problems can affect your employee’s short term job performance? 10how do you manage employee’s personal problems, especially when the worker’s performance repeatedly fails to meet expectations? 11do you encourage troubled employees and how? 12what supervisors should know when facing an employee with personal problems affecting his behavior? 13when do you think confrontation is necessary? 14how do you conduct the corrective interview with the employee with personal problems affecting his performance? 15how do you perform the corrective interview? 16how do you follow-up the corrective interview with the troubled employees? 17is there anything more you would like to add concerning this subject? international journal of commerce and finance, vol. 2, issue 1, 2016, 81-89 the role of social media advertising in consumer buying behavior adnan veysel ertemel, (ph.d.) istanbul commerce university, turkey ahmad ammoura, (msc.) istanbul bilgi university, turkey abstract: p consumer buying behavior is known also as consumer decision making is the process by which individuals search for, select, purchase, use, and dispose of goods and services to satisfy require needs. this study has been designed to answer main question about the role of social media advertising on consumer buying behavior in very active field which is fashion retail industry, then determine the differences if existed in this relation regarding to the name of the brands and consumer demographics factors. by electronic questionnaires conducted for consumers live in istanbul-turkey, findings showed weak relation between social media advertising and consumer need recognition, no relation at all with search for information, strong relation with evaluate the alternatives, and moderate relation for both buying decision and post-purchase behavior, as those steps represent the five steps need recognition model in consumer buying behavior. moreover, findings showed no changes in this relation regarding to consumer’s age, and education level. however, there were changes between females and males in the relation with consumer need recognition, and search for information. in addition, another changes regarding to income between social media advertising and evaluate the alternatives especially for consumers earn more than 5.000tl among other income groups. keywords: social media, social media advertising, consumer buying behavior, five steps need recognition, fashion retail industry 1. introduction the emergence of web 2.0 is one of the biggest development in the history of commerce came along with social media as an evolution based on the web 2.0, this technical revolution had huge affecting in the traditional marketing approach, brought new era among marketers, an era were social media changed totally the relationships between marketers and stakeholders, social media is shifting the power from marketers to consumers, because regarding to the democracy allowed in social media all users as consumers can now be in contact with each other exchanging the information about products and services, which push marketers changing their old methods to match the new needs of consumers, and contact with them in individual as possible as they can, especially in their buying behavior by using social media as marketing channel in both free as word-of-mouth and paid as social media advertising. furthermore, advertising is simply one way that consumers learn about new products, learn about things consumers may want or need, because the more consumers know about products more choices they can make, as no one prefer to make poor choices when it comes to purchase, what social media provide is smart many choices more than poor or just many choices (evans, 2008). this study tries to highlight the impact of social media advertising as paid social media marketing tool in consumer buying behavior regarding to the five steps need recognition model for companies working in fashion retail industry in istanbul city, which step has the strongest relation with social media advertising and which has no relation at all regarding to the changes in the consumer’s demographic factors. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 82 adnan veysel ertemel, ahmad ammoura http://ijcf.ticaret.edu.tr 2. literature review 2.1 fashion retail industry and social media the latter part of 20th century had witnessed many development in direct marketing which become very important promotion tool used by retailers, at the same time another development in technology helped retailers to reach consumers with different ways, this developments paved the way for online retailing, the advent of the internet and the dot-com led to a host of pure play online retailers and an era of fast-moving technological innovation that touched virtually every aspect of the retail value chain, from product development and sales to operations, resulting to that a host of new channels emerged, most of them at the hand of the end consumers like social networking and viral marketing (kpmg, 2009, p7-9). fashion retail industry has deep roots and one of the most important types of retail industry, like most other quickly started using the internet to gain improvements in the efficiency and effectiveness of operations and marketing. nevertheless, consumers are increasingly using internet to make extensive amount of research on products and fashion trends before purchasing through and media, also making more and more online purchase (tuhnainen, rossi, 2012). there are some notable studies on impact of social media in fashion retailing. dorado (2011) examines the use of social media by fashion retail companies, and how they use it to effectively reach their target audiences, and how their audiences are responding, then examines why people choose to create relationship with a particular fashion brand via social media. another study by preece (2012) deals with social media as public relation strategy. moher (2013) studied social media as a marketing strategy and how it affects the market shrinkage in fashion and luxury markets. it can be concluded by all three studies mentioned that consumers like to be in contact with fashion brands in social media platforms, which push fashion retail companies to give a huge interest to social media as marketing channel. 2.2 consumer buying behavior and social media according to khan (2006) all of us are consumers, we consume daily regarding to our needs, preferences, and buying power, which open the door for too many questions about what to buy? how we buy? where and when we buy? in addition, when we say consumer we refer to two types of consuming unites, first one is the organizational consumers like business organizations, government agencies, or non-profit organizations, second one the final consumers like individuals, families, or households (al-jeraisy, 2008, p43). for sure within this project we are going to focus on the second type which represents the final consumers as the field we applied in is the fashion retail industry. 2.2.1 five steps model to consumer buying behavior consumers are the focus of all retail decisions, many questions had been asked about how consumers decide upon what product to buy, the brand, and the store to buy them from. therefore, it is important to appreciate how consumers making their buying decisions. there are many models try to explain the process of consumer buying behavior, but in this project we will focus on the famous five steps of need recognition starting from the first feeling of need to take the buying decision through searching for information and evaluate the other alternatives, then finally after purchase behavior. 1. need recognition: the buying process starts when people recognized that they have unsatisfied need, while unsatisfied need actually arises when consumer satisfaction differ from his or her present level of satisfaction (levy, weitz, 2004, p.111). moreover, need arousal can be triggered by external environment or internally from the buyer itself, needs themselves arise from either physiological (biogenic) or psychological (psychogenic) states, and once a need has been aroused the buyer seek out way to satisfy it (sullivon, adcock, 2002, p.52). cox & brittan (2004) says that consumers as human have certain fundamental needs can be satisfied in quite simple ways but when it needs some complex requirements it is become a problem, the natural response to this problem is to seek a solution which lead to search of information (p.79), in other words it is reasonable to suggest that consumers are looking to satisfy needs when they buy products or services (semenik, 2002, p152). the role of social media advertising in consumer buying behavior 83 http://ijcf.ticaret.edu.tr 2. information search: once the consumer has recognized a need, it is often not obvious what the best way to satisfy that need would be (semenik, 2002, p153), therefore, this stage is concerned with gathering information and processing it to allow consumer to move towards a purchase decision, and this search can involve information retrieval from the buyer memory (internal) as well as external search if internal information is insufficient (sullivon, adcock, 2002, p.52). semenik (2002) explained in more details what internal and external information search are, regarding to him internal information search drawing in personal past experience and prior knowledge and maybe all that is required to make the decision, thus it is important for promotion function in this stage to focus on beliefs and attitude of consumers, but when it is not enough the external information search will be important to help consumers collecting information they need which most of the time will be by searching about others experiences like friends and relatives, nowadays social media become the major tool for this kind of research to read and see what other people writing and saying about other brands. moreover, marketing efforts at this stage should increase the amount of information available to consumers about products they are searching for (al-jeraisy, 2008, p. 90-91). 3. evaluation of alternatives: this stage is an extension of the previous one, once the required information is available, the buyer will begin to evaluate each purchase option with the aim of gradually reducing the list of possible purchases to one. actually this process will developed a strong purchase intention within the mind of buyer which lead to expected purchase unless some problems arise in the period between intention development and final purchase (sullivon, adcock, 2002, p.53). in addition, semenik (2002) explain that evaluative the alternatives could be structured by the consumer’s consideration set which mean subset of brands from a particular product category, and evaluative criteria which include many other factors such as price, warranty, or colour (p154). 4. the buying decision: it is not a single decision but a bundle of decisions, any one of which can result in a change of mind and an alternative route being followed (cox, brittan, 2004, p.80). moreover, if we want to get specific in retailing levy & weitz (2004) says that consumers may not buy the product which is the highest in the list of evaluation, for sure it gives the great benefit but it may not be available in the store or it risks outweigh the potential benefits (p.122). 5. post-purchase evaluation: once the purchase has been made, evaluations continues so consumer can feel that he made the right decision which meet the expectations as we called it post-purchase satisfaction, or post-purchase dissatisfaction if the evaluations does not meet the expectations (sullivon, adcock, 2002, p.53). again promotion can play very good role in this case to make sure that consumers will be satisfied by creating appropriate expectations for a brand’s performance before a purchase and by helping the consumer who has already bought the advertised brand to feel good about doing so (semenik, 2002, p155). 84 adnan veysel ertemel, ahmad ammoura http://ijcf.ticaret.edu.tr figure 1: five steps need recognition model it is very important for this project, after getting through consumer behavior and buying decision, to determine how social media can affect consumer behavior in general and consumer buying behavior in specific to be a start point for determine the role of social media advertising on them regarding to other studies related to this subject. 2.3 social media advertising social media can be defined as “a group of internet-based applications that build on the ideological and technological foundations of web 2.0, and that allow the creation and exchange of user-generated content”. (kaplan & haenlein, 2010, p60). moreover, social media advertising can be definde as “an online ad that incorporates user interactions that the consumer has agree to display and be shared. the resulting ad displays these interactions along with the user’s persons (picture and/or name) within the ad content” (iab, 2009, p4). advertising is very important tool in promotion mix for all kind of organizations usually it refers to one-way communication in any mass media. the american marketing association define it as “ the placement of announcement and persuasive messages in time or space purchased in any of the mass media by business firms, nonprofit organizations, government agencies, and individuals who seek to inform and/or persuade members of particular target market or audience about their products, services, organizations, or ideas”. however, with the development of the internet and online world especially social media environment, a lot of changes happened in advertising, in its capabilities and functions which require a new paradigm (l.tuten, 2008, p2). regarding to l.tuten (2008, p3-5) there are many differences between traditional advertising and social media advertising. first difference is the form of media, while traditional advertising tied with the “mass media” include television, radio, print, or outdoor, advertising by social media might mean both one-to-one advertising through permission-based, and targeted messages, or it could be mass coverage using a display ad, when defining advertising for online media, the size of the audience should not be used as a defining factor of advertising. second, traditional advertising must be paid communications, it is the fact in each definition of advertising since this concept appears, on the other hand social media advertising could be totally free and unpaid or it can be indirectly paid as the case in some aspects of social network advertising like paid ads on facebook. third, traditional advertising has been viewed always as on-way communication from the marketers to the target audience through some traditional media, but with the world of web 2.0 it is become truly enable for two-way or the role of social media advertising in consumer buying behavior 85 http://ijcf.ticaret.edu.tr even multi-way communication between firms and consumers, and this is the case in social media advertising and online advertising in general. forth, traditional advertising relied on a model of interrupting consumers lives, but consumers accepted this interrupting sometimes because it represent a free tool to know about brands via television or radio ads. 3. the research methodology regarding to nielsen (2013) since social media as concept appear most of marketers used the benefit of its free tools, but after 2009 there were increasing in using of another method which represent the paid social media marketing and by 2012 about 75% of marketers indicated that they use this paid method with about 10% of their overall online budget, 64% of them was assuring that this amount of budget will increase in the future. moreover, with question to identify which form of paid social media marketers regularly use, the overwhelming majority use facebook ads (90%), followed by linkedin ads (20%) and twitter ads (17%) (stelzner, 2014). nevertheless, fashion retail industry is not out of this, it is for sure part of competition war, were most companies and retailers working in this field using social media sites with both free and paid methods to promote their products, regarding to demirtas (2012) one out of two active internet users in turkey do shopping through the internet mostly with fashion categories like clothes and shoes. thus, in this study researcher will try to analyze how one of social media marketing tool which is paid social media advertising influence the buying behavior of end users regarding to the different brands they will find and consumers demographic factors in istanbul city were fashion is very important trend. with regard to this, the research problem of this study can be formulated as the following question: is there a role of social media advertising on consumer buying behavior in fashion retail industry in istanbul? it is known that consumer get throw process when he decide to buy anything weather the buying happened online or offline, and there are many model to explain this process but the most important one is the need recognition five steps (need recognition, search for alternative, evaluate the alternatives, take the decision, evaluate the decision). therefore, it is very important not just to determine the impact of social media advertising on consumer buying decision but also to specified which step was the most affected one. regarding to that we can form the first hypothesis as: h1: there are meaningful relation between social media advertising and consumer buying behavior in fashion retail industry. moreover, it is known that consumers differentiated regarding to their demographics factors like age, gender, income, education level…etc. which mean that the impact of social media advertising on consumer buying behavior could be different as well regarding to main changes on consumers characteristics, and the secnd hypothesis will be: h2: there are differences in the way that social media advertising will affect consumer buying behavior regarding to the consumers demographic factors in fashion retail industry. the overall process and idea of data collection follows a particular strategy that helps minimize cost and increase the efficiency by providing valid information. it is ensured that reliable data is provided within the present study. regarding to that some further questions which related to the survey researcher put it and then answered them like: who were the respondent people? these were the people from social media sites: facebook, linkedin, instagram and twitter and also from the online survey website named “survey monkey”. how the questionnaire got distributed? it got distributed via email and by leaving it on the online survey website, and social media platforms. how the filled out forms got received by the researcher? these were received via email, online survey website, and ‘drive’ application of docs-google. during an academic research, it is always very essential to remain within the circle of ethics and within the formalities. the researcher has been careful in this regard and no particular brand has been under criticism. the questionnaires have been distributed to the consumers with the relaxation that identity of none will be disclosed and will be treated as confidential. moreover, it is not the name of the person that has to be addressed but it is rather the mind-set of the consumers with respect to the buying decisions that they make so as to get a better perspective of marketing within istanbul-turkey. 86 adnan veysel ertemel, ahmad ammoura http://ijcf.ticaret.edu.tr . 4. results and discussion table1: regression scores for the five steps need recognition theory buying behavior step sig. correlation (r) need recognition 0.000b 0.246a search for information 0.596b 0.031a evaluate alternatives 0.017b 0.737a take the decision 0.036b 0.526a post-purchase behavior 0.019b 0.331a there from table one we can see that the probability of (f) statistics is in order (0.000, 0.017, 0.036, and 0.019), less that the significant level (0.05) which mean that we have enough evidence to reject the null hypothesis for the steps (need recognition, evaluate the alternatives, take the decision, and post-purchase behaviour). thus, there are relation between the social media advertising and those four steps. however, from the r scores we can see that this relation differ regarding to the steps as it can be weak in the first step with (0.246) and strong with the third step with (0.737), and more moderate regarding to the fourth and fifth steps with (0.526) and (0.331) in order. on the other hand, we can see that the probability of (f) statistics is (0.596) more than the level of significant (0.05) for the second step (search for information). therefore, there is no enough evidence to reject the null hypothesis which mean that there is no relation between social media advertising and search for information. we can indicate from this results that consumers do not rely on social media advertising to find information about the products they want to buy in istanbul city as they prefer to use social media advertising mostly evaluate the alternatives. moreover, from the table 2, we can see that there are no differences in the consumer buying behaviour regarding to the gender, age, and education level as the probability of (f) statistics is in order (0.647, 0.540, 0.082) more than the significant level (0.05), as we do not have enough evidence to reject the null hypothesis, which mean is that the buying behaviour of consumers did not change regarding to their gender, age, and education level. on the other hand, the probability of (f) statistics is (0.029) less than the significant level (0.05) in the income factor, which mean that we have enough evidence to reject the null hypothesis and accept the alternative one, and that mean there are differences regarding to the income on the consumer buying behaviour. to be more specific the post-hoc lsd analysis have been done to determine the differences exist between which categories in specific. table 2: demographics factor one-way anova test results: demographics factor sig. gender 0.647 age 0.540 education level 0.082 income 0.029 the role of social media advertising in consumer buying behavior 87 http://ijcf.ticaret.edu.tr from table 3 we can see that the p value for category number four in income which is ‘above 5000 tl’ always less than the level of significant (0.05), and the mean differences is always significant at the (0.05) level for this category, we can see that clearly in the last section of the same table. indeed, the mean difference between ‘above 5000 tl’ and ‘500 tl900 tl’ (-0.90) at (0.007) significant which reflect the biggest difference between income categories when consumer evaluate the alternatives. however, this differences existing with second category ‘1000 tl300 tl’ with mean differences around (-0.68) at (0.02) significant, and third category ‘3100 tl5000 tl’ with mean differences around (-85) at (0.005) significant. table 3: multiple comparisons to income categories regarding to consumer buying behavior dependent variable: consumer buying behavior lsd 5. conclusion: the motivate of the research was triggered by personal interest in how paid social media advertising effect consumer buying behaviour regarding to the five steps need recognition model of buying decision, in new report for social media examiner website indicate that around 94% of marketers used paid social media advertising in facebook for both b2b and b2c, less than this percentage but still important in other social media platforms. therefore, the research was carried out to measure if a relationship is existing between this paid method and each step of the need recognition buying decision model and how much this relation is strong, applied in very important field in istanbulturkey which is fashion retail industry. the research finding has showed relation in range between moderate and strong regarding to the whole model. however, third step ‘evaluate the alternatives’ has the strongest relation with social media advertising comparing with other steps, contrariwise the second step ‘information search’ have no relation at all with social media advertising. thus, researchers totally believe that social media advertising have an impacts on consumer buying behaviour, and recommend marketing managers whose working in fashion retail industry for both brand direct marketing or as retailers to design their social media advertising as a comparative advertising and avoid providing information about the product itself as consumers don’t rely on social media advertising as a source for information searching, at the same time it is important to study the differences in the demographic factors if there are regarding to the results in this study when they design the advertising. in addition, it is very important to taking into account the limits of this 88 adnan veysel ertemel, ahmad ammoura http://ijcf.ticaret.edu.tr study, and be careful to generalize the results in two areas first one which is the place as this research conducted in istanbul one of the biggest cities in turkey but results could not be the same for other cities inside turkey or in other countries, second one is the field which is fashion products as a part of shopping goods from apparels and shoes and again this results could change regarding to other product category like convenience goods or some types of specially goods. moreover, researcher recommend future studies for each step alone from the need recognition model specially for the second and third steps as they reflect that there is no relation and the strongest relation in order, and recommend future studies for differences in social media platforms regarding to using paid social media advertising and its impact on consumer buying behaviour, considering the limited time and scope of this research, it would be undoubtedly useful and interesting to have a case fashion company and apply social media advertising for this company in different platforms as scenarios offer a comparison between those platforms. finally researcher recommends future studies apply on different product categories and what differences between them could be. to sum up, in this thesis researcher tried to provide a guide could be important to be used in fashion retail industry to make sure design advertising supporting the company itself and consumers buying behaviour in a way that guaranty benefits for both sides, for sure results cannot represent all individuals across istanbul as a whole, but researcher tried to be so close to what is the trends in general regarding to the sample he applied the research on. references books: ander, w. & stern, n., 2004. winning at retail: developing a sustained model for retail success. new jersey: john wiley & sons. cox, r. & brittan, paul., 2004. retailing: an introduction. issue no: 5. london: pearson education. evan, d., 2008. social media marketing an hour a day. indiana: wiley publishing, inc. khan, m., 2006. consumer behavior & advertising management. new delhi: new age publishers. levy, m. & weitz, b., 2004. retail management. issue no: 5. new york: mcgraw hill irwin. schiffman, l. & kanuk, l.l., 2009. consumer behavior. issue no: 10. new jersy: pearson education. semenik, r., 2002. promotion & integrated marketing communications. canada: south-western. stanley, j., 2005. just about everything a retail manager needs to know. australia: lizard publishing. sullivon, m. & adcock, d., 2002. 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 identifying the available physical as well as social infrastructures;  identifying determinants of labor market participation decisions of household and,  estimating the impact of rural infrastructure on the rate of labor market participation in the study area; 2. methodology 2.1. description of the study area this study is limited to jimma zone of oromia regional state. geographically, jimma zone is located in south western part of the country, ethiopia. according to the official report from jimma zone’s administration office in 2016/17, the zone is totally composed of twenty districts called woreda. the number of population is estimated at around three million under 516, 321 households. jimma zone have an agro-ecological background of highlands (15%), midlands (67%) and lowlands (18%) as documented by the united nations development program country report for ethiopia (undp, 2014). the zone is among major coffee growing areas in the country. the zone reliably receives good rains, ranging from 1200-2800 mm per annum; this atmosphere is very comfortable to invest in the area of agro-industry based on natural resource in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e rural infrastructure and its implication to labor market participation in jimma zone, south-west ethiopia 51 well-endowed by nature, as well as product produced by active and strong community (undp, 2014). below is the official geographic map of jimma zone. figure 1. geography of jimma zone 2.2. type and source of data in its nature the data we used was cross-sectional. the survey has used both primary and secondary data set. while the primary data were obtained from the households via structured questions, secondary data were sourced from local trade and industry offices and investment offices. 2.3. sampling methods and sample size determination for the purpose of the current survey we randomly took four (limmu kossa, shebe sombo, gomma and manna) out of twenty one districts in jimma zone. again proportional sample of kebele is arbitrarily selected from each woreda. at the end, households were proportionally randomly selected from each kebele, that were chosen from all four woreda listed above. the required size of sample has been determined following noel et al. (2012): = 390 where n is population size; n represents the sample; (d = 0.05) is chosen margin of error; z=1.96 for 95 per cent confidence interval. note that, the final draw of proportionate size each kebele was quite random. 2.4. multinomial logit model specification according to brigham & houston (2010: 4) the size of the company is the size of a company is shown or judged by labor market has an interesting and unique role in agricultural and off-farm sectors, within the wider input market in the rural economy. timmer (1987) recognizes the agricultural labour should be commonly treated as a ‘buffer’ in economic development. when other sectors in the economy prosper, the agricultural sector tends to signal through amsalu dachito chigeto & minyahil alemu haile 52 releasing the work force from agriculture to other sector whereas at the time of difficulty, the sector tends to absorb more labour from other sectors. by doing so, the sector thus avoids any dramatic unemployment problems. literature related to the institutional frameworks of rural labour markets is rare if not absent. most studies examining the institutional setting of agricultural labour markets in the rural sector often tend to refer to developing countries while typically addressing the failure associated with the smooth flow of labour market performances and the consequent effect for the productivity and efficiency of the agricultural sector (guancheng et al, 2012). the labor supply of the rural households is a categorical variable that can be divided into farm and off-farm activities while the two broad categories can further be split into self-employed and regular wage (salary) earners. in order to estimate the relative share of the determinants incorporated in this study on the variable under consideration, four distinct participation choices are identified: (i) self-employed in farm sector, (ii) regular wage earner in farm sector (iii) self-employed in off-farm sector, (iv) regular wage earner in off-farm sector. in the case of the off-farm sector, one or more than one of the household members may be employed in the sectors other than farming activities either in the rural area or nearby urban area. a household is considered as a participant in any of the two sectors, if there is/was at least one family member in the household who participated (currently participating) in any of the two activities or left the family member and moved to the urban area for paid work. given the discrete nature of the dependent variable, the appropriate model to be adopted is multinomial logit model (cragg, 1971; wooldridge, 2015). since the labor supply of the rural households is a categorical variable with discrete division, we employed the approach of multinomial logit model. that is the dependent variable, labour market participation, is a categorical variable having four possible values where the ith household is participating in at least one of the activities defined above. multinomial logit given all the individual specific covariates (xi), the probability that the ith household choose the jth activity (j= 1,2,….4) such that since the households face a multiple choices, such as different activities to engage, where the order of those activities does not matter, unordered choice model is preferred which can be motivated by a random utility model. that is, for the ith household faced with j choices, the utility from choice j can be given as (wooldridge, 2013; gujarati, 2004); where uij is unobserved (latent) utility of household i from activity j, xs are all the explanatory variables and stands for vector of parameters and is the error term having a standard logistic distribution. if the consumer makes choice j in particular, then we assume that uij is the maximum among the j utilities assuming that a household under consideration is rational utility maximizer. that means the probability that choice j is made among other choices if (wooldridge, 2013; cragg, 1971): equation (2) states that the ith household can only be engaged in the activity j if and only if the utility derived from this activity is greater than the utility from other activity k keeping all else constant. the logit specification for the above equation can be given by; where j=1, 2,….4, the sum of the j probabilities should equal to one. to avoid indeterminacy, we need only to estimate j-1 parameters to obtain probabilities for j choice. if j is set to be 2, then it becomes the typical binary logit model. we can compute the relative risk associated with the j activity (odds ratios) as: ..................................(1) ij i j ij u x    ( ) for all .........................................(2) ij i k pr u u j k  ( ) ( ' ) 1 ( | ) .....................................(3) 1 i j i k x i i ij j x k e pr y j x p e         1 1 2 2 exp( ... .............................(4) ij j j jk k ik p x x x p       rural infrastructure and its implication to labor market participation in jimma zone, south-west ethiopia 53 equation (4) is called odds ratio (the relative risk) associated with a choice of j activity. thus, the change in the odds ratio resulting from a unit change in the kth explanatory variable is equivalent to exp(βjk). from equation 4, one can compute the log of the odds ratio by converting the above equation into logarithmic form. equation (5) implies that the log of the odds ratio is linear function of the explanatory variables and the corresponding coefficients measure the change in the log of the odds ratio associated with a unit change in the explanatory variable under consideration. thus, given multinomial logistic distribution assumption of the error term, utility for workers engaged in the employment category is the log odd ratio given by: 0 1 1 2 2 ( ) log ( ) log( ) .... ....(6) 1 ( ) j j j jk k p y j it y j x x x p y j                 the above model (multinomial logit model) was estimated using maximum likelihood method. the slope coefficient captures the change in log odds of the household being in the job category j as compared with the reference category given the change in one unit of independent variable keeping all else unchanged. the statistical significance of the parameter estimates can be checked using the usual t-test. 3. results and discussion 3.1. descriptive statistics 3.1.1.households’ demographic characteristics demographic information identified for various response rates is presented in the table below; table 1: demographic variables characteristics marital status freq. percent cum. married 327 82.37 82.37 widowed 12 3.02 85.39 divorced 16 4.03 89.42 single 42 10.58 100.00 education level illiterate 140 35.26 35.26 <=6 172 43.32 78.59 <=12 48 12.09 90.68 above 12 37 9.32 100.00 sex of hh head male 305 76.83 76.83 female 92 23.17 100.00 source: (own computation, 2019) in terms of sex composition, the sector is dominated by male headed households where about 76.83 percent of the household heads are male while the remaining proportion is female headed. being household head is more widely 1 1 2 2 j ln( ) ... =x' .............................(5) ij j j jk k ik p x x x p        amsalu dachito chigeto & minyahil alemu haile 54 interpreted by different scholars and they attach it to economic freedom, and decision making power (guancheng et al, 2019). in the context of ethiopia’s rural institution, female rarely become the household head, unless she is single, divorced or widowed. it is long lasting tradition in the country where farming activity is considered to be performed by male and female’s role is considered as only supportive. in terms of marital status majority of the farm households (82.37 percent) are married which is followed by single (10.58 percent). the rest 4.03 and 3.02 per cent, respectively, are composed of divorced and widowed households. 3.1.2. labour supply decision by rural households of the total response rate, majority (71.03%) are engaged in farm activities, (including labour sharing activities as well as sharecropping) followed by off farm sector which accounts 17.36 percent of the total sample households. the remaining 7.05 percent and 4.53 percent respectively have been engaging in the regularly paid and left outside of the labour market. farm household labour supply diversification is believed to pursue additional income-generating activities at the farm-household level, including participation in livestock ranging, local non-farm activities, and offfarm activities whereas in the study area households are concentrated in the farm sector where the portion of farmers who are looking for alternative job outside their farm is relatively rare. detail is provided hereunder: 4.534% 71.03% 7.053% 17.38% non participant farm sector paid job off farm sector fig 4.1. labor supply decision of the household figure 2: labour supply decision of the households source: (own sketch, 2019) the most straight forward implication of labour supply diversification of farm households is that farmers look for generating a portfolio of income/ wealth from sectors with dissimilar degrees of expected risk-returns combination, seasonality and liquidity so that they can be able to adjust their output mix accordingly to cop up with different seasonal hardships in rural area. according to hoff (2000) farm diversification would facilitate the allocation of household scarce and productive assets among different income generating activities which may be in turn notable from village-level diversification, where households become more specialized in a given line of work over time, which in turn provide wider range of goods and services that would contribute to the economic development. 3.1.3. rural access to infrastructures it is worthwhile to mention that the two types of infrastructures (hard and soft) are like two sides of a coin that it is difficult to think of one without insuring the other. the survey result on the accessibility of both forms is given below; rural infrastructure and its implication to labor market participation in jimma zone, south-west ethiopia 55 table 2: infrastructural distribution response freq. percent cum. no access to road 109 27.46 27.46 access to road 288 72.54 100.00 no access to school access to school 39 358 9.82 90.18 9.82 100 no access to credit 31 7.81 7.81 access to credit 366 92.19 100.00 no market information 107 26.95 26.95 have market information 290 73.05 100.00 source: (own computation, 2019) evident from table 2 is reveals that, bout 27.46 percent of the total response rate have no access to all weather roads while the remaining 72.54 per cent do. in terms of access to schooling, around 10 percent of the farm households have no access to school while the remaining 90 per cent have been accessing it. regarding access to formal credit facilities, around 8 percent of the household have no access to the service while looking actively for it. for aggregation purpose, households who have no demand to the service are categorized as if they have access to the service. accordingly, about 92 percent of the households can be able to fulfill their financial constraints from the formal financial market (where most of them have access to microfinance institutions and majority of those who are treated here accessing the service were still no access to formal banking scheme. concerning market information accessibility which is proxied by the availability of mobile phone at least by one of the family member, irrespective of the availability of telecommunication network in the area, around 27 percent of the sampled households have no access to the market information while the remaining 73 per cent do access the same. in this regard, it is undeniable that information plays profound role in improving rural livelihood as farmers require updated information concerning different markets such as inputs and produce markets, as well as production and processing technologies that area available to their disposal. in general, improved access to information help community organization to strengthen local services provision and develop social capital. table 3: tabulation of access to infrastructures and labour supply decision infrastructure labour market participation decision 1. access to road non participant farm paid job off farm total no 5 77 5 22 109 27.78 27.30 17.86 31.88 27.46 yes 13 205 23 47 288 72.22 72.70 82.14 68.12 72.54 2. access to school no 2 27 4 6 39 11.11 9.57 14.29 8.70 9.82 yes 16 255 24 63 358 88.89 90.43 85.71 91.30 90.18 3. access to credit no 0 22 5 4 31 0.00 7.80 17.86 5.80 7.81 yes 18 260 23 65 366 100.00 92.20 82.14 94.20 92.19 amsalu dachito chigeto & minyahil alemu haile 56 first row has frequencies and second row has column percentages source: (own computation, 2019) out of the total farm households who were outside of the labour market, 27.78 per cent had no access to all-weather road and the rest 72.22 percent have access to the same infrastructure. out of the total farm households in the study area who have been engaging in the farm sector 72.7 percent have access to road whereas the rest 27.3 percent have no access to it. in addition, 32 percent and 18 percent of the sampled household from off farm sector and paid job respectively have no access to all-weather road. regarding access schooling, around 9.6 percent of households engaged in the farm sector didn’t have access to schooling. on the other hand around 89 per cent from the non-labour force, 90 percent from farm sector, 86 percent from paid and 91 percent from off-farm sector have access to education. it indicates that individuals from farm sector are relatively more vulnerable in terms of being outside of schooling in particular and any infrastructure in general. it farther implies that there is uneven distribution of infrastructural facilities across different sectors in rural economy and might be the case that those who have enough access to those infrastructures were the one who were exposed to other alternative sectors and who could be able to look for jobs outside the farm sector. in a like passion, access to market information varies with labour supply decisions of the farm household in the study area as market information is concentrated in the off-farm and regularly paid job (about 83 percent and 86 percent of farm households in each sector respectively have access to market information). in contrast, majority of households who were outside the labour force (72 percent) didn’t have access to market information which is followed by the farm sector (70 percent). 3.1.4. labour market participation decision of households factor market fails for many reasons where some of them are demand side factors while others are supply side factors. these imperfections are striking when it comes to rural area. these factors differ with sectors. for instance, low level of education and skill are the main cause in farm sector and it is no more an impending factor in the paid job. the responses from the current survey are summarized in the table below: table 4: impeding factors of alternative job in the study area impeding factors farm off-farm paid job the level of education and skill 218 15 2 no info. about alternative job 53 52 risky to leave current job and search for alternatives 86 41 9 limited access to land and capital 10 6 preference to stay in one’s current residence 98 25 there is no alternative job opportunity 186 62 20 source: compiled from hh survey response (2019) the demand and supply side factors holding the rural households from looking alternative jobs around their residence and nearby urban areas are discussed in this part. one of the factors that limited farmers from engaging in alternative jobs is the absence of alternative jobs in the rural area. in most of the rural area there are no alternative off-farm jobs as well as formal (paid) job. this implies that there is a demand side constraint in the rural area that most of alternative offfarm jobs are concentrated in the urban area so that people are obligated to move from rural to urban center for better job. from the economic theory perspective, farmers’ labour supply decision is based on their objective of utility maximization so that they divide their labour time among different sectors (farm, off-farm 4. access to mkt inf. no 5 86 4 12 107 27.78 30.50 14.29 17.39 26.95 yes 13 196 24 57 290 72.22 69.50 85.71 82.61 73.05 rural infrastructure and its implication to labor market participation in jimma zone, south-west ethiopia 57 and paid jobs) so that the expected marginal return from all the alternative sectors remain equal. nevertheless, farmers are believed to be risk averse so that they allocate less time to risky sector and more time to less risky sectors (though farmer’s version of risk definition may be different). accordingly, significant portion of farm households in the study area who have been engaged in the farm sector prefer to stay in the sector that they fear taking any risk in searching alternative jobs rather than farming. 3.2.evidence from multinomial logit analysis before we directly approach to the regression our logit specification, we have examined all of the validity and reliability conditions and none of them was suggested invalid. our test statistics are presented herewith for convenience. table 6: diagnostic test results, stata ver.14 test statistics null hypothesis values prob. null hyp. mean vif multicollinearity 1.04 rejected lawley chi2 same correlation matrix 73.18 0.00 rejected hettest constant variance 25.91 0.00 rejected breusch-godfrey lm no serial correlation 0.001 0.97 accepted cook’s d outlier 0.0026 rejected link test no omitted variable _hat 0.31 0.77 accepted _hat-squared 0.14 0.51 d-watson stat 2.01 source: (own analysis, 2019) this section presents the potential determinants of rural household labour supply decision with reference to jimma zone. table 5 below reports the results from our regression; table 7: determinants of labour market participation decision (multinomial logit model) lmp coef. std.err. t value age -0.343*** 0.116 -2.95 age squared 0.004*** 0.001 3.21 sex of hh head 0.844 0.608 1.39 marital status -0.030 0.281 -0.11 education 1.314*** 0.256 5.12 family size 0.260 0.210 1.24 family labour -0.769** 0.305 -2.52 access to road 0.305 0.612 0.50 dependency 0.019 -1.25 access to credit 14.934*** 0.436 34.27 access to ext. 0.0212 0.613 0.03 access to mkt in 0.178 0.577 0.31 remittance 0.000*** 0.000 3.88 land_sz 0.068 0.130 0.52 age 0.036 0.127 0.28 age squared 0.000 0.001 -0.15 amsalu dachito chigeto & minyahil alemu haile 58 *** significance at 1 per cent; ** significance at 5 per cent; & * significance at 10 per cent source: own estimation (2019) the overall significance of the model is assured given the conventional wald ch2 test and the null hypothesis that all coefficients are jointly zero is strongly rejected in favor of alternative at one percent significance (p=0.00). the dependent variable (labour force participation) is a categorical variable having 4 values where the four values are types of the sectors that rural households could possibly engage (non-participant, farm sector, off-farm sector and regularly paid job) where the first is taken to be the base category so that the participation of the households in the three of the remaining sectors are analyzed by comparing with the base categories. households in the study area are subdivided into four groups (those individuals currently not working, individuals engaged in farm activities, and off-farm sector as well as individuals who engaged regularly at paid job) and hence, the factors determining labour market participation in each group has been estimated using multinomial logistic regression model and the result is reported in the above table (table 7). sex of hh head -0.273 0.593 -0.46 marital status 0.319* 0.179 1.78 education 1.415*** 0.207 6.83 family size -0.265 0.174 -1.52 family labour 0.546* 0.310 1.76 access to road 1.496** 0.604 2.48 dependency 0.020 0.016 1.25 access to credit -0.722 0.632 -1.14 access to exten 0.0962 0.353 0.272 mkt info 0.676 0.503 1.34 remittance 0.000 0.000 -0.52 land_siz 0.086* 0.151 0.57 age 0.067 0.112 0.60 age squared -0.001 0.001 -0.53 sex of hh head 0.461 0.479 0.96 marital status 0.127 0.208 0.61 education 2.481*** 0.254 9.77 family size -0.175 0.189 -0.92 family labour 0.234 0.273 0.86 access to road 0.313 0.477 0.66 dependency 0.012 0.016 0.78 access to credit 0.155 0.672 0.23 access to exten 0.112 0.613 0.03 access to mkt info 0.915* 0.473 remittance -0.0620* 0.124 -0.26 constant -12.164*** 3.248 -3.75 mean dependent var 1.373 sd dependent var pseudo r-squared 0.316 number of obs chi-square 1890.588 prob > chi2 akaike crit. (aic) 552.885 bayesian crit. (bic) rural infrastructure and its implication to labor market participation in jimma zone, south-west ethiopia 59 3.2.1. impact of rural infrastructure on household labour supply decision a) labour supply decision in farm sector in this study we assumed that farmers who are engaging at own farm plot as well as who have been engaged in the labour sharing activities are put under this category. therefore those under this category are basically engaged in selfemployment in his/ her own farm and for aggregation purpose, those individuals who are working on other’s farm in terms of sharecropping are also treated as farmer who are supplying their labour in farm sector. based on the estimates reported above, access to different types of infrastructural facilities such as road, credit and market information have positive effect on the likelihood of farmers joining farm sector, though access to credit facilities is the only statistically significant variable. this demonstrates that in order to boost the likelihood of farmers to join the sector, financial institution have tremendous influence in smoothing financial constraints facing the farm household. this relation has been highlighted in previous works like, fall and mgnac (2015), and pollard and heffernana (1983). more importantly, credit arrangement for investments is vital to encourage rural entrepreneurs make investment decision so as to create economic opportunities, and purchase agricultural inputs and working capital. suggestive of the role of credit in agriculture, the global food price crisis has moved agricultural finance on top of the africa and international development agenda. according to goodwin and holt (2002) access to financial market irrespective of the type of farm households engaged in the sector is a key so as to unleash and utilize the continent’s potential in the sector as well as ensuring food self-sufficiency. age of household head has negative contribution to the likelihood of households’ engagement in farm sector which is happen to be significant at one percent level. on the other hand, age square has a positive contribution on the sector. the possible explanation for this is older household heads are relatively intensively engaging in the farm sector and those who are relatively young are those engaged in off-farm activities as well as in regular full time work. aging labour forces in agricultural sector is the trend in most of the countries in the world (guancheng et al, 2015). this has its own pros and cons. on one hand aging farmer having more experience and accumulated knowledge regarding the farming activities, their soil nature and related matching of the crop. on the other hand, farming demands physical strength throughout the farming process and those who are middle aged are strong and relatively productive in the sector. it is also argued in terms of the farmer’s acceptance of the new technology, old people are relatively conservative and reluctant in accepting new technology compared to the young. education level of the household head and family labour are also significant considerations with likelihood of labour supply in the farm sector where the former is significant and positive at one percent level, while the latter has negative and significant at five percent level. the positive impact of education is intuitive as the household head who is relatively young is the one with more years of schooling and ready to supply his or her labour in the sector as compared to the older one. concerning family labour, it has negative sign implying that one with larger family size tends to get out of the sector. b) labour supply decision in off-farm sector rural households face diverse challenges in copping up with rural poverty and living condition. the problem is severing when it comes to africa (undp, 2014). cognizant of this fact, households in these countries espouse different livelihood strategies. this strategy holds diversifying the income base of household and avoiding sole dependency in the rural agriculture sector (stefan and barret, 2011; sumner, 1987). one potential means would be to enhance participation in off-farm sector which could only be realized if farmers have access to different assets that paves ways to off-farm sector. in our model above, different household specific variables are estimated as potential determinants in affecting household’s decision to join this sector while four variables are identified as statistically significant in determining smallholders’ engagement in the off-farm sector where access to road is one. access to road is positive and significant in increasing the likelihood of farm households’ decision to participate in this sector. c) labour supply decision in formal (paid) job in farm and off-farm sectors household heads who are engaged in rural regular paid job (on hired contractual or permanent basis) are relatively non-existent in the area. among the modeled variables under this group of employment, only four are significant in determining small farm households’ engagement in this sector. these are level of education of the head, market information, remittance and land size. accordingly farmers with higher education tend to participate outside of their amsalu dachito chigeto & minyahil alemu haile 60 own farm looking for regularly paid work as compared to illiterate farmers. this is not surprising as education intensify the chance of a household to look for alternative work (juvančič and erjavec, 2005; kimhi, 1994). on the other hand, land size is one of the pushing factors as it has negative and significant impact. households with large farm size tend to participate in the farm sector as well as in the off-farm sector and less likely to participate in the paid job. 4. conclusion and policy directions rural households in the study area are concentrated in the farm sector while rarely participating in the off-farm and regularly paid sectors. among others absence of alternative jobs outside the farm sector in the study area is the most hindering factor that restricts farmers to limit themselves in the farm sector. farm households’ risk aversion strategy in terms of diversifying their income base from farm sector is highly limited in the study area as farmers have limited access to the alternative job in off-farm as well as in the regular and formal paid sectors. more than one-third of the total response rate indicated the lack of access to rural-all-weather road from the settlement area. besides, education, information, health and other services are not sufficiently provided. however, the provision of credit service was suggested fair. based on the inferential analysis, accesses to different infrastructural facilities (such as road, credit service and information) contribute significantly for households’ decision to supply labour in the farm sector. level of education on the other hand increases the likelihood of labour supply in the farm sector where as family size acts negatively to the decision of households in engaging in the sector. accesses to road, the level of education, family labour and marital status of the household head were important with reference to off-farm labor supply decision. except family labour, other three variables contribute positively to the labour supply decision of the household in the off-farm sector. one implication from this finding is that, enriching rural area in terms of education and training would pave the way to off-farm sectors and critical for income diversification of farm household in the study area. on the other hand, households with large family labour (large family size where most of them are participating in the labour supply) acts as pushing factor in the sector implying that households with large family labour prefer to stay outside of the labour force or search works in the paid job (as it is positive in the two cases and negative in the remaining two cases) rather than off-farm sector which implicitly show that family planning could contribute positively to the households’ labour supply decision in the offfarm sector. as labor service is not separable from the individual, there are factors preventing individuals from looking for alternative jobs. rural people prefer not to migrate for institutional and social reasons as they are reluctant of losing long term established relations with their neighbors. therefore, providing alternative jobs in off-farm sector in the rural area has paramount importance rather than expecting rural people to migrate for the search of better job. besides, the absence of alternative and better job in their surrounding is the reason why rural households limit themselves in a single job while some think that it is relatively risky to shift from the job that they are currently familiar with and looking for alternative job. therefore, it would be better for the government to create conducive environment in rural area which should be accompanied with awareness creation. remittance and land size of the rural households negatively affect rural households’ participation in the paid job. households who had access to external financing from extended families were not looking for alternative jobs outside their own farm. besides, owning relatively large land size hinders rural households from looking for alternative jobs. given the positive and significant effect of different infrastructural supply (such as access to road and information facilities) it is advisable if the government pays attention for enriching rural areas as a means of widening the alternative jobs available for rural households in the study area. besides, granting land ownership right to the households in the study area boosts households’ labour supply decision in the farm sector as well as attracts others from other alternative sectors towards the farm sector so that the local as well as regional governments need to work towards improving farmers’ security related with access to farm land. rural infrastructure and its implication to labor market participation in jimma zone, south-west ethiopia 61 references corsi a. and findeis j. 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(2015), “introductory econometrics: a modern approach”, 5th ed. michigan state university, usa. international journal of commerce and finance, vol. 6, issue 2, 2020, 198-206 198 macroeconomic and bank specific determinants of commercial bank profitability in ethiopia buzayehu abera lemi, jimma office, ethiopia matewos kebede rafera, jimma university, ethiopia million gezaw jimma university, ethiopia received: sept 01, 2020 accepted: sept 28, 2020 published: oct 02, 2020 abstract the purpose of this study was to empirically examine the impacts of the macroeconomic and bank-specific variables on profitability of commercial banks in ethiopia. for the purpose secondary data collected from seven banks over the period 2000-2017 and other sources were analyzed using a panel ordinary least squares regression model for the fact fixed and random effect model found inappropriate after the hausman tests and breusch-pagan lagrange multiplier (lm). the results of the study showed statistically significant negative impacts of broad money supply and credit risk. inflation and gdp on the other hand was found with significant positive impact s. yet, cash reserve ratio and bank size showed no significant impact on the profitability of commercial banks in ethiopia. the results suggested the need for enhancing credit risk management practice, optimizing the leverage ratio in increasing bank size. a thorough understanding of the strategic business environment also found highly relevant in commercial bank management for the fact macroeconomic variables and regulatory factors found to have significant implication on profitability. keywords: commercial banks, profitability, bank specific factors, macroeconomic factors, cash reserve requirement, 1. introduction the financial sectors in ethiopia have been witnessing growth in the past two decades. currently there are 19 commercial banks (cbs) in ethiopia. it is confirmed in previous studies that a significant and strong link show between the financial sector of a nation and the performance of overall country economy. there are evidence suggesting that financial sector development plays a huge role in economic development (urgaia, 2016; worldbank, 2020) indicating the need for establishing a healthy and sound commercial banking sector. establishing sound commercial banks is paramount to facilitate the economic growth of ethiopia where banks play a key role of financial intermediation and facilitation of commerce and industries. a well-established, responsible and profitable banking sector contributes to the stability of the financial system (said and tumin, 2011). gwatiringa (2020) asserted that, [b]anks have a significant part in the economy and their stability is important and relevant for the financial system. to sustain a firm financial intermediary purpose, banks must be profitable. beyond the purpose of financial intermediation, the performance of banks has a substantial effect on the economic growth of a nation. (p.22) economies with a profitable banking industry have better ability to resist negative shocks and contribute to the stability of financial system (athanasoglou et. al., 2005). it also contributes to sustainability of overall economic development. identifying the factors that significantly determine the profitability of firms in the sector is vital to improve the profitability firms and contribution of the sector to overall economic growth (sastrosuwito & suzuki, 2011). the level of profit in a firm can be driven by external influences and by how the internal mechanism s are able to convert those influences to opportunity and business advantages (rumler & waschiczek, 2010). the external influences on bank profitability literature focuses on economic growth and stability measured by the rate of gdp growth inflation, exchange rate movement, supply of money, and interest rate. the behavior of macroeconomic variables can have positive or negative effect on the firm performance depending on the nature of in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e macroeconomic and bank specific determinants of commercial bank profitability in ethiopia 199 variables (kumar, 2013). further, hefferman (1996) asserts that macroeconomic factors are worsened by regulations imposed on banks, chen, et al. (1986) are significant in explaining firm profitability. it is; thus, implied the importance of considering how business environment specific variable influenced the link between macroeconomic variables and profitability. the financial health and soundness of ethiopian commercial banks have taken the attention empirical studies including those focused on determinates of profitability (yirgalem, 2015; eneyew, 2013; dawit, 2016; tesfaye, 2013; tadese, 2015; amdemichael, 2012; kokobe and birhanu, 2015, gizaw et. al., 2015; elshady et. al., 2017). the results remained mixed and the studies didn’t cover all variables covered in the current study. therefore, this study hoped to fill the gaps on previously researches by including macroeconomic variables such as money supply, cash reserve requirement, rate of gdp growth, rate of inflation, on one hand, and credit risk, leverage ratio, and bank size which represents the firm specific variables hypothesized with significant influences on the profitability of commercial banks measured by roa and roe. with this backdrop, the objective of this study is to examine the impacts of macroeconomic and bank specific factors on profitability of commercial banks in ethiopia. the specific objectives of the study include the following:  to examine the impact of macroeconomic factors (gdp, inflation, money supply) on profitability of cbs  to examine the impact of cash reserve requirement ratio on profitability of cbs  to examine the impact of bank specific factors (credit risk, leverage ratio, bank size) 2. literature review ayanda et al. (2013) examined the determinant of nigerian banks’ profitability in the case of first bank of nigeria using annual time series data from 1980 to 2010. the empirical result shows that bank size and cost efficiency did not significantly determine bank profitability in nigeria. however, credit risk and capital adequacy had significantly negative effect on banks profitability. loan to asset ratio and loans-todeposits ratio have significant negative and positive relationships with profitability respectively only in the short run. on the other hand, money supply growth had a positively association with nigerian bank profitability whereas no evidence was found for inflation rate and gdp determination of profitability. duraj & moci (2015) analyzed bank-specific, industry related and macroeconomic determinants of banks profitability in albania. the result indicates that except for credit risk all the factors i.e. liquidity risk, total loans, gdp and inflation were significant factors that influence banks profitability in albania in the period under their study. samad (2015) examined the impact of bank specific and macroeconomic variables on profitability of banks in bangladesh. the results showed that loan to deposit ratio, loan-loss provision to total assets, equity capital to total assets, and operating expenses to total assets were bank specific factors with significant effect on profitability. but the study showed no significant effect of bank sizes and economic growth variables. tesfaye (2013) indicated that bank specific factor, such as bank size, capital adequacy, operational efficiency, and liquidity risk and income diversification had significant effect on profitability of cbs in ethiopian. he found that cost to income ratio and liquidity negatively affect the bank performance. there are also significant associations between concentration and bank size with profitability. however, no evidence is found as to how gdp and inflation affected performance of banks. amdemichael (2012) investigated the factors affecting bank profitability for a total of eight commercial banks in ethiopia. the findings of the study show that capital strength, bank size, income diversification and gdp have a positive and statistically significant relationship with profitability. asset quality and operational efficiency have statistically significant and negative relationship with banks’ profitability. however, the relationship for inflation, liquidity risk and concentration were found to be statistically insignificant. kokobe and birhanu (2015) examined the determinants of financial performance of commercial banks in ethiopia by using panel data of banks over the period 2002-2013. based on the regression result income diversification, ownership, industry size and inflation variables affect performance of the bank significantly and except inflation which was insignificant and positive for the performance measured by roa. whereas capital structure, operating cost, bank size, tax and gdp and market share affect performance of the bank negatively significant effect except gdp which was insignificant on the performance measured by roa. elshaday et. al., (2017), the finding of the study shows that capital adequacy ratio, credit interest income and size of the bank have positive and statistically significant effect on financial performance. non-performing loans, loan buzayehu abera lemi & matewos kebede rafera & million gezaw 200 loss provision, leverage ratio and operational cost efficiency have negative and statistically significant effect on banks’ financial performance. gemechu (2016) studied the effect of bank-specific, industry-specific and macroeconomic factors on banks’ profitability in ethiopia using a panel data regression model employed on data collected from eight commercial banks for the year 2002 2012. the study found a significant positive effect of bank specific factors save credit risk and expense management. similarly, the macroeconomic factors such as economic growth, interest rate spread, and exchange rate have significant positive relationship with banks’ profitability. on the other hand credit risk, and expenses management and bank regulation were found with significant negative effect. 3. research methodology the overall objective of this paper was to examine the impacts of macroeconomic and bank-specific variables on the financial performance of commercial banks in ethiopian. for the purpose secondary data was collected from the annual report of conveniently selected seven commercial banks for the year 2000 to 2017. the study covered 38.9 % of 18 cbs operating in ethiopia (nbe, 2019) and has been exposed to cash reserve requirement regulation since the year 1996. data related to macroeconomic variables was collected from annual reports of nbe. stata software package version 14.0 was used to conduct the multiple linear regression analysis which suits the study objectives. 3.1. model specification an econometric model, based on based on the review of related literature, had been developed to represent hypothetical relationship between bank profitability and bank specific and macroeconomic variables. the study had measured profitability in terms of roa and roe. thus, the dependent variables in this study were return on asset (roa) and return on equity (roe) employed in two separate models. the macroeconomic and bank specific variables assumed to explain profitability in the models included: broad money supply (msp), cash reserve ratio (crr), gdp, and inflation (inf), bank size (bsz), leverage (lvrg) and credit risk (cr). the multiple linear regression equation which had been used in similar studies (khalid, 2012: ngugi, 2013: kokobe and birhanu, 2015; elshaday et. al., 2017) was used to express the hypothetical relationship between variables as follows: model 1: roa = β0+β1lnmsp +β2crr +β3gdp +β4inf +β5lvrg + β6cdr +β7ln (bsz) +µ model 2: roe = β0+β1lnmsp +β2crr +β3gdp +β4inf +β5lvrg + β6cdr +β7ln (bsz) +µ where, roa – return of asset roe – return of equity β0 – constant coefficient β1β7 – regression coefficients of independent variable ln msp – natural logarithm of broad money supply crr – cash reserve ratio of banks gdp – annual growth of gdp inf – inflation rate lvrg – leverage ratio crcredit risk ln bsz – bank total asset µ – error 3.2. description of study variables macroeconomic and bank specific determinants of commercial bank profitability in ethiopia 201 the dependent variable in the study was commercial profitability measured by return on assets (roa) and return on equity (roe). roa is measured by dividing net profit before tax by total average assets. it gives an idea on how far efficient management practices have been employed in the earning process (mutua, 2013). roe is measured by the ratio of net profit to average share holders’ equity. it indicates the extent at which the management generated sizable return on shareholders’’ equity (olweny & shipho, 2011). the independent studies in the study include the following selected macroeconomic and bank specific variables: broad money supply: the money supply (or money stock) is the total value of monetary assets available in an economy at a specific time. money supply is basically determined by the central bank's policy and affects the behavior of banks and their profitability. this study measured it by transformed natural logarithm of money supply. cash reserve requirement (crr): it is the specified minimum fraction of the total deposits of customers which commercial banks have to hold as reserves either in cash or as deposits with the central bank (dornbusch and fischer, 1990). crr is set according to the guidelines of the central bank of a country and is computed by dividing cash reserves by total deposits. gdp growth: gdp growth is defined as the annual change of the gdp, used as proxy to measure the economic condition. inflation rate: inflation is the rate at which the general level of prices for goods and services is rising in economy overtime. inflation erodes the purchasing power of consumer because we buy fewer good and services with each unit of currency. the relationship between bank profitability and inflation was introduced by revell (1980). leverage ratio: financial leverage is the degree to which net operating assets are financed by borrowing with net financial obligation (stephen, 2010). the degree is measured by taking a ratio of the debt to equity called leverage ratio. credit risk: it is source of risk in commercial banks and it is one of the key drivers of banks’ profitability which is measured by the ratio of loan loss provisions over total loans and advances used in the study done by heffernan and fu (2008), sufian and chong (2008) and in mirzaei and mirzaei (2011), tadese (2015) and elshaday et.al (2017). bank size: it is used total asset of banks from banks balance sheet. asset size is calculated by taking natural log of total asset of bank (ashraf, 2013). 3.3. results of diagnostic tests the estimators of models should satisfy all ols assumptions before the estimation is carried out (brooks, 2008). if the estimators of the model satisfy the ols assumptions it is possible to say the estimators are blue (best linear unbiased estimators). accordingly, appropriate diagnostic tests for each ols assumptions were conducted. mean value of errors was tested through including a constant term in the regression model since the mea n value should be zero. to test multicollinearity of the variables, variance inflation factors (vif) and tolerance level were checked. normality assumption is also tested by using shapiro wilk test and skewness and kurtosis test. then breusch-pagan test was also used to test the problem of heteroscedasticity which breusch-pagan test assumes the error variance is constant. below table indicated that all assumptions were satisfied the model except the presence of heteroskedasticity in model 2. since this problem detected, robust standard error was used. additionally, hausman test and breusch-pagan lm test were employed to select the appropriate model then ols regression model was chosen for this study. table 1 results of model assumption tests assumptio n/ model tests model pro. f-stat decision variables vif 1/vif heterosced asticity breusch-pagan lm roa 0.4297 fail to reject ln(bsz) 8.74 0.114382 roe 0.0000 reject ln(msp) 6.26 0.159652 normality shapiro-wilk roa 0.2638 fail to reject lvrg 3.96 0.252620 buzayehu abera lemi & matewos kebede rafera & million gezaw 202 roe 0.18772 fail to reject crr 1.52 0657052 normality skewness/kurt osis roa 0.0731 fail to reject inf 1.48 0.676637 roe 02791 fail to reject gdp 1.42 0.704885 omitted variables ramsey reset roa 0.0903 fail to reject cdr 1.40 0.712632 roe 0.0073 reject mean vif 3.54 hausman test fixed roa 0.8661 fail to reject roe 0.9729 fail to reject ols breuschpagan lm roa 0.1030 fail to reject roe 0.3185 fail to reject source: stata output based on data from nbe, 2019 4. descriptive statistics the study revealed the performance level of two dependent variables (roa and roe) on table 2. the first is roa that is measured by the operating income before tax divided by average total asset has a mean value of 3.80 percent. this shows that the selected commercial banks on average earned an operating income before tax of 3.80 percent of the total asset. since roa of banks indicates the management efficiency of a firm in generating profit before tax from all the resources invested in the institutions, the higher roa shows that the firm is more efficient in utilizing its resources. the standard deviation for roa was 1.3%, hence, this indicates that the profitability variation among the selected banks was small. the second one of dependent variable is the roe has a mean value of 35 percent. this also shows that the sample banks on average generating an operating income of 35 cents of each birr invested in. the high variation of which is 19.3% of standard deviation was recorded in the selected banks during the study period. table 2 descriptive summary of dependent and independent variables variable mean std. dev. roa 0.038 0.013 roe 0.36 0.193 crr 0.15 0.095 gdp 0.09 0.038 inf 0.12 0.111 cdr 0.01 0.011 lvrg 8.63 4.585 asset in million 25153.91 67924.87 money supply in million 155384 161357.10 source: stata output from nbe data, 2019 macroeconomic and bank specific determinants of commercial bank profitability in ethiopia 203 5. results and discussion the result of the panel regression model used in this study is presented in table 3. the result indicated that macroeconomic and bank specific factors used in the regression model explained 44.8% of profitability of commercial banks in ethiopia measured by roa. the adjusted r-square on model 2 was 75.93% indicating the explanatory variables more explained profitability of banks in ethiopia when measured by roe. in the model explained profitability respectively. according to hsiao (2003) cited on nyamsogoro (2010) the r-square value is considered as large if it exceeds 20 in a panel data regression model. both models were also found fit as showed by statistically significant f-statistic. table 3 results of regression analysis for model 1 & model 2 model 1 model 2 roa coeff. std. er. t. p>/t/ roe coeff. std. er. t. p>/t/ ln(msp) -0.00455 0.00214 -2.13 0.035 ln(msp) -0.04612 0.02189 -2.11 0.037 crr -0.00665 0.01154 -0.58 0.566 crr -0.23129 0.14968 -1.55 0.125 gdp 0.11036 0.02751 4.01 0.000 gdp 0.82123 0.24231 3.39 0.001 inf 0.02290 0.00977 2.34 0.021 inf 0.31071 0.10795 2.88 0.005 cdr -0.48017 0.10123 -4.74 0.000 cdr -6.53971 1.18927 -5.50 0.000 lvrg -0.00087 0.00039 -2.25 0.027 lvrg 0.02854 0.00521 5.48 0.000 ln(bsz) 0.00250 0.00163 1.54 0.127 ln(bsz) 0.02688 0.01691 1.59 0.115 cons 0.09644 0.03061 3.15 0.002 cons 0.64728 0.28543 2.27 0.025 f(7,118) 13.69 r 2 0.4481 f(7,118) 22.98 r 2 0.7593 prob> f 0.0000 adj. r 2 0.4154 prob> f 0.0000 source: stata output from nbe data, 2019 regarding macroeconomic variables, table 3 indicates that the broad money supply (β = -0.00455, t = 2.13, p< 0.05) had a statistically significant negative impact on profitability measured by roa. similarly, the result in model 2 showed a significant negative effect of the msp (β=-04612, t =2.11, p< 0.05). these findings are found similar to kwakwa (2014) but contradicted with faith (2016). results on table 3, on the other hand, showed a positive impact of gdp growth rate (β =0.11036, t =4.01, p=0.000) on roa and (β =0.82123, t = 3.39, p < 0.001) on roe in a similar vein to hassan and bashir (2003), pasiouras and kosmidou (2007), and kosmidou (2008) who concluded a positive impact of gdp on the profitability of commercial banks. it can also be seen from table 3 that the rate of inflation (β = 02290, t = 2.34, p < 0.05) had had a significant positive effect on roa. the positive impact of inflation (β=0.31071, t=2.88, p < 0.001) was highly significant on profitability measured by roe in model 2. this confirmed the study of tesfaye (2013) and ferede (2016) who had concluded a positive effect of inflation on the profitability of commercial banks in ethiopia. yet, the results on table 3 showed no significant empirical evidence s on how the cash reserve ratio affected the profitability of commercial banks in ethiopia. the result in respect is similar to previous findings (chimkono, 2016; abid, 2015 and mulwa, 2015). it has also been observed from table 3 that among the bank specific factors, the leverage ratio showed a mixed effect. it showed a significant negative influence (β = -0.00087, t = 2.25, p < 0.05) when profitability represented by roa in the first model but the effect of leverage ratio becomes stronger positive (β=0.02854) and highly significant (p < 0.001) on profitability measured by roe. results on table 3 also showed that credit risk had a significant negative effect on profitability measured by roa (β = -0.48017) and roe (β= -6.53971) at a 1 % level of significance. these confirmed tefera (2011) and eneyew (2013) who had concluded a negative effect of credit risk on the profitability of commercial banks in ethiopia. similar empirical evidence had also been found in the context of other countries (ara et. al., 2009; kithinji, 2010; al-khouri, 2011). on the other hand, bank size showed a positive effect but was not statistically significant in both models even at 10% level of significance. this was found consistent with prior empirical evidence elsewhere (sufian & habibullah, 2009 and kosmidou, 2008). buzayehu abera lemi & matewos kebede rafera & million gezaw 204 6. conclusion this study aimed at examining how macroeconomic and bank specific variables influenced the profitability of commercial banks in ethiopia. the study hypothesized four macroeconomic and three bank specific variables as predictors of profitability measured by roa and roe in two separate models. based on the findings, the study concluded that broad money supply negatively affected profitability of commercial banks in ethiopia. yet, it impels positive effect of gdp and rate of inflation. nevertheless, the study found no empirical evidence to conclude on the observed negative effect of the reserve ratio. regarding the bank-specific factors, the study implied a negative effect of bank size, and credit risk. however, the leverage ratio has a mixed effect. the effect of leverage ratio was found negative on roa but it showed positive effect on roe. the result, in general, suggested the need for enhancing credit risk management practice, optimizing the leverage ratio in increasing bank size. a thorough understanding of the strategic business environment also found highly relevant in commercial bank management for the fact macroeconomic variables and regulatory factors found to have significant implication on profitability. references abid, f.s and lodhi, s. 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(2014). impact of non-performing loans on financial performance of microfinance banks in kenya: a survey of microfinance banks in nakuru town. international journal of science and research (ijsr), 3(10), 2319-7064 yirgalem, n (2015). determinants of profitability in ethiopian commercial banks: the case of private commercial banks (2001-2013), unpublished mba research paper, saint mary university school of graduate studies, ethiopia. international journal of commerce and finance, vol. 6, issue 2, 2020, 179-186 179 digital innovation: an antecedent for digital transformation ahu tuğba karabulut i̇stanbul commerce university, turkey received: sept 13, 2020 accepted: sept 25, 2020 published: oct 02, 2020 abstract digital innovation facilitates digital transformation of companies. companies which conduct digital innovation can have and sustain competitive advantages in the market place. digital product innovation, digital process innovation and digital business model innovation are major types of digital innovation. the purpose of this paper is to highlight the concept of digital innovation, explain its types and focus on its advantages for companies. digital innovation is using information and communication technology (ict) to create new and improved products, processes, business models, marketing and organizational methods and network. it has three main types namely digital product innovation, digital process innovation and digital business model innovation. its advantages can be summarized as reducing co sts, improving productivity and relationships with stakeholders, and increasing competitive advantages, market share, sales and profits.. keywords: digital innovation, digital transformation, advantages 1. digital technologies and digital transformation digital technologies are required to achieve digital transformation. thus, companies need to implement digital innovation by using digital technologies to achieve digital transformation. digital technologies are composed of information, processing, communication and technology (olszak 2015). the key low cost digital technologies are a s follows: automation, digital platforms, mobile technologies, cloud computing, social media, big data analytics, artificial intelligence, blockchain, the internet of things, the internet of everything, 3d and 4d printing, robotics, autonomous vehicles, machine learning and augmented reality. digital technologies are the reasons of comprehensive changes in the management (nowicka, 2019, pp. 203-208). new digital technologies such as big data analytics, application program interface (api), distributed ledger technology (dlt), cloud computing, machine learning are used to collect, store, exchange and analyze information in digital format (pochenchuk, babukh, and baraniuk, 2018, p. 65). digitalization is transforming entirely or primarily physical contents, processes, and objects to be entirely or primarily digital (negroponte, 1995) (fichman, dos santos, and zheng, 2014, p. 333). digitization is a continuous convergence process of the virtual and real world, is the driver of innovation and change in several sectors (pieriegud, 2016) (nowicka, 2019, p. 204). digitizing processes improve efficiency and make processes more malleable and tailorable. the advantages of digitized contents (text, video and images) are as follows: making unlimited copies, transmitting, duplicating, decreasing costs, improving analyzing, searching, improving and correcting contents (negroponte, 1995). digitizing includes new properties to objects such as addressability, programmability, memorability, communicability, sensibility, associability, and traceability to manufacture malleable digital products and create new domains of potential functionality (yoo, 2009) (fichman, dos santos, and zheng, 2014, p. 333). there is a digital gap between expectations of customers and abilities of companies to meet them. companies which can adapt to digital changes fast can survive. competitive pressures lead companies adapting the process of digital transition to customer expectations and business conditions. companies change their business strategies and models in an environment where market entry barriers are low and information is their resource. new technologies leading business changes increase revenues and profits. digital transformation affects competition and market structure between enterprises. competitiveness among companies in the digital environment is stronger especially when the elasticity of substitution is highlighted, when product interchangeability is high, and while building customer relationships is important by purchasing habits, customer services and after-sale maintenance services (kostić and rađenović, 2017). digital transformation is the main theme of the business strategies and company development. it is a way to reach better business results by using new technologies. digital transformation is organizational change in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e ahu tuğba karabulut 180 management, new technology introduction, business model redefinition, product process customization, and business process optimization (privredna komora srbije, 2017). digitization leads using of new technologies to transform a business model to customer needs and adapt to market demand. digitalized enterprise increases automation of business processes to eliminate repetition of jobs, decrease operating costs and human error risk, connect business functions, automate communication with stakeholders, and perform jobs in a reliable business information system. digitized business creates competitive advantages and stable market position. the digitization process is an technological advancement which will empower customers, increase competition, create added value, enable to reach customers directly, and price of product is decreased (cominng computer engineering, 2017) (kostić, 2018, 18). key changes caused by digital transformation are as follows: a) consumer experience: traditional marketing techniques are expanded to understand consumer needs and behaviors: customer segmentation using tools and internet information, familiarity with consumer needs, tastes, and behaviors through social networks, development of predictive marketing, digital self-service, and customized applications. b) business processes: employee networking, performance improvement, job mobility, decision-making based on advanced analytics and data. employees and customers communicate with algorithms instead of other employees. c) business models: there is a transformation from the physical into the digital by increasing digitalized products and services for redefining business boundaries and the organizational model transformation (coming computer engineering, 2017) (kostić, 2018, 19). 2. the concept of digital innovation digital innovation can be defined as using information and communication technology (ict) to implement new and improved products, processes, business models, network, and organizational and marketing methods. innovation is the role of architecture of information technology artifacts to constrain and enable developing new information technology artifacts and implying to structure and manage innovation in companies. although digital innovation is related to design, it has more holistic perspective to focus wider concepts (kohli and melville, 2019, pp. 201-202). nambisan et al. (2017, p. 224) define digital innovation as “the creation of (and consequent change in) market offerings, business processes, or models that result from the use of digital technology”. several authors such as yoo et al. (2010) focused on innovating products (hanelt et al., 2019, p. 59). henfridsson, yoo, svahn (2009) define digital innovation as using unused digital technology in a product. yoo et al. (2010) believe that using digital technologies initiate digital innovation which create digital transformation. akesson (2009) adds that digital innovation is a solution triggered by digital technologies for innovating information and communication technology (ict) products (nowicka, 2019, p. 204). digital innovation can be defined as implementing new or significantly improved ict products and solutions. it can be defined as using ict for implementing new or improved product, process, external relations, new marketing method and organizational method. it can be considered as innovation triggered by technology (reimsbachkounatze, 2016). digital innovation is defined as the creation of market offers, business models or processes which are created by using digital technologies (nowicka, 2019, p. 204). digital innovation is a product‐centric perspective with new combinations of digital and physical products to create new products (lee and berente, 2012; yoo et al., 2010) (kohli and melville, 2019, p. 201). digital innovation is a new business model, product and process which requires significant changes of adopters, and is enabled and embodied by information technology (fichman, dos santos, and zheng, 2014, p. 330). digital innovation is the creation of and change in market offerings, business models and processes which use digital technology. digital technologies and digitizing processes form, develop, diffuse and assimilate new idea in digital innovation. digital innovation management is the principles, practices, and processes which underlie the effective orchestration of digital innovation (nambisan et all., 2017, p. 224). the digital innovation is technologies and digital working and project practices. it includes technologies for the design manipulation in the form of 3d or other visualization techniques such as virtual reality and the collaboration around and coordination of digital data by using workflows, processes, and standards (shibeika and harty, 2015, p. 455). digital innovation: an antecedent for digital transformation 181 digital innovation requires innovations for new platforms, products, services, customer experiences and ways of delivering value by using digital technologies. the results of these innovations may not be in digital form. digital innovation occurs from using digital infrastructure and tools such as blockchain, mobile data processing, 3d printing, cloud computing and data analytics. digital innovation effects may be disseminated, adapted, or adopted to applications such as digital platforms (nowicka, 2019, p. 204). according to cooper and zmud (1990), digital innovation consists of activities of initiating (triggering, identifying opportunities, making decisions), developing (designing, adopting, developing), implementing (maintaining, installing, providing incentives, training), and exploiting (return maximizing, system and data leveraging for new purposes) (kohli and melville, 2019, p. 202). nambisan (2016, p. 5) defined digital innovations as “infuse a degree of generativity, and hence an extent of unpredictability and fluidity, into entrepreneurial outcomes”. tallon and pinsonneault (2011) believe that digital innovation renders organizational agility as an essential capability to adapt to the turbulant environment. according to yoo et al. (2012), digital innovation is flexible because it is built on digital technologies and innovation outcomes and processes become more complex when companies combine their products and services with products and services of their partners for digital innovation. they (2012, p. 1405) add that increased pace based on generative characteristics causing it “to be continuous, relentless, and fast” characterizes digital innovation. el sawy and perreira (2013) state that companies adopt digital innovation to satisfy their customers and have competitive advantages (hanelt et al., 2019, p. 62). digital innovation brings a new perspective and framework to the innovation process (grover and kohli, 2013; nambisan et al., 2017; nylén and holmström, 2015). digital innovation has a catalyst role for industrial convergence. it initiates collaborations among actors which used to be autonomous in different branches in the industries (yoo et al., 2012). it leads to a multi-actor environment (lyytinen, yoo, and boland, 2016; svahn, mathiassen, and lindgren, 2017). it is essential to understand expectations from and contributions to the solution provided by innovation (makkonen and komulainen, 2018, 1016). digital innovation is created due to industrial requirements and engaged market actors into innovation, needs compatible technologies (parker, van alstyne, and jiang, 2017). it is linked to market dynamics, initiates market needs, complements and substitutes (nambisan et al., 2017) (makkonen and komulainen, 2018, p. 1017). digital innovation is a strategic initiative effected and organized within the function of information technology (it) services. the organization which is a backdrop of digital innovation has business strategies, cultures, and methods affecting digital innovation can be shaped by digital innovation initiatives and shape them (pentland and feldman, 2008). digital innovation can change the company by enabling new business models (fichman et al., 2014) (kohli and melville, 2019, p. 202). digital innovation diffusion focuses on complex elements of a business model or individual solutions. it is connected with digital business transformation process which uses digital technologies for changing the business model and providing opportunities for value and income. it is the process of converting the business model to the digital enterprise model (www.gartner.com/it-glossary/digitalization) including cooperation (nowicka, 2019, p. 204) digital innovation actions outcomes external competitive environment internal competitive environment initiate develop implement product sevice process expolit figure 1. theoretical framework of digital innovation ahu tuğba karabulut 182 resource: the figure was adopted by the author from r. kohli and n. p. melville (2019) digital innovation: a review and synthesis. information systems journal, 29, p. 202. table1. the management framework for digital innovation technology solutions market needs management levels for digital innovation idea of digital innovation innovation concept level digital innovation as a defined solution to a defined need innovation network level digital innovation as interlinked solution couplings of the innovation network members interrelated industries level digital innovation as phonemenon in a dynamic web interlinked solution couplings of various suppliers and customers in interrelated industries resource: the figure was adopted by the author from h. makkonen and h. komulainen (2018) explicating the market dimension in the study of digital innovation: a management framework for digital innovation. technology analysis and strategic management, 30(9), p. 1025. https://doi.org/10.1080/09537325.2018.1433823 companies provide new solutions for new needs to by proceeding digital innoovation. they form innovation networks with its stakeholders in their industry to focus on new solutions (makkonen and komulainen, 2018, p. 1017) table 2. theoretical framework constructs for digital innovation construct description initiate identifying, applying, and assimilating valuable knowledge from outside and inside of a company pertaining opportunities and problems amenable to digital innovation. develop developing and designing a new information system, customizing an existing solution, adopting a pre‐existing solution. implement maintaining and installing is from an organizational and technical perspectives consisting of training, new governance processes and systems. exploit leveraging existing is for maximum value. reusing systems and data for new purposes. internal competitive the organizational backdrop consisting of strategies, knowledge management, environment cultures, and methods. external competitive the competitive marketplace where company is embedded consisting of consumer environment segments, fashion and fads. outcomes projected or actual new products, processes, and services due to digital innovation. resource: the table was adopted by the author from r. kohli and n. p. melville (2019) digital innovation: a review and synthesis. information systems journal, 29, p. 203. digital innovation: an antecedent for digital transformation 183 3. types of digital innovation product innovation, process innovation and business model innovation are main types of digital innovation which companies implement to have and sustain their competitive advantages. digital product innovations are new products or services which are enabled by or embodied in information technology. its examples are new enterprise platforms (crm, erp), new consumer products (smartphones), and existing products enhanced by adding a digital technology (fichman, dos santos, and zheng, 2014, p. 334). digital product innovation focuses on companies producing digital products, institutions, supply-side processes, structures, and market dynamics which support development and diffuse of new products. product innovation is restricted by a core technology, and complementary products and services which are used to provide a product solution and a customer value (mckenna 1985, p. 918) (fichman, dos santos, and zheng, 2014, p. 334). digital process innovations are new ways to do thing in companies which are enabled by or embodied in information technology. its examples are using social media to affect customers and getting their ideas for open innovation or using warehouse automation to manage inventory. companies which apply digital innovations can develop or deploy them by themselves or adopt them from the market. digital process innovations affect processing of transactions, making decisions, dealing with new and existing suppliers and customers. digital process innovations lead to administrative changes such as governance and organizational structures (daft, 1978; markus, 2010 and swanson, 1994). digital process innovation encompasses core technology with organizational technican elements to support the business strategy (fichman, dos santos, and zheng, 2014, p. 334). the business model concept is popular across several disciplines due to explicating the core business logics (osterwalder et al., 2005). chesbrough (2010) believes that a business model is a way of a company for creating and capturing value from technological advances. the value which is provided by underlying technologies depends on the integrated business model. business models are a focus of information systems (is) research on the transformative and disruptive potentials of enhancing business environment digitalization (lucas and goh, 2009; kranz et al., 2016). recent studies highlighted that digital technologies were a primary driver of business model innovation (bmi) (teece, 2010; fichman et al., 2014) (hanelt et al., 2019, p. 59). fichman et al. (2014) acknowledge that digital business model is a company way for creating and delivering customer value for having profits by using information technology. digital business model innovation is different from traditional business model innovation. digital business innovation is flexible for using digital technologies (yoo et al., 2012) and generativity (zittrain, 2006) and is adaptable, incomplete and dynamic. generativity is the fact that digital technologies create data traces which are basis for new innovations (yoo et al., 2012). digital business model innovation is convergence in several approaches stemming from the openness initiated by digital technologies (yoo et al., 2012) (hanelt et al., 2019, p. 60). companies face with challenges of intense competition, and digital technology development changes customer expectations and business models (kostić, 2018, p. 17). business model innovation is considered as the third type of innovation by several researchers. teece (2010, p. 173) believes that a business model “defines how the enterprise creates and delivers value to customers, and then converts payments received to profits”. digital business model innovation is a new approach to create and capture business value which is is enabled and embodied by information technology. teece (2010) adds that information technology has become the main driver of business model innovation. its examples are dvd-by-mail subscription service by netflix’s, ad-sponsored search business of google. business model innovation focuses on supply side of innovation and includes a product innovation as well. digital innovation stages are discovery, development, diffusion, and impact (fichman, dos santos, and zheng, 2014, 335). when companies use digital technologies in business model innovation, they are involved in external knowledge integration (yoo et al., 2012), benefiting their abilities to do so in the future (cohen and levinthal, 1990). the openness afforded by digital technologies drives an absorptive capacity of the company (roberts et al., 2012) (hanelt et al., 2019, p. 65). huang et al., (2017) believe that digital innovations led rapid scaling by using digital platforms. companies should give response to changing demands to profit from digital innovation scalability. sambamurthy et al. (2003) highlight that digital innovations lead to a turbulent business environment, the ability to sense and respond to change regarding operations, competitors, and customers (sambamurthy et al., 2003). bharadwaj et al. (2013) and el sawy and pereira (2013) believe that digital innovation is a vital factor to innovate digital business model effectively. tallon ahu tuğba karabulut 184 and pinsonneault (2011, p. 464) define organizational agility as “the ability to detect and respond to opportunities and threats with ease, speed, and dexterity.” although innovation success is connected to integrating new knowledge (carlile, 2002), the convergence of digital innovations increases external knowledge resources dependence (yoo, 2010) collaboration in digital ecosystems is based on couplings, and the speed of network formation is increasing at a faster rate in digital ecosystems than traditional industries requiring development of organizational capabilities to exploit information, data, and knowledge (bharadwaj et al., 2013). business models relying on cloud computing technologies is characterized by customer relationships requiring companies gather information about customer preferences to be successful (kranz et al., 2016) (hanelt et al., 2019, p. 63). 4. advantages and outcomes of digital innovation companies achieve digital innovation to be ahead of their competitors. creating values to stakeholders, satisfying and surprizing customers, increasing market share, profits and corporate image are main advantages for companies to implement and use digital innovation. reasons for using digital technologies are as follows (nowicka, 2019, p. 209): pressures of customers, shortening the supply chain and eliminating intermediaries, pressures of competitors, improving transparency, synchronizing activities, making more innovations, shortening process implementation time, accessing to an internet platform, connecting partner’s data, reducing process implementation costs, improving communication and coordination, using less employees and decision of the leader. changes occuring from implementing digital technologies are as follows (lei et al., 2010; agrawal and narain, 2018) (nowicka, 2019, pp. 207-208): redesigning business process models including their standardization, digization, and improvement, process automation and improvement based on a new way of access to information, cooperation among actors and stakeholders including connectivity, data exchange, partnership, integrating business functions, implementing product and process innovations, greater transparency for better decisions, reducing inventory levels due to just-in-time deliveries, better visibility of resources due to full integration of systems, greater decentralization of storage to reduce costs associated with deliveries, understanding customer needs much better and improving customer relationships, reacting quickly to demand changes, accessing to current sales information, and increasing sales, profit margins and competitive advantages. impacts of digital innovation are as follows (fichman, dos santos, and zheng, 2014, 338): industrial transformation, distinctive diffusion dynamics, diversity of product and service, personalization of product and service, faster innovation cycles and processes, faster and broader diffusion of product, pricing and distribution flexibility, marketing new products with new approaches, using smart technologies and servitization, moving to real-time question answering systems, creating analytics-driven digital innovation opportunities and democratized innovation. changes occuring from using digital technologies are as follows (nowicka, 2019, p. 210): increasing level of process automation, eliminating unnecessary activities, adding new distribution channels, communicating with stakeholders and partners at the same time, and increasing efficiency of logistics activities. increase in the number of patents is the major outcome of digital innovation (cockburn and griliches, 1988; gittelman and kogut, 2003). digital innovation will affect risk mitigation, productivity, customer loyalty, and profitability. other digital innovation outcomes are risk mitigation, process redesign, error reduction, sales increase (menon and kohli, 2013), customer satisfaction and market share. digital innovation affects features of products, time-to-market, and customer reach (kohli and melville, 2019, p. 213). digital innovation offers innovation outcomes such as new platforms, customer experiences, products, and services and other value pathways which are created by using digitized processes and digital technologies. on the other hand, outcomes don’t have to be digital. digital innovation has digital infrastructure and tools (3d printing, mobile computing, data analytics etc.) for occurance of innovation. digital innovation outcomes may be assimilated, adapted and diffused to contexts of digital platforms (swanson, 1994; bharadwaj et al., 2013; tilson et al., 2010; tiwana et al., 2010; yoo et al,. 2012; yoo et al., 2010) (nambisan et all., 2017, p. 224). companies make investment to digital transformation to increase productivity. they should increase digital transformation investments if they want to be market leader and defeat competitors. according to an empirical research conducted on 644 production companies in five european countries which analyzed what extent companies used advanced technologies and how it reflected on growth of productivity, most companies (55.9%) adopted at least one it instrument, there was a positive link between the company size and the digitization degree. there were digital innovation: an antecedent for digital transformation 185 few companies which were international, dealed with digitization, conducted research and development and grew with their size (veugelers, 2017). company productivity grows consistent with applied information and communication tools number. there is an increasing productivity by using new information communication tools. if effects of introducing digital tools by market leaders on productivity are examined, it will be observed that digitally active companies which adopt an information and communication instrument generates 3% more productivity growth than digitally inactive companies, and additional tool usage improves productivity (kostić, 2018, p. 19). there is a positive relationship between digitization and productivity. one of the regressive models regards labor productivity is a function of internationalization, investing in research and development, and company ownership structures. if digitization is adopting minimum one information-communication tool, there will be a positive correlation between digitization and organizational productivity level. when most productive companies apply advanced tools by 20%, they will have higher productivity growth (over 18%). also, there will be bigger gap between leaders and followers (altomonte, aquilante and ottaviano, 2012). digital economy and society index (desi) was created to combine the following indicators to monitor the development of digital performance: 1) human capital (skills and development); 2) integration of digital technologies (e-commerce and business process digitalization); 3) connectivity (fixed and mobile internet accesses, internet speed and accessibility); 4) using internet (content, online transactions, and communication); 5) digital and public services (e-government) (european commission, 2017) (kostić, 2018, p. 20). high performance digital companies have the following elements; (1) organization; (2) customer decision making; (3) process automation; (4) technology; (5) strategy and innovation, and (6) analytics and data (mckinsey and company, 2017) (kostić, 2018, p. 19). digital technologies play a more supportive and indirect role in orchestration of innovation. problems and solutions emerge from the functional potential initiated by joint and opportunistic sensemaking around digital technologies and formation of new couplings between needs, artifacts, sociotechnical environment, and affordances in digital innovation. digital platforms support innovation orchestration for finding solutions to problems. the potential digital platforms features to find solutions to problems lead to study the intermingling of digital and human agencies in innovation orchestration (nambisan et all., 2017, p. 231). barriers to the implementation of digital technologies are as follows (nowicka, 2019, p. 211): high cost of technology, excluding intermediaries, not having specialists to use the technology, lack of knowledge about technologies and their impact on processes, data security concerns, dependence on the leader who determines the implementation of a technology and fear of losing relationships with partners. 5. conclusion implementing and using digital innovation are required for companies to achieve digital transformation. digital innovation implementations are expected to increase in and after 2020 due to pandemic and other global changes. digital transformation is triggered by pandemic so it leads companies to implement digital innovations to gain and sustain competitive advantages, satisfy their stakeholders and provide more values to them, improve productivity, decrease costs, increase their market shares, sales and profits, and expand in global markets. companies can implement digital innovation by getting the advantages of their network of their stakeholders. thus, they can offer more appropriate digital solutions to market needs and expectations. companies should formulate a digital innovation strategy which is consistent to their corporate strategies, they should allocate enough resources to form the appropriate infrastructure and teams to implement digital innovation, and market its products and services to achieve their performance goals. it can be summarized that digital innovation is a pathway for digital existence, appereance and image of companies in the global marketplace. ahu tuğba karabulut 186 references fichman, r. g., dos santos, b. l., & zheng, z. (e) (2014), “digital innovation as a fundamental and powerful concept in the ınformation systems curriculum” mis quarterly, 38(2), 329-354 + appendices hanelt, a., leonhardt, d., hildebrandt, b., piccinini, e., & kolbe, l. m. (2019), “pushing and pulling-digital business model ınnovation and dynamic capabilities” journal of competences, strategy and management, 10, 55-78. https://doi.org/10.978.395710/3390 kohli r., & melville n.p. (2019), “digital innovation: a review and synthesis” information systems journal, 29, 200223. https://doi.org/10.1111/isj.12193 kostić, z. (2018), “innovations and digital transformation as a competition catalyst” ekonomika, 64(1), 13-23. https://doi.org/10.5937/ekonomika 1801013k makkonen, h., & komulainen, h. (2018), “explicating the market dimension in the study of digital innovation: a management framework for digital innovation” technology analysis and strategic management, 30(9), 1015-1028 https://doi.org/10.1080/09537325.2018.1433823 nambisan, s., lyytinen, k., majchrzak, a., & song, m. (2017), “digital innovation management: reinventing innovation management research in a digital world” mis quarterly, 41(1), 223-238. nowicka, k. (2019), “digital innovation in supply chain management” research papers of wrocław university of economics, 63(8), 202-214. pochenchuk, g., babukh, i., & baraniuk, d. (2018), “innovations of the digital era and economic choice” usv annals of economics and public administration, 18(1), 63-69. shibeika, a., & harty, c. (2015), “diffusion of digital innovation in construction: a case study of a uk engineering firm” construction management and economics, 33(5-6), 453-466. http://dx.doi.org/10.1080/01446193.2015.1077982 international journal of commerce and finance, vol. 4, issue 1, 2018, 27-39 27 non performing financing factor in syaria commercial banking in indonesia erik nugraha sangga buana university, bandung, indonesia audita setiawan sangga buana university, bandung, indonesia abstract this research is based on one of the biggest risk faced by sharia banking that is related to problematic financing that happened due to failure in funding process at bank syariah. sharia banks must have the ability to manage risks on the distribution of financing so as to prevent the creation of non-performing financing (npf). this study aims to examine the effect of return on financing profit and loss sharing (pls), bank size and inflation to non performing financing (npf). the method used in this research is analytical descriptive method to explain each research variable and verifikative with quantitative approach to show whether there is influence of free variable to dependent variable. the data to be analyzed in this study using panel data and will be analyzed by using multiple linear regression. the result of the research shows that the return of financing profit and loss sharing has significant effect to non performing financing with negative influence direction, bank size influence to non performing financing with negative influence direction and inflation has no significant effect to non performing financing with positive direction. this study also shows the result that the return of financing profit and loss sharing, bank size and inflation simultaneously (simultaneously) have an influence on non performing financing. keywords: non performing financing, profit and loss sharing, bank size, inflation 1. introduction the global financial crisis that occurred in 1997 has many negative impacts on the world economy, especially in the banking sector. banking is one of the most severely affected sectors, not to mention banking in indonesia. the financial crisis that occurred then expanded into an economic crisis. the economic crisis caused some banks to be closed by the government. therefore to prevent bank from being closed, banks need to manage risk. banks in carrying out its functions will always be exposed to various risks, one of the risk is credit risk. the risk represents the risk of failure on the credit provided by the bank, in which the debtor does not perform the obligation on the loan. the bank must be able to manage these risks so as not to result in the formation of non-performing loans that could be detrimental to the bank. some examples of cases of credit failure that occurred in banks in indonesia one of them is bad debts that occurred in bukopin bank worth rp 65 billion, where the credit is distributed in order to procure drying equipment (drying center) in east java and central java. the incident is considered to arise because there has been a deviation of lending procedures. another case that occurs is the level of default in 2013 at jatim bank which is a government-owned bank, which reached 3.25 percent of the debtors. the percentage increase compared to the previous year of 2.96 percent, and the increase in non-performing loans came from real sector credit ie people's business credit. the cases of non-performing loans in some conventional banks are evidence of failure in the lending process. the high npl reflects bank failures in lending. the higher npl will result in losses for the bank and also its investment customers. the bank suppresses the interest rate of the investment and applies high for credit in order to share its failure. in the distribution of risk, islamic banks do not rely on interest rates a\s adopted by conventional banks. sharia banking uses profit-sharing principles (pls) in running its operations. non-performing loans (npl), in sharia banking are called non-performing financing (npf). the distribution of funds in islamic banks is known as financing. banks should be able to manage the risks of financing disbursements in order to generate expected returns and can prevent the creation of problem financing (npf). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e erik nugraha & audita setiawan 28 financing disbursed by islamic banks is inseparable from the risk of non-performing financing, and is no exception to profit and loss sharing (pls) financing. the risks contained in pls financing are considered higher than other financing. pls financing based on trust between the owner of the fund (shahibul maal) and the debtor as the entrepreneur (mudharib), and the absence of guarantee causes pls financing to be highly vulnerable to the misuse of trust by the debtor. this can cause problems with financing disbursed. the risk level of each sharia bank financing based on bank perceptions summarized by international research training institute (irti) can be shown in the following table: table 1 level of risk in any type of financing financing type credit risk price risk liquidity risk operational risk murabahah 2.56 2.87 2.67 2.93 financing type credit risk price risk liquidity risk operational risk mudharabah 3.25 3.0 2.67 3.08 musyarokah 3.69 3.4 2.92 3.18 ijarah 2.64 2.92 3.1 2.9 istisna 3.13 3.57 3.0 3.29 salam 3.2 3.5 3.2 3.25 diminishing musyarokah 3.33 3.4 3.33 3.4 note: information: scale 1 to 5, where 1 as the least risky and 5 financing as risky financing. source: (muntoha and mulyo, 2011) referring to the data, if the distribution of pls financing increases, it is considered will increase the level of risk of non-performing financing. according to mustafa and ranti (2007), the determination of a proper profit-sharing ratio will provide high returns for high-risk financing, ie profit sharing (pls). this is a bank policy that is judged appropriate in an effort to reduce the risk of non-performing financing (npf) from the debtors who are not responsible. based on this, if the returns ratio of high risk financing (profit and loss sharing) increases then ideally npf ratio will decrease. the same is also obtained from the research of mustafa and ranti (2007), that the increasing return ratio of pls (mudharabah and musyarakah) will reduce the ratio of npf at bank muamalat. mutamimah and siti nur (2012) also concluded his research that return pls give negative effect to npf sharia bank. different results were obtained from research conducted by siti (2008), where the coefficient of profit return return and loss sharing value was positive, ie every increase of profit return return and loss sharing ratio followed by increase of npf. the results of muntoha and a mulyo (2011) concluded that the return pls no significant effect on non-performing financing. the results of this study is strengthened by the results of research nur anis qadriyah and tettet fitrijanti (2004) ie the different types of financing products for the results and financing the sale and purchase has no effect on the npf. based on the research gap, it is necessary to do further research in order to know the actual results. ahmed (2006) identified the factors that led to the emergence of npls, one of the factor is the state of the bank. the state of the bank can be measured one of them with a variable size of the bank. the size of the bank contributes to the npl or in the sharia bank is called the npf. large banks are considered to grow and able to expand financing. total assets are indicators that can measure the size of a bank. based on this it can be concluded that large banks will be able to manage risk better. this is evidenced by the ability of banks in managing the portfolio and impact on rising profits. these conditions indicate the good quality of the bank's productive assets, thereby being followed by a decrease in non-performing financing (npf). non performing financing factor in syaria commercial banking in indonesia 29 the result of ahmed's research (2006), is that bank size is one factor that has negative correlation with npl. in addition, kheemraj (2005) also mentioned that, the large total assets make banks more able to manage the business and risk. the greater the total assets, will improve the quality of productive assets and the growth of bank financing, thus reducing the npf ratio. gunsel (2007) agrees that opinion, which according to him, the larger bank assets will negatively affect the problematic condition of the bank. different results are shown by kevin j stiroh and adriene rumble (2005), in their research in the united states, that assets have a significant positive effect on business risks. distinguin, et al. (2010) also states that the larger the bank, allowing greater incentives also in taking a greater level of risk. this indicates that the larger the size of a bank will be followed by an increase in the bank's business risk, one of which is the financing risk. thus it is seen that the existence of a research gap related to the influence of bank size to npf, so it is necessary to do further research. problem financing can also be caused by external factors of the bank ie macroeconomic factors, one of which is inflation. bbc.co.uk recorded july inflation soared exceeding market expectations of 3.29%, posting the highest rate since 2008. the calendar year inflation rate from january to july 2013 stood at 6.75% and the annual inflation rate from july 2012 to july 2013 jumped 8.61%. high inflation is expected to encourage the banking sector to exercise restraint in channeling financing to communities. high inflation leads to an increase in the prices of basic necessities, resulting in the ineffectiveness of the debtor's business, resulting in a weakening of the debtor's income which ultimately affects the borrower's ability to pay the financing. failure of financing repayment by debtors will increase the ratio of non performing financing (npf). inflation is proportional to non performing financing (npf), where if inflation rises or falls, it will be followed by an increase or decrease in npf. with the increase in inflation it will result in the ability of customers to pay installments will also be disrupted. chandra and monita (2013), revealed that in theory the base, the npl of commercial banks will increase if inflation and interest rates increase. the essence of npls and npfs is similar, as it reflects the channeling of credit / financing. the result of siti (2008) research, that inflation affects the ups and downs of npf in syariah mandiri bank. the condition of the npf increase is influenced by bank external factors that occur suddenly and disrupt the financial performance of the community. zribi and boujelbene (2011) concluded the results of his research that inflation has a positive effect on non performance loan. this is because the increase in inflation affects the ability to pay from debtors (payment capacity). different research resulted from fofack (2005) research that inflation has negative relation with npl. similar results were also obtained from mutamimah and siti (2012) studies, in which inflation had a negative effect on the npf of sharia commercial banks. it is considered that inflation is well responded by the bank, and the debtor is perceived to have a responsibility or commitment to fulfill its obligation in paying off its loan to the bank. arya wikutama (2010) concludes his research findings that inflation does not have a significant impact on npl changes. the existence of a gap of existing data in certain years and the results of previous research, then it is necessary to do research. 2. review of literature and development of hypotheses 2.1 return financing profit and loss sharing return on profit and loss sharing is the amount of gain or loss attributable to an equity or equivalent in a business (cooperation) with another party, and using profit and loss sharing on the result of the business. the profit-sharing ratio as well as the losses to be gained, determined and agreed upon in the contract. barenberg (2004) in mustafa and ranti (2007), reveals how to obtain higher returns can be obtained by increasing the profit ratio for banks in agreements with debtors. 2.2 bank size the size of an institution in finance sector can be assessed through its assets, deposits or equity capital. total assets / assets are commonly used in banking. this is in line with what is stated by the office of advocacy in elisa tjondro (2007) who conducted a study on "rank and size description for 1996 study", that bank size reflects asset size of financial institutions. banks with large assets will have the opportunity to place funds in the credit sector. companies erik nugraha & audita setiawan 30 that continue to grow is certainly a fresh breeze for investors because they hope the funds invested in the company is able to create attractive benefits. this is in line with that stated by vogt (1997) in tan (2012), that a growing company will be responded positively by the market. stever's research (2005) in jakubík (2013) demonstrates a strong evidence that regulators determine the asset risk limits of each bank, regardless of the size of the bank. therefore, small banks have risks associated with loan portfolios. this is because these banks are not able to diversify the risks as big banks do. according to jakubík (2013), the limitations of these small banks are an accumulation of insufficient funding, less diverse types of borrowers (including lack of access to large-scale borrowers), and limited accessible areas. 2.3 inflation according to bustama (2013), inflation is one of the problems in the economy that every country always faces. meanwhile, according to prathama and mandala (2004) in bustama (2013), inflation is a symptom of a general increase in the price of goods that are continuous. inflation can be inferred a condition of continuous increase in the average price level. inflation is one of the bank's external factors that can lead to the creation of problem financing in banks (npf). the high value of inflation will impact on the hampering economic development. inflation will have an impact on the rising prices in the market, so that if the price increase is continuous, it will also affect the weakening of people's purchasing power, the decrease of income of society and entrepreneurs and will eventually decrease the prosperity of society. 2.4 bank response to inflation in order to respond to adverse economic conditions such as inflation, banks must carry out rescue measures in order to remain in good operation. the bank must exercise prudent principles in disbursing financing, particularly in the event of inflation. the bank shall establish allowance for possible losses in accordance with the respective risk profile of financing. in addition, the bank must perform other rescue actions, such as bank muamalat indonesi a which has compiled a work plan to respond to these economic conditions, among others: (a) run a financial and operational restructuring strategy by improving the capital structure, services to customers through product development and by offering better revenue-sharing to maintain loyal customers in support of revenue-sharing systems; (b) implement prudential and selective principles in channeling financing emphasized on small business by utilizing the network of sharia financial institutions; (c) improving the level of collectibility of financing so that it becomes healthy by reducing the portfolio of non-performing financing. the settlement of deteriorating economic conditions depends on the government's current and future monetary and fiscal policies to be taken by the government to nourish the economy, an act that is beyond the control of the bank, such government measures, among other things, ensuring payment of deposits from customers in the form of demand deposits, savings deposits and deposits, lower the obligation to meet the minimum capital requirement, to change provisions for allowance for productive asset and to conduct recapitalization programs for commercial banks. 2.5 non performing financing an effort, to achieve a goal cannot avoid the existence of a risk of failure. there is a rule in islam that is "al ghunmu bil ghurmi theory" and "alkharaju bidh dhamani" meaning profit is the reward for the readiness to bear the loss and income is the reward for the dependents taken. the purpose of the rule is where the business can run and benefit along with the risks. islam prohibits any kind of profit-making transaction without any willingness to bear losses. bank as a business institution cannot avoid the risk of failure of its distributed financing. the bank needs to mitigate the risk of problem financing by conducting good risk management. indicators that can show the loss due to credit risk is reflected in the large non-performing loan (npl), in terminology of islamic banks called non-perfoming financing (npf). bank indonesia regulation number 8/21 / pbi / 2006 dated october 5, 2006 concerning quality rating of commercial banks conducting business activities based on sharia principles article 9 paragraph (2), states that the quality of productive assets in the form of financing is divided into 5 groups namely current, special mention, substandard, doubtful and pass. npf is the ratio between non-performing financing with total financing channeled by sharia banks. criteria included in the npf and already non performing financing factor in syaria commercial banking in indonesia 31 stipulated by bank indonesia are financing substandard, doubtful and pass. financing is categorized current if the installment payment is done on time, special attention if the arrears have not exceeded 90 days, less smooth if the arrears have exceeded 90 days-180 days, doubt if the arrears have exceeded 180 days270 days, and pass if has exceeded 270 days. there are several obstacles faced by sharia banks in channeling financing that trigger the formation of problem financing, including: (1) uncertainty of market conditions, which will impact on the ability of debtors in returning the loan to the bank (risk ability to pay); (2) there is an error in the analysis of collateral pricing on debtors' financing. this resulted in the creation of the risk of not returning loan funds if the debtor has defaulted; (3) the occurrence of asymetric information, where the debtor has more information than the bank. this is because the debtor does not provide all or inaccurate information to the bank at the beginning of the financing application. this condition will cause the bank to incorrectly analyze the risk profile of the financing it provides, thus potentially creating default risk by the debtor. sharia banks as financial institutions that are trusted by third parties to manage their funds in order to generate profits must be able to manage the risks of uncertainty of return on financing. sharia banks should be able to cope with the problem of financing disloyalty by conducting risk management to suppress rising npf. troubled financing, if not promptly overcome, a very unexpected impact may occur, namely the bank rush (massive withdrawal by customers / fund owners). 2.6 influence of bank size on non performing financing at sharia commercial bank in indonesia the size of the bank is closely related and can affect the bank's operations. asset ownership can give an idea of the size of an enterprise and in this case is a sharia bank. assessment of firm size based on total assets owned. the company (in this case is an islamic bank) which has a larger total asset is considered to have a better performance outlook, which the company can grow and benefit. this is because large banks are considered more capable of expanding financing. according to miller and smith (2002) in tan (2012), the larger the size of a bank, the greater the bank's ability to disburse credit. credit in sharia bank terminology is called financing. banks have a larger financing capacity so banks will tend to better manage risk. according to stever (2005) in jakubík (2013), small banks have risks associated with loan portfolios (in sharia bank terminology called financing). this is because the small banks are not able to diversify the risks as well as large banks. the large total assets will make it easier for banks to channel financing to productive sectors so that they are expected to provide attractive returns and improve the quality of productive assets. large banks (large assets) have a chance to grow better. large banks will have lower debt and will seek to minimize agency problems. it was also revealed by smith and watss (1992) in jakubík (2013), which have found empirical evidence that firms with a greater opportunity to grow have lower debt to equity ratios. banks in their equity financing decisions tend to reduce potential agency problems associated with the existence of risky debt in their capital structure. based on this, the size of the bank will certainly affect the performance of banks, especially in the distribution of financing and also to the problems that often arise in it. the amount of financing disbursed by banks is one component of the assets of sharia banks. the greater the financing will be to increase the amount of assets. the growing size of the bank (large total assets), with better growth prospects, is expected to help banks reduce the probability of problem financing. thus, the financing disbursed by the bank can generate maximum profit. an attractive advantage will stimulate the market to further entrust the funds invested through sharia banks. thus the amount of third party funds will increase and the total assets of banks will be greater, where the bank is able to expand financing. financing is an asset for sharia banks. the greater the asset value reflects the greater the size of the bank. septrivia wahyu gives conclusions on the results of his research, ie variable size has a significant negative effect on npf. that is, the greater the total assets, the problematic financing ratio will decrease further. usually a bank with a large asset is a long-standing bank, thus more experienced in managing financing risks, which in turn can reduce the npf ratio. it is also supported by kheemraj (2005) which states that, banks with large total assets have better risk management strategies in designing an optimal financing portfolio. the results of gunsel's (2007) study also erik nugraha & audita setiawan 32 proves that the larger bank assets will negatively affect the problem condition at the bank. thus, large banks (large total assets) have a negative effect on npf, where banks will be able to prevent non performing financing. 2.7 inflation influence on non performing financing at sharia commercial banks in indonesia the monetary crisis that occurred in 1998 and 2008 has caused many losses for many parties and country. such conditions affect the development of the indonesian banking industry, not least the sharia banking industry, especially in lending, or in the terminology of sharia banks, credit is called financing. the inflation rate affects the decline in credit quality channeled by the bank, one of which is marked by increasing ratio npl. the condition is also in accordance with the results of messai (2013), where inflation has a positive effect on credit risk. credit in sharia banking terms is called financing and npl with npf. increased inflation will affect the ratio of npf (non performing financing) sharia bank. inflation is one of the bank's external factors that can create problematic financing. the problem occurs because the soaring prices of some products on the market that resulted in weakening purchasing power. these conditions have an impact on the decrease in income earned by the debtor for his business. such conditions affect the ability to pay from debtors to be weak, so as to create problem financing (npf). this is also in line with the results of research conducted by tan (2012), that inflation has a positive effect on npl. research tan (2012) also concluded that inflation has a positive influence on the ups and downs of npf. conditions where when there is an up (or fall) inflation will be followed also by an increase (or fall) of the npf. in this case it means that inflation has a positive effect on the npf. thus, this study refers to the results of previous research that inflation has a positive effect on npf. 2.8 effect of return on financing of profit and loss sharing on non performing financing at sharia commercial banks in indonesia according to mustafa and ranti (2007), in the distribution of risk, islamic banks offer a better concept than the conventional banking concept. mustafa and ranti (2007) stated that sharia banking rejects the existence of interest in its operations, and makes a profit sharing system known as profit and loss sharing (pls) as a substitute for interest. this type of profit and loss sharing (pls) financing consisting of mudharabah and musyarakah is the most popular and ideal financing scheme in sharia banking. the profit-sharing system (pls) is the hallmark of sharia banks that distinguishes the interest system adopted by conventional banks. pls financing is considered to have a high risk, this is because the profit earned on a business run by the debtor as mudharib is relatively uncertain, so the owner of the fund must be ready to bear the loss. ranti wiliasih (2005), stated that the absence of guarantee provisions in the financing of pls, causing the bank faces a very high risk. the risk is mainly related to the risk of moral hazard and adverse selection. this happens because of the information asymmetry. pls financing is relatively more risky to make this scheme less attractive by sharia banks. this is because the rate of return generated from the business financed could be positive or negative. this is reinforced by the results of research conducted by khan and ahmed (2001) on the risk level of sharia financing models based on bank perceptions, which put the profit and loss sharing model in the most risky financing positions compared with other financing models. lack of monitoring by the bank's management of the financing process disbursed leads to unexpected risks being truly occurring. weak bank supervision, can provide opportunities for debtors to commit fraud. the debtor has the opportunity to be lax in fulfilling the obligation to pay off the loan to the bank, so that the financing disbursed becomes non performing. according to škarica (2014), it is worth noting that the increase in profit-sharing financing was at the same time followed by an increase in non-performing financing. the financing disbursed to finance a business is expected to provide an attractive return at the end cause loss because of non performing financing. banks are urgently needed to manage the financing portfolio appropriately, in order to reduce the probability of non performing financing. thus, if the portfolio has been executed in accordance with the proper procedures, and carried out intensive monitoring, it will suppress the occurrence of non performing financing. sharia bank management non performing financing factor in syaria commercial banking in indonesia 33 needs to create policies related to the effectiveness of the distribution of financing, in order to generate expected returns by depositors. determination of the appropriate portion of financing, including the ratio of profit sharing ratio of the financing becomes one of the bank policy that is expected to suppress the occurrence of problems in the distribution of financing. the appropriate return policy, especially for high risk pls financing, will have an effect on the decrease of npf ratio. if the resulting return is high, then it should be followed by a decrease in the npf ratio. this is in line with the results of research conducted by mustafa and ranti (2007), that the return is seen significant at a certain level of confidence with a negative direction, which means the increase of return ratio of pls (mudharabah and musyarakah) to the return of financing will reduce the ratio of non performing financing (npf) at muamalat indonesia bank. similar results were also obtained from mutamimah and siti (2012) research, where the ratio of return on pls financing to total return of financing negatively affects npf at sharia commercial bank in indonesia. septrivia revelation also agrees both results that the pls financing return has a negative effect on the npf. referring to the previous research, then if the ratio of return pls financing rise will be followed by the decline in the ratio of npf. thus the return variable pls financing has a negative influence on npf. this financing return variable reflects the syariah bank financing policy related to the return generated from high-risk financing, ie pls financing. as for giving clarity of relationship among variable, hence in figure 1 presented framework that show relation between research variable, that is as follows: figure 1 conceptual framework 2.9 hypothesis based on the conceptual framework previously described, the research hypothesis is as follows: (1) return of financing profit and loss sharing negatively affect non performing financing at sharia commercial bank in indonesia; (2) bank size negatively affects non performing financing at sharia commercial banks in indonesia; (3) inflation has a positive effect on non performing financing at sharia commercial banks in indonesia; (4) return on financing of profit and loss sharing, bank size, and inflation simultaneously affect non performing financing at sharia commercial bank in indonesia. return on financing pls bank size inflation non perfoming financing erik nugraha & audita setiawan 34 3. research methods the research design used in this research is analytical and verificative descriptive method with quantitative approach. descriptive analytical by sekaran (2009) is a study conducted to determine and be able to explain the characteristics of variables studied in a situation. descriptive analytical methodology or methodology is used to explain each research variable, that is independent variable consisting of return of profit and loss sharing (x1), bank size (x2), and inflation (x3), and dependent variable that is non performing financing (y) . while verifikative method is a method used to indicate whether or not the influence of the independent variable to the dependent variable. the data to be analyzed in this research is by using panel data. panel data is a combination of cross section data with time series. if each cross section unit has the same amount of time series observation then it is called a balanced panel (total number of observations = n x t). conversely, if the number of observations is different for each cross section unit then it is called unbalanced panel. due to the age of each bank is different, so the data obtained was not the same amount. therefore, the data analysis used is unbalanced panel. incomplete panel data often occurs in cases in the economic sector. the data in this study were analyzed by using multiple linear regression analysis. because the data used in the form of panel data, then before the analysis using multiple linear regression model (multi linear regression model), first test model consisting of chow test and hausman test. chow test is used to decide whether the model used is common effect or fixed effect. the hausman test is performed to determine whether the test model uses fixed effect or random effect. 4. discussion and findings 4.1 research result multiple linear regression analysis was used to test the effect of independent variables, namely profit and loss sharing, bank size and inflation to non performing financing. estimation of multiple linear regression model can be seen from the output as follows: table 2 multiple linear regression analysis result dependent variable: npf? method: pooled egls (cross-section weights) date: 07/24/17 time: 07:51 sample (adjusted): 2006q1 2016q3 included observations: 43 after adjustments cross-sections included: 10 total pool (unbalanced) observations: 218 linear estimation after one-step weighting matrix cross-section weights (pcse) standard errors & covariance (d.f. corrected) variable coefficient std. error t-statistic prob. c 4.027977 0.186548 21.59216 0.0000 return pls? -0.019100 0.004814 -3.967272 0.0001 total aset? -5.06e-08 9.80e-09 -5.160672 0.0000 inflasi? 0.008856 0.015354 0.576784 0.5647 fixed effects (cross) _bm—c 1.551310 _bsm--c 2.497501 _bsmi--c -1.430090 _bris--c 0.230143 _bnis--c -0.078616 _bcas--c -3.247866 non performing financing factor in syaria commercial banking in indonesia 35 _bjbs--c -0.326348 _buks--c 0.073304 _pans--c -2.455169 _vics--c -1.883172 effects specification cross-section fixed (dummy variables) weighted statistics r-squared 0.786608 mean dependent var 3.002238 adjusted r-squared 0.774117 s.d. dependent var 1.689238 s.e. of regression 1.235848 sum squared resid 313.1005 f-statistic 62.97274 durbin-watson stat 0.876682 prob(f-statistic) 0.000000 source : data processed the constant value of 4.03% shows the average value of non performing financing at sharia commercial bank in indonesia if return on profit and loss sharing, bank size and inflation equal to zero. return on profit and loss sharing is negative coefficient of 0,019, meaning that the increase of profit and loss sharing return of 1 percent is predicted to decrease non performing financing at sharia bank in indonesia by 0,019%. the size of the bank has a coefficient marked negative of 0.0000051, meaning that any increase in the size of the bank of 1 million rupiah is predicted to reduce non-performing financing in islamic banks in indonesia by 0.0000051%, or increase the size of the bank of 1 trillion rupiah is predicted to reduce non-performing financing at sharia banks in indonesia by 0.051%. the results are in accordance with the hypothesis that the greater the size of a bank proxied by total assets, it will be followed by a decrease in non-performing financing at sharia commercial banks. inflation has a positive signified coefficient of 0.009, meaning that any 1% inflation increase is predicted to increase non performing financing at sharia commercial bank by 0.009%. the coefficient of determination is calculated to know how big the influence of the three independent variables (return of profit and loss sharing, bank size and inflation) simultaneously to non performing financing variable. based on the results of data processing contained in table 2, obtained value of adjusted r-square of 0.774 or 77.4% indicates that the return variable profit and loss sharing, bank size and inflation simultaneously able to explain changes that occur in non performing financing commercial bank sharia in indonesia is 77.4 percent. in other words, profit and loss sharing returns, bank size and inflation together contributes 77.4% to the non performing financing. the remaining influence of other factors not observed is 22.6%, that is the influence of other factors outside the variable return of profit and loss sharing, bank size and inflation. 4.2 effect of return on financing of profit and loss sharing on non performing financing based on statistical test results, it can be seen that the return of profit and loss sharing financing has a significant effect on non performing financing. the test results show that the return of profit and loss sharing financing has a negative effect on non performing financing at sharia commercial bank in indonesia. the negative direction corresponds to the initial built hypothesis. the hypothesis is: "return of financing profit and loss sharing negatively affect non performing financing". financing with this model (pls) is a high risk financing compared to other model financing. pls financing is becoming more risky because it does not require a guarantee to the debtor, thus pls financing is based on trust between the bank and the debtor. most banks entrust entirely the business it finances to the debtor as a mudarib. it is the belief that is the base of the agency problem. debtors have more information about the business, while the information obtained by the bank is less. the same is expressed by jensen and meckling (1976), that the contract erik nugraha & audita setiawan 36 between shareholders and managers is an agency relationship. in relation to the financing of the pls, the bank is the shareholder and debtor as the manager running the business. another risk in the distribution of financing is the uncertainty of return. the absence of uncertainty of return is due to the lack of certainty of business results, in other words that the return of pls financing depends on the results of the financed business. associated with the test results, where the return of high-risk financing (pls) has a negative effect on problem financing (npf), the sharia bank is considered to be quite careful in channeling this financing. sharia banks are considered capable of managing the risks that may arise from pls financing. islamic banks have run the financing portfolio appropriately so that the probability of non-performing financing can be lowered. this research is also supported by research result of mustafa and ranti (2007) which conclude that the return is significant in certain confidence level with negative direction, it means that increasing the return ratio of pls (mudharabah and musyarakah) will reduce the ratio of non performing financing (npf) to muamalat indonesia bank. the results of mutamimah and siti (2012) study, stated that the ratio of return on financing of pls to the total return of financing negatively affect the npf at sharia commercial bank in indonesia. similar results are also expressed by septrivia wahyu, the pls financing return has a negative effect on the npf. therefore, any increase in retun obtained from pls financing can lower the npf ratio. 4.3 influence of bank size on non performing financing based on the output obtained from the statistical test, it can be concluded that the size of the bank affects the non performing financing. the t-count values obtained through statistical tests for partial testing are then compared with the t-table value, it is decided to accept the hypothesis constructed. thus it can be seen that the size of islamic banks have a negative effect on non performing financing at sharia commercial bank in indonesia. this means that any increase in bank size will be able to reduce the ratio of non performing financing at sharia commercial bank in indonesia. negative directions are caused by: (1) large banks (large assets) have good managerial skills compared with small banks. according to nkusu (2011), the larger the size of a bank, the greater the bank's ability to distribute credit (financing). large banks have larger financing capacities so banks will tend to better manage risk. according to stever (2005) in jakubík (2013), argues that small banks have risks associated with loan portfolios (in terminology of sharia banks called financing). this is because the small banks are not able to diversify the risks as well as large banks. the large total assets will make it easier for banks to channel financing to productive sectors so that they are expected to provide attractive returns and improve the quality of productive assets. thus, the larger the size of the bank (the greater the total asset) can decrease the probability of problem financing (npf ratio decreases); (2) large banks with large asset holdings have better policies relating to financing (allocation) of financing compared to small banks. large banks have the ability to obtain additional funds from third parties in order to expand larger productive sector. large banks can diversify the risk, in which banks can freely allocate financing in accordance with the risk profile of each type of financing to be distributed; (3) the greater the financing disbursed by the bank, it shows that the assets owned by the bank is even greater. the amount of financing disbursed is the greater one is the policy (strategy) of banks to be able to reduce (decrease) the ratio of npf. this indicates that the greater the total financing disbursed will have an impact on the shrinking value of problem financing so that the npf ratio is low. previous research supporting this research is a study conducted by ahmed (2006) which concludes that bank size has a negative correlation with npl. kheemraj (2005) in jakubík (2013) also mentioned that, the large total assets make banks more able to manage the business and risk. the greater the total assets, will improve the quality of productive assets, where bank financing will grow and generate profits. this will have an impact on the npf ratio. in addition khemraj (2009), stated that the greater bank assets will negatively affect the problematic condition of banks. thus, the larger the size of the bank will cause the decline in non-performing financing at sharia commercial bank in indonesia. non performing financing factor in syaria commercial banking in indonesia 37 4.4 influence of bank inflation on non performing financing the statistical test for partial hypothesis test shows that, inflation has no significant effect on non performing financing. the test direction shows positive and in the same direction with the hypothesis built. however, the positive direction of inflationary influence on non-performing financing is not significant. test results also show that the value of t-count is smaller than the t-table value, so ho accepted and ha rejected. the positive direction of inflation to non-performing financing shows that the greater the inflation rate will be followed by the rising npf ratio. inflation is a tendency to increase market prices in general. the increase occurs suddenly and affects the weakening of people's purchasing power. inflation can also lower the real value of people's incomes, where the income-generating community will experience a decline in the real value of salaries (income). this condition also affects the ability of the debtor to fulfill the obligation of its financing installment to the bank to decrease. thus, inflation will trigger the creation of problem financing and form an increasing npf ratio. the positive effect of inflation on npf is insignificant, meaning that the effect is only applicable to the research sample alone, but has no effect on aggregate or can not be generalized to all sharia banks. the results are supported by the results of arya jakubík (2013), that inflation does not have a significant impact on npl changes. 4.5 effect of return on financing of profit and loss sharing, bank size, and inflation on non performing financing based on the results of statistical tests, it can be seen that the return of profit and loss sharing, bank size, and inflation simultaneously (simultaneously) have an influence on non-performing financing. these results are in accordance with the initial built hypothesis. the influence of the three independent variables is quite large, ie almost eighty percent. the remaining approximately twenty percent is influenced by other factors outside of this research variable. this shows that the influence of the three independent variables in this research is the return of profit and loss sharing financing, bank size, and inflation have a strong and big influence on non performing financing at sharia commercial bank in indonesia. other factors beyond research that may affect the npf include financing allocation, gross domestic product, and others. 5. conclusion: referring to the result of analysis of research data and testing of hypotheses built and the discussion that has been described in the previous chapter, the researcher can draw the following conclusion: (1) the bigger profit and loss sharing return will be followed by decreasing non performing financing at commercial bank sharia in indonesia. this condition occurs because islamic banks have become more wise in managing the financing portfolio of pls which is considered high risk based on the principle of prudence. the ability to manage risks in distributing pls financing impacts on the returns to be earned by banks. the better the bank in managing the financing of pls, it will be followed by the better (magnitude) return to be obtained by the bank. thus, the higher return of pls financing will be followed by decreasing probability of problem financing (npf); (2) the larger the size of sharia banks will reduce the ratio of non-performing financing at sharia commercial bank in indonesia. the effect is due to the increasing size of the bank, the customer will see that the bank has a good ability to operate. in addition, management has the opportunity to expand financing to productive sectors that can generate attractive returns; (3) inflation as an external factor of the bank, partially the greater the value of inflation will increase the amount of npf. inflation can cause market prices to soar, thus undermining public purchasing power and lowering debtor income. such conditions resulted in the ability of the debtor to pay off its obligations to the bank also decreased and eventually formed an increasing npf ratio; (4) simultaneously, return on profit and loss sharing, bank size, and inflation have an effect on non performing financing at sharia commercial bank in indonesia. the effect is 77.4%, while the rest of 22.6% is 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(2011). “the factors influencing bank credit risk :the case of tunisia”, journal of accounting and taxation vol. 3 (4), pp. 70-78. international journal of commerce and finance, vol. 6, issue 2, 2020, 104-116 104 the effect of audit committee characteristics on earnings management and its impact on firm value yenny dwi handayani, mercu buana university, jakarta, indonesia ewing yuvisa ibrani, sultan ageng tirtayasa university, serang-banten, indonesia received: aug 21, 2020 accepted: sept 23, 2020 published: oct 02, 2020 abstract this study aims to examine the effect of audit committee characteristics on earning management and its impact on firm value. the characteristics of the audit committee consist of an audit committee that has expertise in industry and accounting, has expertise in industry and financial supervisors, the number of meetings of the audit committee members, and an independent audit committee. earning management research is very important to research to provide input regarding the factors that cause companies to mark up earnings and their impact on firm value. this study uses a quantitative method with a sample of manufacturing companies listed on the indonesia stock exchange for the period 2016-2018. the results show that the expertise of the audit committee in industry and accounting has no effect on earnings management, the expertise of the audit committee in the industry and the financial supervisors has no effect on earnings management. the number of meetings of the audit committee members has no effect on earnings management. the independent audit committee has no effect on earnings management. earning management has a significant negative effect on firm value. keywords: audit committee characteristics, earnings management, firm value 1. introduction the high value of the company reflects the prosperity that will be received by shareholders, for that we need professionals who can manage the company well. there will be a conflict of interest between company owners and managers in increasing company value, which is often referred to as information asymmetry. managers, as company managers know more about the company's internal information and prospects in the future than the owners (shareholders). this opportunity is used by managers to carry out earnings mark-up actions to achieve the best performance, which is often called earnings management. the act of managing profits is needed to increase company value. at the beginning of this action, there will be an increase in firm value, but the earnings management activity itself can reduce the value of the company in the future. financial statements are the object of earnings management practices because they reflect the company's performance in the short and long term. according to scott (2012) earning management occurs for several reasons, such as to increase compensation, avoid debt requirements, meet analyst forecasts, and influence stock prices. efforts to manipulate information through earnings management practices have become the main factor causing financial statements to no longer reflect the fundamental value of a company (chu, dechow, hui, & wang, 2019; jao & pagalung, 2011; zgarni, hlioui, & zehri, 2016). therefore, the engineering of financial statements has become a central issue as a source of misuse of information that is detrimental to interested parties. that is why the information submitted is sometimes received, not following the actual conditions of the company. earnings management can be carried out through the practice of income smoothing, taking a bath, and income maximization (scott, 2012). a phenomenon related to earnings management practices occurs at toshiba corporation, which is an electronics company from japan with a very good reputation in the beginning. this case occurred in 2015. toshiba was proven to have deceived the public and investors by inflating profits in the financial statements to an overstated profit of usd 1.2 billion since the fiscal year 2008. the scandal involved the top management of the toshiba corporation. to achieve the desired target, financial statements with high profits are made which do not reflect the real condition of the company. the occurrence of earnings management is not only due to opportunistic management actions but also due to weak supervision or monitoring so that there is an opportunity to take deviant actions. to avoid earnings management in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the effect of audit committee characteristics on earnings management and its impact on firm value 105 actions taken by management, companies need to implement corporate governance in their companies. this supervision is very necessary to suppress opportunistic actions that will be carried out by management. in this study, the implementation mechanism of corporate governance uses the characteristics of the audit committee as measured by an audit committee that has expertise in industry and accounting, and has expertise in industry and financial supervisors. this research focuses on the audit committee as a component of corporate governance because the audit committee has the duty and responsibility of reviewing the financial information that will be issued by the company. the principles of corporate governance that are applied consistently can be an obstacle to performance engineering activities that result in financial reports not describing the fundamental value of the company (bédard, chtourou, & courteau, 2004; jao & pagalung, 2011). earnings management practices can be minimized with a good supervisory mechanism to obtain quality audits. several previous studies explained that the audit committee has independence and effectiveness can reduce earnings management. however, there are still few studies that focus on the expertise and competence of audit committee members. the expertise possessed by audit committee members can reduce the length of time to find and correct misstatements in financial statements (shin, zhaohui xu, & lacina, 2014). the industry and accounting expertise possessed by the audit committee will cause supervision in the financial reporting process to be effective (cohen, hoitash, krishnamoorthy, & wright, 2014). the expertise of the audit committee has been described in indonesian financial services authority regulation no 02/ pojk.05/2014. based on this regulation, the audit committee members must have financial expertise to maximize the financial reporting process and reduce the occurrence of earnings management activities. this is in accordance with research conducted by (carcello, hollingsworth, klein, & neal, 2006), which states that the expertise possessed by audit committee members in the financial sector will reduce earnings management activities within the company. several previous studies noted that the audit committee has a negative effect on earnings management (such as, chandar, chang, & zheng, 2012; nelson & devi, 2013; suprianto, rahmawati, setiawan, & aryani, 2019). their research results state that the audit committee with expertise in accounting and non-accounting has a significant negative effect on earnings management. meanwhile, the audit committee has expertise in finance and non-financial professional expertise has an insignificant positive effect on earnings management. the expertise of the audit committee members in the industry sector is not regulated in the existing regulations in indonesia. the audit committee is expected to understand the company's business processes. the results of research conducted by cohen et al. (2014) that an audit committee with expertise in industry can better understand the company's business activities and can evaluate product estimates in certain industries so that the quality of financial reporting increases. the audit committee has an important role in supervising and monitoring the process of preparing financial reports, to ensure that the reports produced are of good quality. there needs to be coordination among members of the audit committee. the audit committee can hold periodic meetings to review the quality of the financial reports produced and discuss significant issues that exist within the company. several obstacles arise where the current regulation does not clearly state the number of frequencies of audit committee meetings for each period. research conducted by skousen, smith, & wright (2009) proves that the number of annual audit committee meetings has a negative effect on fraudulent financial statements. xie, wallace n. davidson, & dadalt (2003) proved that the number of meetings between audit committee members was negatively related to the level of earnings management. conflicts of interest between agent and principal can arise, when the agent has more information than the principal, this condition can be used by the agent to take opportunistic actions, so it cannot be denied that information asymmetry will occur. information asymmetry can be minimized by the presence of an independent audit committee member. companies need supervision from independent parties to ensure good corporate governance. pamudji & trihartati (2010) prove that companies with independent audit committees tend not to commit fraud by practicing earnings management because the audit committee has a supervisory function to ensure that management does its job well. the audit committee is responsible for overseeing financial reports, overseeing external audits, and observing that the internal control system (including internal audit) can reduce the opportunistic nature of management that performs earnings management (gleason, pincus, & rego, 2017; nazir & afza, 2018; sam’ani, 2008) (sam'ani, 2008). managers as company managers know more about the company's internal information and prospects in the future than the owners (shareholders), which causes information asymmetry. information asymmetry between management yenny dwi handayani & ewing yuvisa ibrani 106 and owners provides an opportunity for managers to carry out earnings management to increase firm value at a certain time. research conducted by ibrani, faisal, & handayani (2019) earning management is often carried out by management (agents) to increase firm value, so that firm value looks good in the eyes of investors. earnings management is considered as a manager's strategy that aims to increase firm value, and it seems that investors or potential investors are aware of the policy. this study agrees with the research conducted by ridwan & gunardi (2013) and herawaty (2008), which states that there is a significant effect of earnings management on firm value. thus, earnings management practices can increase firm value, because earnings performance as an earnings management activity has lower persistence than cash flow. however, earnings management will result in incorrectly reported earnings, which will cause the company's value to decrease in the future. 2. literature review and hypotheses 2.1 development of hypotheses effect of the audit committee with expertise in industry and accounting on earning management according to agency theory, conflicts of interest between agents and principals can lead to information asymmetry. management gets the opportunity to mark up profits to obtain the maximum possible profit. in terms of earnings management measures, the expertise of audit committees in industry and accounting may help detect abnormal changes in income and expense accounts. if the deviation found in the financial statements, the audit committee will immediately discuss the matter and review business operations related to management (carcello, hermanson, & neal, 2002; sun & liu, 2014). furthermore, if the audit committee members in industry are added with expertise in accounting, they will better understand accounting specifically for the industry. with the expertise of the audit committee in the industrial sector, it is hoped that the quality of reporting will improve (cohen et al., 2014). the expertise in industry and accounting possessed by the audit committee provides benefits in the form of an increased understanding of the company's financial condition in a particular industry. it can better evaluate various estimates such as estimated sales, production, cost of goods sold, selling expenses, and administrative expenses (cohen et al., 2014; cohen, krishnamoorthy, & wright, 2004). h1: the expertise of the audit committee members in industry and accounting has a negative effect on earnings management effect of audit committee with expertise in industry and financial supervision on earning management earning management actions taken by management requires the audit committee to have competence in the industrial sector and financial supervisors. industry expertise and financial supervisors are skills possessed through their experience in supervising the performance of employees who are responsible for financial reporting (for example, as ceo). knowledge of a particular industry will give the audit committee the ability to determine accounting methods that are appropriate for the industry (cohen et al., 2014). concerning earnings management, audit committees with expertise in industry and finance can find errors in management performance, for example: in applying the accounting method of a company. the audit committee will provide advice on using the revenue recognition method according to the company's business operations so that it is expected to minimize earnings management actions. h2: the expertise of the audit committee members in the industry and financial supervision sector has a negative effect on earnings management effect of the number of meetings of the audit committee members and earning management audit committee members need to coordinate to evaluate their supervisory actions. of course, many findings were obtained during supervision. coordination can be in the form of formal meetings. the indonesian financial servicess authority regulation no.55/ pojk.04/2015 has stipulated that the audit committee is required to hold regular meetings at least once in three months, or a minimum of four meetings a year. the more intense meeting of the audit committee members is a reflection of the supervision carried out (rakhmayani & faisal, 2019). the more the number of meetings, the more frequently discussed problems in the company, so that opportunities to carry out earnings management can be minimized. (abbott, parker, peters, & raghunandan, 2003) proves that companies with audit committees that meet at least four times a year tend not to perform financial report restatements so that there will be a negative relationship between the number of audit committee annual meetings and financial reports fraud. the effect of audit committee characteristics on earnings management and its impact on firm value 107 research conducted by skousen et al. (2009) proves that the number of annual audit committee meetings has a negative effect on fraudulent financial statements. xie et al. (2003) proved that the number of meetings between members of the audit committee is negatively related to the level of earnings management. h3: the number of meetings of the audit committee members has a negative effect on earning management effect of independent audit committee members on earnings management companies with weak internal controls will have many loopholes that create opportunities for management to manipulate transactions by performing non-gaap earnings management, which is a fraudulent act by taking into account revenues that are outside gaap limits. the information that occurs between the company owner (principal) and management (agent) can also be an opportunity to take actions that are only concerned with their interests. agents can take actions that are not beneficial to the principal as a whole, which in the long run, could harm the interests of the company. to avoid fraudulent acts of non-gaap earnings management practices by management, a supervisory unit that is capable of monitoring the running of the company is needed. independent members of the audit committee are expected to carry out and be responsible for a neutral supervisory function to company commissioners (setiany, hartoko, suhardjanto, & honggowati, 2017). independence is the most important characteristic that an audit committee must have to fulfill its supervisory role. it explains why stock exchanges issued laws and regulations relating to the independence of the audit committee. blue ribbon committee (brc, 1999), in its recommendation, even states that the audit committee may only consist of commissioners who have no relationship with the company where the audit committee was formed, which could damage their independence. research conducted by skousen et al. (2009) proves that the proportion of members of the independent audit committee (audcind) has a negative effect on financial statement fraud. pamudji & trihartati (2010) confirm that the independence of the audit committee has a significant negative effect on the level of earnings management. h4: the independent audit committee has a negative effect on earning management effect of earning management on firm value agent as the party who manages the company, has more information than the principal about the condition and prospects of the company in the future. this can lead to information asymmetry between the two. that is why the agent is obliged to give a signal about the condition of the company to the principal. the signal is a reflection of the company's value through disclosure of accounting information such as financial reports. financial reports are very important for external users of the company because that group is in the condition with the highest degree of uncertainty. the asymmetry between agent and principal provides an opportunity for managers to practice earnings management to increase firm value at a certain time. at first, the value of the company did increase in a certain period, but because this activity resulted in the amount of reported earnings value being incorrect. if it was carried out continuously, in the long term, this activity could reduce the value of the company (ibrani et al., 2019). dechow, sloan & sweeney (1996) examined the nature of the information content of the accrual component and the cash flow component, whether it is reflected in the stock price. it is proven that earnings performance originating from the accrual component as an earnings management activity has a lower persistence than cash flow. when the amount of reported profit exceeds the value stated in the operating cash flow statement, the amount of profit can certainly increase the value of the company at this time. ibrani et al. (2019) reported that earnings management is often carried out by management (agents) to increase firm value to make it look good to investors. earnings management is also considered as a manager's strategy that aims to increase firm value. h5: earnings management has a negative effect on firm value 3. research method 3.1. dependent variable a. earnings management, namely management disclosure as a tool for direct management intervention in the financial reporting process through processing income or profits to obtain certain benefits or benefits for managers and companies based on economic factors(schipper, 1989)(francis, schipper, & vincent, 2002). the formula for calculating earnings management, according to stubben (2010), is as follows: conditional revenue model yenny dwi handayani & ewing yuvisa ibrani 108 δarit = a + ß1δrit + ß2δrit x sizeit + ß3δrit x ageit + ß4δrit x age_sqit + ß5δrit x grmit + ß6δrit x grm_sqit + e information: ar = year-end receivables r1_3 = revenue in the first three quarters r4 = revenue in the 4th quarter size = natural log of total assets at year-end age = company age (years) grm = gross margin _sq = square of a variable e = error b. firm value (fv) firm value, according to tobin (1968) and (copeland, 2002), is the price a prospective buyer is willing to pay if the company is sold, measured using the tobins'q ratio. if the q-ratio is above one, it indicates that the investment in the asset is very attractive. conversely, if the q-ratio is below one, investment in assets is not attractive. tobins’q q = (mvs+ mvd) /rva 3.2. independent variable a. the expertise of the audit committee members in industry and accounting the expertise of audit committee members in industry and accounting is the competence or experience of the audit committee in accounting in certain industries (cohen et al., 2014). with the expertise of audit committee members in accounting and finance, it can support good corporate governance and can carry out a supervisory function for management so that they avoid opportunistic actions in the form of tax avoidance (sari, 2014). to measure the expertise of audit committee members in industry and accounting, it is stated in the presentation of the number of audit committee members who have expertise or work experience as chief financial officer (cfo), chief accounting officer (cao), vice-president of finance, financial controller, and positions in other accounting fields in the industry divided by the total audit committee (cohen et al., 2014). based on this information, this study will be calculated using the measurements used by cohen et al. (2014): b. expertise of industry audit committee members and financial supervisors the expertise of audit committee members in the field of financial control in industry tends to have a greater understanding of the need to ensure audit quality and auditor independence than if they only have expertise in the field of financial supervisors (cohen et al., 2014). the denial can be expressed in the number of audit committee members who have work experience as chief executive officer (ceo), chief operating officer (coo), chairman of board, or president of companies in the industry divided by the total audit committee (cohen et al., 2014). based on this information, this study will be calculated using the measurements used by cohen et al. (2014): ind_sfe = c. number of audit committee members meeting. the number of meetings of the audit committee members is the number of company audit committee meetings for one period. using a ratio scale, namely the absolute value of the number of audit committee meetings in one year ind_afe = the effect of audit committee characteristics on earnings management and its impact on firm value 109 d. independent audit committee independent audit committee is an audit committee that comes from outside the company. using the ratio of the proportion of independent members of the audit committee to the total members of the audit committee data analysis technique the purpose of the analysis in this study is to narrow and limit the findings so that they become regular, structured, and meaningful data. the data that has been collected must be analyzed to answer some questions. this study uses multiple regression data analysis techniques with spss version 23 software, with the following regression equation ear_man= α + β1ind_afe + β2ind_sfe + β3aud_meet + β4aud_indp +ε information: ear_man = earnings management ind_afe = expertise of audit committee members in industry and accounting ind_sfe = expertise of audit committee members in the field of industry and financial supervision aud_meet = number of meetings of the audit committee members aud_indp = independent audit committee e = errors fv = α + β.ear_man + e information: fv = firm value ear_man = earnings management e = errors 4. results and discussion 4.1. general description the population in this study were manufacturing companies listed on the indonesia stock exchange (idx) during the 2016-2018 period, while the sample selection procedure used the purposive sampling method with predetermined criteria. 4.2.descriptive statistics the descriptive analysis provides an overview or description of data, which includes the minimum, maximum, average (mean) and standard deviation values of the variables used, namely the independent variable, which includes the characteristics of the audit committee, the dependent variable, namely earnings management and firm value. the control variables are capital intensity and profitability. table 1. descriptive statistics var n minimum maximum mean std.deviation ind_afe ind_sfe aud_meet aud_indp ear_man fv 123 123 123 123 123 123 0.2500 0.1667 4 0.25 5.1822 0.0064 1.0899 1.0000 38 1.00 39.5891 0.1619 0.6797 0.4291 6.65 0.7093 9.0275 0.0865 0.2490 0.2039 5.786 0.3311 5.7317 0.0363 4.3. goodness of fit model test yenny dwi handayani & ewing yuvisa ibrani 110 the goodness of fit model test is a test to show the suitability or goodness of a certain observation result with the frequency obtained based on the expected value. the indicators of goodness of fit can be seen from the determination coefficient test (adjust r-square) and hypothesis test. the following tests were carried out in this study: a coefficient of determination (adjust r-square) the coefficient of determination aims to measure how far the model's ability to explain the variation in the dependent variable. the coefficient of determination is indicated by the adj r-square value of the regression model used to see the suitability of the model, or how much the ability of the independent variables to explain the variance of the dependent variable. table 2. coefficient of determination model 1 r square adjusted r square std. error .999 .999 .14775 table 3. coefficient of determination model 2 r square adjusted r square std. error .240 .233 .0318424 table 2 shows that the coefficient of determination represented by adjust r square is 0.999. it means that 99.9% of the variation in earnings management can be explained by variations in the characteristics of the audit committee. in comparison, the remaining 0.1% is due to other causes outside the model. f-test (fit model) this test is done to evaluate the suitability or goodness of a model. to test whether all independent variables have a significant effect on the dependent variable. the testing of this hypothesis is based on probability. in table 3, the coefficient of determination shows that the adjust r square value is 0.233. it means that 23% of the variable firm value can be explained by variations in earnings management, while the remaining 76% is explained by reasons other than the model. table 4. test of fit model (model 1) model sum of squares df mean square f sig. regression 2066.382 4 516.595 23665.857 0.000b residual 2.554 117 .022 total 2068.936 121 a. dependent variable: lag_manajlaba b. predictors: (constant), lag_audindp, lag_indsfe, lag_indafe, lag_audmeet based on table 4 above shows that the significance value is 0.000. because the sign is much smaller than 0.05, it can be concluded that the regression model is fit (good) so that it can be used to predict earnings management variables. table 5. test of fit model (model 2) model sum of squares df mean square f sig. regression .039 1 .039 38.138 0.000b residual .123 121 .001 total .161 122 a. dependent variable: tobinsq the effect of audit committee characteristics on earnings management and its impact on firm value 111 b. predictors: (constant), ear_man based on table 5 above shows that the significance value is 0.000. because the sign is much smaller than 0.05, it can be concluded that the regression model is fit (good) so that it can be used to predict the firm value variable. hypothesis test table 4. regression result unstandardized coefficients standardized coefficients t sig. b se beta (constant) .162 .035 4.641 .000 lag_ind_afe 1.075 .067 .052 16.025 .000 lag_ind_sfe 1.140 .088 .043 13.027 .000 lag_aud_meet 1.001 .003 1.009 306.883 .000 lag_aud_indp 1.049 .063 .055 16.695 .000 a. dependent variable: lag_manajlaba b. predictors: (constant), lag_audindp, lag_indsfe, lag_indafe, lag_audmeet table 4. regression result unstandardized coefficients standardized coefficients t sig. b se beta (constant) .115 .005 21.322 .000 tobinsq -.003 .001 -.490 -6.176 .000 a. dependent variable: tobinsq hypothesis discussion the expertise of audit committee members in industry and accounting for earnings management the first hypothesis of this study is not supported, the positive sign of the coefficient value of the results of this study is not in line with the proposed negative hypothesis. the expertise of the audit committee in industry and accounting does not affect earnings management. the appointment of an audit committee with expertise in accounting and finance is thought only to fulfill the regulations of the indonesian financial services authority/ ojk, that every company is required to have an audit committee that understands accounting and finance. the role of the audit committee as a supervisor and a neutral party between management and owners has not been appropriately implemented. so, its existence is not effective enough to prevent earnings management actions in the company. the results of this study are not in line with research conducted by cohen et al. (2014), which states that the expertise of the audit committee in industry and accounting can limit earnings management activities in a company. the expertise of the audit committee on accounting combined with industry expertise helps the audit committee understand the financial statements of an industry and can evaluate various estimates and be able to find abnormal changes made by management (sun & liu, 2014). research conducted by siagian & siregar (2018) states that the expertise of the audit committee in accounting, supervision, and finance does not affect earnings management. the establishment of an audit committee in indonesia is solely for compliance with existing regulations. audit committee members with accounting and supervisory expertise have a positive effect on decreasing discretionary accruals. it suggests that audit committees with accounting and supervisory expertise may be inclined to think that accounting conservatism may limit management's opportunistic behavior. yenny dwi handayani & ewing yuvisa ibrani 112 the expertise of audit committee members in the industry and financial supervisory sector on earnings management the second hypothesis of this study is not supported, the positive sign of the coefficient value of the results of this study is not in line with the proposed hypothesis (negative). the expertise of the audit committee in the industry and financial supervisors does not affect earnings management. the audit committee was formed based on compliance with regulations. besides that, the limited understanding of audit committee members about accounting can cause the oversight process for financial statements to be reduced so that this is used by agents to manipulate by regulating every activity so that profit targets can be achieved. the results of this study are not in line with research conducted by cohen et al. (2014). the expertise possessed by audit committee members in the industry and financial supervisors can help the audit committee to understand the company industry specifically. still, not all members of the audit committee can understand the complex accounting industry. research conducted by siagian & siregar (2018) states that the expertise of the audit committee in accounting, supervision, and finance does not affect earnings management. audit committee members with accounting and supervisory expertise have a positive effect on decreasing discretionary accruals. it suggests that audit committees with accounting and supervisory expertise may be inclined to think that accounting conservatism may limit management's opportunistic behavior. number of audit committee members meeting on earnings management the third hypothesis of this study is not supported, the positive sign of the coefficient value of the results of this study is not in line with the proposed hypothesis (negative). so, it can be concluded that the number of meetings of the audit committee members does not affect earnings management. the difficulty of bringing together audit committee members at one time has resulted in less frequent coordination in discussing company issues. this condition causes less supervision in the disclosure of information submitted by management the results of this study are not in line with research conducted by rakhmayani & faisal (2019) which states that the increasingly intense meeting of audit committee members is a reflection of the supervision carried out. the more the number of meetings, the more frequently discussed problems in the company, so that opportunities to carry out earnings management can be minimized. audit committee members need to coordinate to evaluate the supervisory actions they have carried out so far, of course, there are many findings obtained during supervision. coordination can be done in the form of formal meetings. the indonesian financial services authority/ ojk regulation no.55/ pojk.04/ 2015 stipulates that the audit committee is required to hold regular meetings at least once in three months, which means that in a year, the audit committee must meet at least four times. abbott et al. (2003) proved that companies with audit committees that meet at least four times a year tend not to perform financial report restatements so that there will be a negative relationship between the number of audit committee annual meetings and financial statement fraud. research conducted by skousen et al. (2009) and xie et al. (2003) proved that the number of meetings between members of the audit committee was negatively related to the level of earnings management. independent audit committee on earnings management the fourth hypothesis of this study is not supported, the positive sign of the coefficient value of the results of this study is not in line with the proposed hypothesis (negative). so, it can be concluded that the independent audit committee has no effect on earnings management. the existence of an independent audit committee has not been able to prevent fraudulent activities carried out by management, it could be that their existence is only limited to meeting existing regulations, so it is not effective enough to reveal profit mark up activities. this study is not in line with the research conducted by amaliah, januarsi, & ibrani (2015), which states that the audit committee must be able to maintain an independent attitude in carrying out its duties so that the company is less likely to carry out earnings management activities. supervision from an independent party is needed to ensure that the company can implement the best governance standards. skousen et al. (2009) states that the proportion of members of the independent audit committee (audcind) has a negative effect on financial statement fraud. pamudji & trihartati (2010) prove that the independence of the audit committee has a significant negative effect on the level of earnings management. earnings management on firm value the effect of audit committee characteristics on earnings management and its impact on firm value 113 the fifth hypothesis of this study is accepted, earning management has a significant negative effect on firm value. when the company decides to mark up profits, there will be an increase in the amount of profit. the increase in the amount of profit can temporarily increase the value of the company, but if the mark up of profits is carried out continuously, it can indirectly reduce the value of the company in the eyes of the public. research on the effect of earnings management on firm value conducted by herawaty (2008) states that earnings management has a significant positive effect on firm value. research conducted by dechow et al. (1996) states that earnings performance originating from the accrual component of earnings management activities has a lower persistence than cash flow. when the amount of reported profit exceeds the value stated in the operating cash flow statement, the amount of profit can certainly increase the value of the company at this time. ibrani et al. (2019) stated that earnings management is often carried out by management (agents) to increase firm value to make it look good to investors. earnings management is also considered a strategy carried out by managers that aim to increase firm value. 5. conclusion and suggestion 5.1. conclusions the purpose of this study was to examine the effect of the characteristics of the audit committee on earnings management and its impact on firm value, with the object of research for manufacturing companies in the 2016-2018 period. from the results of statistical testing using the spss (statistical package for social science) application and the previous discussion, it can be concluded that: 1. the expertise of the audit committee in industry and accounting has no effect on earnings management. the appointment of an audit committee with expertise in accounting and finance is thought only to fulfill the regulations of the indonesian financial services authority/ ojk, that every company is required to have an audit committee that understands accounting and finance. so its existence is not effective enough to prevent earnings management actions in the company. 2. the expertise of the audit committee in the industry and the financial supervisors has no effect on earnings management. the audit committee was formed based on compliance with regulations, besides that the limited understanding of the audit committee members about accounting can cause the oversight process of financial statements to be reduced so that this can be used by agents to manipulate by regulating every activity so that profit targets can be achieved 3. the number of meetings of the audit committee members has no effect on earnings management. the difficulty of bringing together audit committee members at one time has resulted in less frequent coordination in discussing company issues. this condition causes less supervision in the disclosure of information submitted by management 4. the independent audit committee has no effect on earnings management. the existence of an independent audit committee has not been able to prevent fraudulent activities carried out by management, it could be that their existence is only limited to meeting existing regulations, so it is not effective enough to reveal profit mark up activities. 5. earning management has a significant negative effect on firm value. when the company decides to mark up profits, there will be an increase in the amount of profit. the increase in the amount of profit can temporarily increase the value of the company, but if the mark up of profits is carried out continuously, it can indirectly reduce the value of the company in the eyes of the public. 5.2. suggestion future research is expected to increase the proxies from the audit committee so that the scope of research variables becomes wider, using the corporate governance index measurement or adding variables regarding the status of the audit committee members. the measure of the status of the audit committee is based on previous research by considering the following factors: multiple directorships of audit committees in public companies, educational background, namely being graduates of leading universities and level of education (pollock, chen, jackson, & hambrick, 2010). further research is also suggested to examine differences in the expertise of the audit committee in industry and accounting as well as the expertise of the audit committee in the industry and financial supervisors compared to the expertise of audit committee members only in accounting and in the field of financial supervision. yenny dwi handayani & ewing yuvisa ibrani 114 references abbott, l. j., parker, s., peters, g. f., & raghunandan, k. 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(2016). effective audit committee, audit quality and earnings management. journal of accounting in emerging economies. international journal of commerce and finance, vol. 6, issue 2, 2020, 18-32 18 determinants of gross domestic saving and its trend analysis in turkey: a time-series outlook solomon amare tessema istanbul commerce university, istanbul, turkey received: may 05, 2020 accepted: june 18, 2020 published: oct 02, 2020 abstract saving is an engine for the growth and prosperity of a nation by creating capital accumulation and financial investments through resource mobilization. turkey appears in the set of countries that have relatively low domestic saving rates and relatively high current account deficits. this study examined the determinants of gross domestic saving and its trend in turkey, using time series data (annual) ranging from 1980-2018. data were collected from the world development indicators (wdi) 2019 database, world bank and central bank of turkey annual reports. the macroeconomic variables used in the model were gross domestic saving rate to gdp ratio (gds), inflation rate (inf), deposit interest rate (dir), broad money supply to gdp ratio (m2r), age-dependency ratio (adr), and growth of gross national income per capita (gnipcg). the study has used auto-regressive distributed lag (ardl) model and appropriate diagnostic tests for model specification. the results of the study have shown that the first lag of gross domestic saving, inflation rate, age-dependency ratio, and broad money supply to gdp ratio have positive effects, whereas gross national income per capita growth and deposit interest rate have negative effects on gross domestic saving rate in turkey. only the first lag of gross domestic saving rate and deposit interest rate have statistically significant effects on gross domestic saving in turkey at a 5 percent level of significance. the rest of all variables have statistically insignificant effects. the overall findings of the study underlined the importance of adopting strict fiscal and monetary policies to regulate inflation and money supply with manageable levels to improve the gross domestic saving rate in turkey. keywords: turkey, gross domestic saving rate, inflation rate, deposit interest rate, broad money supply, growth of national income per capita, age dependency ratio, auto-regressive distributed lag model. 1. introduction domestic saving is the difference between the gross domestic product and final consumption expenditure. the sum of the saving by the public sector, the private corporate sector, and the household sector in a country is called gross domestic saving. domestic saving plays a noteworthy role in the economic growth of a country. it is an important factor that finances investment, creates job opportunities, improves the level of productivity, and maintaining high growth rates through its effect on capital formation in a country (khan, 2017). saving is one of the main elements in a macro-economy that contributes to the growth of a nation, improve social welfare, increase per capita income (pci), etc. it is, hence, one of the basic determinants of prosperity, growth, and wealth of a nation. from the perspective of devoting resources to the production of capital goods in the context of developing countries, saving is necessary to fund investment. saving is not only a form of relationship but also a basic source of investment financing. therefore, it would be vital to look at the factors which affect the level of domestic saving and improve economic growth. classical economists emphasized saving as a determinant of growth and economic development. growth in capital stock is functionally related to the portion of additional output, which is preserved and not consumed (polshikov, 1981). this portion, which is saved subsequently, becomes available for investment or an increase in capital. thus, there is a link between saving and growth. it is the growth in saving as a crucial factor in capital formation that eventually determines the direction and level of economic development. according to c.v. rijckeghem (2010), turkey appears or belongs to the set of countries that have relatively low domestic saving rates and relatively high current account deficits. turkish saving rate is also much less than the asian-tigers saving rate. a low saving rate leads to a low investment amount, which in turn hinders the economic in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e determinants of gross domestic saving and its trend analysis in turkey: a time-series outlook 19 growth of the country. so, to achieve a superior rate of economic growth for turkey, it requires a historically unprecedented level of saving, either from domestic or foreign sources. even though the external source of investment financing has some disadvantages as it makes the country highly sensitive to external shocks, it is recommended when the domestic resources are not much enough to finance domestic investment requirements. turkey’s investment has been financed from foreign savings in addition to funds from internal sources. this shows the financial gap of the country to finance its investment. therefore, to avoid this financial gap, and to improve its economic growth rate, domestic saving should be the primary alternative to the economy. because of these facts, deep scrutiny of the dynamics behind saving and the possible policy options has an indispensable role to increase the national savings rate in line with the need of the economy. the purpose of this paper is to identify the major determinants of gross domestic saving rate in turkey and to suggest potential policy options by using time series annual data ranging from 1980-2018 drawn from world development indicators 2019 database. 2. literature 2.1. theoretical literature 2.1.1. the concept and definition of saving saving is defined as the difference between income and consumption at a specific period of time. keynes (1936) agrees with this definition (mithani, 2000). he defined saving as an excess of income over expenditure on consumption. the above definition works for both individual and community cases. symbolically, it can be represented as follows: s=y-c …………………………………………………………… (1) where; s − denotes individual/community-saving. y − stands for individual/community income, and c − stands for individual/community consumption. according to keynes (1936), saving is the function of income, i.e., s = f(y). as income increases, saving also increases, and vice versa. saving depends on the propensity to save which is a stable function of income in a short period. it follows that the consumption function (the propensity to consume), which can be derived from a propensity to save, would also be a stable function of income. however, saving is an increasing function of income. thus, the marginal propensity to save (δs/δy) is always greater than zero, but less than unity. symbolically, 0 < δs/δy < 1 ( mithani, 2000). 2.1.2. theories on the virtue of saving saving is one of the main sources of financing investment in the country. saving with financial intermediaries facilitate the flow of funds to investors and make investment possible. there is circular causation among saving, investment, and growth. hence, promoting investment can be a solution to the economic problems of developing countries (lewis, 2000). the virtue of saving is debatable among scholars. classical economists, consumption theorists, and keynesians have different thoughts about saving. while classical economists consider saving as an advantage of having a surplus, consumption theorists argue saving on the bases that saving will decrease consumption. classical economists suggest that saving is a virtue and the act of saving is virtuous because individual savings will add up to national saving which is a source of investment. however, consumption theorists like g.a. hopson and albert aftalion vehemently oppose the classical theory of saving. they argued that there is no virtue involved in the act of saving because an increase in aggregate saving would lead to growing under-consumption, which would cause an overall decrease in demand and ultimately lead to over-production, which in turn reduce price and profit of the firm, which make firms draw from investing and reduce national investment (mithani, 2000). on the other hand, keynes in his book (1936) titled by the “general theory of money, interest, and employment” took a middle position between the classical and the proponents of the consumption theory. in his opinion, it was not so important whether an individual saves or not but what is more important was what use he made to his saving. solomon amare tessema 20 according to him, saving is a positive virtue but a public vice. saving is a positive virtue since every individual induces to save owing to the instinctive fear of future uncertainty and insecurity and therefore as a precaution has saved to safeguard against future contingencies. according to keynes, when aggregate saving in a community increases through general reduction of consumption by the community as a whole, it leads to decrease in aggregate demand in consumer goods which in turn leads to a decrease in the price of consumption and capital goods, and then producers will decrease their investment in production. 2.1.3. sources of saving and subjective motives for saving there are three main sources for domestic saving in any country. these are: i. household saving: it is the difference between disposable personal income and consumption expenditure at an individual level. ii. firm or corporate saving: it refers to profits or gross income less dividends and business taxes. iii. government or public saving: it is the difference between public revenue and current expenditures. iv. the total saving amount is the sum of private savings (which includes household and firms saving together) and public saving. individuals or households, firms, and government are induced to save more when there are strong subjective factors which motivate them to save. individuals induced to save more when they want to build up a reserve for future uncertainties, to earn additional income from interests and then to smoothen up lifetime consumption, to build up power and self-confidence through capital accumulation, to have new business plans, and so on. likewise, firms induced to save more when they want to purchase capital goods, to solve liquidity problems, to invest in different financial markets, etc. the government used saving as an instrument to narrow the gap between government expenditure and revenue, to reduce higher import rates, to stabilize price and financial markets, and so on (mithani, 2000). 2.1.4. trends of gross domestic saving in turkey economic growth is largely related to the rate of investment which in turn related to saving. it is therefore important to pay close attention to this phenomenon if a country wants to achieve rapid economic growth. turkey has a low national saving rate compared to countries with similar levels of income and it has been declining since 1988. from 1988 to 2002, the private saving rate displayed a stable path while the public saving rate exhibited a trend decline that results in a declining national saving rate. however, these patterns changed radically after 2002. public saving rates marked a considerable increase due to the fiscal austerity measures, whereas private saving rates showed a striking decline, rendering a quite low national saving rate by international standards (e.p. matur et.al, 2012). when it is compared with other equally performing countries, as rijckeghem (2010); turkey’s national saving rate is much lower than its asian tiger counterparts. however, it is comparable to that of central and eastern europe and it is not much lower than that in the eu. turkey’s saving rate is similar to that in eastern european countries, which have also experienced “credit booms” during the last two decades. according to imf (2005), unadjusted private saving has been roughly stable at around 20% of gdp for emerging markets excluding china, east asia, and oil producers. turkey’s private saving rate was almost similar in comparison to this set of countries until 2002: saving unadjusted for inflation lay somewhat above comparator countries while saving adjusted for inflation lay somewhat below. from 2002 onwards, however, turkish private savings declines dramatically. the rapid decline in national saving rates and the fact that the decline in the recent period was primarily driven by the private sector causes concerns about the sustainability of growth in turkey. this is also reflected in the increasing current account deficit. moreover, the dependence on large foreign capital inflow as a major source of investment and growth makes the economy fragile to sudden stops or huge capital outflow. the memories of past crises driven by internal or external factors, such as the 1994 crisis, the 2001 crisis, and finally the 2008-2009 global financial crisis aggravates these concerns. determinants of gross domestic saving and its trend analysis in turkey: a time-series outlook 21 2.1.5. determinants of gross domestic saving economic and demographic factors like income growth, age-dependency ratio, inflation rate, interest rate, and money supply are major determinants of domestic saving (mithani, 2000; abu, 2005; mahmoud, 2008; kidane, 2010; and kıvanç, 2015). according to the life cycle hypothesis (lch), expectations of individuals about lifetime income matters the amount of their consumption and saving ratio in a certain period. the theory classified the individuals’ lifetime into working and retirement periods. individuals are assumed to produce more than their consumption during their working period. so, they are net savers during this period. in the retirement period, individuals are assumed to be dis-savers. in this context, saving performance may have a positive relationship with income growth. lch clearly stated that demographic factors like age-dependency ratio and population growth influence the saving performance of a country. the theory implies that the net effect of population growth is theoretically unclear. the reason is that even if an increase in population growth increases the number of productive workers (net savers), it may be offset by an increase in the young age-dependency ratio (mahmoud, 2008). so, the net effect of population growth on gross domestic saving depends on the dominant factor of the two (i.e. amount of saving increased due to new productive workers versus the amount of saving decreased due to an increase in the young age-dependency ratio). the lch implies that the real effect of inflation on saving performance is almost negligible because of a lack of money illusion. however, individuals who worried about their future will increase their savings while the inflation rate goes up. on the other hand, individuals increase their savings rate with the rate of inflation in order to preserve the value of their wealth which will be diminished over time (mahmoud, 2008). the degree of financial sector development influences the willingness and amount of individuals’ saving. people in many countries having good accessibility of bank facilities are motivated to save more since the cost to bank transactions are too low. if access to banking service is not enough, people prefer to capture their savings in nonmonetary terms like jewelry and real-estate. 2.2. empirical literature kıvanç (2015) examined the determinants of saving in thirteen middle east countries for the period 2000-2013 using the panel data method. results showed that income, money supply, and government expenditures had a negative impact on saving rate whereas the young population and inflation influences saving positively. old population, urban and rural populations had no significant effect on saving. loayza et al. (2000) analyzed the driving factors of private saving across the world by using a large, cross-country, time-series data set. in this study, instrumental-variable techniques were used to correct for endogeneity and heterogeneity. the results showed that the growth of real per capita income, inflation, and fiscal policy had positive impact on saving, whereas dependency ratio and financial liberalization had a negative effect on saving in the long-run. abu (2005) examined the determinants of gross domestic saving in ethiopia for the period 1960 2002 by using a vector auto regression (var) method of estimation technique. the results showed that the growth rate of income per capita, investment rate, inflation rate, and real interest rate had a positive effect on gross domestic saving rate whereas, public consumption, import intensity, openness, and term of trade had a negative effect on it. agrawal et al. (2007) examined the saving behavior in south asia by taking five countries; india, pakistan, bangladesh, sri lanka, and nepal by using co-integration, error correction, and dynamic ols model for the period 1960 2004. the result showed that per capita income, access to banking institutions and interest rate had a positive effect on saving while dependency ratio and foreign saving rate had a negative impact on the domestic saving rate. mahmoud (2008) analyzed the determinants of domestic saving in egypt for the period 1975-2006 by using the ols regression model. the study showed that growth of per capita income, money supply (m2/gnp), inflation, and real interest rate had positive effects on saving, whereas budget deficit ratio and current account deficit had negative effects on domestic saving. 3. the methodology of the study 3.1. data type and data sources this study employed annual data ranging from 1980 – 2018. the data set comprises inflation rate (inf), deposit interest rate (dir), gross national income per capita growth (gnipcg), broad money supply to gdp ratio (m2r), age-dependency ratio (adr), and gross domestic saving rate to gdp ratio (gds). the data was drawn from the solomon amare tessema 22 world development indicator 2019 database, central bank of turkey (tmb) annual report, and world bank annual reports. 3.2. methods of data analysis different econometrics and statistical tools were employed for data analysis. these include diagnostic and model stability tests, descriptive statistics, correlations, unit root tests, co-integration tests, and auto-regressive distributed lag models were employed. 3.3.model specification in this study, the auto regressive distributed lag (ardl) model was used to analyze the major determinants of gross domestic saving in turkey. as many economic theories and previous studies on saving clearly described that domestic saving has a fundamental functional relationship with many macroeconomic variables including, inflation rate, deposit interest rate, age dependency ratio, broad money supply, gni per capita growth rate, gdp, population growth, and so on (girma, 2017). therefore, the functional relationship between domestic saving and its determinants can be expressed as follows: …………………………………………... (2) based on this functional relationship, the following specific econometric model was generated: ……….. (3) where: • gds, inf, dir, m2r, adr, and gnipcg refer gross domestic saving to gdp ratio, inflation rate, deposit interest rate, broad money supply to gdp ratio, age dependency ratio, and gross national income per capita growth rate respectively. • β0 − is an intercept function that shows a change of gds when there is not an independent variable. • β1 to β5 − refers to slope coefficients. • u − refers to the error term which holds variables that affect gds but not included under the model. • t − refers to the time period. 3.4. auto-regressive distributed lag (ardl) model auto-regressive distributed lag (ardl) model is the one that contains both lagged values of the dependent and independent variables (r.c hill et al, 2008). using the ardl model for time series data analyses has a number of advantages in which others might not have. firstly, the ardl model doesn’t need the same order of integration for variables in the model. the variables in the model can have a different order of integration but should be less than i (2). secondly, for small and finite sample data size, the ardl model is relatively efficient than other models and can yield unbiased estimates of the long-run model. thirdly, it is possible to have different lag lengths for variables while using the ardl model (t. nigusse et al, 2019). in its general form, the ardl (p, q) model can be written as follows: 𝑌𝑡 = 𝛼 + 𝛼0𝑋𝑡 + 𝛼1𝑋𝑡−1 + 𝛼2𝑋𝑡−2 + ⋯+ 𝛼𝑞𝑋𝑡−𝑞 + 𝛽1𝑌𝑡−1 + 𝛽2𝑌𝑡−2 +⋯+ 𝛽𝑝𝑌𝑡−𝑝 + 𝑈𝑡………………………………………………………………………………………….(4) where:y and x − refers to the dependent and independent variables respectively, p and q − refers to the maximum lag length of the dependent and independent variables respectively, α − refers the intercept term, α1 to αq and β1 to βp − refers to coefficients, u − refers to the error term, and t − is the time period. 3.5.unit root test for stationarity all the macroeconomic variables used for the empirical analysis of this study are time series. however, the problem of non-stationary is the main challenge in the practice of econometric analysis. in regressing of a time series variable on another time series variable, a very high r2, significant t-values and f-statistics can be obtained although there is determinants of gross domestic saving and its trend analysis in turkey: a time-series outlook 23 no meaningful relationship between the variables. this problem is referred to as spurious regression (gujarati, 1995). the problem arises because if both the time series involved exhibit strong trends (sustained upward and downward movement). the high r2 observed is due to the presence of the trend, not a true relationship between the variables. therefore, it is very important to find out if the relationship between economic variables is true or spurious. this is done by first identifying stationary and non-stationary variables. a time-series variable is said to be stationary if its mean and variance are constant over time and the value of covariance between the two time periods depends on distance or lag. if the mean, variance, and auto-covariance of the individual time series are not time-invariant, these time series are not stationary. stationary variables contain deterministic (fixed) trends, while non-stationary variables contain stochastic (i.e. random) trend (harris, 1995). however, using ardl models for econometric analyses can accommodate those problems arising from unit root variables even though performing the test is mandatory to ascertain that no variable is integrated of order 2. in this study, the augmented dickey-fuller test, which becomes popular over the past several years were applied to identify whether the variables are stationary at the level and/or at first difference. augmented dickey-fuller test designed with three different options to take account of the intercept term. it can be applied without constant term and trend, with constant but no trend, or with constant and trend. the suitable adf test has been selected based on the behaviour of variables found in the model. 3.6.co-integration test the co-integration test is applied to examine whether there is a long-run equilibrium relationship among variables. if there is co-integration, both dependent and independent variables follow a similar stochastic trend and do not go in different directions. for this study, the ardl bounds test for co-integration is applied to examine whether there is a long-run relationship among variables. the null hypothesis of this test is that there is no long-run relationship among variables, and the alternative is that there is a long-run relationship among variables. if there is co-integration among variables, the conditional ardl long-run model can be estimated as follows: 𝛥𝐺𝐷𝑆𝑡 = 𝛼 + 𝛽1𝑖 𝑝 𝑖=1 𝛥𝐺𝐷𝑆𝑡−𝑖 + 𝛼0𝑖 𝑞1 𝑖=0 𝛥𝐼𝑁𝐹𝑡−𝑖 + 𝛼1𝑖 𝑞2 𝑖=0 𝛥𝐷𝐼𝑅𝑡−𝑖 + 𝛼2𝑖 𝑞3 𝑖=0 𝛥𝐴𝐷𝑅𝑡−𝑖 + 𝛼3𝑖 𝑞4 𝑖=0 𝛥𝐺𝑁𝐼𝑃𝐶𝐺𝑡−𝑖 + 𝛼4𝑖 𝑞5 𝑖=0 𝛥𝑀2𝑅𝑡−𝑖 + 𝑒𝑡………………………(5) where: α − refers a constant term; β1 and p − refers the coefficient and lag length of dependent variable gds respectively; α0, α1, α2, α3, and α4 − are coefficients and q1, q2, q3, q4 and q5 are lag lengths for independent variables inf, dir, adr, gnipcg and m2r respectively; δ − refers first difference operator. 3.7.error correction mechanism j.d. sargan was the first economist who had used the error correction mechanism (ecm) for correction of disequilibrium. this method of correction was later popularized by engle and granger. it is a method of making short-run behavior of a variable consistent with its long-run behavior. the granger representation theorem states that if two variables are said to be co-integrated, their relationship can be expressed by ecm. if there is a long-run relationship among variables, the error correction model representation can be specified as follows: 𝛥𝐺𝐷𝑆𝑡 = 𝛼 + 𝛽1𝑖 𝑝 𝑖=1 𝛥𝐺𝐷𝑆𝑡−𝑖 + 𝛼0𝑖 𝑞1 𝑖=1 𝛥𝐼𝑁𝐹𝑡−𝑖 + 𝛼1𝑖 𝑞2 𝑖=1 𝛥𝐷𝐼𝑅𝑡−𝑖 + 𝛼2𝑖 𝑞3 𝑖=1 𝛥𝐴𝐷𝑅𝑡−𝑖 + 𝛼3𝑖 𝑞4 𝑖=1 𝛥𝐺𝑁𝐼𝑃𝐶𝐺𝑡−𝑖 + 𝛼4𝑖 𝑞5 𝑖=1 𝛥𝑀2𝑅𝑡−𝑖 + 𝜃𝐸𝐶𝑀𝑡−1 + 𝑒𝑡…………(6) solomon amare tessema 24 where: α…refers a constant term; β1 and p…refers the coefficient and lag length of dependent variable gds respectively; α0, α1, α2, α3, and α4…are coefficients and q1, q2, q3, q4 and q5 are lag lengths for independent variables inf, dir, adr, gnipcg and m2r respectively; δ…refers first difference operator; θ…refers the speed of adjustment; ecm…refers the error correction term; and et…refers the error term. 4. results and discussion 4.1.results from unit root test as discussed in the previous section, the adf test was applied to ascertain that no variable(s) in the model are integrated at order 2. table 4.1 below shows that three variables namely, gross domestic saving to gdp ratio (gds), inflation rate (inf), and deposit interest rate (dir) are non-stationary at level forms, but they are stationary at the first difference (i.e. i (1)). whereas, variables like the age-dependency ratio, broad money supply to gdp ratio (m2r), and gni per capita growth rate are stationary at level (i.e. i (0)) table 4.1 results of unit root test based on adf test statistics variables adf result at level adf result at first difference with constant with constant and trend with constant with constant and trend inf -2.418 (-2.964) -2.736 (-3.548) -7.865** (-2.966) -7.740** (-3.552) dir -1.719 (-2.964) -2.822 (-3.548) -7.585** (-2.966) -7.747** (-3.552) adr -11.199** (-2.964) 1.928 (-3.548) -0.392 (-2.966) -4.270** (-3.552) m2r -1.232 (-2.964) -3.846** (-3.548) -8.691** (-2.966) -8.566** (-3.552) gnipcg -6.734** (-2.964) -7.181** (-3.548) -11.702** (-2.966) -11.527** (-3.552) gds -2.003 (-2.966) -1.692 (-3.552) -5.515** (-2.969) -5.742** (-3.556) residuals -4.425** (-2.964) -4.366** (-3.548) note:(**) denotes 5% level of significance, and values in the parenthesis are tabulated values at 5% level of significance. the above adf test result confirms that none of the variables are integrated of order 2. in other words, some of the variables are integrated at order 1 (i.e. stationary at level), while some others are integrated at first difference (i.e. non-stationary at level but stationary at first difference). since the variables are integrated at different levels and the study has small sample size, auto regressive distributed lag (ardl) model is more appropriate for the analysis of long-run relationships among variables. determinants of gross domestic saving and its trend analysis in turkey: a time-series outlook 25 4.2. ardl bounds test for co-integration there are different methods for the selection of optimal lag length for variables in the model. akaike information criterion (aic) and bayesian information criterion (bic) are the most common methods for optimal lag length selections by many researchers. selecting too large lag length may affect the power of the test, while selecting too small lag length may offer remaining residuals to serially correlated and then yield biased results. however, the bic tends to select more parsimonious specifications (pesaran and smith, 1998) as cited in ayalew (2013). so, based on the bic, a maximum lag of 1 is selected for this study. f-statistics was used for hypothesis testing. as stated above, the null hypothesis of the ardl bounds test for co-integration is that there is no long-run relationship among variables, and the alternative is that there is a long-run relationship among variables. if the calculated f-statistics is greater than the upper bound critical value at a 5% level of significance (i.e. in our case, 3.79), we can reject the null hypothesis of no long-run relationship among variables, which implies that there is co-integration among variables. if the calculated f-statistics is lower than the lower bound critical value at a 5% level of significant (i.e. in our case, 2.62), we couldn’t reject the null, which implies that there are no long-run relationships among variables. if the calculated f-statistics is between the lower and upper bound critical values at a 5% level of significance, the test result is considered inconclusive. as we can see below in table 4.2, the calculated f-statistics is fall below the lower bound critical value at a 5% level of significance. this result implies that there is no long-run relationship (no cointegration) among variables. table 4.2 ardl bounds test result f-statistics critical values lower bound upper bound decision 2.167 1% 3.41 4.68 no co-integration 5% 2.62 3.79 no co-integration 10% 2.26 3.35 no co-integration when we failed to reject the null hypothesis in ardl bounds test for co-integration at 5% level of significant, i.e. when there is no long-run relationship among variables, we couldn’t estimate ecm model and our estimation should focus only on short-run model, which is the ardl model. 4.3. model stability and diagnostic tests before doing any analysis, it is important to verify the efficiency of the model using some diagnostic tests. the main problem in time series data is the problem of autocorrelation. breusch-godfrey lm test and durbin-watson d statistics method of autocorrelation tests were used for this study. as shown below from the stata result, there is no any evidence to reject the null, which states that there is no serial correlation since the value of durbin-watson d statistics is approximately 2, and this result is supported by the breusch-godfrey lm test in which the p-value associated with the test is greater than the critical value of the standard 5% level of significant (i.e. 0.0509 > 0.05). durbin-watson d-statistic( 7, 38) = 1.900311 . dwstat solomon amare tessema 26 h0: no serial correlation 1 3.811 1 0.0509 lags(p) chi2 df prob > chi2 breusch-godfrey lm test for autocorrelation . bgodfrey ramsey’s reset test was used for test of model specification error (i.e. test of model functional form). the result of the test revealed that the null hypothesis, which states that the model has no omitted variable, couldn’t be rejected (i.e. 0.0544 > 0.05). f(3, 30) = 3.03 ho: model has no omitted variables ramsey reset test using powers of the fitted values of gds . ovtest for test of hetroscedasticity, both the breusch-pagan/cook-weisberg test and white test were applied. the result of those tests showed that the null hypothesis, which states that there is a constant variance, couldn’t be rejected (i.e. 0.1133 > 0.05). this result confirms that there is no hetroscedasticity problem in the model. prob > chi2 = 0.1133 chi2(1) = 2.51 variables: fitted values of gds ho: constant variance breusch-pagan / cook-weisberg test for heteroskedasticity . hettest determinants of gross domestic saving and its trend analysis in turkey: a time-series outlook 27 total 26.12 26 0.4566 kurtosis 2.08 1 0.1491 skewness 5.75 5 0.3308 heteroskedasticity 18.28 20 0.5688 source chi2 df p cameron & trivedi's decomposition of im-test prob > chi2 = 0.5688 chi2(20) = 18.28 against ha: unrestricted heteroskedasticity white's test for ho: homoskedasticity . imtest, white cumulative sum of recursive residuals (cusum) test and cumulative sum of squares of recursive residuals (cusumsq) tests were applied to check the stability of the model. if the cusum as well as the cusumsq line crosses the upper and/or lower critical limits and never returns back, the null hypothesis which states that there is model stability, should be rejected. but if the line goes between the critical limits, we may fail to reject the null. cu su m year cusum lower upper 1987 2018 0 0 fig. 1. cumulative sum of recursive residuals (cusum) solomon amare tessema 28 c u su m s qu ar ed year cusum squared 1987 2018 0 1 fig.2. cumulative sum of squares of recursive residuals (cusumsq) as shown from the above graphs, the cusum line comfortably lies between the upper and lower critical limits. likewise, the cusumsq line finally goes between the two critical limits, which generally imply stability of the model and absence of structural breaks. 4.4. ardl model estimation after verifying the absence of long-run relationships among variables in the model, the upcoming step is running the appropriate ardl model to find out the short-run coefficients which are reported as follows: table 4.3 short-run coefficients of the ardl model variables coefficients standard err. t-statistics prob. gds(-1) 0.419 0.190 2.21 0.035** inf 0.055 0.037 1.50 0.145** dir -0.113 0.053 -2.13 0.041 adr 0.319 0.176 1.81 0.079** gnipcg -0.037 0.135 -0.27 0.786 m2r 0.177 0.139 1.27 0.213 -cons. -9.183 14.212 -0.65 0.523 f (7, 30) = 8.23 r-squared = 0.6143 prob > f = 0.0000 adj. r-squared = 0.5397 determinants of gross domestic saving and its trend analysis in turkey: a time-series outlook 29 the goodness of fit of the model is measured by the coefficient of determination (r-squared). the regression result above showed that the coefficient of determination is 0.6143 which implies that about 61.43% of the variation in gross domestic saving is explained by the explanatory variables incorporated in the model. the f-statistics result (i.e. 8.23) and the corresponding p-value (i.e. 0.0000) confirms the overall significance of the model. as shown above, the first lag of gds has a positive and statistically significant effect on gross domestic savings in the short run. a unit increase in the first lag of gds is associated with a 0.419 unit increase in gds on average, ceteris paribus at a 5% level of significance. it is observed that the inflation rate, measured as a consumer price index, as a proxy of macroeconomic instability, has a positive but statistically insignificant effect on gds in the short-run. regardless of its statistical significance, this result supports the argument of precautionary motive which suggests that increased macroeconomic instability induces people to save a large portion of their incomes. the result is consistent with the findings of ayalew (2013), and kıvanç (2015). the coefficients of gross national income per capita growth are negative and its effect on gross domestic saving is statistically insignificant at a 5% level of significance in the short-run. this result is not consistent with many economic theories. however, kıvanç (2015) suggested, income growth can have a negative impact on saving if there is disequilibrium in income distribution. the age-dependency ratio which is the ratio of total persons under age 15 plus persons aged 65 and above to the labor force (ages 15-64) has a positive and statistically insignificant effect on gross domestic saving at a 5% level of significance. this result is also not consistent with expectations. another striking result that emerged from this analysis is that the negative and statistically significant effect of deposit interest rate (which is measured as the annual interest rate of bank deposits) on gross domestic savings in the short-run. a unit increase in deposit interest rate reduces the level of gross domestic saving by 0.113 on average, ceteris paribus at a 5% level of significance. this result is possible when the income effect of interest rate dominates its substitution effect (mahmoud, 2008). life cycle hypothesis introduced that if households are net lenders, an increase in interest rate will increase lifetime earnings, which in turn increases consumption and reduce saving. this refers to the income effect of the interest rate. so, a negative effect of deposit interest rate on gross domestic saving has an implication of a higher consumption rate rather than higher saving rate. this result is consistent with the findings of girma (2017) and loayza et al (2000). broad money supply to gdp ratio has a positive but statistically insignificant effect on gross domestic saving in the short-run. the positive coefficient for money supply was expected as many economic theories suggest that an increase in the money supply can revive the overall economic conditions. 5. conclusion and recommendations saving is an engine for the growth and prosperity of a nation by creating capital accumulation and financial investments through resource mobilization. most growth models like harrod-domar and solow-swan growth models are in favor of this idea. many newly developing and newly industrialized countries in the world like japan, korea, taiwan, singapore, and hong kong have been attained their maximum economic growth and development through their high saving performance and good saving habits. this study has used time series data ranging from 1980 – 2018 which was drawn from the world development indicator 2019 database, central bank of turkey and world bank annual reports. it examined the impact of five independent variables namely inflation rate, deposit interest rate, age-dependency ratio, broad money supply to gdp ratio and growth of gross national income per capita on gross domestic saving in turkey. auto-regressive distributed lag model with appropriate diagnostic tests was used for the data analyzing process. results obtained from this study have shown that the first lag of gross domestic saving has a positive and statistically significant effect on the gross domestic savings rate at a 5 percent level of significance. broad money supply to gdp ratio has also a positive effect on gross domestic savings in turkey. this result is consistent with expectations that money supply can revive economic conditions and stimulate competitiveness even though its effect is statistically insignificant at 5_percent level of significance. gross national income per capita growth has a negative and statistically insignificant effect on the gross domestic savings rate at a 5 percent level of significance. inflation rate and age-dependency ratio have both positive and statistically insignificant effects on gross domestic saving rate, whereas deposit interest rate has a negative and statistically insignificant effect on gross domestic saving in the country at a 5 percent level of significance. a negative effect of deposit interest rate on saving had a policy implication that an increase in interest rate will not lead to a rise in gross domestic savings in turkey. in general, the significance of a higher gross domestic saving rate to the real economic solomon amare tessema 30 growth of turkey may warrant policy intervention. managing fundamentals that underline the improvement of the gross domestic saving rate should top the policy agenda to reduce excessive volatility impinging on it. so, the government and any other concerned bodies should emphasize controlling severe inflationary cases in the economy through policy intervention because hıgh inflation may the cause for losing the momentum of the economy in the long-run. the negative relationship between gross national income per capita growth and gross domestic saving rate may imply the income inequality in the country. therefore, policymakers have to give attention to solve the problem. besides, emphasis should be given to create awareness in the society to save part of their income by reducing the extravagant 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"corporate governance committee-investment and finance definition," https://onlinelibrary.wiley.com/doi/full/10.1111/corg.12143 international journal of commerce and finance, vol. 6, issue 2, 2020, 145-158 145 quality of e-tax system and its effect on tax compliance (evidence from large taxpayers in tanzania) faustine j. masunga, national institute of transport, p.o.box 705, dar es salaam, tanzania harun j. mapesa, mzumbe university, p.o.box 6, morogoro, tanzania mwakibete andwilile nyalle mzumbe university, p.o.box 6, morogoro, tanzania received: aug 31, 2020 accepted: sept 23, 2020 published: oct 02, 2020 abstract globally, countries endeavor toward improving tax compliance behavior with ultimate goal of increasing of tax revenue collection. this study examined the quality of the e-tax system and its effect on tax compliance behavior of large taxpayers in tanzania. the data were gathered from 313 large taxpayers from three regions in tanzania, namely dar es salaam, mwanza and arusha. the study employed information system success model (the is model) with constructs service quality, system quality, information quality, user satisfaction, behavioral intention and tax compliance behavior (actual behavior). a partial least square structural equation modeling (plssem) with smartpls3 was used to evaluate the latent variables and their indicators. the results showed that behavioral intention to use the e-tax system has the strongest effect on tax compliance behavior. thus, service and information quality had an incredible effect on creating eagerness to accept and utilize the e-tax system which improves tax compliance behavior. however system quality has not shown significant effect on tax compliance behavior. keywords: e-tax system, pls-sem, is success model, compliance, large taxpayers 1. introduction the rapid growth and usage of the electronic tax system (e-tax system) amongst large taxpayers have resulted in transformation of the methods of tax collection and the flow of data and information in most countries in the world (chumsombat, 2015; sondakh, 2017). most governments in the world are turning into technology to ease service delivery and provide quality services. (hammouri and abu-shanab, 2017; kochanova, hasnain and larson, 2018) assert that, the benefits of integrating taxpayers with electronic tax system outweigh the disadvantages of using the system. the benefits of using the e-tax system are manifold, which include and not limited to; reasonable expense evaluation, limit the travelling time to tax offices, keep up persevering record keeping, ideal access of records when required, convenient preparing of tax returns and tax dues, and sharing of reliable tax information among taxpayers and the government which lead to improved tax compliance (mandari, koloseni and nguridada, 2017). therefore, authorities involved in tax collection are taking advantages of the presence of the e-tax system to superintend suitable management of tax revenue as a result of integration with taxpayers through information sharing for tax purposes (gilbert et al., 2009; allen, murphy and bates, 2017). this modernization process has introduced different electronic tax systems for the purposes of improving tax compliance, managing tax revenue and bringing the reliability of service delivery through extensive use e-tax system that support the provision of timely information for decision making and provision of convenient services to taxpayers, e-tax systems like e-filing system, e-tax assessment system (efds), the revenue gateway system (rgs), integrated tax administration system (itax), tanzania custom information system, taxpayer identification number (tin), the computerized motor vehicle registration system (cmvrs) (bird and zolt, 2008). despite the e-tax systems to play a substantial role in minimizing the compliance cost and increasing the value of business (zaburi, 2014; casey and castro, 2015; mandari, koloseni and nguridada, 2017). however, there is no in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e faustine j. masunga & dr. harun j. mapesa & dr. mwakibete andwilile nyalle 146 empirical evidence whether the system has achieved its objectives of improving tax compliance behavior and the link between e-tax system and tax compliance not clearly established (ben, 2015; chatama, 2013; duke, efiok, yilmaz & coolidge, 2013). it has also remained unclear and imprecise on the reluctant, unwillingness, and hesitancy of taxpayers to register and use the e-tax system and the reasons are not well documented (mandari, koloseni and nguridada, 2017; r. and c., 2019). this study, therefore, sought to bridge this gap in knowledge determining the effects of quality of the e-tax system on tax compliance behavior by testing both the segmentation and transmittal effects (direct and indirect effects respectively). 2. literature review 2.1 theoretical foundation the electronic tax system is an advanced strategy whereby a taxpayer is fit of getting all the administrations related to taxes through web offered by a financial and tax authorities such as the registration for a personal identification number, submission of tax returns and other related archives (wasao, 2014). tax compliance is characterized as the detailing of all pay and payment of all taxes by satisfying the arrangement of laws, regulations and court decisions (chatama, 2013). it likewise characterized as the registration, submission of tax returns and other tax archives on time, reporting and payment of all tax commitments on due date without being constrained (swee et al., 2017). an individual or corporation, on the other hand, is said to be non-compliant if fails to report and pay all tax commitments evaluated on the due date, neglects to consent with the tax laws and overstate the allowable deductions or understate the taxable income (musimenta et al., 2017). the study utilized information system model (is model) which determines the link between the six elements of system quality, information quality, service quality, user intention, user satisfaction and the net advantage of utilizing the system (hsu et al., 2014). system use is the measure of system achievement or success. it is potential and expected utilization of a specific system (hsu et al., 2014; chen et al., 2015; tonkin-crine et al., 2016). the nature, superiority and relevance of the system use are important results which indicate the time spent in the use of the system. intent to use the system is considered to be an essential condition under which system use can affect the users (taxpayer) results and performance. when the system is perceived as useful (increase productivity in terms of compliance cost minimization) ; the users will increase the use of the system and vice versa (ein-dor et al., 1981). on the other hand user satisfaction is the measure of the effective interface between an information system and its users, it is the measure of the extent to which the users of the system (taxpayers) believe the system meets their requirements (bharati, berg and berg, 2003). information quality refers to measure of system output that is what real received from the system. this can be the reports obtained from the system, which includes accuracy, precision, reliability, completeness, shortness, relevance, understandability, meaningfulness, suitability, and comparability. system quality is explained in various ways depending on the context of use. basing on the context of the e-tax system; system quality denotes the attributes of electronic information system with dimensions of usability, accessibility, dependability, flexibility and responsiveness (md. aminul islam, 2012). however, in the context of elearning, it is the person's perception on the use of the system that is measured in terms of both hardware and software application made in terms of the intended users and the requirements of the user (freeze, lane and wen, no date). this includes the availability of the system, usability of the system, ease of the system, timely response of the system and user expectation of the system (halawi et al., 2016; guimaraes et al., 2017; singh, 2018). service quality, on the other hand, is the way in which the system can improve performance. service quality can assist the organisation, company or a firm in fostering competitive advantage. the use and acceptance of any system depends on how the user believes about a certain system (md. aminul islam, 2012). 2.2. empirical review the study by (chen et al., 2015) on the factors affecting online tax filing system employed is success model, the study discovered that information quality showed strong and significant influence on behavioral intention to use the system and users' satisfaction. the study further affirmed that higher information quality (iq) affects the perceived usefulness of the system (woodall, no date; bacache beauvallet, 2018). with regard to service quality (sevq); the study indicated that better service quality improves the perception of usefulness and user satisfaction (floropoulos et al., 2010; type and vishanth, 2020). chumsombat(2015) argues that information quality, system quality in terms of functionality, system quality in terms of usefulness and service quality reported positive significant relationship with quality of e-tax system and its effect on tax compliance (evidence from large taxpayers in tanzania) 147 user's satisfaction on e-filing on smes. further mohammadi (2015)affirmed that system quality, information quality, service quality and technical quality positively affect users' actual use all indirectly and through behavioural intention and users' satisfaction. similar results were achieved by other studies (hassanzadeh, kanaani and elahi, 2012). another study by gupta et al (2015), on the influence of information systems success on the acceptance of e-filing system conducted in india . the study used pls-sem as a tool to analyse the data. the results indicated that sevq has positive association with taxpayers' satisfaction with the use of e-filing system. the findings further indicated that peou on intention to accept e-filing system was found to be insignificant; there was a strong positive relationship between taxpayers' satisfaction and intention to use the e-filing system by taxpayers. it has been further noted that user satisfaction of the system is an effective and important latent variable used in many studies to assess the success and attainment of the given system (sys-, 2003). hou(2012)affirms that there is a strong positive relationship between end-user satisfaction of the system and system usage and between system usage and actual usage (tax compliance for the case of this study). from the above statements the following hypotheses are proposed: 2.3. material and method 2.3.1. survey and measurement items the measurement items were developed and adapted from the previous existing literatures and empirical studies. the measurement of the quality of information from e-tax system, service quality, users' satisfaction and quality of e-tax system, were adapted from (wang, 2006; srivastava and teo, 2008; ozkan and koseler, 2009; hsu et al., 2014). tax compliance measurement was adapted from (marandu, mbekomize and ifezue, 2015; isbell, 2017; hm revenue and customs; and hm treasury, 2018). behavioural intention to use e-tax system was developed from; (abdullah et al., 2014). a survey based strategy was implemented to collect data from large taxpayers at once and proposed to test and analyse research model. a self-administered questionnaire, in particular, close-ended type structure was ideal in this study by virtue of its ability to improve responses relative to open-ended questions. a seven-point likert scale was employed to measure the items under study. the scale ranged from very strongly disagree (1) to very strongly agree (7). this study involved large taxpayers who seemed to impose major tax compliance risks, have tactics of h1a information quality positively influences intention to use e-tax system h1b information quality positively influences taxpayers' satisfaction to use e-tax system h2a the quality of e-tax system have a positive direct effect on behavioral intention to use etax system h2b the quality of e-tax system have a positive direct effect taxpayers' satisfaction to use the system h3a service quality of e-tax system has a direct effect on behavioral intention to use the system h3b service quality of e-tax system has a direct effect on taxpayers' satisfaction to use the system h4a users' satisfaction on e-tax system has positive effect on actual usage of the system (tax compliance). h4b behavioral intention to use e-tax system has positive effect on actual usage of the system (tax compliance). faustine j. masunga & dr. harun j. mapesa & dr. mwakibete andwilile nyalle 148 minimising tax liabilities, a large portion of tax assessments and brings about significant role in income generation (banda postg 2012,). large taxpayers had a critical role in revenue collection due to size and the range of taxes they are responsible for, including their role as withholding agents for large numbers of employees. in addition, the justification of using large taxpayers as a unit of analysis is that; large taxpayers are fully-fledged on the use of the etax system, and their turnover per annum exceeds the threshold being the condition of using the e-tax system and the law requires them to adopt and use the system (plan, 2004). data were analysed using structural equation modeling (pls-sem). this technique was proposed due to its robust in providing originality perspective in dealing with manifold relationship at once (sarstedt, ringle and hair, 2017). data analysis was performed in two modes which are; the measurement model and the structural model. the empirical measures assisted us in comparing the theory established measurement and structural models with reality, as represented by the sample data. the important reflective measurement model tested includes composite reliability (cr) to evaluate internal consistency reliability (icr), individual indicator reliability (iir), and average variance extracted (ave) to evaluate convergent validity (cv) and discriminant validity (dv). correspondingly, the structural model assessed the r2 (explained variance), f2 (effect size), q2 (predictive relevance), and the size and statistical significance of the structural path coefficients.the fornell-larcker criterion, cross-loadings, and heterotraitmonotrait (htmt) ratio was ideal to test discriminant validity following its sturdiness suggested in modern studies compared to fornell larcker criterion (flc) and cross loadings (hair et al., 2012). cross loadings fail to show a lack of dv when two constructs are distantly correlated. correspondingly, the flc performs very poorly, especially when indicator loadings of the constructs under consideration differ only slightly (voorhees et al., 2016). previous studies assessed the quality of the e-tax system on compliance (chen et al., 2015; gupta et al., 2015; mohammadi, 2015; ofurum et al., 2018). however, there is no empirical evidence if these studies identified the predecessors that have relatively high importance or high total effects for the target construct but also a relatively low performance. the use of importance performance matrix analysis (ipma) by this study assisted to add dimensions to the analysis that considers the average values of the latent variable scores and indicators' performance (sarstedt, ringle and hair, 2017). the essence of identifying the constructs and indicators that have relatively higher performance is to discover which constructs need to be improved and seek potential areas of improvement that may receive high attention. ipma allows the analysis of not only the importance-performance of the constructs but also can be applied to indicators viability. this extension provided an opportunity for the researcher to identify the areas that specifically required improvement. 3. results and discussion 3.1. results the findings of this study were in two measurements: first, the measurement model and second, the structural model. the study also examined the importance and performance of each construct on the targeted endogenous latent variable by employing the importance performance matrix analysis (ipma). by doing that the study provided a practical implication of knowing which construct or variable requires more improvement in adding value in the organisation. in assessing the outer model the following items were evaluated; internal consistency reliability using modern measuring of composite reliability. composite reliability is more preferred than cronbach's alpha as it delivers modern high bound hence overcomes the problem of low reliability. values between 0.7 to 0.9 cr are acceptable reliability for researches apart from exploratory research with value from 0.6 to 0.7 to be considered. other items tested from the outer model are convergent validity and the discriminant validity using the average variance extracted and the heterotrait-monotrait ratio respectively. the critical value for average variance extracted should be greater than 0.5 to ensure convergent validity and for discriminant validity is suggested to be between 0.85 and 0.9 (sarstedt, ringle and hair, 2017). 3.1.1. measurement model 3.1.1.1. internal consistency reliability the first step in testing the reliability was to evaluate the internal consistency reliability using composite reliability. internal consistency reliability is the measure of how the data test what intended to be measured conceptually, theoretically and empirically. it was tested using composite reliability, which is more preferred than the use of cronbach' alpha. composite reliability considers individualism when testing the reliability than cronbach's alpha quality of e-tax system and its effect on tax compliance (evidence from large taxpayers in tanzania) 149 which tends to undervalue the internal consistency reliability. basing on the findings (table 1 below) all constructs have values greater than 0.7, which show strong internal consistency reliable and are statistically significant (sarstedt, ringle and hair, 2017). table 1. internal consistency reliability constructs cronbach's alpha rho_a composite reliability average variance extracted (ave) bi 0.810 0.831 0.868 0.572 infqual 0.737 0.747 0.826 0.487 servqual 0.750 0.767 0.842 0.573 sysqual 0.807 0.829 0.862 0.517 tcb 0.705 0.722 0.834 0.627 usersat 0.799 0.805 0.869 0.624 whereby: bi= behavioral intention, infqual= information quality, servqual = service quality, sysqual = system quality, tcb= tax compliance behavior and usersat = user satisfaction. 3.1.1.2. convergent validity "this is the extent to which a measure relates positively with alternative measures of the same construct". this means indicators of a reflective should converge or share high proportion of discrepancies. the higher the outer loadings the higher the associations of the indicators on the specific captured construct. the critical value for statistical significance of the convergent validity should be greater than 0.5 of average variance extracted or value 0.708 or higher than of the outer loadings. the results of this study indicate than all constructs have value of higher than 0.5 except information quality of e-tax system whose value is 0.485 (see table 1 above). the findings show that the constructs are different from each other and the indicators are statistically significant valid belong to the specific constructs (see also indicators outer loadings figure 1) 3.1.1.3. discriminant validity this is the measure of how one construct differs from other constructs in the model. this means the construct measure the phenomenon which is not measured by another construct in a specific model. the first thing to measure the discriminant validity is by determining indicators of outer loading and the cross-loadings. this study preferred more the use of heterotrait-monotrait ratio (htmt) because it overcomes the problems resulted from cross loadings and fornell-lircker criterion of failing to detect the lack of discriminant validity when two constructs correlate or constructs differ only marginally. htmt is the mean of the between correlation to the geometric mean of the within correlation, where the values of 0.85 to 0.90 are an acceptable indication of the presence of discriminant validity. the findings show that sysqual, infqual, servqual, tcb and usersat have values between 0.85 and 0.9 which confirm the presence of discriminant validity (table 2). table 2. htmt construct’s constructs bi infqual servqual sysqual tcb usersat bi infqual 0.950 servqual 0.989 0.956 sysqual 0.853 0.821 0.803 tcb 0.970 0.793 1.266 0.787 usersat 1.123 0.884 0.950 0.864 0.965 faustine j. masunga & dr. harun j. mapesa & dr. mwakibete andwilile nyalle 150 whereby: bi= behavioral intention, infqual= information quality, servqual = service quality, sysqual = system quality, tcb= tax compliance behavior and usersat = user satisfaction. 3.1.2. structural model in the second stage, the study examined five items, namely collinearity, the path coefficients, the coefficient of determination (r2), the effect size (f2) and the predictive relevance of the constructs (q2). the test for collinearity used the variance inflation factor (vif) where values greater than 0.2 and lower than 5 considered to be acceptable. p values and t values used to evaluate the significance level of the constructs. the coefficient of determination used to test how the predecessors contributed to outcome variables. 3.1.2.1. assessment for collinearity in this stage, we first examined model concepts for multicollinearity (simply collinearity). the essence of testing for the collinearity was because the pls-sem in the part of the structural model is built on ordinal least square regressions of each outcome latent variable (bi, usersat and tcb) on its equivalent antecedent constructs. it might happens the path coefficients become subjective and biased if its estimation involves high level of collinearity (valiance inflation factor above 3) among its exogenous constructs in the model, testing first for collinearity was a priority for this study. the results of our findings show that all exogenous latent variables have values below 3 which confirm the absence of multicollinearity (see table 3) table 3. inner vif for constructs constructs bi infqual servqual sysqual tcb usersat bi 6.643 infqual 2.477 2.376 servqual 2.781 2.288 sysqual 2.249 1.951 tcb usersat 2.925 6.643 3.1.2.2. testing the significance and the relevance of the relationships among the constructs in examining the significances and relevance of the relationships the study compared the critical values (t-values) and (p-values) from the standard normal distribution. critical values closer to one of path coefficients indicate stronger relationships. the findings of this study indicate that there is strong relationships between user satisfaction of the etax system and behavioural intention (0.703) followed by behavioural intention and tax compliance behaviour (0.474) others are service quality and user satisfaction (0.411). in contrast system quality of e-tax system has a little effect on behavioral intention to use the system. other constructs (infqual-usersat, infqual-bi, and servqual-bi) have moderate impact (see figure 1 and table 5). r2 determines the combined effect of all antecedent latent variables on the outcome variable. it shows the amount of changes of the endogenous variable(s) caused by all predecessor latent variables. values of 0.25, 0.5 and 0.75 indicate low, medium and higher effect. the results of this study indicate that system quality (sysqual), information quality (infqual), service quality (servqual) and user satisfaction (usersat) of e-tax system explains about 87.8% on behavioral intention followed by 65.8% and 57.8% on explained latent variables of user satisfaction and tax compliance behaviour, respectively. both exogenous latent variables have substantial effect (greater than 50%) on explained variables (endogenous latent variables) (see quality of e-tax system and its effect on tax compliance (evidence from large taxpayers in tanzania) 151 figure1. showing the evaluation of indicators outer loadings, path coefficients and coefficient of determinations (r2) table 4. path coefficients, p-values and t-values constructs original sample (o) sample mean (m) standard deviation (stdev) t statistics (|o/stdev|) p values bi -> tcb 0.474 0.478 0.110 4.295 0.000 infqual -> bi 0.126 0.123 0.031 4.075 0.000 infqual -> usersat 0.185 0.184 0.059 3.150 0.002 servqual -> bi 0.143 0.147 0.042 3.441 0.001 servqual -> usersat 0.411 0.411 0.060 6.891 0.000 sysqual -> bi 0.036 0.037 0.031 1.153 0.250 sysqual -> usersat 0.319 0.321 0.056 5.672 0.000 usersat -> bi 0.703 0.702 0.034 20.900 0.000 usersat -> tcb 0.301 0.300 0.111 2.708 0.007 table 5. test for hypotheses hypotheses p-value status h1a information quality positively influences intention to use e-tax system 0.000 supported h1b information quality positively influences taxpayers' satisfaction to use e-tax system 0.000 supported faustine j. masunga & dr. harun j. mapesa & dr. mwakibete andwilile nyalle 152 h2a the quality of e-tax system have a positive direct effect on behavioral intention to use e-tax system 0.250 not supported h2b the quality of e-tax system have a positive direct effect taxpayers' satisfaction to use the system 0.001 supported h3a service quality of e-tax system has a direct effect on behavioral intention to use the system 0.000 supported h3b service quality of e-tax system has a direct effect on taxpayers' satisfaction to use the system 0.000 supported h4a users' satisfaction on e-tax system has positive effect on actual usage of the system (tax compliance). 0.000 supported h4b behavioral intention to use e-tax system has positive effect on actual usage of the system (tax compliance). 0.000 supported 3.1.2.3. assessing the effect size (f2) and model predictive relevance (q2) of the constructs the assessment of the effect size and model predictive relevance provides more comprehension of the quality of inner model of partial least square. the effect size measures the impact of a particular exogenous construct on the explained latent variable. reporting the effect size is of paramount significance in understanding the quality and the impact contribution of the given predictor constructs in measuring the endogenous construct when it was excluded (sarstedt, ringle and hair, 2017). values 0.02, 0.15 and 0.35 indicate small, medium and large effect. the findings show that user satisfaction (users-bi) has positive effect on behavioural intention to use the e-tax system (1.379) followed by service quality on user satisfaction (servqual-usersat) (0.215). system quality of the e-tax system has a medium effect on user satisfaction of etax system (0.153) followed by behavioural intention on tax compliance behaviour (bi-tcb (0.08). other constructs have a small impact (infqual-usersat 0.042), (servqual-bi 0.06) and usersat-tcb 0.032 (figure 2). this study also tested model's predictive relevance (q2) of the specific predictor constructs on the outcome latent variables using cross-validated redundancy approach (cvra). cvra is more preferred than cross-validated communality approach because the latter does not include the structural model information to anticipate the excluded data points. q2 measures the predictive relevance of the model by predicting the data points of indicators in reflective measurement models by evaluating the relevance of antecedent constructs on the specific explained variables. values 0.02, 0.15 and 0.35 indicate that antecedent constructs have small, medium or large predictive relevance for the chosen outcome variables. the findings show that exogenous constructs have large predictive relevance on behavioural intention to use e-tax system (q2 = 0.467) followed by user satisfaction (q2= 0.385). however, all predictor constructs have predictive relevance on the explained variables because their values are greater than zero (see table 6 below). the formula for calculating q2= 1-sum of squared prediction error sum of squared original data table 6. predictive relevance (q2) of the specific exogenous constructs on explained latent variables constructs sso sse q² (=1-sse/sso) bi 1,565.000 834.267 0.467 infqual 1,565.000 1,565.000 servqual 1,252.000 1,252.000 quality of e-tax system and its effect on tax compliance (evidence from large taxpayers in tanzania) 153 sysqual 1,878.000 1,878.000 tcb 939.000 622.079 0.338 usersat 1,252.000 770.510 0.385 table 7. indirect effects of constructs constructs specific indirect effects infqual -> usersat -> bi 0.130 servqual -> usersat -> bi 0.289 sysqual -> usersat -> bi 0.224 infqual -> bi -> tcb 0.060 servqual -> bi -> tcb 0.068 sysqual -> bi -> tcb 0.017 infqual -> usersat -> bi -> tcb 0.062 servqual -> usersat -> bi -> tcb 0.137 usersat -> bi -> tcb 0.333 sysqual -> usersat -> bi -> tcb 0.106 infqual -> usersat -> tcb 0.056 servqual -> usersat -> tcb 0.124 sysqual -> usersat -> tcb 0.096 3.2.importance performance map analysis (ipma) the ipma intended to compare structural model total effects on the particular construct in the path model. ipma measured the important constructs and those with low effects which signified the area that requires more improvement. centering on the findings obtained from this study on the target construct tax compliance behaviour, user satisfaction has a high effect and is more important on the tax compliance behaviour (0.634) followed by behavioural intention (bi) (0.474). in contrast, information quality (infqual) is less important that is, has low effect on tax compliance behaviour. that means a unit increase in performance of user satisfaction (usersat) from 59.864 to 60.864 on tax compliance behaviour would increase the effect (the importance) of user satisfaction by 0.634 on tax compliance behaviour ( see figure 3 below). however, other constructs cannot be ignored if the government needs to increase tax compliance behaviour should invest more on the constructs that make taxpayers be satisfied with the services provided by the e-tax system. faustine j. masunga & dr. harun j. mapesa & dr. mwakibete andwilile nyalle 154 figure 3. importance-performance map (tcb) 4. discussion of the findings this paper examined the quality of the e-tax system and its effect on tax compliance behaviour by applying the delone and mclean success model. the findings of this study show that system quality of e-tax system, information quality and service quality have positive direct effect on user satisfaction and behavioral intention (β = 0.319; p<0.05; β=0.185; p<0.05;β = 0.411; p<0.05; β= 0.126; p<0.05; β=0.143; p< 0.05 respectively. however, the e-tax system quality has not shown significant influence on behavioural intention (β = 0.036; p=0.250). the study further depicted that behavioural intention to use e-tax system has the strongest effect (β =0.474) on tax compliance behaviour. this means the quality of the service (servqual) provided by the system used by large taxpayers to pay taxes online, file their tax documents and issuing electronic tax receipts has a great impact on creating a positive intention (β =0.143) to adopt and use the e-tax system which has an impact on tax compliance behaviour. consistent findings were reported which confirm that service quality is a strong antecedent on behavioural intention to use the system (chen et al., 2015; zaidi, henderson and gupta, 2017). correspondingly, the quality of the service that the etax system have to provide to large taxpayers has a significant effect (β =0.411) on satisfying large taxpayers to use the system. when large taxpayers are satisfied with the quality of the e-tax system (β =0.319), it positively leads to change their behaviour intention to continue using the system which creates a great effect on tax compliance behaviour (β =0.703). this shows that taxpayers' satisfaction with the system has a strong significant on behavioural intention to use e-tax system. the quality of the information from the e-tax system has a direct positive influence on users' satisfaction to use the system (β =0.185) and on behaviour, intention to use the system (β =0.126). the results agree with other empirical studies which advocate that system quality has a positive relationship with users' satisfaction (casey and castro, 2015; mohammadi, 2015; hammouri and abu-shanab, 2017). in contrast system quality found not significant to influence behavioral intention to use e-tax system (β =0.036; p>0, 05). the results of this study conflict with the findings obtained on measuring system quality on behavioural intention in an e-learning context. this depicts that the positive or negative effect on the use e-system depends also in the environment and user group in which the system being applied (hsu et al., 2014; mohammadi, 2015). generally the findings of this study propose that large taxpayers focus more on the quality of information and the service they receive from electronic tax system which impact on their behavior intention to use the system and creates satisfaction which eventually has consistent tax compliance behavior. our study also examined the indirect effect of e-tax system quality on tax compliance behavior. the study found that there is a strong indirect effect between users' satisfaction to change taxpayers' behavioral intention on tax compliance behaviour (0.333) (shown in table 7) that is; the effect of taxpayers' to satisfy with e-tax system quality on tax compliance behaviour is mediated by behavioural intention to use the system. more precisely, the nature of the relationship between users' satisfaction on tax compliance behaviour is determined by behavioural intention. similar results were reported by mohammadi (2015) and hassanzadeh, kanaani and elahi (2012) which confirmed that there is a significant strong indirect effect between users' satisfaction through behavioural intention tax compliance behaviour. quality of e-tax system and its effect on tax compliance (evidence from large taxpayers in tanzania) 155 5. conclusion and recommendation this paper assessed the quality of the e-tax system and its effect on tax compliance behaviour. the study precisely intended to understand the effects of the use of the e-tax system on filing, payment and issuing of electronic receipt with regard to the behaviour of large taxpayers in tanzania. the objectives of this study were explored using seven likert scale points ranged from 1 very strongly disagree to 7 very strongly agree. a survey of 327 large taxpayers from manufacturing and allied services, financial and telecommunication services and extractive and allied services were involved whereby 313 questionnaires were returned making 95.7% response rate. before analysis, the data were checked for missing data using case wise deletion. the results indicate that both user satisfaction and taxpayers' behavioral intention on the use of the e-tax system has a strong positive effect on tax compliance behaviour. the strong positive effect of bi and usersat on tax compliance behaviour are influenced by service quality and information quality that means the e-tax system assist taxpayers in curbing the problem of high cost of tax payment, time used by taxpayers to file tax documents and pay taxes. however, system quality to influence behavioural intention to use the e-tax system shown insignificant effect, which means, taxpayers intention to use and comply for taxes not influenced by the quality of the e-tax system. the results ipma indicated that user satisfaction on the e-tax system has the strongest influence on tax compliance behaviour though does not perform highly like service provided by the system like easy payment, easy filing, and reduced cost of compliance. therefore, service quality performs highly in influencing tax compliance behaviour compared to user satisfaction. in contrast, the quality of the e-tax system has both low performance and less important (shown in figure 2). this study recommends the government to underscore the use of the e-tax system for large taxpayers which has a positive effect on tax compliance behaviour. users of the e-tax system evidenced that the system has enabled them to minimise the cost of paying taxes, the time used to process tax returns and other tax documents. the government needs to emphasise other groups of taxpayers to adopt and use the e-tax system in order to improve the compliance and maximise revenue from tax. the government also has to ensure quality of the system, the information provided by the system meets the needs of large taxpayers that can create consistent tax compliance behavior. the study has many implications; first taxpayers who are totally involved in using e-tax system have increased their value of the business and saved their time that used to pay taxes before embarked in e-tax system. on the part of the government, the e-tax system minimised the compliance cost, which had an impact on the revenue generation. the study also provides strategies for the government on how to increase the performance and importance of the use of e-tax system through the application of ipma. 6. limitations and future studies this study has mainly two limitations; the first limitation is on the unit of analysis. the study involved large taxpayers in examining the effects of e-tax system quality on tax compliance behaviour. future studies can be directed towards other groups of taxpayers, especially those who use different systems in their daily transactions. the study was limited to three regions in tanzania that is; dar es salaam, arusha and mwanza future studies can be carried out in different contexts. there are different theories and models of technology, and system application, the study in hand used information system success model (the is success model) future studies can combine different theories that add more constructs to widen the study. 7. acknowledgement this study is part of a ph.d. thesis undertaken from mzumbe university (mu), morogoro tanzania with a title “influence of electronic tax system on tax compliance behaviour experience from large taxpayers in tanzania.” we recognize the mzumbe university for unremitting academic support and the national institute of transport (nit) for the profound financial support provided to ensure my ph.d. study is successful from the proposal, thesis development and perfection of this manuscript. special thanks should go to my supervisors; dr. haruni mapesa and dr. andwilile mwakibete for their diligently guidance throughout this 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(2017) ‘the moderating effect of culture on e-filing taxes: evidence from india’, journal of accounting in emerging economies, 7(1), pp. 134–152. doi: 10.1108/jaee-05-2015-0038. international journal of commerce and finance, vol. 4, issue 1, 2018, 10-26 10 bad debt issues in islamic bank: macro and micro influencing (indonesia cases) soeharjoto soekapdjo ryoto16@yahoo.com trisakti university, jakarta barat, indonesia lucky nugroho lucky.nugroho@mercubuana.ac.id mercu buana university ahmad badawi abadawi9497@yahoo.com mercu buana university wiwik utami wiwik.utami@mercubuana.ac.id mercu buana university abstract the research aims to test the influence of the variables affecting non-performing financing (npf) in this case is financing debt ratio (fdr), capital adequacy ratio (car), operational expense ratio against operation income (bopo), exchange rate, inflation and real national income (pdbr). the data analysis method used in this study is multiple regression. regression analysis meth od, in addition to measuring the strength of the relationship between two or more variables, also shows the direction of the relationship between the dependent variable with the independent variable the result of processing obtained from the value of r2 adjusted equal to 0,362 which means variation or behavior of independent variable that is fdr, car, bopo, kurs, inflation, and pdrb able to explain variations or the behavior of the dependent variable that is npf equal to 36,2%. the rest is equal to 63,8% are variations or actions of other independent variables that affect the npf but are not included in the model. keywords: micro influencing in bad debt, macro influencing in bad debt, non performing financing (npf), islamic bank, bad debt. jel classifications: g14, g24, g32 1. introduction islamic banking in indonesia was supposed to have the prominent role in indonesia's economy. indonesia as a country with a total population of number the world's largest muslim population. the consequence of the government's commitment to making indonesia as the center of islamic finance in the world, then in indonesia should have a sustainable islamic financial system (sustainability) and one of the actors of the financial system is sharia banking. banking as an intermediary institution has significance for the economic system other than as an intermediary institution that supports financial transactions, but banking has a systemic impact on the economy in the event of bankruptcy from the bank. it happened in indonesia during the monetary crisis in mid-1997 where 16 banks were liquidated, among others: bank dwipa, majapahit jaya commercial bank, anrico bank, bank harapan sentosa, andromeda bank, and others. there are also several state-owned banks that are required to merge namely bank dagang negara, bank bumi daya, indonesia export-import bank, and bank pembangunan indonesia (bennte, 1999; tarmidi, 2003; nugroho et al., 2017). reflecting on the incident, then to make indonesia as the center of islamic finance of the world, it is necessary for islamic banking that has good quality and fundamentals. i n te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e mailto:ryoto16@yahoo.com mailto:lucky.nugroho@mercubuana.ac.id mailto:abadawi9497@yahoo.com mailto:wiwik.utami@mercubuana.ac.id bad debt issues in islamic bank: macro and micro influencing (indonesia cases) the interest of the world community towards islamic banking in the aftermath of the global economic crisis has increased since the islamic finance, particularly islamic banking the alternative to reduce the possibility of a worldwide financial crisis in the future. this is due to islamic banks that have market discipline which can monitor and to maintain the balance of credit or financing growth with the real sector growth and there are bans of maghrib (maysir-gambling and speculation, gharar-uncertainty and riba-interest rate) transaction which imply injustice and unproductive activity (ahmed, 2010; sukmadilaga & nugroho, 2017). also, compared to conventional banks, islamic banks aim hasn't only improved its financial performance, but also on the distribution of welfare such as poverty alleviation (financial access for the poor and remote communities) and also providing care in realizing social prosperity for the people. these concerns are also aligned with the islamic bank's commitment to achieving economic objectives of islam (maqashid sharia) which includes social justice, equitable distribution of income, financial wealth with the entire purposes is social well-being (wadji dusuki, 2008; alam choudhury & syafri harahap, 2008, nugroho et al. 2017). therefore the existence of sharia banking must be maintained and strived for to provide benefits or maslahah (maqhasid sharia). regarding choudhury (2014) and aprastowo (2015), the presence of sharia banks will have a positive impact on the whole society because the principle of maqhasid sharia is in harmony with sustainable development (profit, people, and planet). islam is a religion of rahmatan lil 'alamin meaning islam is a religion that brings grace and prosperity to all, the entire universe, including animals, plants, and jinns, let alone fellow human beings. by the word of allah in surat al-anbiya verse 107 which reads: "and we have not sent you, [o muhammad], except as a mercy to the worlds." the main principles of maqhasid sharia include:  first, maintaining faith (din). humans require absolute faith or religion. without religion, there is no guidance in life, and even religion is the most important of all basic needs. religion ranks first because it is in the qur'an and hadith of a man driven to believe in allah, and that is set up a way of life;  second, self or preserving life (nafs). nourishes the soul is intended to keep the right to live in dignity and nourishes the soul to avoid acts of persecution such as murder, as well as activity that harms involve ea ting foods that can provide negative impact to the body or excessive in taking it;  third, maintain intellect (aql). sharia sees the human intellect or mind as the original gift from allah which is very important. with mind, the human mind can discern what is right and what is wrong. with the brain, the people assigned to worship because of that, the brain or mind must be maintained and protected. for this reason, islamic law forbids drugs, alcohol and all kinds that can kill the creativity of the human and degrade of morale;  fourth, maintaining lineage or descendants (nasl). descendants very important to protect discontinuity of population from one generation to another generation. therefore, islam regulates marriage and forbid adultery, assigns anyone who may marry the ordinance of marriage and terms, and the regulation that must be met. these made for preserving evident and healthy descendants in a serene and peaceful atmosphere;  fifth, maintain the wealth or property (mal). although the property principally belongs to allah, maqhasid sharia framework recognizes an individual's right. islam requires that regulations concerning activity such as purchase, lease, borrow or lend and so on, but prohibits fraud and practicing usury. maintaining a wellunderstood property set up the activity system of fairness and willingness;  sixth, maintain the environmental, qs. ar-rum verse 41 stated: "corruption has appeared throughout the land and the sea by [reason of] what the hands of people have earned so he may let them taste a part of [the consequence of] what they have done that perhaps they will return [to righteousness].” in this verse, allah revealed the emergence of the environmental damage caused by human activities, and people will accept the consequences. because of environmental damage would threaten human existence, especially our future descendants.” sharia banks in channeling financing will face the problem of risk financing. according to sukmadilaga and nugroho (2017), islam is a complete religion. therefore, none of the affairs of the world and the hereafter has been described in islam. as in surat al-an'am, 38, it means: "and there is no creature on [or within] the earth or bird that flies with its wings except [that they are] communities like you. we have not neglected in the register a thing. then unto their soeharjoto soekapdjo & lucky nugroho & ahmad badawi & wiwik utami lord, they will be gathered'. business activities (business) is the nature of humans because with a human endeavor to meet various needs. any business run by humans will inevitably lead to two consequences in the future, namely profit and loss. thus the risk itself is a nature that is always inherent in human life. therefore, islam does not recognize the existence of risk-free business transactions (rosly et al. 2001). the average npf of sharia banks during the period 2007 to 2017 is relatively high, i.e., 3.37% above the ideal rate of financing is 3%. the npf of islamic bank for the period 2007-2017 shown in the table below: table 1.1 non performing financing of islamic bank 2007-2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 *2017 average npf 4.05 1.42 4.01 3.02 2.52 2.22 2.62 4.33 4.34 4.16 4.43 3.37 source: indonesian banking statistics indonesia financial services authority data * june 2017 hou and dickinson (2007) argue that the npf's impact on the economy is hampering economic growth and leading to low levels of economic efficiency, which in turn have an effect on lending behavior by banks. this result may ultimately lead to a crisis, a situation where financial institutions limit their financial supply so that intermediary functioning is not working appropriately (gertler & kiyotaki, 2010). one of the primary financial indicators of banking has a good quality the ability of banks in lending. the primary financial sign is npl (non-performing loan) in the conventional bank or npf (non-performing financing) at sharia bank. if the npf of a bank is high, then the bank has a high risk due to the loan disbursement or bank financing is experiencing problems and there is a possibility of default customers that may result in losses of the bank. furthermore, if the loss is significantly going to be increasing a possibility bank tend to bankrupt if not able to cope that matter. therefore, to prevent the occurrence of problematic financing, it is necessary to know the cause of the bad debt. therefore, the purpose of this study to investigate the factors that cause bad financing in islamic banks. this research is expected to add to the literature related to the causes of problem financing in bank syariah so that it can become an input for sharia banking management in taking policy and being careful of the factors that cause the problematic financing in question. also, this research is expected to be an input for regulators, especially in regulating the operation of sharia banking 2. methodology and literature review 2.1. methodology research design the research design used is hypothesis testing by using multiple regression models. the research aims to test the influence of the variables affecting non-performing financing (npf) in this case is financing debt ratio (fdr), capital adequacy ratio (car), operational expense ratio against bopo, exchange rate, inflation and real national income (pdbr). variables and measurements in this research type of research used is causal research, that explains the influence of independent variable (independent variable) to the dependent variable (dependent variable). the data analysis method used in this study is multiple regression. regression analysis method, in addition to measuring the strength of the relationship between two or more variables, also shows the direction of the relationship between the dependent variable with the independent variable (ghozali, 2006). the statistical model used in this research is as follows: εpdbr 6 βinflation 5 βkurs 4 βbopo 3 βcar 2 βfdr 1 β 0 βnpf   npf: non-performing financing formula as follows: bad debt issues in islamic bank: macro and micro influencing (indonesia cases) bad financing outstanding financing outstanding  fdr: financing deposit ratio formula as follows: financing outstanding third party fund  car: capital adequacy formula as follows: capital weighted risk asset  bopo: cost efficiency ratio/bopo formula as follows: operating cost operating income  kurs/exchange rate: comparison of the value of the rupiah against the dollar is indicated by rp/$  inflation: inflation formulas as follows: ihk: the consumer price index x100% 1-t ihk 1t ihktihk    economic activities/pdrb: real gross domestic product with the base year of 2010 2.2. literature review agency theory application of agency theory according to jensen and meekling (1976), aims to explain a relationship between one or more people who as the principal (principle) with management as a manager of capital (agent). the understanding of management here is the party in the contract with the owner of capital, which then given the authority to represent the interests of shareholders. in fact, the management is required to account for each job to the owners of capital. thus, jensen and meckling (1976) emphasize the separation of the principle ownership function by the agent management function. in the application of agency theory according to eisenhard (1989) is based on three assumptions, namely:  human nature that humans have selfishness (self-interest) and do not like risk;  organizing that there is a conflict between members within an organization;  information that there is asymmetric information between principal and agent. moral hazard in islamic perspective moral hazard is one of the most significant management challenges for sharia banks. in conducting its business, sharia banks must conform to the values of islamic rules. risk taking in business led by managers and owners should be by religious principles (mili & abid, 2017). these religious beliefs must be based on morals imposed by the quran and hadist since the manager and owner exercise the trust of the stakeholders who wish to implement the islamic values in totality (kaffah). also, financial business reporting in islamic banking and finance aims to create equitable equity, where priority is channeled equity financing rather than debt-based financing (kassim et al., 2009) so that there is a share of sharia banks for the success or failure of the financing distribution indeed. soeharjoto soekapdjo & lucky nugroho & ahmad badawi & wiwik utami according to the kim and santomero (1988), the definition of credit risk is the potential that the debtor or counterparty will fail to fulfill its obligations under the agreed terms. regarding if macroeconomic conditions and credit disbursement policies are in good condition, then npl/npf positions will be good, and vice versa. but if npls are found to increase while other factors support means congestion is more due to risky lending behavior as banks do not implement the principle of prudentiality in lending. this condition also indicates the occurrence of moral hazard in banking. moral hazard theory is a part of agency theory known as asymmetric information that is neither worth nor equal. this asymmetric information condition can cause problems. first, moral hazard is when the agent does not implement the things that have been mutually agreed upon in the employment contract. second, adverse selection is a situation where the principal cannot know whether a decision taken by the agent is based on the information it has acquired or occurs as negligence in the task (arrow, 2001; hölmstrom, 1979; eisenhardt, 1989; harahap, 2008). definition of moral hazard, according to dowd (2009) is where one party is responsible or bear the burden on the interests of others. this is because of one of the parties who prioritize their interests without regard to the rights of others. moral hazard arises when one party takes more risks for others to bear the burden of the risk. moral hazard occurs because there is asymmetric information. asymmetric information is caused by a lack of action that can be verified and validated by those who do not have access to that information (macho & perez, 2001). the primary cause of moral hazard is the lack of information and knowledge that are the primary risks in the relationship. one of the causes of the banking crisis in indonesia in the period 1997-1998 was the presence of moral hazard element in bank management (ibrahim & ragimun, 2011). the monetary crisis has been detrimental to the government that has issued bailout funds amounting to trillion rupiah against bad debts against 16 liquidated banks and state banks merged into bank mandiri (adhyaksana, 2008). according to mishkin (2001) and godlewski & weill (2011), moral hazard in the banking industry is also caused by information asymmetry. there are two main issues related to information asymmetry, namely the presence of adverse selection and moral hazard, which can be explained as follows:  adverse selection is a problem of information asymmetry that occurs before the occurrence or conduct of financial transactions (credit disbursement) where low-quality borrowers (with high credit risk), will seek loans at very high-interest rates.  moral hazard is a problem of information asymmetry that occurs after a credit transaction is made. after the credit is withdrawn, the risk of transferring to the lender/bank. moral hazard problems can arise because the borrower makes a profit for diverting his project on a high-risk project, which is not desired by the lender. the behavior of the borrower is based on a significant benefit if the project is successful, but if the project fails will be borne by the lender (credit provided is not returned). conventional banks are forced to reform the problems that caused the global financial crisis. some of the causes of these problems are derivative products that are not supported by real assets, the implementation of risk transfer, the application of interest rates, market prices not by actual conditions and capital banking that cannot cover the losses (gupta, 2010). thus the islamic financial principles can be a solution because have their origins in sharia law which prohibits the payment or receipt of riba (interest) (obaidullah, 2005; anugroho et al., 2017; bnugroho et al. 2017 ). islamic banks also face other restrictions – such as the use of many derivative products because according to sharia, all contracts should be free from gharar (extreme uncertainty or speculation) (obaidullah, 2005; masyita, 2015; anugroho et al., 2017; bnugroho et al. 2017). according to arafat and nugroho (2016), the principles and values contained in sharia banking can be used as a solution to prevent the occurrence of financial crisis, especially the value of islamic banks are the values of social values, environmental sustainability, and spirituality. moreover, the principles of operational islamic banking are the prohibition mechanism "maghrib": maysir (gambling and speculation), gharar (uncertainty) and riba (interest) thus the objectives of islamic banks is to create a social wellbeing (choudhury, 2014; bprastowo, 2015; arafah and nugroho 2016). bad debt issues in islamic bank: macro and micro influencing (indonesia cases) obligation to manage risk in islam according to bouheraoua and ali jinnah ahmad (2015), the scholars agree that two relevant rules must be considered in running the business and every business transaction, namely al-kharaj bidh dhaman (risk accompanied by the attitude of responsibility) and al-ghunmu bil ghurmi (profit accompanied by the risk of loss). the two rules derive from the hadith of the prophet sallallaahu 'alaihi wa sallam from aisya radhiyallahu'anha, that a man bought a slave man then the slave lived with him for some time. one day the buyer got a defect on the slave. then the buyer tells the seller to the prophet shalallahu 'alaihi wa sallam and the prophet-decided that the slave is returned. so the messenger said, "o messenger of allah, did he hire my slave?" so the prophet said: "profit is a reward for loss" (hr ahmad, at-tarmidhi, abu dawud, an-nasai and stated by al-bani). the logical consequence is the person entitled to profit is the person who has an obligation to bear the loss (if it happens). a trader is allowed to take advantage of the goods he sells because he has assumed all the risks associated with his merchandise (damage to goods before the sale, loss of merchandise, unsold and so on). based on this rule, islam prohibits any transaction in which there is an imbalance between risk and profit. in other words, islam prevents any profit-making deal without any willingness to bear a loss. that is why islam forbids any additional (interest) in debt transactions that can occur in the conventional financial system. the lender has no risk whatsoever for the funds it lends because islam requires each borrower to repay the debt. therefore, any additional debt repayments are considered usury. regarding sukmadilaga and nugroho (2017), risk can be defined as a potential occurrence of events that can cause losses. the risk of a possibility of the existence of undesirable outcomes, which can cause harm if not anticipated and not managed properly. risks in banking are a potentially anticipated and unanticipated potential event that negatively impacts both bank earnings and capital. these risks cannot be avoided, but can be managed and controlled. risks can be differentiated into two major groups: systematic risk, i.e., the risks posed by certain macro-specific conditions or situations, such as changes in the political situation, changes in government economic policy, changes in the market situation, crisis or recession situation. the situation and condition could affect the general economic conditions; and unsystematic risk (unsystematic risk) is a unique risk, inherent in a particular company or business only. various risks faced by the bank are liquidity risk, market risk, financing risk, operational risk, compliance risk, legal risk, reputation risk, strategic risk. macro economics according to suyuti (1989), macroeconomy is an external factor consisting of events that come from outside the company. thus the company is unable to control it. athanasoglou et al., (2006), says that banks gain profitability influenced by internal and external factors. external factors in question is a factor that is not directly related to bank management, but it has an indirect impact on the economy and financial institutions. bad debt bad debts' refers primarily to losses arising from transactions made on credit in the ordinary course of business, that is, losses on trade accounts and notes receivable (smith & butters, 1949). in the daily practice of sharia banking, the definition of problem financing is financing whose category of collectibility falls into the criteria of in special attention, doubtful and loss. troubled financing has multiple interpretations: a) financing, for which the installment payment has not reached the desired target by the bank, including financing, which has the potential for future risk to the bank in the broadest sense; b) having difficulties in settlement of its obligations either in the form of principal repayment or profit sharing, late fines and bank charges incurred by the debtor; c) criteria of financing in which the installment is threatened with arrears, especially if the expected repayment resources are not expected to pay the installments so as not to achieve/meet the desired target; d) financing in which there is a pledge injury in the payment of installments of the agreement so that there are arrears, or there are potential losses in the debtor company to have the possibility of risks in the future of the bank; e) financing in special attention, substandard, doubtful and loss and current financing with the potential to be delinquent. soeharjoto soekapdjo & lucky nugroho & ahmad badawi & wiwik utami  non performing financing npf ratio is the ratio used to measure the failure risk of financing, where npf is the ratio between nonperforming financing (which falls into the criteria of non-performing financing, doubtful and loss) with total financing disbursed. according to bank indonesia regulation number 6/10 / pbi / 2004 the financing, which belongs to the special attention category, the class is substandard, doubtful and loss is called npf gross. while the net npf is financing that goes into financing substandard, doubtful and loss. bank indonesia has set the gross npf level to a maximum of 5 percent at a tolerant rate for the health of a bank. the higher the npf (above 5 percent) then the bank is declared unhealthy or high risk. high npfs lead to reduced profits to be received by banks due to the rising costs of provision that must be created due to potential losses from declining financing quality (ruziqa, 2013, purbaningsih, 2014; nasih, 2014; cnugroho et al., 2017).  factors causing npf the causes of bad loans (npf) can be seen from the external and internal side of the bank (margaretha & zai, 2013). the external factors of bad debt financing are changes in government policy on the real sector, high rise of production factor prices due to changes in exchange rate, increased lending rates, recessionrelated to declining levels of economic activity, devaluation, inflation, deflation and other monetary policies. moreover, the existence of natural disasters and increased competition is the cause of the occurrence of bad financing also caused the external side of bad debt increasing (louzis et al.,2012). internally, due to the lack of financial planning of fixed assets/working capital, the failure to meet the requirements in lending, and the weakness of analysis by credit officers since the beginning of the feasibility process of credit/financing proposal (messai & jouini, 2013). several previous studies (louzis et al., 2012, margaretha & zai, 2013, messai & jouini, 2013; klein, 2013; dimitrios et al., 2016) also mentioned that factors leading to bad credit or bad financing or nonperforming financing in sharia bank. npf can be caused by three elements, namely (i) from the bank itself (creditor), (ii) from the debtor, (iii) and outside the creditors and the debtor, such as a factor that caused by the performance of banks (microeconomics). several factors that are causing npf from the external element, such as (i) economic activity (pdrb), (ii) inflation, and (iii) exchange rate. the causes of bad financing from the internal bank itself is related to the characteristics of the existing system in islamic banks. the policy of financing types can be reflected in the (i) financing deposit ratio (fdr), (ii) the capitalization policy to maintain liquidity that represented by capital adequacy ratio (car), (iii) and operational effectiveness of banking represented by bopo/cost efficiency ratio. research framework the methodology used in this study is multiple regression with secondary data obtained from the statistics of sharia banking of the financial services authority (ojk) and the central bank of indonesia (bi). the framework of this research is as follows: bad debt issues in islamic bank: macro and micro influencing (indonesia cases) figure 1.1 research framework 3. result and analysis 3.1. result descriptive statistics the results of the processing of descriptive statistics can be seen in table 3.1. for npf variables obtained the average value of the islamic banking industry npf in indonesia amounted to 3.91%, which means that npf syariah banking in indonesia has a good performance that is at the value of npf between 2 to 5 %. the standard deviation value of 1.128 shows that the variation of npv value every month is in the range between 2% to 6% where the maximum value of npf is 6.618% while the drinking value is 2.220%. for fdr variables, the results of descriptive statistical processing resulted the average value of fdr of islamic banking industry in indonesia amounted to 95.028%, which means that the overall performance of fdr from indonesian syariah banks falls into the category of good groups. this is because the value of fdr is <110% as perceived by bank indonesia. the standard deviation score of 5,890 indicates that the variation of the fdr value of syariah banking in indonesia from month to month is in the range of 90% to 100%. the minimum fdr value is 85.99%, and the maximum value is 104.83%. descriptive statistics for car variables yield an average value of 15.376%, which means that the overall performance of islamic banking car in indonesia has a good capital adequacy that can finance business expansion and has a high coverage risk because the value exceeds the provisions of bank indonesia of 8%. the standard deviation score of 1,267 indicates that the variation in car value of indosat sharia banking is relatively stable. the minimum value of car is 12.230%, while its maximum value is 20.230%. statistical descriptive results of bopo variables obtained an average value of 84.163%. the standard deviation score of 9,290 shows the variation of the bopo value of sharia banking industry from month to month in the range of 75% to 95%. the maximum value of bopo is 99.04%, and its minimum value is 70,430%. the average value of the bopo variable was 84.163%. the standard deviation score of 9.290% indicates the variation of the bopo value of sharia banking industry from month to month in the range of 75% to 95%. maximum value of bopo is 99.04%, and its minimum value is 70.430% soeharjoto soekapdjo & lucky nugroho & ahmad badawi & wiwik utami exchange rate variable, the result of descriptive statistic calculation yields an average value of rp11240/$. the standard deviation value of rp1885.91 indicates that the movement of the rupiah against the us dollar is very significant. the lowest exchange rate is rp8504/$ while the highest value is in the range of rp14652/$. the inflation variable yields an average value of 0.422%, which means that during the period 2011 to 2016. the standard deviation score of 0.558% indicates that the month-to-month inflation movement in indonesia during the period 2011 to 2016 is quite varied. the maximum monthly inflation rate is 3.29% and the minimum value is 0.450%. descriptive statistics for real gdp variables yield an average value of rp2,089,651 billion. with a standard deviation of rp190,925.2 billion, indicating a significant increase in real gdp per month. the maximum value of grdp is rp2,428,570 billion, while its minimum value is rp1,748,731 billion. table 3.1 descriptive statistics of research variables npf fdr car bopo kurs inflation pdbr mean 3.919 95.026 15.376 84.163 11240.33 0.422 2089651. median 3.630 94.950 15.185 79.055 11571.00 0.305 2081092. maximum 6.168 104.830 20.230 99.040 14653.00 3.290 2428570. minimum 2.220 85.990 12.230 70.430 8504.00 -0.450 1748731. std. dev. 1.128 5.890 1.267 9.290 1885.91 0.588 190925.2 observations 72 72 72 72 72 72 72 source: bank indonesia statistics that have been processed research hypothesis testing after using the four classical assumptions (normality, autocorrelation, heterokesdasitas, and multicollinearity). two assumptions are violated autocorrelation and multicollinearity on the inflation and exchange rate variables so that the additional process using the autocorrelation coefficient (rho) and the result of regression model processing after the additional process can be seen in table 3.2 as follows: bad debt issues in islamic bank: macro and micro influencing (indonesia cases) table 3.2 results of npf model regression testing hypothesis theory  goodness of fit model (r2) the result of processing obtained by the value of r2 adjusted equal to 0,362 which means variation or behavior of independent variable that is fdr, car, bopo, kurs, inflation, and pdrb able to explain variations or behavior of the dependent variable that is npf equal to 36,2%. the rest is equal to 63, 8% are variations or actions of other independent variables that affect the npf but are not included in the model.  simultaneous testing (test -f) the result of processing obtained by prob. the value of f statistics equal to 0,000 <0,05 which means ho is rejected (ha accepted) so it can be concluded that proved that at least one independent variable has significant effects of the dependent variable.  individual testing (test-t) individual test results for each independent variable can be explained as follows: a) the processing result of testing the effect of fdr on the npf is shown by the estimated coefficient value of 0.0073 which means the increase of fdr will increase the npf and the decrease of fdr will decrease the nfp . these findings suggest that hypothetical theory which indicates that fdr negatively affects npf are not proven b) the processing result in the car variable is indicated by the estimated coefficient value of -0.0017 which means increasing the car will decrease the npf and vice versa the decrease of car will increase the npf. with prob. of 0.9612 / 2 = 0.4806> 0.05 then ho accepted which means proven that the negative effect of car on npf but not significant. c) testing the influence of bopo on npf obtained the estimated coefficient of 0.0274 which means the increase of bopo will increase the npf and vice versa decrease bopo will decrease the npf. with p-value value of 0.0018 <0.05 then ho is rejected (ha accepted) so it is evident that the positive influence of bopo on npf is significant. d) testing the effect of exchange rate on npf resulted in the estimated coefficient value of 0.000184 which means that the rising of rupiah exchange rate against the dollar (depreciation) will increase npf and vice versa decrease of the rupiah exchange rate to the dollar (appreciation) will decrease npf. with a p-value of 0.0392 <0.05 then ho is rejected (ha accepted) so it is evident that the effect positively of exchange rate on npf is significant. soeharjoto soekapdjo & lucky nugroho & ahmad badawi & wiwik utami e) testing the effect of inflation on npf is shown by the coefficient value of -0.140739 which means that rising inflation will decrease npf and on the contrary decrease of inflation will increase npf. these findings indicate the theoretical hypothesis that inflation has a negative effect on npf is not proven. f) the result of influence test from pdbr to npf is shown by the coefficient value of 0.173e-06 which means increasing of pdbr will increase npf and otherwise decrease of pdbr will decrease npf. these findings suggest that the theoretical hypothesis that pdbr negatively affects the npf is not proven. 3.2. analysis based on the result of statistical data processing, it is known that only bopo/cost efficiency ratio was affecting npf significantly. this is in line with the previous research (demirgüç-kunt, 1989; whalen, 1991; barr and siems, 1994; wheelock and wilson, 1995). nevertheless, increasing the number of npf in the period 2008 to 2015 which is higher than the conventional banks as follows: 1,42 4,01 3,02 2,52 2,22 2,62 4,95 4,84 3,20 3,31 2,56 2,17 1,87 1,77 2,16 2,39 2008 2009 2010 2011 2012 2013 2014 2015 graphic 1 npf of islamic bank vs npf of conventional bank npf gross islamic bank npf gross conventional bank related to messai and jouini (2013), beside the internal and external factors that can be influencing non-performing financing, there is also another factor that will be possible to affect of non-performing financing such as the experienced of the bank. based on graph 1 (one) related to the growth of npf of sharia banks above conventional banks, it is possible that the distribution of financing/asset quality of sharia bank has no better than conventional banks. from the history of the establishment of the first syariah bank in indonesia in 1992 (bank muamalat indonesia), the operational experience of sharia banks and the fulfillment of employees with a specialized competence on sharia products is still limited (bnugroho et al., 2017). the oldest conventional bank in indonesia is bri established in 1896, so there is a big gap of experience between sharia banks and conventional banks. islamic banks are still very young, which is 25 years old, so it in the early stage and should have a lot to improve quality and efficiency (cnugroho, et al., 2017). the ability to perform financing schemes and competitiveness are essential in anticipating the emergence of problem financing (mishkin, 2001; louzis et al., 2012; messai & jouini, 2013). the majority of researchers agree that knowledge assets such as human capital play an essential role in generating company performance (alam choudhury & nurul alam, 2013; swart & kinnie, 2013). furthermore, human beings are core capital related to previous research proves that human capital investment is positively associated with the process of adding value to the company (hsu, 2007; crook et al., 2011; chang, 2015; taswar, 2017; dnugroho & kiranti, 2017). at the same time, with the emergence of intense competition, the knowledge of workers becomes vital for companies to gain and maintain their competitive advantage in the market (hislop, 2013; nawaz, 2017). in the qur'an, surah al-bayyinah verse 7: "indeed, they who have believed and done righteous deeds those are the best of creatures." furthermore, the ability to compete not only regarding human resources that should be improved, bad debt issues in islamic bank: macro and micro influencing (indonesia cases) but also information technology and also a simple or slim organization. rapid competition of market conditions required innovation of products and services. therefore, products or services produced by islamic bank should be delivered with appropriate to the needs of the community. currently, the demand for technological, financial services and digital banking, especially in developing countries such as indonesia increasing rapidly (shaikh et al., 2017). characteristics of services and products needed today are easily accessible and cheap thus banks are required to perform efficiency and innovation. however, business processes and business model needs to be appropriately targeted to reduce risk, speed up service time and lower costs also become the issue to improve services of islamic bank. indonesia as the most significant muslim country in the world has the potential of a large islamic financial system. however, knowledge of sharia bank products is still deficient (lestari, 2015) therefore, the religious and consciousness of society as a debtor must be increased to avoid the occurrence of moral hazard from the customer side (lestari 2015). furthermore, with the awareness of religion based on the qur'an and hadith related to the debt:  qs al baqarah verse 282: "o you who have believed, when you contract a debt for a specified term, write it down. he let him fear allah, his lord, and not leave anything out of it. dictate himself, then let his guardian dictate in justice and if there are not two men [available], then a man and two women from those whom you accept as witnesses so that if one of the women errs, then the other can remind her and do not be [too] weary to write it, whether it is small or large, for its [specified] term that is more just in the sight of allah and stronger as evidence and more likely to prevent doubt between you, except when it is an immediate transaction which you conduct among yourselves. for [then] there is no blame upon you if you do not write it. and take witnesses when you conclude a contract. let no scribe be harmed or any witness. for if you do so, indeed, it is [grave] disobedience in you. and fear allah. and god teaches you. and allah knows all things.  hr. ibn majah: "whoever owes, while he intends not to pay off his debt, then he will meet god as a thief."  hr. muslim: "all the sins of the martyr are forgiven except the debt." 4. conclusion  the existence of islamic banks is necessary to provide benefits for the broader community so that the occurrence of problem financing should be avoided both from the internal and external side. there are several important issues in the prevention of problem financing;  currently, banks are required to have a level of intense competition, so banks should have an advantage in the field of information technology, organization, and human resources. this will have an impact on business processes and business models that can reduce operational costs, reduce risk and increase service quality;  the importance of science and awareness of sharia products has become one of the keys to reduce 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(2003). banking system, real estate markets and nonperforming loans. international real estate review, 6(1), 43-62. international journal of commerce and finance, vol. 3, issue 2, 2017, 71-88 71 the moderator effect of the multinationality factor on the relationships between organizational structure and managerial competency m. çağrı pehlivanoğlu (ph.d. candidate) istanbul commerce university, istanbul hüner şencan (prof. dr.) istanbul commerce university, istanbul abstract: the purpose of this study is to reveal the relationship between the organizational structure perceptions and the managerial competence perceptions of individuals working as managers in national and multinational companies in turkey and to investigate whether these perceptions are affected by “the multi-nationality” factor. in this context, the relationship between the estimation variable "organizational structure" and the outcome variable "managerial competence" is researched; additionally, the effects of both the estimation v ariable and the organizational and individual demographic variables on the outcome variable are analyzed. the main research question is whether the managers’ perception of organizational structure affects the perception of managerial competence. the main research hypothesis is that the perception of organizational structure has a positive effect on the perception of managerial competence. the measurement tools developed by the researcher were applied to entry-, middleand senior-level managers. the research data were obtained from 330 managers working in national companies and 270 managers working in multinational companies operating in turkey. the results of this research indicated that there was a statistically significant relationship between the estimation variable and the outcome variable and that the perception of organizational structure affects the perception of managerial competence (r2 = 0.530, p <0.05). it was observed that the organizational structure factor explained 53% of the managerial competence factor. in addition, when organizational demographic variables such as “the number of personnel working in the department” and “the model of organization” and individual demographic variables such as “management level” and “total work experience” are considered as factors in the analyses, it was observed that the r 2 parameter showing a relationship between the estimation variable and the outcome variable has increased to 62%. other individual and demographic variables did not contribute to the model, and as a result, their effects are concluded to be either equal or constant. the moderator effect of the "multi-nationality" factor was seen to be not statistically significant, and the moderator effect was not found (r 2 = 0.001, p = 0.253> 0.05). keywords: managerial competence, organizational structure, multinational enterprises, national enterprises. jel codes: 1. introduction the literature contains many studies on the concepts of organizational structure and managerial competence. however, scientific studies that directly investigate the relationship between organizational structure and managerial competence are extremely limited. most studies have investigated the relationship between these concepts and the performance of individuals and companies. in this context, this study takes "organizational structure" factor as the main factor of interest affecting managerial competence and investigates the effect of organizational structure perception on the perception of managerial competence. in addition to this investigation, 6 of 12 organizational demographic variables and 4 of 13 individual demographic variables are believed to affect this relationship and are included in the analysis as control variables. these selected control variables were thought to have the potential to influence the relationship between organizational structure and managerial competence and were determined based not on theory, but on observations and logical considerations. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e m.çağrı pehlivanoğlu & hüner şencan 72 2. background the concept of "organizational structure" has been a topic of discussion ever since the emergence of classical organization theory. according to the classical organizational theory approach, certain principles and methods should be followed to determine organizational structure. in contrast, situational theory claims that internal and external conditions shape the organizational structure. the concept of “organizational structure” has been the subject of many studies. researchers such as harvey (1968), pugh, hickson, and pheysey (1969), özdevecioğlu (2002) and keçecioğlu (2008) have investigated the factors that directly affect the organizational structure. in contrast, organizational structures’ changes over time have been studied by scholars such as rajan and wulf (2006), kanbur (2008), and sağsan (2008). scholars such as rothwell (1996), demir and okan (2009), teixeira, koufteros, and peng (2012), csaszar (2012) and yi-horng (2013) have investigated the relationship between organizational structure and performance. dikmen (2003), legerer, pfeiffer, schneider and wagner (2009), i̇çerli (2010), örücü, kılıç, yıldız and yıldız (2012), feizi and farid (2013), and gounaris and tzempelikos (2013) have studied the organizational structure’s effect on individuals. since 2015, researchers such as gurianova and mechtcheriakova (2015), zakrzewska-bielawska (2016) have investigated the relationship between the organizational structure and strategy; dicle and okan (2015), benavides espinosa and merigo lindhal (2016) have investigated the relationship between organizational structure and organizational learning; and strese, meuer, and flatten (2016), baia, feng, yuea, and feng (2017) have investigated the relationship between organizational structure and cross-functional cooperation. dalton et al. (1980) define organizational structure as the anatomy of the organization. through this anatomy, enterprises carry out their functions. according to another view, the organizational structure is the body that enterprises use to regulate, coordinate and evaluate their inputs and sources (caves, 1980). the organizational structure officially regulates the enterprise’s business roles and managerial mechanisms to carry out intraorganizational activities and achieve business objectives (baia et al., 2017). an organization’s structure shows how its activities are distributed in line with its main objectives, as shown through schemes called organizational charts, which are visual presentations of the organizational structures. intra-organizational functions, positions, and the relationships among them are shown on these charts. this enables the definition of tasks, responsibilities, roles, relationships, and communication channels. using these charts, employees can understand their mission within the organization (matseshe and arasa, 2016). organizations must continuously rediscover themselves if they are to exist in harmony with the environment, adapt to changes and earn more profit. all enterprises create their own organizational structures by considering their operations, environment, technology and other factors (kral and kralova, 2016; agbim, 2013; çalış and tokat, 2013). according to ugbomhe and dirisu (2011), the organizational structure has various effects on the behavior of an enterprise’s workforce. these effects vary between enterprises and employees. the organizational structure is intended to facilitate the realization of the enterprise’s goals and objectives. it also forms the basis of organizational culture and affects employees' behavior, performance, motivation, and cooperation. an effective organizational structure adapts to possible changes and needs in the environment and always helps the enterprise achieve superior results from its resource utilization and human capital. the organizational structure enables employees to use their talents productively, encourages them to be creative and creates benefits for the entire organization. although studies show that organizational structure influences employee performance, there are no research findings on organizational structure’s exclusive effect on managerial competence. for this reason, this research seeks to understand the relationship between these two concepts. the concept of "managerial competence" has been examined by many disciplines other than management, including politics, education, and psychology. it was handled by many researchers in the literature (katz, 1955; mccelland, 1973; mintzberg, 1973; selznick, 1975; bandura, 1989; hogan and warrenfeltz, 2003; drucker, 2009). the concept has emerged with mcclelland’s (1973) argument that it was necessary to develop competence assessments as an the moderator effect of the multinationality factor on the relationships between organizational structure and managerial competency 73 alternative to traditional intelligence testing in evaluating performance. the concept became well known through the study conducted by boyatzis (1982). the essence of the work is based on task fulfillment. individuals contribute their contributions to the achievement of organizational goals. actions must be initiated to achieve those goals (boyatzis, 1982). to become an effective leader, the manager should know how to use information, how to operationalize assigned missions, and how to realize assigned missions. this capability is briefly called competency (rothstein and burke, 2010). according to erondu (2002), competency is the sum of the knowledge, skills, values, attitudes, and experiences obtained by the individual throughout life; according to bayraktar (2002) and özutku and algur (2012), it is a compound of personality, motivation, impulse, qualification, skill, role and knowledge accumulation. a competent person can transfer knowledge and skills from one area to another. to be a competent manager is to have the desire and willingness to demonstrate effective behavior (rajadhyaksha, 2005). singh and paul (2016) indicate that employees’ performances may differ according to their methods of doing the tasks. boyatzis (1982) defines competence as the bundle of characteristic traits that equip the individual to provide superior performance. according to mcclelland (1973), competence makes the difference in achieving performance. martina, hana, and jiri (2012) see managerial competencies as the key to successful organizational performance through the appropriate behavior and effective management style of the manager. managerial competency also creates a competitive advantage for organizations. the changing social, economic and technological environment also transforms the difficulties and missions encountered in the management of the organization. the new business lines and tasks that accompany technological advances require a high level of training and competence (raisiene, 2014; boahin, eggink, hofman, 2014). therefore, managers should constantly develop and maintain their managerial competencies, attitudes, and behaviors. in the new world, complexity, uncertainty, and risk is increasing, and organizations’ management styles are changing rapidly. the managers are confronted with complex situations and problems from low to high levels. although cases with low degrees of complexity, which are very routine and predictable, can be managed with standard guidelines, cases with high levels of complexity, which are difficult to predict, cannot be managed using standard guidelines, and their analysis and emotional management are difficult (widhiastuti, 2012). the managers of the twenty-first century must be masters of change who can effectively use human capital and resources to be successful (nekoranec, 2013). along with the changes that have taken place, managerial competence has become an important factor to an enterprise’s success. many researchers have addressed the concept of managerial competence. boyatzis (1982), mumford et al. (2000), and cengiz and hısım (2012) investigated the relationship between managerial competence and performance. pillay (2008), saylı and ağca (2009), potgieter, basson, and coetzee (2011), wickramasinghe and de zoyza (2011), and arditi, gluch and holmdahl (2013) have examined the relationship between managerial competence and individual competence. in contrast, erich, rubin, and morgeson (2009), ramezani et al. (2011), and saxena and bendale (2013) have emphasized the relationship between managerial competence and managerial roles. mumford, campion and morgeson (2007), çetinkaya (2009) and ünal (2013) have examined the relationship between managerial competence and managerial level; çetinkaya and özutku (2012), königova, urbancova and fejfar (2012), özutku and algur (2012), and chen and chang (2011) have investigated the relationship between managerial competence and human resource management. as of 2015, studies of managerial competence have addressed the relationship between managerial competence and crisis management (tomasika, strohmandlb and cechc, 2015; andreoua, karasamani, louca and ehrlich, 2017) and the relationship between managerial competence and organizational performance (hawi, alkhodary and hashem, 2015, osei and ackah, 2015). in the organizational structure literature, studies focus on factors such as organizational and individual performance, organizational learning, organizational strategy and level of cross-functional cooperation, but not the relationship between organizational structure and managerial competence. however, the observations show that especially in highly institutionalized multinational companies, the characteristics of organizational structure, among other factors, have a greater effect on managers’ competence. such views and opinions are among the topics that are often mentioned by many company managers. although managers’ competence is affected by factors such as level of m.çağrı pehlivanoğlu & hüner şencan 74 experience, knowledge of a foreign language, the departments in which they work and the number of subordinates they manage, it may be more affected by the organizational structure factor, although this factor is a general framework that affects the mentioned organizational demographic variables. the organizational structure is the whole of an organization’s characteristics: in institutionalized, stabilized and balanced structures, these characteristics have more influence on competencies than does a single individual or organizational demographic variable. although this theory has not been thoroughly examined in the literature, the relationship between the "organizational structure – managerial competence" factors is a logical, consistent and expected relationship. the exploratory and descriptive character of this research is important when examining the extent of the influence of the independent variable of organizational structure on the dependent managerial competency, along with other individual and organizational demographic variables. 3. the methodology and model the study involves cross-sectional area research that is both exploratory and descriptive. it was carried out to examine the relationships between organizational structure and managerial competence under the effect of individual and organizational demographic variables. two scales were developed to reveal the concepts of organizational structure and managerial competence. participants' responses to the measurement tools were assessed, and the relationships between structure and competence were tested with hypotheses. simple and hierarchical regression analysis methods were applied to test the hypotheses. 3.1 population, sample and research application the research covers managers working in companies operating in different sectors of turkey that are registered with the international investors association (yased) and the istanbul chamber of commerce (ito). in this framework, the research has two main populations. the theoretical populations are defined as managers from the first 1000-member companies included on a list of member companies obtained from the ito in june 2015, along with managers from 203 companies registered with the yased. following our review of the ito list, 419 national companies were shortlisted by removing the branch companies and the companies overlapping with the yased member list. no sectoral restrictions have been made, and the listed companies are included in the sampling group through random selection. the reason for the selection of these companies from yased and ito is that they have improved management and organizational systems and it is more likely that comprehensive information will be acquired from companies with a substantial number of employees. based on the assumption that there are at least 8 managers at different levels in each selected company to respond to the questionnaire, the practical research population was determined as 3,352 managers from national companies and 1,624 managers from multinational companies. in the study, two separate sample sizes are determined from the two main populations. the number of the sample population is calculated at a 95% confidence interval, with an error margin of 5%, based on the assumption that the basic characteristics sought to be measured was distributed 50%-50% in the population. 315 managers from the population of the national company managers and 311 managers from the population of multinational company managers are chosen as the size of the samples. the likelihood of non-return of the questionnaires is taken as 5% and therefore, it was planned to reach out to 362 national and 327 multinational business managers. at the end of the research, survey data were obtained from 350 national and 310 multinational company managers. after data cleansing, data from 330 national and 270 multinational company managers were included in the final analysis. compared to the first-determined sample sizes, the return rate of the questionnaires was 95% for the national company managers and 96% of the multinational company managers. the measurements in the study were obtained through the participants’ self-reports. the power analysis of the sample size was performed over 600 cases at a 0.95 significance level, and a score of 0.93 was obtained (osse an the moderator effect of the multinationality factor on the relationships between organizational structure and managerial competency 75 online sample size estimator, 2017). this value suggests that the sample volume is sufficient and the power of effect is high. 3.2 measurement instruments the measurement tools consist of demographic questions and two perception scales. the demographic questions were organized into two sections as follows: individual demographic questions and organizational demographic questions. the individual demographic questionnaire has 13 questions, and the organizational demographic questionnaire has 12 questions. six of the organizational demographic questions (number of employees in the organization, number of employees in the department, sales value, hierarchical structure, organizational model, technology) and 4 of the individual demographic questions (age, management level, work experience, management experience) are defined as "control variables" and examined to determine whether they have an effect (even an indirect one) on the organizational structure – managerial competency relationship. another goal of the examination is to avoid the "neglected variable deviation" phenomenon and examine the model together with more comprehensive and possible effects. the first measurement tool is the "organizational structure perception scale". this scale was developed by the researcher and included 2 dimensions and 14 items after the reliability, validity and dimensionality analyses. these dimensions are called as "specialization" and "strategic clarity". there are 7 items in the dimension of specialization and 7 items in the dimension of strategic clarity. in the regression analysis, the general composite median scores and factorial composite mean scores were used. the second measurement tool is the "managerial competence perception scale". this scale was also developed by the researcher; it included 3 dimensions and 22 items after the reliability, validity and dimensionality analysis. these dimensions are known as the "strategic thinking", "relationship management" and "software usage" competences. there are 10 items in the relationship management dimension, 9 items in the strategic thinking dimension, and 3 items in the software usage dimension. in the regression analysis, the general composite median scores and factorial composite mean scores were used. to develop the first measurement tool, the organizational structure perception scale (osps), a comprehensive literature review was performed. this review benefited from studies by mintzberg (1979), özdevecioğlu (2002), legerer, pfeiffer, schneider and wagner (2009), csaszar (2012), teixeira, koufontes and peng (2012), örücü, kılıç, yıldız, and yıldız (2012) and yi-horng (2013). the ospc is a likert-type 5-level measurement tool. the labels and levels used in the ospc are as follows: not at all true = 1; not true = 2; undecided = 3; true = 4; very true = 5. the second measurement tool, the managerial competence perception scale (mcps), was chosen as the outcome (dependent) variable. the mcps benefited from katz (1955), mccelland (1973), mintzberg (1973), boyatzis (1982), mintzberg (1990), mumford, zaccaro, harding, jacobs and fleishman (2000), boyatzis and oosten (2003), mumford, campion and morgeson (2007), erich, rubin and morgeson (2009), çetinkaya (2009), and özutku and algur (2012). the mcps is a likert-type 5-level measurement tool. the labels and levels used in the mcps are as follows: never = 1; rarely = 2; fairly = 3; often = 4; always = 5. 3.3 research model and hypothesis the study aims to address the relationship between the estimator variable "organizational structure perception" and the outcome variable “managerial competence perception” and to investigate the effect and variation created by the organization structure perception of managers together with the organizational and demographic variables. m.çağrı pehlivanoğlu & hüner şencan 76 in the first stage, organizational structure perception is defined as the estimator variable and managerial competence perception is defined as the outcome variable. their relationship is tested using a simple regression analysis (see figure 1). in this framework, the hypothesis is determined as follows: "organizational structure perception positively affects the perception of managerial competence". in the second stage, the "multi-nationality" factor, which is included among the demographic variables but not among the control variables, is considered the moderator variable, and its effect on the relationship between the organizational structure perception and the managerial competence perception was investigated. the moderator effect of the multi-nationality factor was tested by multiple regression analysis (see figure 1). in this context, the hypothesis was "the moderator variable multi-nationality factor affects the relationship between organizational structure perception and managerial competence perception". the third stage involved the investigation of whether the chosen demographic control variables, along with the organizational structure perception variable that is the main variable of interest, have additional effects on the dependent variable. in this context, 10 (6 organizational demographics, 4 individual demographic) variables are transformed into dummy variables, and the hierarchical regression analysis method is applied (see figure 1). the relationships are analyzed by creating two separate blocks for organizational demographic variables and individual demographic variables. the hypothesis for the first block is defined as follows: "the independent organizational demographic control variables and independent organizational structure perception variable jointly affect the managerial competence perception". for the second block, the research hypothesis was defined as follows: "the independent individual demographic control variables and independent organizational structure perception variable jointly affect the managerial competence perception". 4. findings the findings of the research are given in the following subheadings: organizational and individual demographic descriptive statistics of participants, the dimensionality, reliability, and validity of the scales, and hypothesis testing results. figure 1. research model note: 2 of the organizational demographic variables out of 6 and 2 of the individual demographic variables out of 4, which have relationship with the dependent variable, are taken into the final model. the control variables which are found to have no relationship after the regression analysis are not shown in the model. moderator variable estimator variable number of people working in the department (1 >10 people) organizational model (1= mechanical) management level (1= middle & senior) work experience (1 >10 years) managerial competence perception organizational structure perception multi-nationality individual demographic control variables organizational demographic control variables outcome variable the moderator effect of the multinationality factor on the relationships between organizational structure and managerial competency 77 4.1 descriptive statistics according to the individual demographic variables, 86% of the research participants are individuals aged 30 years and above. forty-two percent are upper-level managers, 31% are mid-level managers, and 27% are entry-level managers. seventy percent of managers have 11 years or more work experience, and 31% have 10 years or more managerial experience. according to the organizational demographic variables, 71% of the companies have 251 or more employees, and 62% of the companies have an annual sales value of 501 million tl or more. in 70% of the companies in which the managers are in charge, the departments have 11 or more employees. according to the managers’ perception, 60% of the companies have a vertical hierarchical structure and 40% have a horizontal hierarchical structure; 28% of the companies have an organic structure and 72% have a mechanical structure. fifty-seven percent of the companies have a very advanced level of technology. in summary, the companies in the research population have an institutionalized structure, and the vast majority of their managers are experienced people. 4.2 analyses of dimensionality, reliability, and validity to determine the factorial structure of the developed scales, a pilot study was conducted as a first step. next, using the main research results, exploratory factor analyses were conducted to determine the dimensionality and the factors. in the dimensionality analyses, the factorial structures of the scales are analyzed with the “factor 10.3” statistical program. variables that have a value of 0.40 and above were included in the final scales. however, some of the variables with a value of 0.40 and above were removed from the scales and omitted from the analysis because their overlapping values with other variables were found to be less than 0.20. the validity analyses were carried out in three stages as face, content and construct validity. in the analysis of the data, ibm spss 22.0, factor 10.3 software and amos 23.0 (a module of ibm spss software) were used. to determine the scope of "face validity", a group of five experts was selected. those experts were asked to read all the variables for both scales. all experts had favorable views and face validity was found. "content validity" was realized at two levels. at the first level, the dimensions and factors were determined by investigating the literature, and we checked whether the indicators and the items were sufficient to represent the conceptual area. each dimension is represented by at least five and at most thirteen items. in the second stage, the relatedness and understandability level of the dimensions and items are reviewed by a panel group consisting of 5 people with ph.d. degrees. for both scales, lawshe’s (1975) content validity ratio (cvr) was found to be equal to 1, demonstrating that the scales have content validity. the "construct validity" analyses were carried out in three steps as follows: nomological validity, the validity analyses made using the method of explanatory factor analysis (efa) and the confirmatory factor analysis (cfa). the first step of the construct validity analysis was performed using the nomological validity analysis method. in the literature, scholars take three approaches to describing nomological validity. the first approach is that conceptual constructs and their dimensions should be related to and compliant with the theory. in this framework, a compressive literature search was done and the conceptual structures’ dimensions and indicators were defined. by looking at studies related to the concept of managerial competency perception, 3 dimensions were identified and are referred to as technical, human and conceptual, whereas 42 items are defined for inclusion in the nomological network. by looking at studies related to the concept of organizational structure perception, 7 dimensions were identified and referred to as centralization, division of labor and specialization, organizational culture, determination of the objectives, departmentalization, strategic clarity, openness of communication channels, whereas 35 items are defined to be included for inclusion in the nomological network. these dimensions and items all comply with the theory. however, after analysis, the number of factors in the osps m.çağrı pehlivanoğlu & hüner şencan 78 decreased to two and the number of factors in the mcps was determined to be three. in addition, the names of the dimensions have changed. this has led to some deviation from the theory regarding nomological validity. the new factorial structures fit the collected survey data but have moved away from the nomological definition of the theory, at least to an extent. the second approach considers that the relationships between the conceptual structures included in the model should have been previously included in the theory and tested in empirical research. however, no empirical research was found to directly examine the relationship between organizational structure and managerial competence in theory. therefore, the organizational structure – managerial competence relationship does not have theory-based nomological support. in this framework, nomological validity was based solely on the collected research data. according to the third approach, although there are no prior empirical data, the research should be based on the actual empirical data. for that reason, a specific relationship or correlation between the two conceptual structures must be found. nomological validity occurs when the correlation coefficient between conceptual structures is greater than zero. because the correlation coefficient between osps and mcps is r = 0,771 and p = 0.00 <0.05 according to the results of pearson correlation analysis, it was determined that the model has nomological validity. the second step of the construct validity analysis was performed using the explanatory factor analysis (efa) method. in the literature, the first efa results are used as a proof of the construct validity, and then the confirmatory factor analysis (cfa) is generally applied (diiorio, 2005). in the first scale, osps, the efa result is 0.972 in the kaiser-meyer-olkin (kmo) test, whereas the bartlett scoring test result was found to be significant 13307.4 (df 595; p = 0.00). therefore, the data are considered suitable for factor deducting. with respect to the eigenvalues, the scale has three factors, and the "common variation rate 1" of these factors is 74 percent. the factors are renamed organizational culture, specialization, and strategic clarity. in all three factors, the factor loads of the items are above 0.40. in the second scale, mcps, the efa result is 0.971 in the kmo test, and the bartlett scoring test result is found to be significant at 12361.7 (df 595; p = 0.00). the data are considered suitable for factor deducting. with respect to the eigenvalues, the scale has three factors, and the "common variation rate" of these factors is 69 percent. the factors are renamed strategic thinking, relationship management, and software usage competences. in all three factors, the factor loads of the items are above 0.40. in the third and final stage of construct validity, the confirmatory factor analysis (cfa) method was applied. this stage is for the validation of the factors identified by the efa in the previous stage. according to brown (2015), the cfa is used to verify the factorial structure of the test tool in the scale development process. in this way, the dimensions and relationships among the dimensions are examined. the cfa structural validity analyses were conducted at three levels. at the first level, testing was done using the goodness of fit analysis; at the second level, convergent validity was investigated; and at the third level, discriminant validity was investigated. 1 in the analysis, instead of basic components analysis method, the common factor analysis method is used. therefore, instead of “explained total variance” value, “common variation ratio” value is used. the moderator effect of the multinationality factor on the relationships between organizational structure and managerial competency 79 table 1. goodness of fit statistics of the cfa model of osps and mcps goodness of fit scales suggested value mcps calculated value osps calculated value chi -square/degrees of freedom (χ2/df) ≤5,00 4,164 2,928 cfi (comparative fit index) ≥0,90 0,900 0,968 agfi (adjusted goodness of fit index) ≥0,80 0,852 0,933 gfi (goodness of fit index) ≥0,85 0,879 0,952 rmsea (root mean square residual) ≤0,10 0,073 0,057 the goodness of fit statistics are interpreted in the context of the value ranges indicated in the explanations of table 1 and the cut-off criteria for fit indexes values suggested by hu and bentler (1999). the chi-square/degrees of freedom = χ2/df ≤ 5 criterion is valid for both the scales. the values of cfi are found to be above or at 0.90, which is the general acceptance value for both the scales. the values of agfi are found to be above or at 0.80, which is known as the threshold value. the agfi value of the osps is higher than that of the mcps. when assessed with respect to the values of gfi, osps is above 0.95, whereas mcps is below 0.95 but above 0.85. researchers consider the gfi fit index acceptable when the index value is greater than or equal to 0.85 (von krogh and roos, 1999, qi, shen and dou, 2013). the rmsea values are below 0.10 for both scales and meet the criteria. the goodness of fit statistics show that there is a good model data fit in both osps and mcps. convergent validity is performed using two methods. in the first method, average variance extracted (ave) values are interpreted. in the second method, composite reliability (cr) values are checked (see table 2, table 3). for mcps, all the standard factor loads of variables are over 0.50. ave values are 0.529 for strategic thinking, 0.42 for relationship management, and 0.411 for the software usage competences. normally, the ave values should be above 0.50. however, if the ave is below 0.50, some researchers indicate that validity still can be present if the cr value is above 0.50 (safiih and azreen, 2016, huang, wang, wu and wang, 2013). for this reason, the cr value was checked, because the ave value appeared to be below 0.50 in two dimensions. the cr value for strategic thinking was 0.997, whereas it is 0.998 for relationship management competence and 0.989 for software usage competences. as a result, all the values are above 0.70, which is accepted as the benchmark value. for osps, all the standard factor loads of variables are also above 0.50. however, the factor load of the variable numbered oy11ök, which belongs to the organizational culture dimension, is found to be 0.10, which was below 0.50. the ave values are 0.389 for organizational culture, 0.536 for specialization and 0.566 for strategic clarity. normally, the ave values should be above 0.50. the ave values for the specialization and strategic clarity dimensions are above 0.50, but the value was below 0.50 for the organizational culture dimension. for this reason, the organizational culture dimension was removed from the scale. although the cr value of this dimension was as high as 0.94, it is seen more important that it does not meet the value requirement of ave. it was determined to be more appropriate to continue the research with the other two dimensions, specialization and strategic clarity. to achieve discriminant validity, the ave value of a factor must be greater than the correlation of this factor with other factors (fornell and larcker, 1981). according to the researchers, the ave values of the scale’s variables should be above 0.50, and the cr value should be above 0.70. in the analysis for mcps and osps, all the correlation coefficients are found to be higher than the ave values. it is important to note that the dimensions of neither the osps nor the mcps have discriminant validity. however, some authors claim that fornell and larcker’s (1981) assessment criteria are problematic in determining discriminant validity. therefore, not obtaining the expected values is considered within the frame of this view (henseler, ringle and sarstedt, 2015). m.çağrı pehlivanoğlu & hüner şencan 80 table 2. cr, correlation coefficient and ave values for mcps goodness of fit scales number of items cr ave correlation coefficients strategic thinking relationship management software usage strategic thinking 9 0,997 0,529 relationship management 10 0,998 0,422 0,820 software usage 3 0,989 0,411 0,820 0,790 table 3. cr, correlation coefficient and ave values for osps goodness of fit scales number of items cr ave correlation coefficients specialization strategic clarity specialization 7 0,880 0,536 strategic clarity 7 0,894 0,566 0,890 after the validity analysis, the mcps was composed of 3 dimensions and included 22 items, whereas the osps was composed of 2 dimensions and included 14 items. the reliability analyses of the scales were carried out at four levels: (1) checking correlations among items, (2) investigating the split-half reliability (3) cronbach’s alpha reliability and (4) mcdonald’s omega reliability calculations. for the first scale, osps, the correlation values among the 14 items vary between 0.34 and 0.78. the average of the item correlation values is 0.40. therefore, the relationship among the items in the scale is within the expected values. for the second scale, mcps, the correlation values among the 22 items vary between 0.40 and 0.78. the average of the item correlation values is 0.41 and is within the expected range of 0.20-0.40. when examining the split-half reliability, to obtain the reliability of the entire test, the spearman-brown correction formula was used. osps had a value of 0.94 and mcps had a value of 0.95. as a result, both scales have values that are above the expected threshold value of 0.80. for cronbach’s alpha and mcdonald’s omega reliability, the relevant values of the scales should be at least α ≥ 0.70. the reliability analyses are done by using the factor 10.3 and spss 22.0 statistical programs, and similar results were obtained with small differences after analyses. the reliability of all the scales and all their dimensions are found to be higher than the expected level (α ≥ 0.70) (see table 4). the moderator effect of the multinationality factor on the relationships between organizational structure and managerial competency 81 table 4. reliability analysis results scales and dimensions number of items n spss 22.0 cronbach’s alpha factor 10.3 cronbach’s alpha factor 10.3 mcdonald’s omega mcps 22 600 0.97 0.95 0.97 strategic thinking 9 600 0.91 0.92 0.94 relationship management 10 600 0.94 0.94 0.94 software usage 3 600 0.70 0.71 0.81 osps 14 600 0.96 0.96 0.96 specialization 7 600 0.88 0.92 0.92 strategic clarity 7 600 0.89 0.94 0.94 4.3 hypothesis testing results the main hypothesis was first tested in the overall sample, then in the two subgroups (national company managers – multinational company managers) separately. in addition, the difference in managerial competence perception scores between the two groups of multinational and national company managers is analyzed using the t-test. in the fourth stage, the moderator effect is examined and in the fifth step, the effect of control variables on the model is examined. in the first stage, the overall sample was analyzed with linear regression analysis. according to the analysis, the estimation variable organizational structure perception scale scores explain 53% of the variance in the dependent variable managerial competence perception scale scores (r2 = 0.530, f (1, 598) = 671.722, p = 0.00 <0.05). thus, the null hypothesis of the main hypothesis was rejected, and it was understood that organizational structure is an effective factor in determining managerial competence. in the second stage, the main hypothesis was tested in different subgroups. in the linear regression analysis made for the managers of the national enterprises, it was found that the osps estimator variable explains 56% of the variance of mcps (r2 =0.564; f (1,339) = 434.241; p = 0.00 < 0.05). thus, it is found for the first group that the organizational structure perception factor explains the managerial competence perception at a significant level. in the linear regression analysis made for the second subgroup, the managers of multinational enterprises, it was found that the osps estimator variable explains 56% of the variance of mcps (r2 = 0.556; f (1,259) = 323.971; p = 0.00 < 0.05). it is also found in the second group that the organizational structure perception factor explains managerial competence perception at a significant level. in the third stage, we investigated whether there was any difference in the mcps scores with respect to national and multinational company managers’ perceptions. according to the results of two independent sample t-tests, a statistically significant difference is found between the managerial competence scores of the national company managers (mean = 4.61, sd. = 0.47; se. = 0.0253) and the managerial competence scores of the multinational company managers (mean = 4.46; sd. = 0.42; se. = 0.0258), and the null hypothesis is rejected [t (598) = 4.25; p = 0.00 < 0.05]. when the arithmetic mean values are considered, it is seen that contrary to expectations, the competence scores of the national business managers are somewhat higher. this difference, however, is not significant enough to distinguish the groups from each other in real life. m.çağrı pehlivanoğlu & hüner şencan 82 in the fourth stage, the moderator effect is examined. to do so, we aimed to conduct a multiple regression analysis based on barrett and kenny’s (1986) model and to use hayes’ (2017) process model, but the analysis did not pass to the process stage because the test result was not significant. according to the results, the regression analysis model-1 is f (2, 597) = 512.730; p = 0.00 < 0.05 and the regression analysis model-2 is f (3, 596) = 342.435; p = 0.00 < 0.05, making both the models statistically significant. however, when the r2 variation values are considered, the variation in the second model was 0.001 and was found to be very small and not statistically significant (p = 0.253> 0.05). for this reason, the moderator effect was not detected. in the fifth step, the effect of “control variables” on the model is examined. it is found that the organizational demographic variables "number of employees in the department" and the "organizational model" and the individual demographic variables “level of management” and “work experience” make a significant contribution to the model, whereas the other remaining demographic variables did not make any contribution and were removed from the measurement model. it is seen that only 4 of the 10 selected control variables contributed to the model. according to the results, although the r2 value of the main hypothesis was 53%, the individual demographic variables contributed to the model at a rate of 5%, and the r2 value increased to 58%. when 2 organizational demographic variables were added to the model as control variables, an additional 1% contribution appeared and the variance of the dependent variable increased to 59%. finally, 4 control variables were included in the model, and the explained ratio of the variance by the entire model increased to 62%. with respect to this result, it can be said that the organizational structure perception of midand senior-level managers with more than 10 years of work experience, who are working in departments including more than 10 people and whose companies have a mechanical organization model2 affected their competency perception scores at a rate of 62%. finally, the simple organizational structure – managerial competence model became more meaningful with the contribution of the additional 4 demographic variables to the relationship. 5. conclusion this study aimed to investigate the relationship between managers’ organizational structure perception and managerial competence perception and to determine whether the multi-nationality factor, which was noted by the observations, is more effective in determining managerial competence when interacting with the organizational structure factor. the analysis showed a statistically significant relationship between the organizational structure perception and the managerial competence perception of managers, but the multi-nationality factor did not have an important effect or make a contribution to this relationship. the relationships between organizational structure perception and managerial competence perception appeared statistically significant for both of the study’s selected main populations. it was predicted before the research that the structure competence relationships in multinational and national enterprises would be significant, but it was estimated that this relationship would be higher regarding r2 value in multinational enterprises. however, it was found after the research that this difference was not significant in multinational and national enterprises (organizational structure – managerial competence relationship in the multinational enterprises had r2 = 0.556; the national enterprises had r2 = 0.564). one of the issues that should be considered in research of this nature is that there should not be any "neglected variable bias". for this purpose, 10 demographic control variables were included in the model, and the analyses found that 6 of them do not affect the organizational structure perception – managerial competence perception relationships. since the anova results of the remaining 4 demographic control variables were found to be 2 in the dummy variable practice, the 1 and 0 coded arrangements are as follows: 1 = work experience of 11 years and above, 0 = work experience below 11 years; 1 = middleand senior-level managers, 0 = first level managers; 1 = 11 and more employees in the department, 0 = less than 11 employees in the department; 1 = mechanical organization model, 0 = organic organization model. the moderator effect of the multinationality factor on the relationships between organizational structure and managerial competency 83 significant, they were assessed in the model. these demographic variables are as follows: "the number of employees working in the department", "organizational model", “management level” and "work experience". the demographic control variables’ total contribution to the model is 9%. with the simple linear regression analysis, the effect of organizational structure perception on managerial competence perception is found to be 53%, and when including the demographic control variables, this effect increases to 62%. as a result, future researchers analyzing the relationships between the organizational structure perception and managerial competence will be able to perform a more meaningful analysis if they include the mentioned demographic variables in their models. the following practical conclusions can be drawn from this research. first, managers’ competence perception, or in indirect terms, their competence level, increases with the level of an enterprise’s institutionalization. second, managers’ competence perception (or competence level) increases in large departments, in mechanic organizations, at middleand seniorlevel management levels and with more work experience. however, these findings are not the main determining factor. the main determining factor is organizational structure perception. two factors also gained importance in the organizational structure perception. these are strategic clarity and specialization. what must be understood from strategic clarity is that the company should have an open strategy that is shared with and embraced by all employees and is sensitive to the environmental transformation. what must be understood from specialization is that employees who specialize in certain stages of the company act in an integrated manner and thereby contribute to organizational effectiveness and efficiency. specialization and strategic clarity are the most important factors affecting managers’ competence perceptions. 6. recommendations for future research the relationship between organizational structure perception and managerial competence perception must be closely investigated when evaluating organizations and managers’ ability to adapt to changes in their environments, to compete with rivals and to achieve success in business. this research is based on perceptions, and in future research on this subject, it would be proper to work with concrete data figuring the organizational structure. the precision and sensitivity degrees of the results would increase in future research if more enterprises were included, additional independent variables such as organizational performance and personality test were included in the measurement as the main effect variables, and the “marker variable” were applied for the validity and reliability analyses. another phenomenon is the emergence of the ceiling effect in 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(2016). perceived mutual impact of strategy and organizational structure: findings from the high-technology enterprises. journal of management & organization, 22(5), 599-622. international journal of commerce and finance, vol. 6, issue 2, 2020, 1-17 31 farmers’ technology adoption decision and use intensity in the agricultural sector: case of masha district (double hurdle model) amsalu dachito chigeto jimma university, ethiopia alebachew angelo jimma university, ethiopia received: oct 30, 2020 accepted: april 30, 2021 published: may 01, 2021 abstract convinced with the importance of full understanding of the determinants of technology adoption in agricultural sector in planning technology-related policies and programs, this research aimed to critically analyze the determinants of technology adoption as well as the use intensity by small farm households in the study area (masha district). to achieve the set-out objectives of the study, 6 kebelles were randomly selected from the district and 251 sample households were proportionally and randomly identified from the selected kebeles. the data collected from the sample households have been analyzed using both descriptive as well as inferential analysis. for inferential analysis, the double hurdle model was adopted to estimate the technology adoption decision as well as use intensity of small farm households in the study area. results of the findings show that technology adoption decision was associated with household-specific characteristics such as sex, education, extension and family size which increases the likelihood of technology adoption whereas rigidity with the old technology is highly correlated with the age of the household head, where old age farmers are not inclined towards new technology. on the other hand, institutional factors such as access to extension service and access to credit facilities have a significant impact where the latter has contributed negatively to the farmers’ decision regarding technology adoption. besides, the government should engage in awarness creation regarding new technology in the area along with ensuring fair and timely access for those technologies. keywords: technology adoption, masha woreda, double hurdle model, agricultural productivity 1. introduction the report by african union (2014) recognized that there has been little improvement in agricultural production and factor productivity (labor and land) while agricultural growth in africa is generally achieved by cultivating more land (land intensive) and by mobilizing a larger agricultural labor force (labor-intensive), which produces very little improvement in yields. on average, cereal yields are 50 percent less as compared to those obtained in asia per a given plot. in the last three decades, africa’s population has doubled, which implies the continent now has more mouths to feed and less per-capita land to cultivate. however agricultural output has been unable to keep growing side by side. this resulted in being food self-insufficiency which puts the continent to be a net importer of cereals from the rest of the world. the dimension of african’s agricultural growth has been recognized to be different as compared to asia and south america. it was through intensification that agricultural growth was registered in asia, while growth in south america, was driven largely by improvements in labor productivity which is resulting from mechanization. opposed to these, area expansion was responsible for the increase in production in the agricultural sector along with predominant intensification of cropping system in sub saharan countries (nepad, 2014; brink and eva, 2009). as ssa is generally endowed with abundant land and most of this arable land is still unexploited, area expansion in the decades to come may not seem problematic. but since in rural ssa there is uneven distribution of land while a considerable share of its rural population resides in smallholder farming areas that are densely populated and face land shortages (oecd/fao, 2016; jayne et al., 2014). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e amsalu dachito & alebachew angelo 32 in countries with constrained land size, area driven growth may come at the expense of fallows. rapid growth of rural populations and associated land would result in continuous cropping in many african countries, with fallows largely disappearing in densely populated areas. the repeated cultivation will not be a problem only if sufficient use of new agricultural technologies (such as fertilizers, improved seed verities, soil amendment practices and other related investments on farm land) are promoted and coupled with continued teaching and awareness creation to maintain and improve soil quality (stoorvogel and smaling, 1990; drechsel et al., 2001; tittonell and giller, 2012). the above arguments can be summarized as; if africa need to attain food self sufficiency as well as sustainable development, it need to improve its practice in terms of technology adoption and those backward cultivation practices should progressively be transformed into relatively modern way and any attempt to boost production and productivity should be environmentally friendly. despite its critical implication for food security, information with regard to adoption of agricultural technologies on the factors influencing adoption and use intensity of improved seed technologies being promoted in the districts was not thoroughly studied and documented in the study area. hence, the specific objectives this study is aimed to address are;  assessing the technology adoption practices of small farm households in the study area  estimating the determinants of farm households’ decision in participating in the technology adoption  estimating the determinants of the use intensity of technology adoption by the farm households in the study area. 2. methods 2.1. description of the study area masha woreda is one of the three woredas in sheka zone of the south nation nationalities and peoples region (snnpr. masha woreda shares borders on the south by the andracha woreda on the west and north by oromia regional state and on the east by keffa zone (csa, 2007). concerning demographic characteristics, masha woreda has a total population of 40810 of whom 20,116 are men and 20,694 women. about 6787or 16.63% of its population is urban dwellers. religion wise majority of the inhabitants (56.5%) were protestant followers followed by ethiopian orthodox christian (32.82%) while the remaining 7.15% practiced traditional belief and 1.56% were muslim (census 2007 tables). it receives mean annual rain fall about 2000m and its mean monthly temperature ranges between 18 – 21oc. total area of the woreda is 217,527.15 hectare (csa, 2007) (benyam and fayera, 2018). 2.2. data types, sources and methods of data collection this study used the data both from primary and secondary sources. primary data was collected directly from randomly selected farmers in the study area using structured questionnaire while the secondary data was obtained from different published and unpublished government reports especially from sheka zone agricultural and rural development office. the secondary data is used for triangulation purpose so as to validate the primary data obtained from the farmers. more to this, data is collected through group discussion with concerned parties like woreda agriculture and natural resource management offices, site supervisor and through key informant interview with development agents. 2.3. sampling techniques and sample size regarding the method used to draw the sample units from the target population (farmers in masha woreda), a multistage sampling technique was adopted. in the first stage, sheka zone is purposively selected based on the observed degree of reluctance in technology adoption by the farm households, from the three woredas in the zone, masha woreda is randomly selected in the second stage. in stage three, out of 19 kebeles in the woreda, five kebeles (yina, degelle, wello, ateso and gatimo) are randomly selected and the final stage (stage 4) deals with selecting a total of 251 farm households proportionally from the selected kebeles as a representative sample and hence the final questionnaire was distributed to these farm households so as to get the relevant data. these 5 kebeles have a total of 2,613 farm households and the aforementioned sample size is determined by using the statistical formula forwarded by yemane (1967) by choosing the precision level to be 7 percent. farmers’ technology adoption decision and use intensity in the agricultural sector: case of masha district (double hurdle model) 33 2 1 ( ) n n n e   where, n = sample size, n = total (target) population and for this study it is 2613 2 2, 613 251 1 2, 613(0.07 ) n    table 2.1 distribution of sample households in selected kebeles kebele total farm household sample size yina 463 45 degele 590 57 wello 710 68 ateso 450 43 gatimo 400 38 total 2613 251 source: own data (2019) 2.4. method of data analysis regarding the data analysis techniques, the researcher used both descriptive and inferential analysis methods so as to answer the research question and associated objectives mentioned above. the descriptive analysis make use of the usual methods such as computing mean and frequency distributions using tables and graphs basically to support the inferential analysis. in inferential analysis on the other hand, double hurdle model is used to estimate factors influencing the farmers’ decision as well as intensity to adopt agricultural technologies in the study area. the estimate the aforementioned model, stata software version 14 was used in this study. regarding econometric model specification; the double-hurdle mode; most adoption studies have used the tobit model to estimate adoption relationships with limited dependent variables. tobit model is, however, very restrictive for statistical reasons, which makes this model unsuitable for certain empirical applications. tobit model is also statistically restrictive because it assumes that the same set of variables determine both the probability of non-zero adoption and intensity use level. that is why recent empirical studies have shown the inadequacy of the tobit model in cross-sectional analysis, stressing the relevance of alternative approaches. therefore, the appropriate model considered in this study is double-hurdle model, which was initiated by cragg (1971). dh model assumes farm households faced with two hurdles in any agricultural decision making processes such as, participation decision (the decision to adopt) which is followed by use intensity (the decision regarding the level of production). double-hurdle model hence, allows for the simultaneous consideration of the determinants of technology adoption decision of the hhs as well as the determinants of use intensity through two separate stages. this model make use of both probit regression and truncated regression at different stages where it involves running a probit regression to determine factors affecting the decision to participate given all the sample population in the first stage and a truncated regression model on the individuals who passed the first hurdle (i,e the one who decided to participate) to analyze the intensity of adoption in the second stage. double hurdle model is helpful as it allows a subset of the data to pile-up at some value without causing bias in estimating the determinants of the continuous dependent variable in the second stage hence, it can be possible to obtain all the data in the remaining sample for the participants. thus, there are no restrictions regarding the elements of explanatory variables in each decision in double hurdle model. stated differently, it is possible to separately analyze the determinants of adoption decision and the extent of adoption decisions. due to this separability, the estimates of production decisions can be obtained by a means of probit regression and that of the level of adoption decision can be analyzed by use of a truncated regression. according to burke, the separability in estimation may not be mistaken. amsalu dachito & alebachew angelo 34 the general form of the double -hurdle model employed for analyzing for farm households' decision for adoption and intensity of adoption of technologies in term of area coverage in hectare based: * * ' .........................................................................(1) ' ........................................................................(2) ' 0 ' i i i i i i i d z y x y if z and x y                 0 0 ' 0 ' 0 or .........................(3) ' 0 ' 0 or ' 0 ' 0 1 , ( , ) (0, ), = i i i i i i i if z and x if z and x if z and x where bvn                                           where, z and x respectively are the set of explanatory variables which enter in the first and second hurdle. di represents a latent variable indicating the household’s participation decision while y* is a latent variable as well measuring the intensity of adoption. lastly, y indicates the actual (observable) amount of intensity which can only be observed if the household is a potential adopter (d>0) as well as the actual adopter (y*>0). 2.4.1. measurement and definitions of variables the dependent variable of the model takes a censored value depending on the farmers’ decision either to adopt or not to adopt the improved technologies as well as the intensity of adoption if they decide to adopt the technology. in this case, it indicates the amount of fertilizer per hectare cultivated in the year 2018. a farmer is said to be adopter if he/she use inorganic fertilizer on his/her farm land. 2.4.2. the independent variables and their definitions in the dhm adoption literatures provide a long list of factors that may influence the adoption of agricultural technologies. generally, farmers’ decision to use improved agricultural technologies and the intensity of the use in a given period of time are hypothesized to be influenced by a combined effect of various factors such as farm household specific characteristics, socioeconomic and physical environments in which farmers operate. based on the previous study done on the adoption of improved crop technologies and the experience of the farming system of the study area, farm household specific characteristics’ such as marital status and age of the household head, education level of the household head, religion of the farmer are considered. as a institutional factors access to road, access to credit facilities and extension services are considered. additionally variables such as previous output level as well as farm size were selected for this study as a potential variables hypothesized to affect the adoption decision as well as extent of adoption. 3. results and discussion the figure caption should begin with an overall descriptive statement of the figure followed by additional text. they should be immediately after each figure. start this caption with a short description of your table. format tables using the word table commands and structures needless to state, agriculture sector in ethiopia is and continue to be the base of the country's economy accounting for more than one third of gross domestic product (gdp), and more than 80 percent of exports, as well as total employment (nbe, 2018). ethiopia's agriculture is highly exposed to natural phenomena and beleaguered by periodic drought, soil degradation caused by overgrazing, deforestation and poor infrastructure. yet agriculture is the country's most promising resource as well as a possible means for self-sufficiency in food. the controversy of ethiopia’s resource structure (labor and land abundance) and self insufficiency in food remains unsolved regardless of policy directions by the government. though 80 percent of the labor force has been engaging in the sector, the country has continued to import food items from the rest of the world. farmers’ technology adoption decision and use intensity in the agricultural sector: case of masha district (double hurdle model) 35 3.1. descriptive analysis table 1 mean output (in quintal) by adoption status adoption freq mean output std. deviation non participant 85 26.95 21.59 participant 166 82.38 53.82 combined 251 63.61 52.53 difference -55.43 ho: mean diff = 0 .00 prob = 0.000 source: own computation (2019) as can be shown from the table, out of 251 sampled farm households, 166 individuals are agricultural technology adopters and the remaining 85 individuals are non users. average outputs produced by technology users is about 82.38 quintal per hectare with the standard deviation of 53.82 where as those how didn’t use any technology on average produce about 26.95 quintal per hectare with associated deviation of 21.59. the mean productivity difference between the two groups is about 55.43 quintal per hectare and this difference is statistically meaningful as can be checked using t-test. the non users can be treated as the one who are less ready to take risk (risk averse farmers) as the mean deviation for the users is relatively higher as compared to the mean deviation of the output for non users. the argument is in line with the fact that technology in any sector is more risky as well as more return. obviously, farmers are reluctant to practice new technology on their farm as they are afraid to take risk because they want to be safe and avoid failure. but those who are constantly involved in risk-taking activities have the probability to become successful. therefore the risk-return trade off associated with new technology adoption can be taken as one factor behind the reluctance of some farmers from adopting agricultural technologies on their farm land. table 2. average output distribution across various attributes non-adopter adopter education freq mean output freq mean output illiterate 25 34.36 13 61.46 1-4 4 33 7 90.14 5-8 23 21.13 38 58.87 9-12 27 24.30 59 90.86 >12 6 26.33 49 94.86 total 85 26.95 166 8238 marital status single 3 35 3 94 married 77 26.92 148 85.12 divorced 4 20.75 12 53.42 widowed 1 30 3 51.67 extension access yes 36 26.69 146 89.67 no 49 27.14 20 92.20 credit access no 40 30.85 63 72.17 yes 45 23.49 103 88.63 amsalu dachito & alebachew angelo 36 sex female 6 19.67 10 46.10 male 79 27.51 156 84.71 source: own computation, (2019) across their educational attainment, farmers’ technology use improves. that means, farmers’ with higher educational attainment are ready to use agricultural technology as compared to individuals with lower educational background. on the other hand there is no evidence that education improves agricultural productivity for non-users of technology. illiterate non-adopters on average produce 34.36 quintal per hectare and this output declines to 33 quintal for 1-4th grand individuals and as education increases, the mean output level of the non-adopters is almost constant with no major change. opposed to non-adopters, technology adopters’ average productivity improves with educational attainment. illiterate farmers’ average productivity is about 61.46 quintal per hectare and this figure rises to 94.86 quintal per hectare for grand 12 and above. in terms of marital status, single farmers are the most productive group with average output of 35 quintal per hectare for non-adopters and 94 quintal per hectare for adopters followed by married farmers (whose average output ranges about 27 quintal for non-users and 85 quintals for users. access to extension service on the other hand improves the decision to participate in the technology adoption whereas it doesn’t have any significant implication on the average productivity for both adopters and non-adopters. as can be seen from the above table, out of 85 non-adopter farmers 49 (58%) farmers do not have access to extension whereas only 36 (42%) farmers have access to extension service. in terms of average productivity of nonadopters, the one who have access to extension service produce 27 quintal per hectare and this figure is almost similar to the farmers who do not have access to extension service. on the other hand, out of the total technology adopters (166 farmers), 146 (88%) farmers have access to extension service and the remaining 20 (12%) farmers have not. in terms of their average productivity, farmers who adopt technology as well as have access to extension service on average produce 90 quintal per hectare and farmers with no access to extension on average produce 92 quintal per hectare. regarding farmers’ access to credit facilities, out of the sampled households 103 (41 %) farm households do not have access to credit facilities whereas 148 (59%) have access to credit. in terms of technology use, out of the nonusers, 40 (47%) have no access whereas 45 (53%) have access to credit facilities. from the other side, among the technology users 63 (38%) have no access to credit and the remaining 103 (62%) have access to it. one can conclude from the above figure that access to credit is not the inessential determinants of technology adoption decision in the study area as about 47 % of non-adopters have access to it and still decides not to adopt the technology on their farm land the adoption decision of farm households are split in gender wise in the above table and accordingly, 16 (6.37%) of the farm households are female headed and the remaining 235 (93.63%) farm households are male headed. out of the total female headed farm households, 6 (37.5% ) are non-adopters and the remaining 16 (62.5% ) engage in technology adoption. in terms of average productivity, male headed households are more productive as compared to female headed households in the study are (27.51 vis-à-vis 19.67 quintal for non-adopters and 84.71 vis-à-vis 46.1 quintal per hectare for adopters). 3.2. inferential analysis 3.2.1. double hurdle model) in this part the data is estimated using dh model after taking care of all the priori tests on the collected and managed data. to address the researcher’s objective of measuring the decision as well as use intensity of technology in the study area, the researcher chooses double hurdle model because of its superiority as discussed in the previous sections. farmers’ technology adoption decision and use intensity in the agricultural sector: case of masha district (double hurdle model) 37 table 3. determinants of technology adoption (dh model) 1st hurdle (participation decision) 2nd hurdle (intensity) agri_tech coefficients p-values coefficients p-values sex 0.48** 0.02 0.07 0.86 education 0.04 0.35 0.07** 0.01 extension 0.39** 0.01 1.11* 0.00 age -0.01* 0.00 -0.01 0.75 farmers’ perception 0.41** 0.04 0.37* 0.00 family szs 0.07* 0.00 0.01 0.74 land ownership 0.05 0.84 0.13 0.15 off-farm income 0.151* 0.00 0.61 0.21 credit -0.21** 0.02 farm size -0.03 0.17 0.07 0.14 ln_sigma -0.60 0.92 0.00 /sigma 0.55 0.03 n = 251 lr chi2(6) = 104.52 p > chi2=0.00 pseudo r2=0.52 source: own estimate, (2019) * significant at 1% level, ** significant at 5% level, *** significant at 10% level. significance levels are based on significance levels of the underlying marginal effects. to estimate the determinants of adoption decision and use intensity of agricultural technology the double hurdle estimates are reported in table 3 above. accordingly, the overall significance of the model is checked given the likelihood ration test statistics (lr chi2(6) = 104.52) and its respective p-value (p > chi2=0.00) which indicates the model is statistically meaningful. whereas out of the total variation of the dependent variable, about 52 percent is explained by the variation of the variables included in the model (pseudo r2=052). sex of the household head does significantly affect farm households’ decision to adopt the agricultural technologies whereas once if the household decides to adopt the technology, to the extent to which the farmers decide to adopt is not influenced by genderwise differences of the household head. accordingly, as compared to female headed households, male headed households have higher likelihood to participate in the technology adoption. on the other hand, education level of the household is estimated to affect farm households’ decision to participate in the technology market and doesn’t have any significant impact on the intensity of technology use in the study area. farm household with better educational attainment have relatively higher probability to participate in the technology market while the variable is statistically significant at 5 percent level. other variables such as extension access and family size have a positive impact on the use intensity of agricultural technology in the study area whereas age of the household head and credit access have a negative and significant impact on the use intensity of the technology in the study area. all variables but access to credit have their respective expected sign and access to credit is happen to be negative which is against the theory as well as intuition. empirically access to extension services has been found to be among the key determinants of technology adoption. extension agents have a critical role in providing information to farmers about the access as well as the benefits of new technology along with giving guidance on the farm land how and how much to use. extension agent are assumed to serve as a bridge between technology innovators (research and development) and users of the same technology through facilitating information flow and reducing the transaction cost (genius et al., 2010), (margaret mwangi samuel kariuki 2015). apart from this finding, access to credit has been believed to facilitate technology adoption (mohamed & temu, 2008) by promoting the adoption of risky technologies through lessening of the financial constraint of farm households and boosting household’s-risk bearing ability (simtowe & zeller, 2006). farm households’ decision to adopt as well as their intensity of adoption is highly influenced by their subjective opinion about the technology they have access to. thus, as can be checked from the table above, farmers with amsalu dachito & alebachew angelo 38 positive preference to the technology and their associated (positive) judgment concerning the compatibility of the technology with their environment (such as the soil type and temperature) are likely to adopt such technology expecting positive reward from those investment. farm size owned by the farm households is generally believed to play a significant role in on technology adoption decision of the farmers (margaret mwangi and samuel kariuk, 2015). many researchers have argued land size as one of determinant of technology adoption as land size can influence other factors determining the adoption decision (lavison 2013). opposed to many studies who have reported a positive impact of farm size and technology adoption (kasenge, 1998; gabre-madhin and haggblade, 2001 ahmed, 2004; uaiene et al., 2009) this study has revealed no significant impact of land size on farmers’ adoption decagons as well as the intensity of adoption. this finding is generally against the arguments of previous researches that farmers who have ownership of large farm size are likely to use new technology as they can be able to put aside part of their land to practice a new technology so as to avoid crop failure if used in their entire land. on the other hand, large farm size facilitates the use of other farm technologies (such as tractor) as it requires economies of scale to make sure profitability (feder, and zilberman, 1985). but the latter argument doesn’t work specially for the study area as land size in the study area is more or less distributed symmetrically and relatively small. regarding the off-farm income, we find positive and significant association to farmers’ technology adoption decision whereas, when once the adoption decision is made, off-farm income doesn’t influence the intensity of adoption. this study partly confirms the findings by banker and macdonald, (2005) and uaiene, r et al (2009). 3.2.2. impact of adoption on productivity farmers in the study area claim that technology has an adverse impact on the productivity of their land, as o ne of the reason behind low rate of technology adoption. aiming to test the impact of technology on productivity, cobbdouglas production function was estimated where technology use is entered as one of the explanatory variable. table 4. determinants of productivity output coefficients std. error p-values m. status -0.04 0.12 0.72 religion -0.00 0.08 0.98 lnd size 0.13* 0.02 0.00 education 0.09** 0.04 0.04 extension 0.46* 0.12 0.00 age -0.01 0.05 0.38 family szs 0.07* 0.02 0.00 distance_road 0.01 0.49 0.76 credit 0.02 0.99 0.81 ftlzr 0.85* 0.11 0.00 n = 251 f(10, 240) = 22.93 p > f=0.00 r2=0.49 source: own estimation (2019) * significant at 1% level, ** significant at 5% level, *** significant at 10% level. the objective under this part is to empirically test whether the claims by most of the small farm households in the study area about the ineffectiveness of agricultural technology is true, by estimating the production function including the technology adoption as one of the determinants of productivity. they argue that the technology they are supplied by the government is incompatible with the nature of the soil and has been contributing adversely to the productivity of their land. apart from this claim, as can be seen from the table above, fertilizer use is one of the statistically significant determinants of productivity in the study area. accordingly as compared to non-users, output increases by about 85 percent for technology users. farmers’ technology adoption decision and use intensity in the agricultural sector: case of masha district (double hurdle model) 39 along with technology, output in the study area is determined by land size, education level of the household head, access to extension service and family size. on the other hand household characteristics such as marital status, religion and age of the household head as well as institutional factors such as access to road and credit facilities have no significant impact on productivity in the study area. 4. conclusions and recommendations population growth, land fragmentation and associated over-utilization of land has been one of the serious cause of low productivity, food self insufficiency and mal nutrition in developing country in general and ethiopia in particular. access to new and improved technological has been recognized as a vital part at both micro level (productivity) and macro level (economic growth and development) (solow, 1994; kasenge, v. 1998). the readiness associated with new technology supply and diffusion remains critical for sustainable agricultural productivity and self food sufficiency (franklin simtowe, 2011). use of agricultural technology such as fertilizer and improved seeds has been advocated as a cure to loss of natural fertility of the soil and associated low productivity. apart from these consensuses the degree of technology adoption varies spatially as well as temporally. among others, the study area (masha district) is the one where farmers remain reluctant for agricultural technologies. some of the possible explanations for the variation are capacity constraint (lack of credit access and high technology price) and low educational attainment of the farm households. apart from the low rate of technology adoption, the productivity difference between adopters and non adopters is very significant and positive while the variability of productivity (the standard deviation of output) is very large (about 53) within the technology adopters, which implies that the uniformity of the adoption is still a problem which might be emanated from farmers’ low education level as well as constrained access to extension service. one and the most imperative thing to be noted in this study is that the negative perception towards adoption in the study area is merly from lack of knowledge as well as a loose relation between extension agents and the farm households in the study area. therefore government’s assignment in awareness creation is not accomplished yet in the study area in addition with timely and faire distribution of the agricultural technology. thus local government should pay attention in building confidence in the farm households concerning the technology they provide by integrating the farmers and local development agents (extension agents) while demonstrating the fruits of the technology 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(2010). information transmission in irrigation technology adoption and diffusion: social learning, extension services and spatial effects jayne, t.s. and d.l. tschirley (2009), “food price spikes and strategic interactions between the public and private sectors: market failures or governance failures”, commodity market review 2010, pp. 3-18. kasenge, v. (1998). socio-economic factors influencing the level of soil management practices on fragile land. in proceedings of the 16th conference of soil science society of east africa, 13th-19th, december 1998, tanga, tanzania pp.102-112, 1998. lavison, r. 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(2009) determinants of agricultural technology adoption in mozambique. discussion papers no. 67e vannoy, sandra & palvia, prashant. (2010). the social influence model of technology adoption. commun. acm. 53. 149-153. 10.1145/1743546.1743585. young, (2009) innovation diffusion in heterogeneous populations: contagion, social influence, and social learning: the american economic review, vol. 99, no. 5 (dec., 2009), pp. 1899-1924 zeder, g., just and zilberman, d. (1985)“adoption of agricultural innovations in developing countries: a survey.” economic development and cultural change. 33 (1985):255-298. international journal of commerce and finance, vol. 6, issue 1, 2020, 155-165 155 factors affecting economic growth in central java soeharjoto soekapdjo, universitas trisakti, jakarta indonesia debbie aryani tribudhi, universitas trisakti, jakarta indonesia dini hariyanti, universitas trisakti, jakarta indonesia lucky nugroho universitas mercu buana, jakarta indonesia abstract economic growth is an indicator of the success of the development. increasing economic growth in central java will be realized if the government can implement the right policies. research on factors that influence economic growth can be used as a reference in making government policies in the economic field. the results of the study using multiple regression in 2008.q1-2016.q4 are foreign direct investment (fdi), domestic investment (di), consumer price index (cpi), health index (hi), education index (ei), and the gross regional domestic product previous year (grdp (-1)) was able to explain economic growth in central java by 99.9 percent. fdi and grdp (-1) have a positive and significant effect on economic growth. hi, negative and significant effect on economic growth. di, cpi, and ei are not significant for economic growth. keywords: economic growth, foreign direct investment, domestic investment, consumer price index, health index, education index, and gross regional domestic product 1. introduction indonesia is one country that has a large area and is an archipelago. this situation can be an opportunity or even an obstacle to the development of its economy. it can be said that, if the government has the right strategy in development with its potential, it will produce extraordinary development. this was also done by the government, which had carried out development policies through centralization for 40 years in the old order and new order era, then changed to decentralization in the reform era. java island is one of the largest islands in indonesia, which is densely populated, which is divided into several provinces. the existence of the province of central java has been quite long and has a unique condition, namely its relatively stable economic condition. but what is unfortunate is that economic growth is still below the national level. this happens because the available resources and capital are still dominated by the central government (figure 1). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e soeharjoto soekapdjo & debbie aryani tribudhi & dini hariyanti & lucky nugroho source: bps economic development in indonesia will have an impact on the region. moreover, to support development, a number of investment funds are needed, both from within the country and abroad. with the presence of investors, it will absorb labor in its area, and the welfare of its people will increase, which will ultimately increase regional income. the development of domestic investment (pmdn) in indonesia has continued to increase, but foreign investment (pma) has complained that the increase is not so significant and then decreases (figure 2). source: bkpm factors affecting economic growth in central java 157 inflation is an important support in the macroeconomy to increase production and consumption. thus, low and stable inflation is needed to facilitate economic growth. the inflation condition in central java is very supportive of regional development. moreover, inflation is still below the national level (figure 3). this situation will benefit his blood because, in production, it will be efficient and, at a stable price, will increase the demand of the people. figure 3. inflation in indonesia and central java, in 2010-2016 (percent) source: bps besides good funding and conducive macroeconomic conditions, there are actually other elements that are not less important in supporting economic growth. this is not different from other developed countries, namely human resources. reliable hr can carry out efficient and effective work so that it will accelerate economic growth. the human development index (hdi) is one indicator of the strength of a country's human resources. the hdi from central java is good, although there is a slight difference below the national level (figure 4). the dimensions of the health index, education index, and expenditure index are elements that exist in the hdi. however, to support reliable human resources, good education and health are needed. soeharjoto soekapdjo & debbie aryani tribudhi & dini hariyanti & lucky nugroho figure 4. ipm indonesian and central java (percent) source: bps the economic growth of a region is one indicator that can be used to see the success of its development. this indicator, also used in the province of central java. by knowing the factors that influence economic growth, policies can be made that support the success of regional development. 2. literature review economic development, according to azariadis & drazen (1990) and soeharjoto (2018), can occur because of the ability of humans to save and invest capital, which at the end of the process is stationary. however, in line with the time, the profits will decrease, which is due to business competition and low-interest rates. in the process, economic growth can occur from two aspects, namely the growth of total output (natural resources, human resources, and stock of capital goods) and the presence of growth agents (farmers, producers, and entrepreneurs). economic growth, according to dewi et al., (2020), soekapdjo et al., (2019), and solow, 1956), is very dependent on the existence of additional factors of production (population, labor, and capital accumulation) and technological progress. in many ways, with the existence of a market mechanism, balance can occur, so that government intervention is limited to fiscal and monetary policies. however, if the capital per capita has reached a stable level, there will be a long-term balance, thesis backwardness in developing countries (cumulative causation) from rudra (2002) stated that their economic relations developed countries and not would lead to international imbalances, especially in per capita income and poverty in countries that are not developed. the causes are the inequality of progress in the field of science and technology, and the existence of a broad market and concentration of capital in developing countries. setterfield (1998), rejects the assumptions of neo-classical and considers it unrealistic with the existence of general equilibrium and constant return to scale. as for his opinion, that in the production process will lead to increasing returns to scale, in situations of imbalance (disequilibrium), which will arise endogenously, within an economic system. besides that, thinking from neoclassical is considered excessive, especially in terms of the importance of the role of prices formed in free markets, which can be used as a guide to determine the level of output (allocation of economic resources). in fact, according to him, the company has other objectives besides seeking profits, according romer (1986), the growth of gross national products is more determined by the system of the production process and not from outside the system. besides that, according to him, there is no decrease in the scale of production. so, basically, the growth occurs because of the presence of endogenous factors. he also explained the factors affecting economic growth in central java 159 peculiarities of international capital flows, which would exacerbate the inequality of developed countries and developing countries, due to the low level of complementary investment, especially human resources (education), infrastructure, research, and development. krugman (1991) considers that there will be an impact of free trade and the determinants of global migration. this happens because the location of the factors of production and economic activity can be analyzed in an integrated manner, in a framework of equilibrium models, which are often used in economic analysis. the analysis focuses on the impact of economies of scale on the trade sector and business location. he found that the more goods and services produced in the same factory, the lower the production costs. as a consequence, the market will not compete perfectly as stated by the creators of previous international trade theories. according to him, the theory of comparative advantage cannot answer the phenomenon of international trade at this time. in fact, world trade in the 20th and 21st centuries was dominated by only a handful of countries, which turned out to trade the same product. 3. previous research mulyadi (2017), revealed economic growth in the city of semarang. domestic capital growth and foreign capital are not significant for economic growth. hussin et al., (2013), revealed economic growth in pakistan. foreign direct investment (fdi) has a negative and significant influence on economic growth for the long term. pambudi & miyasto (2013), revealed economic growth in central java province. investment has a positive and significant effect on economic growth. human capital investment is not significant for economic growth. lenka & sharma (2013), revealed economic growth in developing countries. education and fdi have a positive and significant influence on economic growth. inflation has a negative and significant effect on economic growth. loana & mihaela (2014), revealed economic growth in 12 new eu member countries. human resources have an influence on economic growth. suparno (2014), revealed economic growth in east kalimantan. the government expenditure on the education sector has an effect on economic growth. maharani & isnowati (2014), revealed economic growth in central java. regional private investment, government investment, and labor have a positive and significant effect on economic growth. udeaja & onyebuchi (2015), revealed economic growth in nigeria. expenditures for education have a positive and significant effect on economic growth, and fdi is not significant for economic growth. pribadi et al., (2015), revealed economic growth in gresik regency. investment, labor, and inflation have a positive and significant effect on economic growth. tabassam et al., (2016), revealed economic growth in pakistan. the previous year's gross domestic product has a positive and significant influence on economic growth. 4. research methods in this study, using quarterly time-series data, during the period 2008-2016. testing data with estimation methods of regression equation models (sekaran & bougie, 2016). the independent variables used are grdp (-1), pma, pmdn, cpi, health index, and education index, while the dependent variable is grdp. 4.1. description of research variable grdp growth in central java has an average of 1.31 percent. the maximum investment value is 1.61 percent in 2016 in the third quarter, and the minimum value is 1.61 percent in 2009 quarter 1. this situation, supported by a small standard deviation, is 0.077861 percent. soeharjoto soekapdjo & debbie aryani tribudhi & dini hariyanti & lucky nugroho figure 5. grdp growth in central java, in 2008.1-2016.6 (percent) source: bps cpi in central java has an average of 102.166 percent. the maximum inflation value is 124.307 percent in 2016 in the fourth quarter, and the minimum value is 79.404 percent in 2008 quarter 1. this situation is supported by a significant standard deviation of 13.73711 percent. figure 6. consumer price index in central java, in 2008.1-2016.4 (percent) source: bps pma in central java has an average of rp. 1,128,622 billion. the details of the maximum investment value are rp3,492.253 billion in 2016 in the third quarter and the minimum value was rp83,829 billion in 2009 quarter 1. this situation is supported by a significant standard deviation of rp1,197,797 billion. domestic investment in central java has an average of rp2,366.75 billion. the details of the maximum investment value are rp9,710.18 billion in 2016 in the fourth quarter, and the minimum value was rp53.86 billion in the first quarter of 2008. this situation was supported by a significant standard deviation of rp2,379,598 billion. factors affecting economic growth in central java 161 figure 7. pma and pmdn in central java, in 2008.1-2016.4 (rp. billion) source: bkpm the education index in central java has an average of 51.78 percent. the details of the maximum investment value are 58.06 percent in 2016 in the first to fourth quarters, and the minimum value is 46.73 percent in 2009 quarter 1 up to 4. this situation, supported by a moderate standard deviation, is 4,592362 percent. the health index in central java has an average of 32.14 percent. the details of the maximum investment value are 35.52 percent in 2011 in the first quarter and the minimum value of 28.72 percent in 2010 quarter 1 up to 4. this situation, supported by a moderate standard deviation, is 1.811896 percent. figure 8. education index and health index in central java, in 2008.1-2016.4 (percent) source: bps soeharjoto soekapdjo & debbie aryani tribudhi & dini hariyanti & lucky nugroho 4.2. testing of research hypotheses in testing the hypothesis, the research needs to do data processing. the results are in table 1 table 1 results of processing economic growth regression variable you are expected coefficient t-statistic prob. conclusion di (+) -0.053 -2.081 0,023 ho accepted fdi (+) 0.136 1.837 0,038 ho rejected cpi (-) -3.659 -0.158 0,437 ho accepted ihealth (-) -36.749 -1.934 0,031 ho rejected ieduc (+) 24.619 1.081 0,144 ho accepted grdp(-1) (+) 1.009 91.689 0,000 ho rejected r-squared 0.999 f-statistic 223772,1 adjusted rsquared 0.999 prob(f-statistic) 0.000000 jarque berra 14,134 lm test 4,9789 prob 0,000 prob 0.0257 white test 29,765 prob 0.3724 from the results of processing r 2 is obtained adjusted amounted to 0,999, which means that the variation or the behavior of the independent variables are di, fdi, cpi, ihealth, ieduc, grdp (-1) was able to explain the variation of the dependent variable, namely its economic growth which is proxied by the gdp price constant at 99.9 percent, while the remaining 0.1 percent is a variation of another independent variable ya ng affect the economic growth of central java province, but not included in the model. these results indicate that the resulting model has good goodness of fit. individual testing is done to examine the effect of each of the independent variables that influence central java's economic growth. the findings of data processing can be explained as follows: a) testing the effect of domestic investment on economic growth in central java is indicated by an estimated coefficient of -0.053, which means that domestic investment has a negative effect on economic growth in the province of central java. increasing domestic investment will reduce economic growth in central java, and conversely, the decline in domestic investment will increase economic growth in central java. these findings indicate that domestic investment is not proven to have a positive effect on economic growth in the province of central java. b) the results of processing for testing the effect of fdi on economic growth in central java are indicated by an estimated coefficient of 0.136, which means that an increase in fdi will increase economic growth in central java, and conversely, a decline in fdi will reduce economic growth in central java. with the pvalue of t statistics of 0.038 <0.05, ho is rejected, and ha is accepted, so it can be concluded that the hypothesis that pma has a positive effect on economic growth in central java is proven. c) the processing results for the inflation variable proxies through cpi are indicated by an estimated coefficient of -3.659, which means increasing the cpi will reduce economic growth in central java, and preferably a decline in the cpi will increase economic growth in central java. the prob value of t statistic is factors affecting economic growth in central java 163 0.437> 0.04, indicating that ho is accepted, so it can be concluded that the negative effect of the cpi on economic growth in central java province is not proven. d) to test the effect of the health index, which is proxied from the percentage of the population experiencing health problems (ihealth), it produces an estimated coefficient of -36,749, which means an increase in the percentage of residents experiencing health problems will reduce economic growth in central java province, and preferably the declining percentage of the population experiencing disruption will increase economic growth in the province of central java. with a prob value of t statistic of 0.031 <0.05, then ho is rejected, and ha is accepted, so it can be concluded that the negative effect of the percentage of the population experiencing health problems on the economic development of the province of central java proved significant. e) the test results from the influence of the education index (ieduc) on economic growth in the province of central java are indicated by an estimated coefficient of 24.619, which means increasing the education index will increase economic growth in the province of central java, and in fact, the declining education index will reduce economic growth in the province central java. the prob value of t statistic is 0.144> 0.05, indicating that ho is accepted so that it can be concluded that the positive effect of the education index on economic growth in the province of central java is not proven. f) test results for grdp (-1) on economic growth in the province of central java are indicated by an estimated coefficient of 1.009, which means increasing grdp (-1) will increase economic growth in the province of central java, and as a result, the decline in grdp (-1) will reduce economic growth in the province of central java. the prob value of t statistic is 0.00> 0.05, indicating that ho is rejected, so it can be concluded that the positive effect of grdp (-1) on economic growth in central java province is proven. 5. conclusion pma, pmdn, ihk, ihealth, ideas, and grdp (-1) are able to explain the economic growth in central java at 99.9 percent. pma and grdp (-1) have a positive and significant effect on economic growth. health has a negative and significant effect on economic growth. pmdn, cpi, and ideas are not significant for economic growth. nvertheless, the implication of the research as follows:  the government needs to take policies that can improve the quality and quantity of pma and pmdn, such as the ease of licensing procedures, tax relief, and levies, legal certainty, the use of local raw materials, export-oriented, technology transfer, and others;  the government needs to make breakthroughs and strategies to increase grdp without reducing justice and public welfare;  the government and regional officials and the community need to maintain a conducive atmosphere so that prices are stable;  the government and regional officials and communities need to maintain good health with a healthy lifestyle and maintain the environment and provide health facilities optimally;  the government and regional officials and the community need to improve the process and carry out education, both formal and non-formal education. soeharjoto soekapdjo & debbie aryani tribudhi & dini hariyanti & lucky nugroho references azariadis, c., & drazen, a. 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(1956). a contribution to the theory of economic growth. the quarterly journal of economic, 70(january), 65–94. factors affecting economic growth in central java 165 suparno, h. (2014). pengaruh pengeluaran pemerintah sektor pendidikan, kesehatan dan infrastuktur terhadap pertumbuhan ekonomi dan peningkatan pembangunan manusia di provinsi kalimantan timur. journal of innovation in business and economics, 5(1), 1–22. https://doi.org/10.22219/jibe.vol5.no1.1-22 tabassam, a. h., hashmi, s. h., & rehman, f. u. (2016). nexus between political instability and economic growth in pakistan. procedia social and behavioral sciences, 230(may), 325–334. https://doi.org/10.1016/j.sbspro.2016.09.041 udeaja, e. ., & onyebuchi, o. . (2015). determinants of economic growth in nigeria: evidence from error correction model approach. developing country studies, 5(9), 27–42. international journal of commerce and finance, vol. 2, issue 1, 2016, 14-24 market liquidity, analysts coverage, and ownership concentration: evidence from ase majd iskandrani, (assoc. prof.) the university of jordan, jordan abstract: this research investigates the association between analyst coverage, ownership concentration and market liquidity in amman stock exchange (ase). using a unique dataset about information asymmetry, several proxies related to the information asymmetry are used to clarify certain aspects of market liquidity. in a sample of 131 companies with comprehensive data collected from company guides and datastream, information asymmetry measured by analysts’ coverage is found to be an important determinant of market liquidity. in particular, market liquidity is lower where firms have larger analysts coverage and where firms are denoted with high degree of ownership concentration. the effect of analysts coverage is, however, found to be more marked in firms with high levels of ownership concentration. the study provides theoretical and empirical improvement of market liquidity literature towards an understanding of the information asymmetry proxies in ase. policymakers, after the 2007-2009 scandal have formed governance codes that highlight the importance of disclosure requirements as key responsibility of financial analysts. the link between analysts coverage and market liquidity established in this research provides evidence for insider investors on the roles and potential effectiveness of analysts in carrying this responsibility. keywords: analysts coverage, ownership concentration, market liquidity, ase jel codes: g14 and g32 1. introduction we examine the association between ownership concentration, analysts coverage and market liquidity. there are two conflicting views on the effects of ownership concentration on market liquidity: adverse selection and trading hypotheses. the former argues that when large shareholders possess superior information about the firm’s prospects compared to minority shareholders, an adverse selection problem arise, which decreases market liquidity (e.g., easley & o'hara 1987; glosten & milgrom 1985; grossman & stiglitz 1980; kyle 1985; rubin 2007). nevertheless, the latter suggests that minority shareholders trade more often, which increases market liquidity (e.g., demsetz 1968; merton 1987; schwartz & shapiro 1992). prior literature on the relationship between ownership concentration and market liquidity is far from conclusive (e.g., attig et al., 2006; brockman et al., 2009; ginglinger & hamon 2007; heflin & shaw 2000; jacoby & zheng 2010; naes 2004). interestingly, there is few evidence on how analyst coverage is associated with market liquidity. this paucity of evidence motivates our study. moreover, we test the association between ownership concentrations, analysts’ coverage and market liquidity on amman stock exchange (ase) who is often regarded as one of the most successful arab countries in protecting investors (i.e. minority investors) relative to its economic size. therefore, jordan offers an ideal setting to examine the degree of information asymmetry in the region. in particular, little evidence documents with respect to the relationship of ownership concentration, analysts’ coverage and market liquidity. this relationship is important to capital market participants mainly minority shareholders given the role of analysts’ forecasts in transforming the private information into public that leads to higher market liquidity (e.g. brennan & subrahmanyam, 1995; roulstone 2003; jiang et al. 2011). others (e.g.,van ness et al. 2001; easley et al. 1998) document a negative relationship between analysts coverage and market liquidity. these studies assume that financial analysts have a greater motivation to follow firms with higher ownership concentration. thus, the relationship between analysts coverage and market liquidity is also expected to be positive (negative) when the firm’s ownership is concentrated (dispersed). to sum up, although scholars report that analysts coverage and ownership concentration is related to market liquidity, empirical evidence on this relationship is mixed. we include a sample of ase firms for the period of 2005-2013. in investigating the relationship between analysts’ coverage, ownership concentration and market liquidity, we incorporate a number of control variables that are important determinate of market liquidity such as shares price, return volatility and firm size in the ols models. our findings indicate that firms with larger number of analysts following have higher proportional bid-ask spread and in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 16 grzegorz zajac http://ijcf.ticaret.edu.tr lower trading activity measures (i.e., turnover ratio by volume and trading volume). moreover, we notice that firms with higher ownership concentration have a wider proportional bid-ask spread and lower turnover ratio by volume and trading volume. interestingly, we show that the effects of analyst following on market liquidity are more pronounced in concentrated firm. our findings are consistent with rubin (2007) who document a negative association between ownership concentration and market liquidity. and in the line with the findings of jiang et al. (2011) show that firms with larger analysts’ coverage have lower market liquidity. our study adds to the literature that investigates the association between ownership concentrations, analysts’ coverage and market liquidity the following two points. first, by documenting a relationship between analysts following and market liquidity, we show that financial analysts are linked with the information environment of the firms. we also infer that financial analysts may access the precision of private information of the firm’s prospects when ownership concentration is higher, which in the line with the adverse selection hypothesis. second, our study adds to the literature on the market liquidity. to the best of our knowledge, this study is the first of its kind to links ownership concentration, analyst coverage and market liquidity in ase. our findings are important given the significant effect of analysts coverage in reducing the degree of information asymmetry between insider and outsider investors. our findings document that analysts coverage is an important determinant of market liquidity in highly concentered firms. the remainder of this article is organized as follows. in section 2, we form our hypotheses. we present our methodology and the research model in section 3 and discuss the sample selection in section 4. we highlight the results in section 5 and document our conclusions in section 6. 2. literature review and hypothesis development blockholders have an informational advantage over minority shareholders with regarding the firm’s private information and possess economies of scale in the collection of information (e.g., brockman et al., 2009; heflin & shaw 2000; jacoby & zheng 2010). as a result, we conjecture that blockholders may trade in that private information. theories offer a clear expectation on the association between ownership concentration and market liquidity. for example, coffee (1991) was among the first to point out that the active role of large shareholders and the liquidity of their shares cannot go hand on hand. others (glosten & milgrom, 1985; copeland & galai 1983) also argue that large shareholders are informed investors who may trade against uniformed investors. as a result, market makers increase the bid-ask spread, which leads to lower market liquidity. nevertheless, the empirical studies that have examined the impact of blockholders on market liquidity have been inconsistent (brockman et al., 2009; heflin & shaw 2000; jacoby & zheng 2010). for instance, kini & mian (1995) document a significant and positive relationship between blockholders and bid-ask spread for 1063 nyse listed firms for 1985. moreover, heflin & shaw (2000) investigate the impact of blockholders on market liquidity, measured by quoted, effective, adverse selection components of bid-ask spread and depth, in 260 us listed firms, over the period from 1988 to 1989. they report a positive relationship between blockholders and, the quoted and effective bid-ask spread, and adverse selection spread components. furthermore, rubin (2007) examines the effect of blockholders on market liquidity using a sample of 1369 nyse firms for the period 1993-2003. he documents a negative relationship between blockholders and dollar volume and a positive relationship between bid-ask spread and price impact ratio. similar to that vein, brockman et al. (2009) and jacoby & zheng (2010) examine the relationship between blockholders and market liquidity and report a negative relationship between them. following this series of empirical studies, we form the relationship between ownership concentration and market liquidity as follows: h1: there is a negative association between shareholder concentration and stock market liquidity. many shareholders do not have the potential to analyse the information in firm’s earnings forecasts. in making trading decisions, they depend on the recommendations from financial analysts. as a result, an effective way for managers to influence market liquidity is to provide financial information directly to financial analysts. by improving the firm’s information environment through higher quality financial reports and more disclosure, firms can reduce the the degree information asymmetry which leads to a higher market liquidity (e.g. copeland & galai 1983; welker, 1995). the scope of state aid and public service obligation for airports and air carriers in the light of european law 17 http://ijcf.ticaret.edu.tr nevertheless, the relationship between analysts following and market liquidity will depend on whether the firm is concentred or dispersed (i.e., firms who are more (less) concentrated are more (less) likely to to be followed by financial analysts. on the one hand, in concentrated firms blockholders may access valuable private information and thus they can create an adverse problem in the capital market (e.g., jiang et al. 2011; zhou 2011). these studies suggest that the adverse selection risk faced by market makers may be negatively correlated with the number of analysts following the firm. in turn, this implies that the bid-ask spread may be lower for firms followed by a larger number of financial analysts. following this series of reasoning, we form the relationship between analysts coverage and market liquidity as follows: h2: there is a negative association between analysts following and market liquidity in summary, the review of the empirical papers that investigate the influences of ownership concentration and analysts’ coverage on market liquidity reveals several important gaps in the literature. in the first place, the number of empirical studies in this area is clearly limited and this explains the few papers that were discussed in the empirical review. in addition, the review indicates the need for this study in the ase since most of the above-mentioned studies come from the us and developed markets (chiang & venkatesh 1988; dennis & weston 2001; kini & mian 1995; rubin 2007; jiang et al. 2011). however, as discussed previously, the differences in corporate governance arrangement, codes’ rules and regulations between countries justify the need for more country-specific studies especially from the mena countries. to the best of our knowledge, this study is the first of its kind in the ase that investigates the effect of ownership concentration and analysts’ coverage on market liquidity. 3. the methodology and model this study depends on linear regression using the method of ordinary least square (ols). we run linear regressions using the proportional bid-ask spread (pbas), turnover by volume (trvo), then trading volume (vo) as measures for stock market liquidity. generally, the relationship that relationship between ownership concentration, analysts coverage and market liquidity can be written as follows: liqit = α0+ β1bkoit+ β2analit+ γ1mvit+ γ2pit+ γ3volit + + εi…………(1) liqit analit market liquidity variables: information friction (proportional bid-ask spread) and real friction (trading volume and turnover by volume) number of analysts who follow the firms bkoit proportion of aggregate blocks of at least 3% of the firm’s outstanding shares held by outside investors mv it the natural logarithm of the market capitalization as a proxy for firm size p it price per share vol it return volatility measured by the standard deviation of daily returns ind a dummy variable for industry year a dummy variable for each year of the eight years from 2005-2013, 2005(y1), 2007 (y2)……………. 2013 (y9) εit unobservable individual-specific effect the model includes three control variables –size, return volatility and share pricethat previous studies document that they are related to the firm’s information asymmetry and that may affect the association between ownership concentration , analysts coverage and market liquidity. we measure firm size (mv) as the natural logarithm of market capitalization at the end of the fiscal year. previous research report that firm size has a positive impact on market liquidity as stated by anderson & fraser (2000). in addition, larger firms, on average, release more information than 18 grzegorz zajac http://ijcf.ticaret.edu.tr smaller firms release and had more analyst coverage and are thus subject to more scrutiny by the investment community than smaller firms (e.g., brennan & subrahmanyam 1995). thus, we expect a positive relationship between mv and market liquidity. we control for the volatility in returns (vol) because it reflects information uncertainty. prior studies (e.g., mclnish & wood 1992; stoll 1978; tinic & west 1972; jegadeesh & subrahmanyam 1993) have confirmed that there is a positive relationship between price volatility and bid-ask spread. we measure volatility of share price as the standard deviation of daily returns. moreover, we include the share price (p) to control for price discreteness and acts as a proxy for market depth; that is, low prices are associated with higher market depth (jegadeesh & subrahmanyam 1993; welker 1995; stoll 2000). thus, this study measures the annual stock price using the average of the daily closing prices. 4. sample selection and descriptive statistics 4.1. sample selection we choice our sample from the population of amman stock exchange (ase) firms over the period 2005-2013. we extract data on ownership concentration from the companies’ guides, analysts’ coverage data from the i/b/e/s database, and accounting and market data from datastream. the sample contains all firms with comprehensive data for the main variables used in the empirical analyses. our main sample consists of 131 nonfinancial firms. 4.2. descriptive statistics table 1 shows descriptive statistics for the variables used in the empirical tests. the mean (median) value of ownership concentration (bko) is 34% (23%).furthermore, the mean (median) of the analysts following (anal) is 9.64 (5). for market liquidity proxies, table 1 reports that the mean (median) of proportional bidask spread (pbas) and trading volume (vo) are jd 0.03 (jd 0.01) and jd 28546 (jd 7549.3), respectively indicating that our sample contains of relatively liquid firms. for firm characteristics, mean (median) firm size (mv) and return volatility (vol) are jd 157.53 (jd 20.70), 9.4% (8.4%), respectively revealing that our sample contains of relatively larger and less risky firms. the mean (median) of share price is jd 2.39 (jd 1.6). table 1 descriptive statistics table 1 presents descriptive statistics for the dependent variables and independent variables. total number of firms is 131 over the period 2005-2013. variable definitions are given in appendix 1. mean median standard deviation max min vol (%) 9.4% 8.4% 4.2% 29.5% 0 mv in millions jd 157.53 20.70 653.86 10445.04 1.01 vo in thousand 28546.09 7549.3 65606.02 875496.4 0 pbas in pence 0.0307 0.0063 6.1020 0.50 0 p 2.39 1.6 4.38 46.51 0.03 tr (%) 1.35 0.34 2.9 31.62 0 bko (%) 34% 23% 36% 95% 0 # of anal 9.64 5 10.41 35 0 table 2 shows the pairwise correlations among the variables used in the empirical results regressions. the table shows that blockholders (bko) is negatively correlated with turnover by volume (trvo) and trading volume (vo), showing that the firms with higher block ownership have lower market liquidity. analysts coverage (anal) is insignificantly positively correlated with turnover by volume (trvo) and negatively with proportional bid-ask spread (pbas). for market liquidity measures, turnover by volume (trvo) is significantly positively related with the scope of state aid and public service obligation for airports and air carriers in the light of european law 19 http://ijcf.ticaret.edu.tr trading volume (vo). while, proportional bidask spread (pbas) is negatively correlated with turnover by volume (trvo) and trading volume (vo). table 2 correlation matrix table 2 shows pairwise correlation matrix for the variables used in the empirical results. numbers are significant at 5% and more. variable definitions are given in appendix 1. tr vo vol mv p pbas bko anal tr 1.00 vo 0.82* 1.00 vol -0.01 0.02 1.00 mv 0.08* -0.04 -0.04 1.00 p -0.23* -0.20* 0.01 0.05 1.00 pbas -0.04 -0.19* 0.04 -0.06 -0.25* 1.00 bko -0.32* -0.21* -0.01 -0.01 -0.27* 0.01 1.00 anal 0.04 -0.04 0.02 0.02 0.13* -0.01 -0.01 1.00 5. results and analysis 5.1. the effect of ownership concentration and analysts coverage on market liquidity we test the relationship between ownership concentration, analysts coverage and market liquidity. table 3 reports the estimation results of the ols dummy year and industry effects regression models. column (1) reports the results of the proportional bidask spread (pbas). similar to the findings of jiang et al. (2011), this study shows that the coefficients on bko and anal are insignificantly positive. column (2) of table 3 documents that the coefficient on anal is -0.57 (t-stat= -2.33). in the line with the adverse selection hypothesis, the anal coefficient is positive and significant at the 1% level showing that there is a negative relationship between analysts following and market liquidity. the bko coefficient documented in column (3) is positive and significant (coefficient=-0.06, t-stat=-1.69) at the 10% level. furthermore, column (3) reveals a negative relationship between anal and market liquidity, this result is once again broadly in the line with the adverse selection hypothesis. in terms of control variables, the results are consistent with our expectations and the previous studies. columns (1) to (3) show that the return volatility is negatively correlated with market liquidity. in particular, this negative relationship is common in the literature, where firms with higher volatility are exposed to higher uncertainty and information asymmetry (black 1986; french & roll 1986). our results are in line with previous studies (e.g., poon et al. 2013; rubin 2007). the coefficient of firm size is negative and significant with proportional bid-ask spread (pbas). this negative relationship confirms that larger firms have lower information asymmetry and higher market liquidity because they are more able to diversify risk and have quick and greater access to the capital market. moreover, table 3 indicates that the share price has a significant effect on market liquidity. under the ols estimation, the negative relationship is consistent with the trading hypothesis. for instance, stoll (2000) reports a negative and relatively significant relationship between share price and market liquidity. one of the most common tests used to check for the multicollinearity problem is called the variance inflation factor (vif), which is calculated as follows: 20 grzegorz zajac http://ijcf.ticaret.edu.tr vif=1/tolerance…………………………….…………….………………………….…………………………(2) where: tolerance = 1-r2 r2 is the coefficient of determination it has been suggested that, if the vif exceeds 10, which means that r2 exceeds 90%, this indicates a multicollinearity problem for those variables in the model using market liquidity as the main dependent variables. the results of vif tests indicate that multicollinearity is not a problem in our dataset. from table 4 it is clear that all values are less than 10. from table 4, we can notice that the average vif is 1.89. consequently, this value confirms that our dataset is free from multicollinearity problems. table 3 relationship between ownership concentration, analyst coverage and market liquidity table 3 reports the results of the regressions that run the dependent variables (proportional bid-ask spread (pbas), trading volume (vo), and the turnover by volume (trvo) on block holders (bko) and analysts coverage (anal) and control variables (mv, vol, and mv). variable definitions are given in appendix 1. ***,**,* indicate significance at 1%,5%,10% levels respectively. table 4 variance inflation factors (vifs) test table 4 presents an overview of the maximum variance inflation factors (vifs) test for all research variables reported in table 3. the reported vifs are the maximum vifs obtained from the regression analyses in stata 11. pbas vo trvo anal 0.08 (1.13) -0.57 (-2.33)*** -0.76 (-5.61)*** bko 0.02 (1.55) -0.05 (-0.64) -0.06 (-1.69)* mv -0.03 (-2.51)** 0.29 (3.07)*** 0.05 (0.84) vol -0.02 (-0.53) -0.23 (3.14)*** -0.09 (-1.95)* p -0.07 (-1.69)* -0.06 (-0.35) -0.58 (-6.43)*** constant 0.08 (1.67)* 2.76 (10.67)*** 0.35 (2.24)*** industry dummy yes yes yes year dummy yes yes yes observations 1179 1179 1179 adjusted r2 0.85 0.17 0.30 pbas vo trvo bko 1.54 1.54 1.54 anal 1.04 1.04 1.04 the scope of state aid and public service obligation for airports and air carriers in the light of european law 21 http://ijcf.ticaret.edu.tr 5.2. further analysis and robustness checks this section provides a further test to confirm the prior results in the main analysis and to pinpoint any potential drawbacks about our model. in particular, this study divides the data into concentered, dispersed firms based on their blockholder ownership, and re-examines the relationship between analysts coverage and market liquidity. in fact, this check allows us to determine whether the nature of the relationship between market liquidity and analysts coverage is different between concentrated and dispersed firms. concentrated (dispersed) firms are defined as firms that have a block ownership (equal to or greater) than the median of block ownership for the entire sample of 64 firms. in table 5 panels a and b, the study reports the pooled ols year and industry dummies results for concentrated and dispersed firms respectively. with respect to analyst following, table 5 panel a reveals that the effect of analyst following on proportional bid-ask spread (pbas) is stronger and significant for concentrated firms than dispersed firms. moreover, analysts following have a more negative and significant effect on trade turnover by volume ratio (trvo) and trading volume (vo). taken together, table 5 shows that the relationship between analysts coverage and market liquidity is stronger and more significant for concentered firms than dispersed firms. existing literature has stated that concentrated firms have a higher degree of information asymmetry between insider and outsider investors, which leads to lower market liquidity (chiang &venkatesh 1988; jacoby & zheng 2010; kini & mian 1995; williams 1986). in contrast, dispersed firms have a large number of shareholders; as a result, more investors will participate in trading. consequently, this may dilute the relationship between analysts coverage and market liquidity (jacoby & zheng 2010; jiang et al. 2011). table 5 table 5 shows the results of the regressions that run the dependent variables (proportional bid-ask spread (pbas), trading volume (vo), and the turnover by volume (trvo) on blockholders (bko) and analysts coverage (anal) and control variables indicated above.. variable definitions are given in appendix 1. ***,**,* indicate significance at 1%,5%,10% levels, respectively. mv 1.06 1.06 1.06 vol 1.04 1.04;2 1.04 p 1.27 1.27 1.27 industry dummy yes yes yes year dummy yes yes yes mean vif 1.89 1.89 1.89 model intercept anal vol mv p adj.r2 panel a concentrated firms pbas 0.15 (1.69)* 0.05 (1.35) -0.01 (-0.28) -0.08 (-2.96) -0.07 (-0.90) 0.80 trvo 0.35 (1.66) -0.12 (-2.17)** 0.03 (0.42) -0.13 (-2.17)** -0.68 (-6.22)*** 0.26 vo 3.98 (15.45)*** -0.12 (-1.57) 0.11 (0.96) 0.07 (1.02) -0.61 (-3.52)*** 0.15 panel b dispersed firms pbas -0.02 (-0.63) 0.01 (1.29) -0.01 (-1.03) 0.01 (0.42) -0.09 (-2.88)*** 0.93 trvo 0.29 (2.12)** -0.04 (-0.90) 0.06 (0.94) -0.05 (-0.97) -0.57 (-4.72)*** 0.18 22 grzegorz zajac http://ijcf.ticaret.edu.tr 6. conclusion: the association between ownership concentration, analysts coverage and market liquidity consider one of the most area in the mena countries such as jordan, where the legal protection of investors is weak. the issue is particularly relevant post to the 2007-2008 financial crisis, where large shareholders and insiders have often been blamed for their greedy behavior against minority shareholders. theoretical perspectives on the effects of ownership concentration, analysts coverage and market liquidity are far from conclusive, and there is little empirical work on how analysts coverage is related to market liquidity in ase. our findings on this issue reveal that companies with more financial analysts coverage have lower market liquidity. in addition, we notice that companies with higher ownership concentration have lower market liquidity. nevertheless, the effect of analysts coverage is, however, found to be more marked in firms with high levels of ownership concentration. references amihud, y., & mendelson, h. 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(1992) ‘the challenge of institutionalization of the equity market, in recent developments in finance’, anthoney saunders, ed. (new york salomon center, new york, 1992). stein, j. (1988) ‘takeover threats and managerial myopia’, journal of political economy 96 (1): 61-80. stoll, h. (1978) ‘the pricing of security dealer services: an empirical study of nasdaq stocks’, journal of finance 33 (4 ): 1153-1172. stoll, h. (2000) ‘friction’, journal of finance 55(1): 1479−1514. tinic, s. m. & west, r. (1972) ‘competition and the pricing of dealer service in the over-the-counter stock market’, journal of financial and quantitative analysis 7 (3) : 1707-27. welker, m. (1995) ‘disclosure policy, information asymmetry, and liquidity in equity markets’, contemporary accounting research 11 (2): 801-82. williams, j. (1986) ‘financial anomalies under rational expectations: a theory of the january and small effects’ , working paper , new york university , gsb. zhou, d. (2011) ‘ownership structure, liquidity, and trade informativeness’, journal of finance and accountancy 6: 110. appendixes appendix 1: definition of the variables variable description bid (pb) the highest price for a stock in a particular day at which the market maker (i.e. dealer) is willing to buy ask (pa) the lowest price for a stock in a particular day at which the market maker (i.e. dealer) is willing to sell proportional bid-ask spread (pbas) (pa-pb)/ (pa+pb)/2 trading volume (vo) the total value of shares traded for a stock on a particular day in jd adjusted for capital action (stock split) turnover ratio (tr) the number of times that shares are traded for a stock on a particular day, calculated by dividing stock trading volume (vo) by the number of shares outstanding (wc05301) blockholders (bko) the proportional of aggregate blocks of at least 3% of the firm’s outstanding shares held by all institutional investors 24 grzegorz zajac http://ijcf.ticaret.edu.tr analysts coverage (anal) the number of analyst who follows the firms return volatility (voli) the standard deviation of daily returns share price (p) the official closing price expressed in pence market value of equity (mv) is measured as the share price on a specific date multiplied by the number of ordinary shares in an issue adjusted for capital action changes (stock split and dividend) (p * wc05301) international journal of commerce and finance, vol. 8, issue 1, 2022, 63-84 *stie, muhammadiyah jakarta, indonesia, orcid: 0000-0001-8919-198x, e-mail: herivirpat64@gmail.com **stie, muhammadiyah jakarta, indonesia, orcid: 0000-0001-7046-612x, e-mail: lela_nwm@yahoo.com ***stie, muhammadiyah jakarta, indonesia, orcid: 0000-0001-8714-9155, e-mail: wandasaputra345@gmail.com ****stie muhammadiyah jakarta, indonesia, orcid: 0000-0001-8156-5203 e-mail: hidayat.stiemj@gmail.com *****stie muhammadiyah jakarta, indonesia, orcid: 0000-0002-8224-6682 zensha_68@yahoo.com 63 does fintech literation affect cashless society and individual shopping culture? heri ispriyahadi* lela nurlaela wati** wanda saputra*** hidayat darwis**** zaenudin zaenudin***** submitted: 30.11.2021 accepted: 10.05.2022 published: 24.06.2022 abstract this research examines the impact of financial technology literacy on the phenomenon of a cashless society and the changes in individual spending culture in the millennial generation. respondents in this study are millennials, particularly those born and grew up amid technological advances. they live in different indonesian cities like jakarta, bogor, and tangerang (jabodetabek). this study employs the structural equation modelling (sem) to analyze the data. the result showed a significant positive effect of fintech literacy on a cashless society, fintech literacy on the individual shopping culture changes, cashless society on the personal shopping culture changes, and fintech literacy on the individual shopping culture changes in a cashless society. the results also show an increased cashless society; the millennials fully understand financial technology literacy. this condition will affect the transformation of the individual spending culture. in addition, the increased cashless society phenomenon will affect the culture of personal spending changes. the results are beneficial for the government’s financial technology policy. the fintech companies can use it as the evaluation material and motivation to innovate the fintech-based business. keywords: fintech literacy, cashless society, individual shopping culture, the millennial generation mailto:herivirpat64@gmail.com mailto:lela_nwm@yahoo.com mailto:wandasaputra345@gmail.com mailto:hidayat.stiemj@gmail.com mailto:zensha_68@yahoo.com international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 64 1. introduction technology has become a part of human life, and human dependence on it is irreversible. one of the technological advancements in finance is financial technology. coping with it, people need the knowledge of it. xu and zia (2012) stated that financial literacy is the financial awareness and understanding of financial products, financial institutions, and concepts regarding managing finances. currently, people make online transactions and get online services much easier due to the advancement of information technology and the fast internet penetration. consequently, it encourages people to make use of more digital financial services. this digital financial service known as financial technology is later shortened to fintech. therefore, people must act smartly by taking advantage of the ease and effectiveness of digital interactions and transactions in the digitalization era. the development of the financial technology (fintech) business has also influenced companies' appearances in the digital financial sector. the emergence of these electronic payment instruments allows people to transact without cash or the phenomenon of a cashless society (rif'ah, 2019; alonso et al., 2020). the cashless society phenomenon is not a new atmosphere since it was developed globally and nationally several years ago. the indonesian government began to support the cashless society program in 2014 when the government launched the national non-cash movement (gnnt) followed by the implementation of a comprehensive non-cash payment system for toll road payments in 2017. this government’s vision is called ‘go digital vision 2020’. the government has recently echoed its vision of creating a cashless society amid the massive cash transaction system. as a result, the program does not fully succeed. compared to such countries as sweden, china, and india, whose cashless systems are best practices, indonesia is still in the second-largest rank of cash transaction users globally. indonesia, therefore, still needs to develop the technical aspects and the knowledge of fintech continuously. fintech development is a shared responsibility of the government, companies, and the community. the goal of creating a cashless society will be achieved if fintech is used massively. the potential of digital finance will still be wide open in the momentum of the demographic bonus because the population of productive age will be dominated by generation z and millennials (kaifi et al., 2012; rappaport & stones, 2019). these generations grow up with rapid technological development, and the internet has become part of their lifestyle. international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 65 millennials are considered more able to adapt to a new culture of cashless payment because millennials are a technology-literate generation and live amid the internet. the rapid advancement of technology and information also changes people's shopping culture. they tend to use non-cash transactions. in addition to the fast technological advancement, the covid-19 pandemic also triggers a change in people's lifestyles worldwide. the differences cover the sectors of health, society, and economy. the covid-19 makes people stay at home, work from home, and do the self-isolation and social distancing. these new rule activities result in a unique lifestyle in terms of working patterns, decision-making, and shopping activities. of the three lifestyles, the shopping activity experiences an increase during the covid-19 pandemic. the central statistics agency (bps) data related to demographic and social studies showed that 9 out of 10 respondents stated that their online shopping activity rose significantly. online shopping can prevent people from being infected by the coronavirus since the cash is believed to transmit the virus. it indirectly helps bank indonesia's cashless transaction program. even though the covid-19 cases have decreased recently, people still do their online activities during the new normal implementation. the increasing business of financial technology causes the presence of digital financial companies (azarenkova, 2018; rif'ah, 2019). some digital financial products are credit cards, debit cards, and electronic money (e-money). electronic payment instruments will allow people to transact without cash, known as the cashless society phenomenon. the more fintech product knowledge the people have, the more they use the fintech, creating a cashless society. this is supported by kraiwanit et al. (2019) regarding a cashless society in thailand. it shows that income and internet use are significantly related to cashless society access. in indonesia, many small medium enterprises (smes) producing batik clothes (indonesian wax-resist dyeing cloth) have implemented non-cash payments to support digital financial literacy (citradika et al., 2019). the results of previous research regarding the influence of fintech on individual shopping culture were documented by maida (2019), stating that e-money has a positive effect on personal shopping culture. the development of e-money affects the number of new players in the world of financial services, such as fintech, and changes the indonesian consumer culture (maida, 2019). technology plays a fundamental role in the cashless payment system, and people must cope with this system. in line with this, kim and kim (2018) state that technological readiness significantly impacts perceived usefulness and perceived ease of use. international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 66 concerning the ease of use, the e-wallet has its influence. a study on the e-wallet found that the use of e-wallets was significantly influenced by the variables of convenience, social impact, and speed (chern et al., 2018). the problem in indonesia today is that the financial literacy of the indonesian people is still low. in 2016, the indonesian people's financial literacy was 29.7%, with financial inclusion of 67.8%. based on the national literacy and financial inclusion (snlik) survey, this result was conducted in 2016 of 9,680 respondents in 34 provinces. this research focuses on the millennial generation who live in the capital city of jakarta and the surrounding area with the consideration of having better financial technology knowledge than other regions in indonesia. this study aims to determine the effect of fintech literacy on a cashless society and changes in shopping culture in jabodetabek for the millennial generation. this study is different from previous studies because previous researchers have not examined the impact of financial technology literacy on changes in individual shopping culture with the increasing phenomenon of a cashless society as an intervening variable in the millennial generation. this research fills previous gap research (chern et al., 2018; kim & kim, 2018; maida, 2019; kraiwanit et al., 2019; li et al., 2020; sreelakshmi & prathap, 2020). 2. theoretical background and literature review 2.1. financial technology literacy the presence of financial technology will help people who have problems with their financial management. this happens because fintech will help improve people's financial literacy, marked by an increasing understanding of financial products. at the same time, the definition of financial literacy is the combination of awareness, knowledge, skills, attitudes, and behaviours needed to make financial decisions with the ultimate goal of achieving individual economic well-being (oecd/infe 2015). the rapid progress of information technology, especially internet penetration, has triggered the increasing presence of financial technology. fintech itself is a technological innovation in the financial sector that serves as the modern-technology-based financial services; it was defined by the national digital research centre (ndrc) in dublin, ireland. the world bank (2016) defines fintech more broadly as an industry consisting of companies that use technology to make the financial system and financial services more efficient. financial literacy is considered international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 67 an essential adjunct to promoting financial inclusion, consumer protection, and financial stability (vijayvargy & bakhshi, 2018; akileng et al., 2018). the financial services offered by fintech are increasingly diverse, ranging from crowdfunding, loans, payments, insurance, and remittances. all of these have become a form of revolution in the start-up business. fintech financial services make business activities more efficient, and consumers feel more comfortable because they can transact without being limited by time and place. by relying on smartphones, all business transactions can be done quickly without meeting face-to-face. as an illustration, crowdfunding provides an opportunity for you to get funds from all over the world. even the funds you receive can come from people you don't know because fintech makes it easy to send money across countries or internationally. for example, such payment services as paypal will automatically change the currency exchange rates; those in america can easily buy goods from indonesia. based on this exposure, consumer behaviour and expectations can vary with the presence of fintech. 2.2. cashless society the cashless society is seen as an alternative medium for payment other than cash (hard cash) used in trade transactions for goods or services. in this case, the exchange of money between the parties involved in the transaction is replaced through electronic systems, such as electronic payments (e-payments), credit cards, and other electronic payment models (rif'ah, 2019). there are several benefits of using mobile money (transactions or payments using mobile phones) in public benefit distribution schemes. the benefits include increased efficiency, transparency, and traceability of disbursements (thompson, 2017). a cashless society is a new social setting that does not view money as such physical forms as sheets of paper or metal coins. instead, it uses a new system called electronic money (e-money) as a medium transaction. the emergence of the concept of a cashless society is also based on the fact that the physical use of cash transactions requires a lot of costs, such as the issuance of physical money, circulation and distribution, maintenance, and the replacement of damaged/obsolete money. 2.3. changes in online shopping culture and behaviour the industrial revolution 4.0, which uses technology and the internet, is the economic driven to reform the economy, culture, and the spending behaviour of individuals all over the world. the international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 68 purchase of goods and services through the internet is a form of online shopping behaviour which has become a new culture of buying goods or services. online sales are growing in use, effectiveness, security, and popularity. consumers don't need to spend a lot of energy when shopping online; just by looking at the website, they can immediately complete the transactions (dedy & dita, 2018). online shopping behaviour has increased since the millennials have changed their shopping habit from offline to online shopping. they were born and grew up amid the rapidly developing digital world, which causes them to become very familiar with information technology. millennials are individuals born in the 1980s and 2000s (kaifi et al., 2012). 2.4. hypothesis formulation 2.4.1. the effect of financial technology literacy on the increasing phenomenon of cashless society the growing financial technology business influences the increasing number of digital financial products. digital financial products are debit cards, credit cards, or electronic money (e-money). if the fintech business can develop, it indicates an increase in literacy and knowledge of the fintech product itself. more people have an excellent literacy level (well literate) towards fintech products. it will affect the number of fintech companies that have sprung up; thus, the massive use of fintech creates a cashless society (rif'ah, 2019). based on several studies, the main factors affecting financial literacy are gender, education level, occupation, region, and wealth. however, kharchenko (2011) found that age and area of residence are not significant in explaining financial literacy. research conducted in thailand by kraiwanit et al. (2019) shows that age, education, income, and internet use are significantly related to cashless society access. this illustrates that education is an essential factor affecting financial literacy and a cashless society. research conducted by lie et al. (2020) strengthens this statement because the results of the research state that financial knowledge has a positive effect on mobile payments. a study of young people conducted by trinugroho et al. (2017) showed that the perception of readiness was positively correlated with the quality of supporting facilities. more educated, younger people had high enthusiasm for this cashless system. in addition, the hbm (health belief model) construct, namely perceived severity, perceived susceptibility, and self-efficacy significantly affects the adoption/confirmation of mobile-based payments (sreelakshmi & prathap, 2020). international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 69 based on the description above, the first hypothesis is: h1: financial technology literacy has a positive and significant impact on the increasing phenomenon of a cashless society 2.4.2. the influence of financial technology literacy on individual shopping culture changes people quickly accept the fintech services due to their various benefits such as practicality, convenience, and speed. it is even believed that financial innovations carried out by fintech increase financial literacy and financial inclusion in households. an empirical study conducted by maune et al. (2020) shows that financial inclusion positively impacts economic growth. in addition to this phenomenon, fintech is incomparable to other startups, and it can fundamentally change the business landscape and economy. fintech also has an essential role in changing consumer behavior and expectations. fintech benefits the economy; it increases consumer satisfaction with reduced transaction costs. it is a source of income for non-cash payment service providers. it is a time-economized transaction, and it improves economic growth and welfare levels. research conducted by kim and kim (2019) showed a positive relationship between technological advances and consumer online shopping culture changes. their research reveals that the benefits and conveniences offered by technology readiness and services are the driving force for the intention to continue using these services. thus, it has enormous potential to change the consumer online buying culture. knight (2017) emphasizes that online transaction behavior will reach a wider community if fintech can provide more financial services. the presence of fintech also changes individual online shopping behavior in muslim countries. biber’s research (2019) found increased financial inclusion, especially among women in muslim countries. based on the theory and previous research, the second hypothesis is: h2: financial technology literacy has a positive and significant effect on individual shopping culture changes international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 70 2.4.3. the influence of increasing cashless society phenomenon on individual shopping culture changes there are still many studies on a cashless society's nature and practice, although there is not an exact definition of it. a cashless society is a new group of people who do not perceive money as physical forms of sheets of paper or metal coins. electronic money, known as e-money, replaces the physical structures of money for transactions. the emergence of a cashless society is also based on the fact that the physical use of cash in transactions requires a lot of costs for the issuance of physical money, circulation and distribution, maintenance, and the replacement of damaged/obsolete money. in addition, the awareness of potential frauds and crimes also makes people realize the usefulness of a cashless platform. in this way, the government can prevent illegal transactions and practices by managing and supervising the financial and trade transactions through electronic reports. the development of e-money affects the number of new players in the world of financial services such as fintech and changes the indonesian consumer culture. user motives in e-money are classified into two motives: because-of motive and in-order-to motive. the because-of motive users consist of a desire not to be stuck in traffic congestions, a willingness to follow the rules of payment methods in public transportations, a passion not to hold cash, and a desire to shorten the time of the transaction process. on the other hand, in-order-to motive users consist of three motives: practical and efficient transaction process, getting the desired discount, and having transaction records. goel et al. (2019) argue that professionals and business people use digital payment methods. offers and cashback are among other factors influencing people to use digital payment platforms. in particular, the one percent rise in the population using cell phones may increase the income by about 0.3 percent. the one percent increase in financial inclusion has a dual impact on revenue (ghosh, 2016). meanwhile, convenience, social influence, and speed significantly influence students who use the e-wallet, but factors of security and gender have no significant effect on e-wallet usage (chern et al., 2018). based on this study, the subjective elements and the perceived usefulness of online transactions influence the intention to shop online. lim et al. (2016) found a positive impact of purchase intention on online shopping in their research. international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 71 shopping or making transactions without using cash have become commonplace for the millennial generation. they are accustomed to using electronic devices such as debit cards, credit cards, or electronic money to make payments. ultimately, the cashless society phenomenon has altered millennials' current consumption patterns and behavior. based on the previous theory and research, the third hypothesis is: h3: the cashless society phenomenon has a positive effect on shopping culture changes. 2.4.4. the influence of financial technology literacy on individual shopping culture changes through the cashless society phenomenon the industrial revolution 4.0, which uses technology and the internet, is the economic-driven to reform the economy, culture, and the spending behavior of individuals all over the world. the purchase of goods and services through the internet is a form of online shopping behavior, and it has become a new culture of buying goods or services. online sales are growing in use, effectiveness, security, and popularity. doing a successful online business, we need to perform the proper strategy to attract internet users and keep them in our business tract; the appropriate approach is to fully understand the consumers' online purchasing behavior. current technology has developed quite rapidly, influencing the payment system development, especially the non-cash payment system. the non-cash payment system currently replaces the cash payment system in indonesia's economic transactions. the development of e-money through information technology innovation continues to create a cashless society. this community uses non-cash transactions by taking advantage of these electronic transaction facilities. most young people still do not entirely understand the financial technology term. they merely know it in the meaning of words and cashless knowledge for young people. the go-pay electronic transaction system run by the indonesia online transportation service has not reached many consumers, leading to an unlucky prospect. however, the tam theory explains that this condition can be better when researchers keep providing education on the cashless payment benefits to all people (ferdiana & darma, 2019). meanwhile, the study shows that mobile money adoption and its direct or indirect use affect financial inclusion (gogia & agrawal, 2016; okella et al., 2020). besides, the adoption and the use of mobile money and digital consumer protection influence financial inclusion. this is in contrast to the research conducted by putri international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 72 et al. (2019) called the method of payment adoption in indonesia. e-commerce launches effortless payment methods, which are frequently used in e-commerce transactions; it was found that e-commerce customers are less interested in the payment methods because they are charged. the higher an account owner feels secure over a payment method, the higher their balance. a different study was also conducted by kumar et al. (2019) to predict online repurchase intentions with e-satisfaction as a mediator, showing that security, privacy concern, trust, and ease of use (eou) has a significant positive relationship with repurchase intention. these findings also reveal that electronic satisfaction has a fully mediating effect between security and repurchase intention and trust and repurchase intention. the development of emoney supports the cashless society by using these electronic transaction platforms (maida, 2019). based on the explanation above, the fourth hypothesis can be obtained as follows: h4: financial technology literacy has a positive effect on individual shopping culture cultures through the cashless society phenomenon based on previous theory and research, the author makes a research framework in the following figure: figure 1. research framework scheme cashless society phenomenon individual shopping culture h2 h3 h4 financial technology literacy h1 international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 73 3. methodology the data in this study were from questionnaires distributed to millennial respondents living in the greater jakarta area. the data collection took three months, from may to july 2020. this research is causality research because it intends to reveal the influences of a dependent variable and independent variable. the sample in this study was 100 millennials in jabodetabek. the sample size refers to the hair formula because the population size is unknown. the sampling method uses hair (2010:176) which explains that if the sample size in the study is too large, for example, 400, the approach to get the goodness of fit measures will be challenging. hair recommends sampling a minimum of 5-10 observations for each parameter. the following is an operating table of research variables: table 1. operational definition of variables variable variable concept indicator financial technology literacy (lf) independent variable fintech literacy is a priority level in increasing the cashless society phenomenon and changing individual spending in the millennial generation in indonesia. ansori m, 2019: 5; wildan, 2019. 1. fintech knowledge 2. fintech services 3. fintech development 4. fintech potential 5. fintech barriers cashless society phenomenon (cs) intervening variable a cashless society is a term that refers to people who transact without physical money; instead, they use the digital financial transaction. in daily transactions, people do not use real money, but digital money. bintarto and elshabyta, 2018; rif'ah, and sifwatir, 2019. 1. the trigger for a cashless society 2. the influence of the cashless society 3. benefits of a cashless society 4. the weaknesses of a cashless society individual shopping culture changes (sc) dependent variable the industrial revolution 4.0 which uses technology and the internet is the economic-driven to reform individuals' economiy, culture, and shopping behaviour in the world. harahap & dita, 2018; maida, 2019 1. individual attitudes towards online shopping culture 2. lower costs 3. convenience, timesaving 4. there is an increasing trend of online shopping. 5. individual confidence level 6. ease of use of the system. international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 74 7. perceptions and influences of people around you. 8. uncertainty in using the system source: compiled by authors the data analysis used in this research is the structural equation model with smart partial least square software. the research model to test direct and indirect hypotheses is as follows: cs = β1lf + ε1…. (3.1) sc = β2lf + β3cs + β4lfcs + ε2…. (3.2) information: cs = cashless society lf = fintech literacy sc = shopping culture lfcs = indirect effect of fintech literacy ε = error to test the relationship between variables (hypothesis testing), a statistical value is used to compared the table value or significant value (p value). if the t-statistic value is greater than the t-table, or the significance value (p-value) is less than 0.05, the hypothesis can be accepted. conversely, if the t-statistic value is smaller than the t-table, or the significance value (p-value) is more than 0.05, the research hypothesis is rejected (wati, 2018). 4. results and discussion 4.1. descriptive analysis results table 2 below describes the minimum, maximum, average, and standard deviations of fintech literacy, the phenomenon of a cashless society, and individual spending culture. international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 75 table 2. descriptive statistics variables n minimum maximum mean std. deviation fintech literacy (fl) 100 25 50 44.66 6.738 cashless society (cs) 100 21 50 45.42 5.817 individual shopping culture (sc) 100 23 50 44.42 6.888 source: results processed by smart pls. the descriptive statistical data above shows that the minimum value of fintech literacy (x) is 25, the maximum value of fintech literacy is 50, the average is 44.66, and the standard deviation is 6.738. the individual shopping culture (y) has a minimum value of 23 and a maximum value of 50. the average shopping culture is 44.42, and the standard deviation is 6.888. the cashless society (z) phenomenon has a minimum value of 21 and a maximum value of 50. the average value of the cashless society is 45.42, and the standard deviation is 5.817. 4.2. validity and reliability testing (outer model) table 3 below explains the results of outer loading for each indicator to test the validity of the research instrument. table 3. validity testing variable indicator loading t-statistics information fintech literacy shopping culture cashless society fintech literacy (lf) x.1 0.867 24.402 valid and significant*** x.2 0.877 34.228 valid and significant*** x.3 0.882 36.464 valid and significant*** x.4 0.782 15.618 valid and significant*** x.5 0.858 26.625 valid and significant*** x.6 0.918 42.309 valid and significant*** x.7 0.873 26.070 valid and significant*** x.8 0.908 42.538 valid and significant*** x.9 0,867 27.839 valid and significant*** x.10 0,775 30.360 valid and significant*** individual shopping y.1 0.895 30.360 valid and significant*** y.2 0.926 60.898 valid and significant*** international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 76 culture (sc) y.3 0.938 77.436 valid and significant*** y.4 0.844 22.329 valid and significant*** y.5 0.621 6.938 valid and significant*** y.6 0.810 17.550 valid and significant*** y.7 0.813 16.272 valid and significant*** y.8 0.831 18.751 valid and significant*** y.9 0.737 14.049 valid and significant*** y.10 0.761 14.635 valid and significant*** cashless society (cs) z.1 0.751 11.190 valid and significant*** z.2 0.719 8.381 valid and significant*** z.3 0.736 8.699 valid and significant*** z.4 0.817 11.558 valid and significant*** z.5 0.760 13.410 valid and significant*** z.6 0.825 13.800 valid and significant*** z.7 0.853 22.416 valid and significant*** z.8 0.925 50.687 valid and significant*** z.9 0.862 21.965 valid and significant*** z.10 0.696 10.583 valid and significant*** ***significant level at ꭤ 1%, **significant level at ꭤ 5%, *significant level at ꭤ 10% source: results processed by smart pls. the factor loading has met the convergent validity; namely, the indicator value is above 0.5. table 4 below describes the results of reliability testing. table 4. reliability testing variable ave composite reliability cronbach's alpha fintech literacy (lf) 0.743 0.966 0.961 individual shopping culture (sc) 0.677 0.954 0.945 cashless society (cs) 0.636 0.945 0.936 source: results processed by smart pls the reliability testing in table 4 reveals that the composite and cronbachs alpha for variables of fintech literacy, cashless society, and individual shopping culture is more than 0.9. it means that the indicators used in each variable have good reliability in measuring the construct. likewise, the average variance extracted (ave) for variables of fintech literacy, individual shopping culture, and cashless society is above 0.5. thus, it assumes that the variables of financial technology literacy, individual shopping culture, and the cashless society have discriminant validity of high results processed by smart pls. international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 77 4.3. the goodness of fit model (inner model) source: results processed by smart pls the value (r2) of the cashless society phenomenon variable is 0.646, which means that the cashless society phenomenon can be explained by the financial technology literacy variable of 64.6%. other factors not included in this study contributed 35.4% to the effect of a cashless society. the individual shopping culture variable is 0.690, which means that the variation in personal shopping culture can be explained by the financial technology literacy variable and the cashless society phenomenon by 69.0%. in comparison, the remaining 31.0% is determined by other variables not included in the research model. meanwhile, the predictive-relevance value for the structural model in this study was 0.891 or 89.1%, meaning that the model could explain the changes in individual shopping culture associated with the variable of financial technology literacy and the phenomenon of a cashless society. therefore, since the model is splendid or has an outstanding predictive value, it can be employed for hypothesis testing. table 6. hypothesis testing the relationship between variables parameter coefficient tstatistics result fintech literacy => cashless society 0.804 23.613 supported *** fintech literacy => individual shopping culture 0.676 6.553 supported *** cashless society => shopping culture 0.183 1.705 supported ** fintech literacy => shopping culture through cashless society 0.147 1.669 supported ** ***significant level at ꭤ 1%, **significant level at ꭤ 5%, *significant level at ꭤ 10% source: results processed by smart pls. the table above explains that the path parameter obtained from the impact of the financial technology literacy variable on the cashless society phenomenon is 0.804 with a statistical value of 23.613> 1,660 at the significance level ꭤ= 0.05 (5%). there is a positive and significant table 5. the goodness of fit model (r2) variable r. square cashless society 0.646 individual shopping culture 0.690 predictive relevance (q2) 0.891 international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 78 influence between financial technology literacy and the cashless society phenomenon. the value of 0.804 in the parameter coefficient implies that the better the fintech literacy, the more cashless society will increase. this supports the first research hypothesis, stating a positive and significant influence between fintech literacy and the cashless society. the results of this hypothesis are in line with previous researchers' statements. according to rif'ah (2019), the development of financial technology business has also influenced companies' emergence in the digital financial sector. one of these digital financial products is electronic devices such as debit cards, credit cards, or electronic money (e-money). the emergence of electronic payment instruments will allow people to transact without cash. or it is known as the cashless society phenomenon. the results of the second hypothesis indicate a positive and significant influence between financial technology literacy and individual shopping culture. this study's results align with maida's (2019) research regarding the effect of e-money on personal shopping culture. it explains that e-money has a positive impact on individual shopping culture. thus, excellent financial technology literacy can increase the chances of the individual shopping culture in the millennial generation in jabodetabek. the third hypothesis shows a positive and significant influence on the phenomenon of a cashless society and the individual shopping culture changes, and the third hypothesis is accepted. the results of this study are in line with maida (2019), stating that e-money has a significant effect on the individual shopping culture changes. furthermore, this study found that the development of e-money affects the number of new players in financial services such as fintech and changes the indonesian consumer culture. in other words, an increased cashless society phenomenon will change the individual shopping culture of the millennial generation in jabodetabek. the results of the fourth hypothesis indicate that there is a positive and significant influence between financial technology literacy and the individual spending culture through the cashless society phenomenon. this study's results are in line with the research conducted by eroglu (2014) regarding the internet consumer behavior towards the changes in shopping culture. he states that the internet significantly affects shopping culture changes, and online shopping also eliminates geographic boundaries and provides users with more information, less time, and cost. in addition, excellent financial technology literacy plays a role in changing the individual spending culture and creating a cashless society in the millennial generation. international journal of commerce and finance ispriyahadi & wati & saputra & darwis & zaenudin 79 5. conclusion this research examined the impact of financial technology literacy on the phenomenon of a cashless society and the changes in individual spending culture in the millennial generation in jabodetabek. in this case, the cashless society phenomenon is an intervening variable. the analysis results show that financial technology literacy positively affects the increasingly cashless society phenomenon. this means that the more people understand financial technology correctly, the more cashless society is. the second hypothesis indicates a direct and positive relationship between financial technology literacy and individual shopping culture changes. it means that adequate financial technology literacy will increase the millennial generation’s shopping culture in jabodetabek. finally, the third hypothesis result shows a positive influence between the cashless society phenomenon and the changes in individual spending culture. as a result, the millennial generation in jabodetabek, who implements the cashless society, will change the shopping culture from conventional to digital methods. the fourth hypothesis finds a positive influence between financial literacy technology and the individual spending culture changes through the cashless society phenomenon. this indicates that financial technology literacy indirectly affects personal spending culture changes through the cashless society phenomenon. based on the empirical testing, millennials can adjust quickly to the digitalization culture because they are technology literate and live amid the financial technology to set up the cashless society and change the individual shopping culture (offline to online cultures). moreover, the government can consider the results of this study when making policies associated with financial technology, and the fintech companies may utilize these findings to evaluate, motivate and innovate the fintech business. 6. limitations and further research the small number of samples, types of respondents, and the little questionnaire distributed to only the millennial generation in jakarta, bogor, depok, tangerang, and bekasi become the limitations of this study. furthermore, this research only went through surveys 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commerce and finance, vol. 6, issue 1, 2020, 70-80 70 analysis of financial structure of cooperative organization in nigeria nurudeen afolabi sofoluwe olabisi onabanjo university, ago-iwoye, ogun state, nigeria bamidele ilo olabisi onabanjo university, ago-iwoye, ogun state, nigeria abstract this study analysed financial structure of workers cooperatives using university based cooperatives as a case study. the paper employed secondary data from annual reports and accounts of the cooperatives between 2012 and 2018 accounting years and uses descriptive statistics to analysis the data. the financing structure of the cooperatives consists of share capital, reserves and savings. the assets structure of the cooperative consist of outstanding loans to member-patrons, cash and stock of trading items. further analysis shows that the trend of share capital as a component of financing structure was increasing more consistently over the period. keywords: finance, workers cooperative, assets, university, nigeria. jel classification: g32, j54, p13 1. introduction cooperatives, including enterprises owned by workers, could play significant roles in repositioning an economic system as a whole, in addition to generating another form of social governance. this, in addition to the rising ideas of democracy in various business establishments and organizations, have brought about renewed interest in cooperativism in various academic and community circles (alperowitz, 2013). among several factors to which economic and social needs of individuals could be met, cooperation among workers is vital. however, skepticism remains on the capabilities of workers in organized institutions to realistically own and manage successful business. relative to all existing types of cooperatives, workers-owned cooperatives appear to attract higher level of involvement from employees (perotin, 2015). in such arrangement, many employees are able to contribute capital and labour to the development of their cooperative. in workers’ cooperative, two main forms of participation exists: involvement in decision-making and policy formulation, and shared equity which includes dividends, and individual financial account (cheney et al., 2014). in recent years, and following declining fortunes from direct employment into formal institutions, increasing number of cooperative groups are changing their business orientation from rochdalian and more conservative approach to conventional and profit driven self-help organizations (hendrikse & veerman, 2001). in this circumstance, financial structure of such cooperatives is modelled to mirror investors owned firms while retaining specificity of cooperative organization. expectedly, changes in business and financial orientation of a cooperative group could results in increasing demand for both short term and long term needs of members-patrons of cooperative firm. but, undue financial pressure may results most especially in the presence of risks that are known to be associated with conventional business orientation. the question is whether workers cooperative with primary obligations to their employers in an organized institution could put up additional capabilities to meet both the short and long term obligations to members who are also the patrons. hence, the need for understanding financial structure of cooperatives set up and managed by workers using higher institution of learning as a case study. despite the view held by a number of scholars (anheier & salamon, 2006; levi & davies, 2008) that cooperatives societies belong to nonprofits organization, largely due to its principles and market operations, its contribution to social economy cannot be ignored (defourny and nyssens, 2006). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e analysis of financial structure of cooperative organization in nigeria 71 in the financial literature, the overall impact of firms’ financial leverage on the cost of capital to business enterprise is contentious. but, it is traditionally expected that a business enterprise can lower the cost of capital by substituting debt for equity. consequently, optimum financial structure that reduces cost of capital is expected. while the importance of financial structure of conventional firms has been widely debated since the research efforts of myers (1984), little attention has been paid to the relevance of financial structure to cooperative business enterprise. for a healthy business enterprise, an optimum financial structure is required to provide direction to decisions on asset financing, cost and risks. in recent times, limited studies have analysed financial structure of cooperative firms. the work of kassali, adejobi and okparaocha (2013) was narrowed to agricultural cooperatives with overall interest in financial performance. although their findings indicates negative effect of financial measures such as loan and cooperative size on performance, understanding the financial structure of cooperatives was suggested as crucial to projecting cooperative financial performance. earlier, hendrikse and veerman (2001) tested applicability of transaction costs theory to financial structure of marketing cooperatives. they found less favourable terms for marketing cooperatives compared to conventional firms with respect to outside equity. in this study, we examine the trends in financial structure of cooperatives organized and managed by university workers. we also analysed the capabilities of the cooperatives to meet short term and long term obligations to the members using university based cooperatives as a case study. it is expected that the outcome would lay a clear premise for understanding the nature of financial strength of cooperatives organized by labour. also, the findings should provide insights into financial policy formulation for future financial strategies of cooperatives. the rest of the paper is arranged in sections; section two covers review of literature on cooperatives in general and workers cooperatives specifically. it reviews theoretical underpinning of financial structure and the linkage between financial structure and workers cooperatives. section three presents the methodology including the data for the study. these two sections are followed by results, discussion and conclusions. 2. literature review prior to the internationally acclaimed definition of cooperatives by ica (1995), a number of scholars have defined and conceptualized cooperatives in several ways. although the principles and practices of cooperatives are widely acknowledged, modern economic changes suggest that the appropriate definition of cooperatives could better be understood if the structure and types of cooperatives are put into perspective. for instance, ica (1995) put the definition of cooperatives as “an autonomous association of people united voluntarily to meet their common economic, social and cultural needs as well as aspirations through a jointly-owned and democratically controlled enterprise”. the definition of ica puts up a number of issues that are specific; it implies cooperatives are only formed by people who have common challenges and needs. also, the management structure of workers cooperatives especially in government controlled institutions does not make it absolutely independent of discreet monitoring. nonetheless, the implied definition of cooperatives as economic enterprises (galor, 2003) initiated and owned by members provides the basic linkage to financial structure assessment. to this end, valetinov and lliopoulos (2013) argued for understanding of cooperatives from three economic perspectives. the perspectives are drawn from early proposition of nourse (1922) and emelianoff (1942). they viewed cooperative as “a form of vertical integration to serve the members, a distinct firm from members’ individual business and a coalition of people”. the ensuing argument emanated from the principle of cooperative-operation at costwhich implies that a cooperative firm neither incurs profit nor loss. based on this, cooperative could be modelled as a business unit from multi business entities thereby establishing rules and decisions for cooperative pricing and output (cook, 1995). economic realities underlined the motives for cooperative formation to achieve desired financial leverage. some of these include need for risk reduction (lliopoulos, 2009), need to manage transaction cost in business (hansmann, 1996; valentinov, 2007), need for improved marketing margins (cook & lliopoulos, 1999), opportunities offered by scale economies or increased power of bargaining (ortmann & king, 2007) and avoidance of market power that is usually wielded by contractual partners in the business chain (valetinov & lliopoulos, 2013). a number of theoretical perspectives have been put into the analysis of financial structure of firms. mackay & phillips (2005) base their work on competitive equilibrium models and found that financial structure decisions are nurudeen afolabi sofoluwe not independent of risk and technology choices of business enterprise. in addition, the three interdependent decisions are dependent on the positions of the firm in its industry. the implication of the finding is that financial structure of workers cooperatives can only be assessed through identification of their position in the broad cooperative entities-producers and service cooperatives. sexton and iskow (1993) argued that ratios as financial measures are devoid of sound economic theories and on the basis that cooperatives are only a vertically and jointly integrated entity. hence, such entity may not be suitable for the peculiarities of financial ratio analysis. but, the argument does not take into consideration an important dimension of cooperatives which emphasizes management of cooperative business entity. even in a case where such entity will be managed by elected governance members or board in replica to investors owned firms. also, while cooperative is truly a vertical entity of members, suitable financial measures for cooperatives may actually depend on the type and nature of the cooperatives. in addition, some cooperatives in modern times do exhibit similar behaviour to investors owned firm (soboh et al., 2009). consequently, financial ratios are applicable to cooperatives as business enterprise. mateos-ronco and guzman-asuncion (2018) considered financial decisions of agricultural cooperatives and used financial ratios to determine long term financial decisions of agricultural cooperative firms. decisions of the sampled were closer to pecking order theory with equity capital that pushes them to debt to fund future growth. the review of extant literature leave a gap that suggest the need for detail analysis of financial structure of cooperative organization. 3. methodology we employed descriptive survey design for the study. with specific focus on university based cooperative which is owned and managed by academic staff of olabisi onabanjo university, ago–iwoye, ogun state, nigeria. in the history of workers cooperatives in nigeria, our case study is one of the foremost and functional workers’ cooperatives in nigeria. the sampled cooperative firm was established in 2002 as olabisi onabanjo university academic staff (ago-iwoye) co-operative multipurpose society limited. it attained cooperative legal status in 2004. it currently has five hundred and ten (510) members comprising 386 male and 124 female staff-members as at december, 2018 (table 1). although the cooperative became legally functional in 2004, the financial record only became standardized from the year 2012. hence, data for the study were sourced from the annual accounts and statistics of the sample cooperative firm from that period. the data covers the period of seven (7) years between 2012/13 and 2018 cooperative business years. the data were secondary in nature. information gathered covers data on current assets, current liabilities, fixed and total assets, as well as the cooperatyive investment over the sampled period. the data collected measure the cooperative capacity to meet short term obligations of the member-patrons. descriptive statistics were largely employed to analyze the data. 4. results and discussion 4.1. characteristics of the sampled cooperative: membership the sample cooperative has skewed distribution across gender over the study period. the number of male membership is far more than female. for instance, there is a record of 284 male to 85 female in the period between 2013 and 2014 accounting year. this represented a difference of 199 in favour of male. the result perhaps suggests gender imbalance in the cooperative’s industry sector in the country. it also depicts gender imbalance in the employment of the university housing the cooperative and perhaps the university education sector in the industry. the data reflects the same observation for the succeeding years as there are more male patrons of workers cooperative than female. the data show high possibility of female exclusion from employment bracket in the study area. the period also witnessed decline in membership from 386 to 369, representing a decline by 17. a possible reason could be work mobility of members from the location of the cooperative settings to another work place or non attractiveness of cooperative ideals to the members. although there is an increase in membership in the succeeding years by 50 cooperators, the data shows an increase at a decreasing rate of additional members to the workers cooperative as shown in table 1. table 1: description of sampled cooperative firm period (year) membership (% change) male female analysis of financial structure of cooperative organization in nigeria 73 2012 386 nc nc* 2013 369 (-17) 284 85 2014 419 (50) 324 95 2015 463 (44) 353 110 2016 479 (16) 365 114 2017 492 (13) 376 116 2018 510 (18) 386 124 source: annual reports of the sampled cooperative firm (2013-2019) *ncnot categorized 4.2. financial structure of workers cooperatives the financial structure of the sampled workers cooperative is presented in table 2. the current assets progressively increased over the period to reach n798.724 million ($2.219 million) in the year 2018. the total assets of the cooperative firm at the end of the study period (2018) stood at n811.860 million ($2.255 million). however, the investment flow is not impressive as constant values were recorded from the period 2015 to 2018. although the current liabilities increases over the period, the rate of increase is minimal. the estimates of percentage change in the financial series is presented in table 3. the current assets of the worker cooperatives show over 100% increase (117.189%) over the sample period (2012-2018). however, the fixed assets of the cooperative increased by 30.488% over the period. the overall assets of the sampled workers cooperative increased by 117.408% over the period under study. the liabilities has reduced per cent value of (-78.532%) (table 3). table 2: balance sheet of workers cooperatives (n 360 =$1)* year ended 2012 2013 2014 2015 2016 2017 2018 balance sheet asset (n million) current asset 367.755 ($1.022) 394.196 ($1.0949) 464.807 ($1.2911) 522.361 ($1.451) 573.018 ($1.5917) 689.949 ($1.917) 798.724 ($2.219) fixed asset 5.671 ($0.016) 6.184 ($0.017) 6.589 ($0.018) 6.755 ($0.018) 6.986 ($0.019) 7.258 ($0.020) 7.400 ($0.021) investment 5.738 ($0.016) 5.737 ($0.016) 86.748 ($0.241) 5.737 ($0.016) 5.737 ($0.016) 5.737 ($0.016) 86.748 ($0.241) total 373.427 400.380 558.145 534.853 585.741 702.943 811,861 current liabilities (n) 373.426 ($1.037) 400.380 ($1.112) 459.413 ($1.276) 73.0723 ($0.203) 76.247 ($0.212) 77.469 ($0.212) 80.168 ($0.223) source: annual reports and accounts of the cooperative * values are in millions table 3: changes in the balance sheet (2012-2018) (n 360 = $1) variables 2018 n($) millions 2012 n($) millions difference n($) millions % change asset (n) current asset 798.724 ($2.219) 367.755 ($1.022) 430.969 ($1.197) 117.189 fixed asset 7.400 5.671 1.729 30.488 nurudeen afolabi sofoluwe ($0.021) ($0.016) ($0.005) total 811.861 ($2.255) 373.427 ($1.037) 438.434 ($1.218) 117.408 current liabilities (n) 80.168 ($0.223) 373.427 ($1.037) -293.259 ($-0.815) -78.532 source: computed from the cooperative annual reports and accounts 4.3. description of financial structure of the sample cooperative the descriptive statistics of the balance sheet is presented in table 4. the average current assets of the sample workers cooperative is 1.51 in million us dollars over the sampled period. this represents cash, goods or items having a short life which are the most important current assets of the cooperative. the value of the current assets is more than fixed assets which stood at 0.02 million dollars. the higher value of the current asset suggests that the workers cooperative give more priority to liquidity. the cooperative only shows record for current liabilities and the value stood at $0.61 millions over the sampled period. since the value of the current assets is greater than the current liabilities, it could be inferred that the cooperatives lay more emphasis on staying liquidworkers are financially prudent in the management of their cooperative. this is an indication of future success and sustainability of the workers cooperative. however, the investment flow is low at 0.04 million dollars over the sample period. this suggests that opportunity to grow the cooperative and generate desirable employment potential may be limited. the standard deviation of all the variables indicates stability of the workers cooperative effort over the years. with the exception of investment variable that has higher standard deviation than its mean values, all other values of the deviation are expectedly lower than that of the mean. over the period under study, investment value of the cooperative is the lowest relative to other balance sheet variables. the minimum fixed asset generated is 0.02 million dollars. comparative of current assets to current liabilities show that the minimum value of the current assets is 1.02 million us dollars while that of current liabilities is 0.20 million us dollars. the higher value of the current assets relative to current liabilities suggests that the sampled workers cooperative has higher working capital, implying higher liquidity for the business albeit in the short run. the maximum value is observed with current assets which stood at 2.22 in million us dollars. the maximum for the fixed assets over the period is $0.02 million us dollars which also equal the minimum value observed for the same period. the maximum value of investment is 0.24 million us dollars over the period. table 4: description of financial structure of the sample cooperative (360n = 1$) (’million) variable mean* std. dev. min max current asset n 544.40 ($1.51) n 156.67 ($0.44) n367.76 ($1.021) n798.72 ($ 2.22) fixed asset n 6.69 ($0.02) n 0.61 ($0.00) n 5.67 ($0.02) n 7.40 ($0.02) total asset n 566.76 ($1.57) n155.53 ($0.43) n 373.43 ($1.04) n 811.86($2.26) investment n 15.67 ($0.04) n 31.46 ($0.09) n 0 ($0) n 86.75 ($0.24) current liabilities n 220.03 ($0.61) n 180.52 ($0.50) n 73.07 ($0.20) n 459.41 ($1.28) *1$ = n 360 source: data analysis 4.4. breakdown of financing and asset structure of cooperatives 4.4.1. financing structure of cooperatives results in table 5 shows the financing structure of the cooperatives. the financing of the cooperatives rests on capital contributions from members in form of share capital, reserves and savings. the overview of capital contribution values indicates that the share capital of members generally increased over the period under study suggesting an increase in members of the university community showing preference for financial transaction with cooperative organization. the capital contribution grew from $0.258 millions dollars in 2012 to a high value of analysis of financial structure of cooperative organization in nigeria 75 $308.258 millions dollars in 2018. this suggests high responsiveness of university members to capital contributions in the cooperatives. similarly, the reserves also increased over the period from $0.106 in 2012 to $0.306 in 2018. in the cooperative structure, the reserves are meant to fund fixed assets need of cooperative organizations. savings as a difference between cooperative earnings and expenses also increased from $0.179 to $0.577 over the sampled period. the percentage changes in the financing structure is presented in table 6 and illustrated in figure 1 to 3. with the exception of years 2014 and 2015, the percentage changes in capital contribution of members to cooperative could be described as relatively consistent. aside the observed exceptions, the changes range from maximum of 22.98% to minimum of 16.21% over the sampled period. although, higher percentage changes is observed fro cooperative reserves as form of financing, the successive changes in the value is also relatively consistent. while the percentage changes in the values of savings could be said to be irregular, the trend of changes is relatively consistent. table 5: financing structure of cooperatives (n 360 = $1) n($) millions* year 2012 2013 2014 2015 2016 2017 2018 capital contribution 92.740 ($0.258) 112.054 ($0.311) 14.089 ($0.039) 178.401 ($0.496) 207.319 ($0.576) 254.96 ($0.708) 308.18 ($308.18) reserves 38.072 ($0.106) 47.34 ($0.131) 55.066 ($0.153) 69.60 ($0.193) 834.519 ($2.318) 90.37 ($0.251) 109.99 ($0.306) savings 64.59 ($0.179) 77.11 ($0.214) 96.33 ($0.268) 121.34 ($0.337) 140.62 ($0.391) 172.38 ($0.478) 207.86 ($0.577) grand total 195.406 ($0.543) 236.502 ($0.657) 165.489 ($0.459) 369.347 ($1.026) 1182.461 ($3.285) 517.712 ($1.438) 626.037 ($1.739) source: annual report and accounting of the cooperative table 6: changes in financing structure (2012-2018) 2013 2014 2015 2016 2017 2018 % % % % % capital contribution 20.83 -87.43 1166.28 16.21 22.98 20.87 reserves 124.33 116.33 126.39 119.89 108.29 121.71 savings 119.38 124.93 125.962 115.89 122.59 120.58 source: computed from data extracted from annual reports of the cooperatives nurudeen afolabi sofoluwe fig. 1: % changes in capital contributions of members to the cooperative fig. 2: trend of financial reserves of the cooperative (2012-2018) fig. 3: trend of savings of the cooperative (2012-2018) 4.4.2. assets structure of cooperatives the breakdown of assets structure of the cooperative organization is presented in table 7. the assets structure are decomposed into fixed assets and current assets. the current assets are by loans, investment, cash and stock of trading items as contained in the annual reports and accounts of the cooperatives. the outstanding loans of the cooperative was increasing steadily up till 2016 with the exception of 2014 (figure 4). the outstanding loan reduces from $0.603 in 2013 to $0.553 in 2014 representing about 8.4% reduction in outstanding loan to members (table 8). from 2016, there was an increase in the value of loan up to 76%. this shows an increase in inclination towards loan access through cooperative organizations. the cash representing liquidity of the firms to meet urgent financial needs was generally decreasing over the period. the percentage changes in stock of trading items over the period was found to be flunctuating. analysis of financial structure of cooperative organization in nigeria 77 table 7: assets structure of cooperative (360n = 1$)* millions 2012 2013 2014 2015 2016 2017 2018 fixed asset 5.671 ($0.016) 6.184 ($0.017) 6.589 ($0.018) 6.755 ($0.018) 6.986 ($0.019) 7.258 ($0.020) 7.400 ($0.021) current assets loans 165.398 ($0.459) 217.244 ($0.603) 198.952 ($0.553) 217.244 ($0.603) 224.417 ($0.623) 396.226 ($1.101) 557.913 ($1.549) investment 5.738 ($0.016) 5.737 ($0.016) 86.748 ($0.241) 5.737 ($0.016) 5.737 ($0.016) 5.737 ($0.016) 86.748 ($0.241) cash 29.016 ($0.081) 0.4 ($0.001) 5.944 ($0.017) 0.594 ($0.002) 0.589 ($0.002) 0.005 ($1.389e05) 0.005 ($1.389e05) stock of trading items 167.398 ($0.465) 388.059 ($1.078) 173.163 ($0.481) 298.786 ($0.829) 342.275 ($0.951) 466.963 ($1.297) 154.058 ($0.428) sources: computed from annual reports of cooperatives fig. 4: trend of outstanding loans of cooperatives table 8: changes in assets structure of cooperative 2013 2014 2015 2016 2017 2018 % % % % % % fixed asset 9.05 6.55 2.52 3.42 3.89 1.96 current assets loans 31.353 -8.420 9.194 3.302 76.558 40.807 investment -0.010 1412.079 -93.387 0 0 1412.079 cash -98.621 1386 -90.007 -0.842 -99.151 0 stock of trading items 131.818 -55.377 72.546 14.555 36.429 -67.009 nurudeen afolabi sofoluwe total% change (current asset) 7.249 17.913 12.382 9.698 20.406 15.766 source: computed from data extracted from annual reports of the cooperatives 5. discussions and conclusions there is an increasing drive for cooperative formation and participation across the world. however, in emerging countries like nigeria, cooperative involvement and establishment is rampant among formally employed individuals who strive to take advantage of both economic and social needs expected from cooperative membership that is usually not attainable from the gains of employment in the country. among the most coveted by people is institutional based cooperative group. to this end, we chose university based cooperative as a case study. the analysis of the financial structure of the cooperative shows interesting outcome. first, the working capital of the workers cooperative and hence its liquidity status, as dictated by the ratio of its current assets to current liabilities, is relatively impressive given the higher value of the former compared to the latter. but, the utilization of such advantage in investment is unimpressively low. after over 16 years of existence of such cooperative, it is expected that one of the cardinal values of cooperative –to generate employment will be a centre focus not neglecting the need to raise the economic needs of the patrons. the appraisal of the balance sheet leads to the understanding that workers’ cooperative, though desires by many workers in nigeria, is yet to reach its potential. a constant value of investment show either lack of investment education on the part of cooperatives or low capacity to take advantage of cooperatives ideals to contribute to community development through increasing investment drive for the cooperative firms. the study found that a number of individuals are increasingly participating in cooperative with financial commitment as reflected in the balance sheet. but, one of the critical additional concern is low involvement of women in the cooperative participation. overall financial benefit is desirable through elimination of gender exclusion in the running of cooperative business activities. the study points to financial exclusion of women which perhaps could lead to cross fertilization of ideas for better investment which is obviously lacking in the financial outcome of the sampled workers cooperative. the findings of the study leads to suggestion that the workers’ cooperative has poor investment drive. expectedly, potential for investments should be higher given higher working capital presented in the balance sheet. evidence of poor investment presented show the need for further investigation on the reasons for poor investment drive of workers cooperative. in arriving at appropriate understanding of financial structure of cooperatives, two components were identified and analysed. these are the financing structure of the cooperative which comprises of share capital, reserves and savings. these represent the sources of funds for the workers cooperative. capital contribution through share capital was found to be a crucial source of financing for the cooperatives. the assets structure are categorized into two where current assets were found to comprise of outstanding loans to member-patrons and which was expected to be repaid at flexible exchange rate. other components of current assets include investment, cash and stock of trading items. under this financial item, outstanding loan was found to be more important as it appears that members participate in cooperative based on expectation of flexible loans. the cash representing liquidity of the firms to meet urgent financial needs was generally decreasing over the period. the percentage changes in stock of trading items over the period was found to be flunctuating. the overall assessment of the financial structure show that workers manage the finance of their cooperative based on stable financing sources and distribution of same as loans to member-patrons. acknowledgements the authors are 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(eds) the routledge companion to alternative organization, pp. 64–88. london: routledge international journal of commerce and finance, vol. 6, issue 1, 2020, 81-101 81 effect of employee motivation on job performance: in case of fiche general hospital dereje muleta lencho salale university, fiche, ethiopia abstract motivation is significant issues affecting human behavior and it is not only affecting other cognitive factor like perception and learning but also affects total performance of an individual in organization setting. hence this study was focused on investigate the effect of employee motivation on their job performance in fiche general hospital. it also intended to evaluate employee level of motivational and their level of job performance. in order to meet this objective, the researcher has used simple random sampling techniques; in collected from 179 employees out of 287, using likert scale questionnaires. data was analyzed using descriptive statistics (mean, and standard deviation) and inferential statistics (correlation and regression). the result of the descriptive statistics finding indicated that the employee job performance has been under practiced in fiche general hospital. the results of inferential statistics have revealed that all motivational factors under study are positively related to employee job performance. according to this finding the employee empowerment practices is more significantly associated and has impacts on employee job performance than all motivational factors under study. hence, managers of fiche general hospital as advised to more empower their employee in the work place as motivational tool in order to enhance t heir job performance. keywords: empowerment, job performance, motivation, fiche general hospital 1. introduction 1.1 background of study motivation is significant issues affecting human behavior and it is not only affecting other cognitive factor like perception and learning but also affects total performance of an individual in organization setting. this is the reason why managers should attach great importance to motivation in organization (daniel, a. 2012). organizations design motivation systems in order to increase employee’s performance and attract potential workers. the ways to motivate employees is to give rewards and incentives for good performance (daniel, a. 2012). motivation that is characteristic of the job itself. according to beer and walton, 2014), intrinsic rewards ensue from performing the task itself, and may include the satisfaction of accomplishment or a sense of encouragement. mosley, pieria and mosley jnr., 2012 describe extrinsic motivation as the behavior performed, not for its personal interest, but for the consequences connected with it. according to stanley ,2012, in current marketplace, where companies pursue a competitive advantage, motivation is crucial for capacity retention and performance. the motivation goal is to make a workplace that is attractive and motivating, where employees need to stay, grow and contribute their knowledge, experience and knowhow. according to chung ,2013, industrial psychologists and managerial practitioners have developed a variety of concepts of human motivation continues to state that in an exertion to find the elements of motivation and performance. many psychologists have established motivational philosophies in terms of human needs or reasons, while most management researchers have established managerial philosophies in terms of encouragements or stimuluses (riggio, 2014). traditionally, the study of job performance has been based on two independent assumptions: that performance can be understood in terms of the individual's ability to perform the tasks, and performance depends merely upon the level of motivation (chung, 2013). motivation is normally explained as the inner forces that control the course of a person's level of effort, as well as a person's determination in the face of difficulties (stanley, 2012). the concern for motivation is three-fold: it falls on the senior leadership, the direct manager and employee. several aspects are elaborate, from faith, engagement and principles to job fulfillment, accomplishment, acknowledgement and rewards. motivation is indispensable for working distinctly, as fit as aimed at alliance and active collaboration in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e dereje muleta (stanley, 2012). motivating employees for improved performance includes these serious aspects: member of staff engagement, organizational vision and values, management acknowledgment and gratitude of effort done as per standard, and overall acceptability of leadership. performance assessment i is one of the greatest vital human resource practices by which supervisors evaluate the performance of subordinates and the focus of the performance assessment i is measuring and improving the actual performance of the employee and aims to evaluate what an employee does. performance evaluation is generally viewed as unique of the utmost dynamic human resource management roles (judge and ferris 2013), moreover; an accomplished performance evaluation and management arrangement is a vital portion of an organizations human resource management capabilities. worker reactions to assessment in standings of perceived worker justice, correctness, and fulfillment are vital basics of assessment effectiveness because these perceived employee reactions can motivate employees to improve their performance. performance assessment i helps as a means for providing feedback that can result in enhanced performance. researches in performance assessment i has demonstrated that performance assessment i features (such as assessment i purpose and source) can provoke constructive employee reactions to performance assessment i and, which in turn, can encourage employees to improve their performance. therefore, performance assessment is going to the core of personnel management and sets out dissimilar aims which are straight accountable for the profession advance of employees and continual development of the organiza tions. employee turnover is a communal encounter that all organizations everywhere the world face (stanley, 2012). among the aspects which stated to high employee turnover is demonization. there is an increasing agreement among managers and leaders about the worth of merging actual motivation encouragements to good performance (cole and kelly, 2011). for organizations to see their aims, they essential have a staff that is stimulated and works towards achieving the aims (steers and porter, 2011). motivating employees is an encounter and care employees inspired bigger challenge. currently, organizations are under dynamic burden to recognize and implement plans that will verify actual in improving employee efficiency (deci, 2013). it is not at all extensive adequate to rise salaries and expect improved efficency; it is more multifaceted than employee motivation disturbs efficiency and a low motivated work force will be expensive to the organization in terms of decrease efficiency and performance, high work turnover, add costs, common absence adverse effect on the self-esteem of workers. it is a well-known fact that the success of an organization largely depends on the quality of its human resource, nonetheless of the hospital within which it functions (deci, 2013). it is with this in attention that leaders and managers must struggle to confirm that their workforce is motivated and therefore creative. motivation is seen as one of the most vital issues related to human resources management (hrm) and organizational behavior management (nelson, 2013) philosophies of job performance offer that motivation is a crucial element of performance the role of motivation in the work setting has been considered to understand what causes employees to try work hard, or more specifically what causes the stimulation, direction, and persistence of voluntary actions that are goal directed (mitchell and linden, 2012). it is therefore imperative that managers understand what motivates employees and by what means to motivate them effectively (deci, 2013). 1.2 statement of the problem motivation is the foremost core of employee job behavior field in the work environment (masydzulhak, ali, & anggraeni, 2016). motivation is an important factor that supports employer to advance employee job performance (sandhya & kumar, 2011). motivation and performances of the employees are essential tools for the success of organization in the long time (dobre, 2013). according to (muogbo, 2013), the effect of motivation on employee job performance has been the attention of thorough research effort in recent times to identify how well an organization inspires its workers. there is positive association between employee motivation and employee job effectiveness (dobre, 2013). the motivation of public service workers in developing and industrialized countries differ as workers earning low income are more extrinsically motivated and receive inducements in order to make ends meet (undp, 2014). employee motivational factors will rest on, not only on country level investigation, but also at regional, local and sector level (devadass, 2011). low motivation in any organization has led to high turnover of employees, inefficiency, fraud, corruption, indiscipline at work (muze, 2014). as per these scholars, (matsie, 2008, temesgen, 2012, tizazu, 2015 and farooq & shafique, 2016), have found gap on these identified four basic variables of motivational factors on employee job effect of employee motivation on job performance: in case of fiche general hospital 83 performance. the study by (muralidharan & sundararaman, 2009 shows payment is associated with output of employees and serves as incentive to enhance workers’ performance. developing and implementing employee training motivate workers (dobre, 2013), increases productivity, improves the services and brings positive change in organization (shaheen, naqvi, & khan, 2013). the study by harrison & novak, 2006 reveals that efforts by management to establish promotion opportunities contributes to employee’s job satisfaction and turns as a stimulus for job performance. the study by manzoor, 2012 shows a positive association between employee empowerment and employee job effectiveness as the more the employees are purpose to tasks accomplishment higher will the employee job performance. few researches have been done on motivational issues and job performance in service organization particularly to ethiopia. some of them were conducted at federal level administered organization such as factories (ambo mineral water factory etc.), telecom, banks (cbe) & higher educational institution etc. to the extent of my knowledge i have not seen studies at fiche general hospital regarding to effect of motivational factors on job performance. thus, empirical and practical gaps support the importance of undertaking study on the effect of motivational factors on job performance at fiche general hospital 1.3. objectives of the study 1.3.1 general objective the general objective of the study was to examine effect of employee motivation on job performance fgh. 1.3.2. specific objectives the specific objectives of the studs includes; 1. to identify the main motivational factors practiced in fgh. 2. to examine the relationship between each motivational factors and employee motivation in fgh. 3. to investigate the cumulative effect of motivational factors on employee performance in fgh. 4. to find which motivational factor is more important. 1.4. hypotheses of the study hypotheses 1 h1: there is a significant association between working condition and job performance. h0: there is no significant association between working condition and job performance hypotheses 2: h1: there is a significant association between benefits and job performance h0: there is no significant association between benefits and job performance hypotheses 3: h1: there is a significant association between empowerment and job performance h0: there is no significant association between empowerment and job performance hypotheses 4: h1: there is a significant association between recognition and job performance h0: there is no significant association between recognition and job performance 2. literature review 2.1. types of motivation 2.1.1. intrinsic motivation intrinsic motivation refers to individual motivation stimuli that are coming from inside. a want to perform a specific task because its results are in accord with his trust system or fulfill a want and our deep-rooted desires have highest motivation power (prasad, 2005). there three forms of intrinsic motivation: in the first form people engage in activity for its own interest since they find the activity the aforementioned as a source of enjoyment and satisfaction. example: can be hobbies that dereje muleta one selects to pursue in the work context fulfilling an exciting task. the second form is activities which are tedious and unexciting but their accomplishment is a source of pressure. for instance, meeting a deadline at work brings a sense of achievement. third form is about compliance it states that it is a matter of compliance with standard for their own sake that propels people to act. these standards may be ethical standards, commitment to group members, and desire to act according values of material or fairness procedure (frey and osterloh, 2002). 2.1.2 extrinsic motivation according to ryan & deci, 2000 extrinsic motivation is when people act because of external aspects that prompt them to take action. extrinsic motivation is concerned with whatever activity that is done to attain a result that is distinguishable from the activity itself. in a career context extrinsic motivation means the desire to satisfy the need or goals that are not related to the work itself. extrinsic motivational is external in the nature. the most famous and the most discussed motivational is money. other examples of extrinsic motivation include employee of the month award, benefit package, bonus and organized activities (armstrong 2012). 2.2. motivator factors motivator aspects are intrinsic to the job, such as the content of the work itself and the availability of opportunities for duty, improvement and appreciation for accomplishment (santrock, 2009). hygiene aspects are extrinsic to the job and relay to the situation in which the job is performed. such factors include the organization’s policy and administration, working conditions, salary, supervision and interpersonal relations. herzberg argued that the extrinsic aspects of work (the hygiene factors) could not provide a source of motivation for employees but could, if ‘bad’, provide a source of disappointment and thus undermine employees. hygiene factors should be seen as the precondition to allow the motivating aspects to influence employee’s motivation. in a situation where there were ‘good’ hygiene factors, the employee would be in a state of ‘no dissatisfaction’. the motivator factors, which herzberg (1959) described as complex factors leading to this sense of personal growth and self-actualization, would reflect employee inspiration as a result rise job satisfaction and efficiency. as a consequence, in order to motivate workers in the direction of advanced productivity, while it is important to ensure that the hygiene aspects are accurate, the manager essential manipulate the motivators by attending to job-content matters for example jobenrichment (sisk, 2009). even though a lot has been written on motivation, this subject is not visibly understood and more often than unwell practiced. for instance, one salesperson may be motivated by the commission received on sales, while the other may be more concerned about attaining sales goals. this creates a fine distinction in the subject matter because motivation to enhance performance varies from person to person and from organization to organization (daft, 2009) 2.3. employee performance an effective performance management action is a significant instrument for employee inspiration for best performance. though, it is not an adequate state for effective performance management. furthermost vital issue with any performance management structure is how vital it is taken and how devotedly it is practiced by managers and employees. (pulakos ,2009) performance management is all about rightness, coordinating, progression to create value for and from customer with the result of economic value making to stockholders and owners. the expansion of performance management is clearly very huge, which is why performance management requirement be viewed within an enterprise as a instrument to improve on employee motivation for in height performance. (cokins 2009, 9) efficient management of performance requires a strong worry of the performance domain. that is, capturing the requirement and projects that are part of the job description within a firm. once you have full skills of what the work involves, you have the foundation for evaluating and increasing performance. this is the foundation for assessing and enlightening performance within organization. once this is no present, the significance is a mislaid connection in measuring employee performance and the likelihood of increasing employee performance within organization. besides, there is also the misplaced connection in evaluating workers performance in association to other workers in the same job status (robert, 2003). effect of employee motivation on job performance: in case of fiche general hospital 85 2.4. job satisfaction in general job satisfaction as the singular assertiveness concerning the numerous characteristics of their works. job satisfaction as the emotive happiness that outcomes from the evaluation ones work as attaining or simplifying the accomplishments of one’s job importance (lock, 1969). the observed work happiness produces progressive sentiment amongst individuals which in casual signify optimistic emotive reply in the direction of want for authority. the author additional discuss that satisfaction is attained as ones understands the importance of work standards to achieve one’s elementary requirements. for the individuals working life skill job satisfaction is one of the important factors. job satisfaction significance is connected to an individual getting enough extrinsic and intrinsic benefits to inspire the workers to stay and continue to expend a huge extent of period and accomplishing their responsibilities. many scholars agree that job satisfaction is a direct on employee performance at numerous levels in an organization. it is one of the most important broadly debated topics in organizational manners, organizational management, staffs and human capital management. in simple word job satisfaction is sensation decent the job performed, combine with the organization mission and vision and a state of awareness lewis et al. (2002). according to steijn, b (2002) job satisfaction is an enjoyable sensitivity that outcomes from the insight that one’s job permit or achieve of one’s personal work standards. persons want to accomplish their quantifiable capital through the work completed intentionally or unintentionally. job satisfaction is the amount to which employees think significantly about their work (pool, s.w,1997). job satisfaction is an emotional response to ones work as well as the social and physical situation of the job environment. it is expected to be greater for workers who observe incentive involvement steadiness in their connection with engaging organization. in sum up job satisfaction is the results of numerous egotisms inclined by personnel on the road to his or her work. these job satisfaction attitudes may be connected to work aspects such as job safety, atmosphere of work, pays, and quick abstraction of grievances, job surroundings, and chance for development, and chances for participation in decision making and other choice of marginal payments. any type of industry or enterprise the job satisfaction of whole labour force plays a key role and with a collection of pleased employee organization can effectively implement their policy. numerous observed investigations have revealed that job satisfaction has direct effect on the employees’ job performance at many levels in an organization. job satisfaction is connected to worker performance and motivation (kiviniemi et al, 2002). according to meyer et al. (2002) clarified that job satisfaction is an approach originated from worker compassions of their works or job setting and indications to the degree to which an individual loves his or her work. it is an attitude very delicate to the features of the setting in which its culture. 2.5. performance in organization performance in organization can be categorized into organizational performance and job performance (otley 1999, 363-382). according to otley, the performance of organization is subjected to the performance of worker’s job performance and other elements which can be environment of the organization. the difference between organizational and job performance is seeming; an organization that is performing best is the one that is effectively attainment its aims, in other words: one that is in effect carrying out an appropriate plan and job performance is the single result of an employee’s work. besides, high job performance is the ability of the employee himself. the employee must be able to give better results and also have a high productivity (hunter, 1986, 72 98). 2.6. job performance a good employee performance is essential for the organization, since an organization’s achievement is reliant on upon the employee’s creativity, innovation and commitment (ramlall 2008, 128). good job performance and efficiency progress are also vital in soothing our economy; by means of improved living situations, high wages, increase in the availability of goods for consumption, etc (griffin et al 1981) griffin et al. also reason that therefore research of individual employee performance is vital to society in universal. employee invention and employee job performance looks to be associated; performance in some cases is evaluated as the number and value of goods produced. however, in overall, productivity is associated with production-oriented dereje muleta terms (e.g, profit and turnover) and performance is connected to efficiency or perception-oriented terms (griffin et al 1981, 655-664). 2.7. performance improvement it is a response to make services of an organization better, affordable and faster. it seeks to rectify any problems that exist and build upon those performance levels that are already good (katz and green, 1997). according to katz and green (1997, pp.: 2000) performance improvement involves the resolution of performance problems and the exploitation of performance opportunities. problems may be related to service, practice or governance. performance opportunities consist of those occasions when, although the performance target is adequate, an opportunity exists to improve the outcome of the service or process by which the service is delivering. 2.8. performance assessment methods the most commonly used performance assessment approaches include: essay assessment: this simply needs the rater to write a series of statements regarding an individual’s strengths, weaknesses, previous performance and likely for promotion. graphic rating scale: in which the rater measures an individual on issues such as initiative, dependability, cooperativeness, attitude and quantity of work. checklist technique: in which the rater does not assess performance but simply records it on a sequence of questions concerning the employee’s behavior, the rater checks yes or no answers. critical occurrence: assessment in which the evaluator is requested to have a written record on actions that demonstrates both constructive and harmful conduct of the individual being evaluated. ranking method: it develops essential to compare performance of two or more individuals. management by objective (mbo): method or performance assessment in which is founded on adapting organizational goals and aims for individuals (obserg, 1972 and maiser, 1976) recommends that the performance assessment method might be communicated to the evaluated individuals using the following methods. tel and sell technique: the assessor let the worker recognize in what way he or she is responsibility, gets worker’s getting of the assessment, and has the employee agree to plan of enhancement. this method according to maier is most likely to be actual with innovative, new workers and with workers who are in a new task. individual in these situations are more likely to have lack of confidence that can result from inexperience and usually are more anxious to receive the helpful advice of a more knowledgeable individual. tell and listen technique: the technique with tell and listen method is for the rater to communicate the evaluation and then wait for a reply from the employee. principally, the assessment is takes place in two ways. during the first ways, the worker’s strong and weak points are covered, during the second, the employee is stimulated to distress and express his or her feelings about the assessment. problem solving technique: as per maier, the first two techniques tell and sell and tell and listen techniques place the rater in the position of being a judge and force the individual being assessed into a defensive position. though, the problem technique is to take the evaluator out of the role of a judge and make him or her helper and a friend. 3600 assessment technique: this technique confirms that not only the greater that assesses the subordinate but also the subordinate also assesses the larger. colleagues also assess colleagues and individuals who assess themselves and all the assessment is are used to reach at the final assessment result subsequently calculating the average. 2.9. importance of motivation motivation is necessary for employee performance. if people do not feel inclined to engage themselves in work behavior, they will not put necessary efforts to perform well. however, performance of an individual in the organization do not only depends on motivation instead their other factors besides the level of motivation which include abilities, sense of competence, role perception and resources. motivation seems to be one of the most important tools for increases productivity and retaining employees. organizations that design motivation systems are not only meant to encourage employees to perform in the most effective way but also to attract potential candidates. one of many ways to motivate and retain employees is by giving traditional rewards and monetary benefits, compensation incentives to reward good performance (memmott and growers, 2012). effect of employee motivation on job performance: in case of fiche general hospital 87 2.10. theoretical review numerous scholars have developed several motivation theories approaching motivational problem but all stressing on comparable set of associations which comprise individual, his desires, his perception on how to satisfy his needs, and weather his needs satisfaction is equitable. all theories are not combined thus may work only in a particular situation. in this study maslow’s hierarch of needs, herzberg’s motivation theory, mcgregor’s theory x and y will be discussed to find out importance and suggestions in inspiring workers. 2.11. maslow hierarchy of needs the most popular theory of motivation which is considered as base for this study is abraham maslow’s motivation theory. abraham harold maslow (1908 – 1970) is an american psychologist who is famous for his theory of hierarchy of needs. the theory demonstrates five different phases of human needs in a hierarchic order, starting from the most basic to the most complex ones (haggbloom, warnick, warnick, jones, yarbrough, russell, borecky, mcgahhey 2002). there are some needs that are essential to human beings, and lacking their presence nothing else matters. we living person consider needs as a motivator. we always start with the lowest level of needs (skemp-arlt & toupence 2007) and strive for satisfaction fulfillment; once achieved, we are then looking to satisfy higher needs. in other words, “a person cannot move to the next level of needs without satisfying the preceding level” (maslow 1954) maslow’s hierarchy of wants is frequently defined in a pyramid shape with the biggest and supreme elementary levels of need at the bottom, and the need for self-actualization at the top (steere 1988). “maslow used the terms ‘physiological’, ‘safety’, ‘belongings’ and ‘love’, ‘esteem’, and ‘self-actualization’ to describe the pattern that human motivations generally move through. the goal of maslow’s theory is to attain the highest level offstage: self-actualization needs” (mcewen & wills 2014). the most basic and crucial four layers of maslow’s hierarchy of needs pyramid are called “deficiency needs” or “dneeds”: physiology needs, safety needs, love and belongings, and esteem. if there is a absence on this level, an individual’s all behaviors will be directed to content the deficits (cherry 2015). furthermore, if these “d-needs” are not met – with the exception of physiology needs: a fundamental level of need which must be fulfilled with satisfaction in the first place – the individual will feel nervous and scared. for example, if you have not slept well or eaten adequately, you will not be interested in your belonging’s desires. it is suggested by maslow that the most essential level of needs must be met and achieved before a person moving to satisfy higher levels of needs (goble 1970). in addition, the “d-needs” itself classified into basic needs (including physiological and safety needs) and psychological needs (including love and belonging and esteem) (mcleod 2007, 2016). the hierarchy of needs starts with the lowest level of need: physiology needs (skemp-arlt et al. 2007). physiological needs comprising vital necessities for human life, such as; air, water, food, and other living needs. physiological needs are considered to be the best important because without satisfying it first, the desire for other needs is not a matter of concern. without food, a human body cannot function well; if you are hungry, all your activities will be oriented and forced to find food; “employers who pay at least a minimal living wage will meet these basic employee needs” (silberstein 2017). therefore, physiological needs should be met first. once an individual’s physiological needs are achieved and somewhat satisfied, the person drives the desire towards his or her safety needs (skemp-arlt et al. 2007). it includes, for instance, the personal security: of body, of health and wellbeing, of morality, and of family; the job security: of work opportunity, and of employment; and the financial security: of property, and of resources. in the world currently, it is a worry when the need for safety is day by day growing. it is not just about having a place to live, feeling certain and being free from the threat of danger and pain. people feel unsafely due to such reasons as normal disaster, war, violence, abuse, or economic instability. this level is more likely to be appeared in children as they normally need the feeling of being secured. in organization, “employers can meet these needs by ensuring employees are safe from physical, verbal or emotional hazards and have a sense of job security” (silberstein 2017) the next level of needs is love and belonging (skemparlt et al. 2007), which belongs to human’s psychological needs. “humans need to love and be loved – both sexually and non-sexually – by others” (goble 1970). according to maslow, when an individual’s basic needs are fulfilled, their need is interpersonal, involvement, and acceptance. this is the need to be social, to have friends, and dereje muleta relationships. it can be the involvement in a group of co-workers, clubs, student organization, hobbies group, or a person’s own gang; or the connections with family, close friends, colleagues, and neighbors. we cannot deny the important role of love and belonging needs in human’s life, as there are evidences of people experiencing from loneliness, anti-socialization, autism or even depression in the deficient of this element. respectively, for employers in business aspect, being able to create a satisfactory reward system and implement organizational program in which employees are actively take part in can help fulfill and satisfy these needs of employees (silberstein 2017). the fourth level mentioned by maslow in the hierarchy of needs is esteem needs. “all people in our society have a need or desire for a stable, firmly based, usually high evaluation of themselves, for self-respect, and for the esteem of others” (maslow 1954, stephens 2000). consequently, this level of needs is categorized into two types, which can be defined by the term “self-respect” and “esteem”. self-respect refers to “the desire for strength, for achievement, for adequacy, for mastery and competence for confidence in the face of the world, and for independence and freedom” (maslow 1954). this level is achieved when a person feels satisfied and enjoyable with what they have completed, like merely by feeling positively, and living an expressive, valuable and on-purpose life. likewise, esteem portrayed the desire to be accepted and valued by others. and only by satisfying the “desire for reputation or prestige, status, fame and glory, dominance, recognition, attention, importance, dignity, or appreciation” this esteem needs will be fully achieved (maslow 1954, brembeck 1991). finally, self-actualization: that is classified as the “being needs” or “b-needs – is the highest level in maslow’s hierarchy of needs. “what a man can be, he must be” (maslow 1954). this level demonstrates the need of “to become everything that one is accomplished of becoming” (hagerty 1999): to be aware of and achieve a person’s full potential. in other words, they will try to do everything to the best of their ability. when a person has reached the state of self-actualization, they tend to be characteristic, concentrating more on themselves and having a wish to broaden knowledge, obtain new skills, take on new tasks, knowledge more new encounters, and act in a way that will take them to achieve their wanted life aims. according to maslow, in order to completely achieve this level of wants, an individual necessity not only achieves and satisfying the earlier needs, but also dominant them (maslow 1954; mcleod 2007, 2016). 2.12 hygiene theory (herzberg 1968) this is another motivational theory developed by fredrick herzberg who conducted intensive study on the experience and feelings of about 200 engineers and accountants in nine different companies in united state of america concerning their previous jobs. theorist found that there were two categories of needs essentially independent of each other affecting behavior in different ways thus are maintenance or hygiene factor and motivational factors. hygiene factors these include several factors like company policy and administration, technical supervision, interpersonal relationship with peer and subordinates, salary, job security, personal life, working conditions and status. these are not intrinsic part of a job, but they are related to conditions under which a job is performed. they produce no growth in a worker output they only prevent losses in workers performance due to work relations. these maintenance factors are necessary to maintain reasonable level of satisfaction of employees, increase beyond this level will not provide any satisfaction while decrease below this level will dissatisfy employees. motivational factors are capable of having positive effect on job satisfaction often resulting in an increase in one’s total output. these include achievement, recognition, and advancement; work itself, possibility of growth and responsibility. most of these factors are related to job contents. an increase in these factors will satisfy the employees; however, any decrease will not affect their level of satisfaction. since these increase the level of satisfaction of employees may be used in motivating them for higher output. implication of herzberg model is based on the fact that most of the people are able to satisfy their lower order needs considerably. the model has been applied in the industry and has given several new insights. one of the insights is job enrichment which involves enrichment of jobs in such a way that they have more motivators than before, the idea behind job enrichment is to keep maintenance factor constant or higher while increasing motivational factors (prasad, 2005). the theory alerts human resource managers that an employee cannot be motivated by a single motivation factor instead a combination of intrinsic motivation factors like promotion, career achievement, recognition as well extrinsic factors such as salary, medical benefits, transport benefits and working condition are required to achieve better performance. effect of employee motivation on job performance: in case of fiche general hospital 89 2.13. mcgregor’s theory x and y the theory involves assumptions such as generalization and hypotheses relating to human behavior and nature. mcgregor presented assumptions that could predict human behavior in two opposite point as follows; 2.13.1. theory x management is responsible for organizing the element of productive enterprise that is money. material, equipment, people in the interest of economic ends, it also assume that without active intervention by management, people would be passive even resistant to organization needs, furthermore this theory assume that an average man is by nature indolent, man lacks ambition, dislikes responsibility and prefer to be led, lastly the theory assume that a man is inherently self-centered, indifferent to organization needs and resistant to change by nature. 2.13.2. theory y the expenditure of physical and mental effort in work is natural as play or rest, second assumption states external control and threat of punishment are not the only means for bringing about effort towards organization objectives, thirdly commitment to objective is a function of the reward associated with achievement. fourth assumption state that the average human being learns under the proper conditions not only to accept, but to seek responsibility. furthermore, the capacity to exercise a relatively high degree of imagination, ingenuity, and creativity in the solution of organizational problem is widely, not narrow distributed in the population and lastly under the conditions of modern industrial life, the intellectual potentialities of the average human being are only partially utilized. theory x and y implies that management should greatly consider kind of people has in the organization especially when undertaking management functions such as planning, directing, apprising and controlling. 2.14. vroom’s expectancy theory the first component in the equation is expectancy, which is well-defined as a person’s trust that their effort will rose in wanted results, such as performance or achievement. it is also a person’s assessment of what kind and how much energy should be put in order to attain better outcomes or higher performance. for example, an employee working in the customer services department believes that if he/she tries harder, the work performance will lead to customer satisfaction. when the employee has a strong emotion of it and is aware that he/she is able to achieve the aim, then he/she will be likely to put more energy to work. in this way, we say he/she has high expectancy. the second component – instrumentality – refers to a person’s belief that his/her performance is connected to later results, such as reward or punishment. for instance, if a person believes that his/her hard-work will be recognized and resulted in rewards, he/she is likely to put more exertion to work. finally, valence component shows a person’s awareness about the amount of reward or punishment received as a result of performance. if a person feels that the reward or punishment is well-earned with his/her effort and performance, he/she will put more effort to achieving it (skemptarlt et al 2007; scholl 2002).force, which indicates a person’s motivation to perform a set of activities, is the result of the three components. “in general, people will work hard when they think that it is likely to lead to desired organizational rewards” (skempt-arlt et al 2007). “vroom thought that people are motivated to work toward a aim if they believe the goal is worthwhile and if they perceived that their efforts will contribute to the attainment of that objective” (moran 2013). in short, the theory suggests that when a person extents a high level of all constituents in the equation, he/she will be extremely motivated and put more effort into attaining the preferred results. 2.15. the effects of motivation on employees’ performance the motivation theorists such as maslow (1946), herzberg (1968), alderfer (1972) and mcclelland (1988) have suggested specific things that managers can do to help their subordinates become self-actualized, because such employees are likely to work at their maximum creative potential when their needs are met. these authors (koch, 1990; stuart, 1992) all stated that appreciation of a job well done or full appreciation for work done is often among the top motivators of employee performance and involves feedback. positive feedback follows the principles advocated in reinforcement theory, which states that behavior is contingent on reinforcement. examples of dereje muleta constructive support in this context may include workplace visits by top executives to high-performance employees, personal handwritten notes of thanks accompanying paychecks, and telephone calls by top executives to employees at home (knippen and green, 1990). philosophies such as fairness has some imperative implications for ways of motivating people by not underpay, overpay and giving information about outcomes in a thorough and socially sensitive manner. it states that, companies that attempt to save money by reducing employees‟ salaries may find that employees respond in many different ways to even the score; those that overpay some employees as a useful motivational technique to increase performance may later realize that when you overpay one employee, you are underpaying all the others. osei (2011), also agrees with the equity theory that, one of the fundamental issues that is sensitive and critical which can make or unmake any organization is wage or salary determination. justice, fairness and equity in salary determination, to a great extent, put to rest all the traumas an individual or any organization may practice, and that is highly motivational enough to assess the optimal usage of time and energy. also, theory such expectancy has several important implications for ways of motivating employees by clarify people’s expectancies that their effort will lead to performance, that is by training employees to do their jobs more efficiently and so achieve higher levels of performance from their efforts and linking valued rewards and performance by specifying exactly what job behaviors will lead to what rewards. it is possible for employees to be paid in ways directly linked to their performance such as through piece-rate incentive systems, sales commission plans or bonuses. locke (1968), goal setting theory believes that you can achieve effective performance goals by assigning specific goals; difficult but acceptable performance goals; and providing feedback concerning goal attainment. he further indicated that giving praises, management by objectives (mbo), and job-design increases employees‟ performance. praise is motivator (not hygiene) because it meets employees‟ needs for esteem, self-actualization, growth and achievement. it is most powerful, less expensive, and simplest, yet the most underused motivational technique. to motivate people to high-levels of performance, objectives should be difficult but achievable, observable and measurable, specific, with a target date, anticipatively set when possible and accepted by employees. employee who meet their objectives should be rewarded through recognition, praise, pay raises, promotions etc. many organizations now link pay to meeting goals (lussier, 2005) and the way the first step in organization design is job design the process by which managers decide how to divide tasks into specific jobs, for example, mcdonaldisation (jones et al, 2000). 2.16. empirical literature review several researchers have examined factors that motivate workers and their subsequent impact their employee motivation. this section presents a review of some most recent empirical studies on employee motivation and in various organizations including health. aiyetan and oltuah (2006) conducted a research on the relationship between job performance and employee motivation of workers in fgh purpose was to identify a number of motivational schemes that enhance the performance of two types of workers: professional health workers and administrative (supportive staff) workers. the study used two sets of questionnaires: one set was administered on management staff and the other on nonmanagement staff (operatives). the study revealed that salaries paid to all staffs in the study were below the stipulations of the employee motivation it further showed that all staffs are rarely promoted, and operatives prefer financial incentives to non-financial incentives. the study recommended that increases in salary via promotion, overtime allowances and holidays with pay should be used as motivators (financial incentives) for increase in performance of all workers in fgh. the three motivating factors were interpersonal relationship, workplace environment and interesting work, all of which have the potential to motivate employees at higher levels. for long-term motivation, job related factors such as meaningful work, flexible working hours, and friendly social gestures were found to be effective motivators, while monetary, social gathering, tangible items such as awards, certificates and gifts were most effective motivators for short-term. the purpose was to assess motivation to perform among healthcare workers in hospital healthcare facilities. its purpose was to examine factors that motivate employees in order to have increased performance within the hospital. the study found that employees at ultimate in fgh had an overall fair job satisfaction. the employees are not satisfied with their current salary situation at the hospital which illustrate that financial motivation was important effect of employee motivation on job performance: in case of fiche general hospital 91 within a hospital the findings equally showed that majority of the employees are motivated most to perform when they receive non-financial rewards. also, majority of the employee showed a great intrinsic value for higher performance. finally, the study recommended that the management at ultimate companion limited should use multiple motivational strategies in order to achieve greater performance from the employees 2.17. conceptual frame work the model below illustrates some of the motivating factors which affect employees’ motivation. these factors will form the independent variables of the study and will be manipulated to positively or negatively affect the dependent variable, which is employee motivation. these independent variables have been broadly covered in the literature review. independent variable dependent variable 3. research design and methodology to conduct this research the researcher has employed explanatory research design. this research design has been used to explain the effect and relation that exist between the aspects of employee motivation and job performance of the employees. moreover, it is used to explain the cause effect relations and used to generate many ideas. to reach on appropriate conclusion about the issue and in order to answer research hypothesis the necessary data has been collected through quantitative approaches. the quantitative approach would allow the researcher to measure and analyze statistical data. fiche general hospital permanent employees would be the main targets of this study. the fiche general hospital operating department are, medical department, specialist/clinical/, midwifery, nursing, pharmacy, mental health, hrm and finance department. the total number of employees in fiche general hospital operating are 287 from which adequate samples would be selected using appropriate method of sample size determination. to determine representative sample from the fiche general hospital of the 287 employees, the researcher has used yamane 1976 formula and the sample size was 187 employees. the type of data used for this was primary data. this data was collected through questionnaires from target respondent and interview was also used to collect primary data from authorized body of fiche general hospital. in order to know the effect of employee motivation on job performance in fiche general hospital, the researcher use the multiple regression models as follows 𝑌 = 𝛽1𝑋1 + 𝛽2𝑥2 + 𝛽3𝑋3 + 𝛽4𝑋4 + 𝛽5𝑥5 + 𝛽6𝑋6 + 𝛽7𝑥7 + 𝛽8𝑋8 + 𝛽9𝑋9 where; y -job performance x1-benefit package x2-empowerment x3-recognition working condition benefits empowerment recognition job performance dereje muleta x4working condition x5-education x6-gender x7-experience x8-age x9-salary where; y is the job performance e= is random error. b1, b2, b3 up to b9, refers to the coefficient of their respective independent variable which measures the change in the mean value of x, per change in respective independent variable. 4. data analysis and interpretation 4.1. descriptive analysis of motivational factors table 4.1: analysis of employee benefit package no benefit package practices mean std. d 1 in fgh i have got adequate payment for the responsibility i discharged 2.13 1.285 2 fgh employee benefit package compared with similar jobs in other companies is fair 3.69 1.640 3 in fgh, the reward programs are timely up date has encourage me for better performance 2.19 1.449 4 in fgh, i am motivated as a result of benefit package offered for me 3.41 1.381 5 in fgh i am encouraged for the practices of training and development programs as employee benefit package. 3.37 1.285 6 an employee compensation and benefit package of fgh is attractive & retains me 2.78 1.248 n=179 source: survey, 2019 the mean score of employee benefit package sub factors are range between 3.69 and 2.13, as presented in table 4.1 above. the mean score was higher for the equivalence of fiche general hospital employee benefit package with similar jobs in other companies is 3.69, followed by the employee motivation level as a result of benefit offered by fiche general hospital is 3.41 and the level of training and development practices as employee benefit package in fiche general hospital is 3.37 correspondingly. this infers that the majority of participants scored highest level of agreement (strongly agree) about equivalence of employee benefit package with similar jobs in other companies raised questions. table 4.2: employee empowerment practices no empowerment practices mean std. d 1 in fgh i normally get sufficient resource to do my job 2.16 1.253 2 in fgh i have significant autonomy in determining how i do my job 2.57 1.341 3 in fgh i have control over those aspect of my job for which i am accountable 2.88 1.334 4 in fgh i have mastered skills necessary for my job 4.21 .734 5 in fgh there is clear system of handling employee dissatisfaction 2.14 1.193 effect of employee motivation on job performance: in case of fiche general hospital 93 6 in fgh, i have involved in decisions making that affect my work. 3.51 1.459 n=179 source: survey, 2019 as presented in table 4.2: the mean value of employee empowerment practices sub factors study result differs from 4.21 to 2.14 and it would be described from general to specific as follows. the level of employee mastered skills after working in fiche general hospital was scored higher mean 4.21; followed by the level of employee involvement in decisions making that affect their work has been the next highest mean scored 3.51. this implies that majority respondent levels of agreement have been strongly agreed with raised statement of item 4 & 6. this means that there are good practices of item 4 & 6 in fiche general hospital. however, with the level of employee control over those aspect of their job for which they are accountable has the mean score of 2.88, followed by the level of employee autonomy in determining how they do their job has 2.57 mean scores; the level of resource allocated for employees so as to accomplish their job has 2.16 mean scores and the availability of clear system of handling employee dissatisfaction practices has 2.14 mean scores with the level of disagreement respectively in fiche general hospital. table 4.3: employee recognition practices no employee recognition practices mean std. d 1 in fgh i have got relevant & timely recognition for my achievements at work. 2.67 1.539 2 the way i am noticed when i do a good job enhance me for more job performance 2.34 1.382 3 the praise i get for doing a good job in fgh has positive influence on my job performance 2.45 1.307 4 the pride i get for a job well done in fgh has motivated me 2.61 1.367 5 in fgh i get the chance to be important in the eyes of others 2.11 1.197 source: survey, 2019 table 4.4 fiche general hospital employee working condition no fiche general hospital working condition mean std. d 1 my workplace has a warm, friendly and a pleasant atmosphere that i am happy with. 2.24 1.138 2 my manager recognizes and appreciates my achievements and that inspires me to work harder. 2.37 1.101 3 there is adequate supply of stock and equipment that enables me to provide the required standard of service to the patients. 2.21 1.259 4 my workload is sometimes increased because my co-workers are absent 3.45 1.209 5 i am given sufficient information to protect myself against hazards that may result in my work. 3.98 .909 6 our managers keep us informed on regular basis about important issues and new developments regarding the hospital and its management. 3.43 1.456 n=179 source: survey, 2019 the mean responses of all items of employee working condition are range between 2.21 and 3.98, as presented in table 4.4 above. with regard to getting sufficient information to protect against hazards in the wok area has highest mean score 3.98, followed by change in employee workload is 3.45 and the level of getting relevant information from manager practices is 3.43. this suggests that the majority of members scored higher level of agreement (agree) about dereje muleta item 5, 4 & 6 raised questions. this means these items mean shows there are good employee working condition in fiche general hospital. on the other hand, the level of employee recognition and appreciation for their achievements has the mean score 2.37, followed by the employee workplace atmosphere has the mean score of 2.24 and adequacy of working equipment supply has the mean score of 2.21, shows the lower level of agreement, which is disagree respectively in fiche general hospital. 4.2. descriptive analysis of employee job performance table 4.5: fiche general hospital employee job performance no employee job performance mean std. d 1 the employee recognition practices of fgh improved my job performance 2.68 1.281 2 the employee empowerment practices in fgh has encouraged me for better job performance 2.26 1.413 3 the employee benefit package practices of fgh boosted my job performance 2.55 1.341 4 the overall working condition of fgh enriched my job performance 2.46 1.302 5 the job performance standard criteria of fgh has motivated me for better job performance 2.17 1.260 6 in fgh there is employee motivation practices for better job performance 2.61 1.407 7 in fgh i have significant opportunity for independence in how i do my job 2.31 1.411 n=179 source: survey, 2019 as presented in table 4.5: the mean value of employee job performance sub factors study result differs from 2.68 to 2.17 and it would be also analyzed from general to specific as follows. the employee recognition for better job performance practices has higher mean 2.68; followed by employee motivation practices for better job performance has the next higher mean score.2.61; employee benefit package for superior job performance has 2.55 mean scored; the level of working condition for healthier job performance has 2.46 mean scored; the level of employee independence in how they do their job has 2.31 mean scored; employee empowerment practices for superior job performance has 2.26 mean score and the level of employee satisfaction about fiche general hospital job performance standard criteria. the mean scores indicate that all the participants have been disagreed to sub factors of job performance question raised in association with fiche general hospital employee motivational practices. table 4.6: comparative analysis of overall study variable no mean rank mean std. d variability rank 1 job performance 2.4008 1 st .66918 5 th t 2 recognition practices 2.4358 2 nd .57127 3 rd 3 empowerment practices 2.9125 3 rd .59684 4 th 4 benefits package 2.9283 4 th .50278 2 nd 5 working condition practices 2.9404 5 th .49421 1 st n=179 source: survey, 2019 as showed in table 4.6: the overall mean score of independent variables of the study were ranging from 2.401 to 2.940 with their corresponding standard deviation have been ranging from 0.66918 to 0 .49421. relatively, the mean score was higher for working condition practices 2.9404; followed by benefits package 2.9283; empowerment effect of employee motivation on job performance: in case of fiche general hospital 95 practices 2.9125; recognition practices 2.4358 and job performance 2.4008 respectively. this implies that the below the average respondents has been disagree. in general, all of this study finding shows there is poor practices of employee motivational practices for their better job performance in fiche general hospital. the job performance has the highest standard deviation 0.66918; followed by empowerment practices with value of standard deviation 0.59684; recognition practices 0.57127, benefits package 0.50278 & working condition practices 0.49421 respectively. according to the observed standard deviation value of table 4.7; shows there is high variability of respondent rating of job performance with strongly disagree, disagree, neutral, agree & strongly agree at fiche general hospital. 4.3. correlation analysis with an objective of measuring the relation between motivational factors and employee job performance in fiche general hospital the researcher has used pearson correlation analysis as follows. table 4.7: correlation matrix of employee job performance jp bp ep rp wc a edu ex g sa job performance corr. 1 .648 ** .752 ** .769 ** .704 ** -.035 .167 * .059 .008 -.072 sig. .000 .000 .000 .000 .645 .026 .436 .915 .341 benefits package corr. .648 ** 1 .516 ** .694 ** .487 ** -.077 .040 .068 -.055 -.045 sig. .000 .000 .000 .000 .305 .596 .365 .464 .552 empowerment corr. .752 ** .516 ** 1 .764 ** .698 ** -.037 .148 * .054 .037 -.030 sig. .000 .000 .000 .000 .619 .049 .472 .623 .694 recognition corr. .769 ** .694 ** .764 ** 1 .666 ** -.009 .116 .145 -.044 -.035 sig. .000 .000 .000 .000 .906 .121 .054 .559 .646 working condition corr. .704 ** .487 ** .698 ** .666 ** 1 -.056 .147 * .062 .012 .020 sig. .000 .000 .000 .000 .456 .049 .408 .875 .788 age corr. -.035 -.077 -.037 -.009 -.056 1 -.135 -.116 -.034 -.031 sig. .645 .305 .619 .906 .456 .073 .121 .649 .684 education corr. .167 * .040 .148 * .116 .147 * -.135 1 .059 .011 -.023 sig. .026 .596 .049 .121 .049 .073 .433 .880 .763 experience corr. .059 .068 .054 .145 .062 -.116 .059 1 -.153 * .051 sig. .436 .365 .472 .054 .408 .121 .433 .041 .501 gender corr. .008 -.055 .037 -.044 .012 -.034 .011 -.153 * 1 -.060 sig. .915 .464 .623 .559 .875 .649 .880 .041 .425 salary corr. -.072 -.045 -.030 -.035 .020 -.031 -.023 .051 -.060 1 sig. .341 .552 .694 .646 .788 .684 .763 .501 .425 n=179 *. correlation is significant at the 0.05 level (2-tailed). as it can be seen from table 4.8; there is significant relation between the dependent variable and all independent variable under study. employee job performance has strong positive relation with employee recognition practices accounting for 76.9% showing that the better employee recognition practices would better improve the employee job performance. the second most correlated motivational factor with employee job performance is employee dereje muleta empowerment practices have also a strong positive relation which accounts 75.2% showing that improving employee empowerment practices by fiche general hospital will increase employee job performance and also empowering the employees at different level is shown to have direct initiation to the job performance at the same time improving the promotion and better training provision to the employees have been shown to have an ability to raise the employee’s job performance level to better level. the third correlated motivational factor with employee job performance is employee working condition have strong positive relation; which accounts 70.4% showing that better employee working condition will improve the employee job performance in fiche general hospital. the fourth correlated motivational factor with employee job performance is employee working condition have moderate positive relation; which accounts 64.8% showing that better employee benefits package will improve the employee job performance in fiche general hospital. conversely, all controlling variables under study have shown to have almost insignificant/not visible relation with the employee job performance except educational qualification of participants in fiche general hospital. 4.4. regression analysis table 4.9: predictors of employee job performance regression model model summary r r square adjusted r square std. error of the estimate .846 a .716 .701 ,.52842 mode sum of squares df mean square f sig. regression 118.943 9 13.216 47.331 .000 b residual 47.189 169 .279 total 166.131 178 model unstandardized coefficients standardized coefficients t sig. b std. error beta (constant) .026 .357 .072 .943 benefits .216 .057 .220 3.815 .000 empowerment .281 .069 .285 4.088 .000 recognition .233 .077 .239 3.021 .003 condition .225 .058 .233 3.870 .000 age .019 .063 .012 .296 .768 education .062 .047 .056 1.323 .188 experience -.023 .053 -.019 -.438 .662 gender .024 .088 .011 .274 .785 salary -.085 .075 -.046 -1.124 .262 a. dependent variable: job performance b. predictors: (constant), gender, experience, age, education, salary, benefits package, empowerment, recognition, working condition the model summary table above shows the sum degree of association that the stated independent variable and controlling variables have with the dependent one that is employee job performance. as such, it has been shown by r that the stated independent variables (the employee motivational factors) all together with the controlling variables have stronger positive relation have at a rate of 84.6% this shows that the better the variables are treated the more the job performance of the employees will be. the r-square result in the same table being 71.6% shows that the sum total effect of the variables under consideration on the job performance of the employees in fiche general hospital. this is to mean that certain level of improvement in the level of these motivational factors will have 71.6% positive influence on the job performance of the employees under consideration at a significant level. effect of employee motivation on job performance: in case of fiche general hospital 97 the analysis of variance table above shows the model fitness test. the significance level (.000) proved that f is large enough to prove that the model used is suitable for the measurement of effects that these independent variables have on the job performance of the employees. from the four motivational factors are employee empowerment practices (t=4.08, p<0.05), employee working condition (t=3.87, p<0.05) employee benefits package (t=3.82, p<0.05) and employee recognition practices (t=3.02, p<0.05) were significantly contribute for positive prediction of employee job performance. to ascertain the level of individual contributing variable the unstandardized coefficient beta value of the four motivational factors have been considered. the unstandardized coefficient beta of empowerment is 0.281, recognition is 0.233, working condition is 0.225 and benefits package 0.216. consequently, employee empowerment practices contribute more than employee recognition practices, employee working condition and employee benefits package, since it had larger unstandardized coefficient. this finding implies that employee empowerment practices has been identified as the most determinant variable that predicted employee job performance as practiced in fiche general hospital. that means as one standard deviation increase in employee empowerment the level of employee job performance increase by 0.281; as one standard deviation increase in employee recognition the level of employee job performance increase by 0.233 and as one standard deviation increase in employee working condition the level of employee job performance increase by 0.225 and as one standard deviation increase in employee benefits package the level of employee job performance increase by 0.216 in fiche general hospital. here, the contribution of employee benefits package on employee job performance is low as compared to empowerment, recognition and employee working condition in fiche general hospital. depending on this fact if manager of fiche general hospital employed more employee empowerment, the employee job performance would be better improved. based on the extent of weighted beta, it can be concluded that if all independent variables are ignored, then fiche general hospital itself have the value of 0.026 on the employee job performance. nevertheless, if there is one additional standard deviation changes in independent and controlling variables; empowerment, recognition, working condition, benefits package, education level, gender, experience, age and salary would be improved the employee job performance with a value of 28.1% ,23.3%, 22.5%, 21.6%,6.2%, 2.4%, 1.9 %,-2.3%, and -8.5% respectively. the objective of the regression in this study is to find such an equation that could be used to find the effect of predictors on dependent variable. the specified regression equation takes the following form: y= 0.026 + 0.281x1 + 0.233x2 + 0.225x3 + 0.216x4 + 0.062x5 + 0.024x6 + 0. 019x7 + (-0.023) x8 + (-0.085) x9 + e where; y is the job performance that used as dependent variable of the study and the explanatory variables used in regression analysis includes, x1 is empowerment, x2 is recognition, x3 is working condition, x4 is working condition, x5 is education, x6 is gender, x7 is experience, x8 is age and x9 is salary are factor that affec ts the employee job performance and ℮ is the residual amount which are represented in the above regression model. 5. recommendations based on the findings and conclusions of the study, the following recommendations are forwarded in order to improve the employee motivation and job performance in fiche general hospital. out of study the variable, all of the study variables are under practice, particularly, employee job performance is relatively poorly practiced or the lowest score in the study area. hence, the management of fiche general hospital& other stakeholders are politely recommended to motivate employee by improving the existing benefits package; empowerment practices; recognition practices and work condition for better employee job performance. among the motivating factor studied the most dominant contributor for better employee job performance come from the empowerment; followed by recognition, working condition, and benefits package have the degree of first, second, third & fourth significant effect on the employee job performance in fiche general hospital. hence, the concerned management body of fiche general hospital have been advised to give due attention for the employee empowerment practices so as to improve employee job performance. as per this study result, even though the researcher has identified the recognition, working condition, and benefit package are relatively lesser contributor to dereje muleta employee job performance, the management of fiche general hospital& other stakeholders are also advised to give due attention for further improvement. notwithstanding the useful contributions of the study, it is clear that this research study had the following limitations. firstly, the study design was a cross-sectional data or participants are only from one sector at the same time so that the findings could only be inferred to the study area. because data were collected at one point in time, the direction of causality of the relationships examined in this study is not certain. secondly, the scope of the study is limited to fiche general hospital. this means that organizations which come under a different law, other organization were not included. concerning the work motivational factors issue selected for the survey nearly most of the sample respondent at fiche general hospital where get disagree. therefore, the management of organization understudy advisable to pay attention for improvement of employee empowerment, benefits package; work condition & recognition in connection with their job performance practices. it advantageous, if the management of fiche general hospital wisely work towards developing a mechanism to motivate their needy employee on these identified gaps. it is also 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(2014). motivation of public service officials insights for practitioners. singapore: undp global centre for public service excellence. international journal of commerce and finance, vol. 6, issue 2, 2020, 218-225 218 political risk and turkey 2002-2019 kahraman arslan, istanbul commerce university, turkey tuğçenur ekinci furtana istanbul commerce university, turkey received: june 07, 2020 accepted: aug 29, 2020 published: oct 02, 2020 abstract political risk has become a common topic in recent years. political risk, which is considered as the main parameter of country risk by international rating agencies, affects cds credit scores and foreign investor decisions, which are very important in international trade. this study aimed to investigate the factors that make up turkey as an example of political risk. accordingly, the situations involving the political risk and the effects of the country in the period after the 2001 financial crisis were analyzed. examples of political content and measure the risk scoring system used in the prs group research company, including risks related to the methods and principles taken from the 2001-2019 year, turkey was subjected to analysis with this data. besides scores of different international rating agencies it is made by comparing a general assessment about turkey. it was determined that the political risk damaged the country's economy, growth, investment and future. in order to reduce the perceived political risk in the international system of turkey, emphasized the necessity of the factors affecting ratings are given. keywords: political risk, fdi, country risk, credit rating 1. introduction the importance of the analysis of the risks in the countries invested increases with the increase of international trade and therefore foreign investments. country risk analyzes are the ratings by which political risks and economic risks are measured and scored, and that measurement companies calculate using different percentages. political risk is analyzed under country risk calcualtion. political risk is a type of risk faced by investors, companies and governments, where political decisions, events or circumstances will significantly affect the profitability of a business actor or the expected value of an economic action. in other words, it is defined as the political damage that a business and its operations will suffer due to political behavior. in addition, if the political risk is not noticed, the enterprise will suffer much more than this. risk is often measured as the probability of occurrence of a loss or negative impact (aydın, 2013) . the main point here is to make a profit by paying the price within the framework of the measurability and predictability of the risk. therefore, political risk affects cds (credit default swap) risk premiums in international trade and the decision of the country to transfer the investor's money. cds is the price for a person or organization to agree to assume the risk of non-payment of the credit that the lender may face. in this context, it works in a sense like credit insurance. this study includes turkey's, which is an emerging economy, situation is illustrated by the political risks discussed until 2019 after the 2001 financial crisis and explained by examples. 2. political risk concept political risk is the threat of social, political or economic factors in a foreign country that can affect the feasibility and profitability of an organization's global operations. political risk is the changes in the operating conditions that will affect the ownership rights and corporate behavior of foreign investors, such as war, riot, political violence, and corporate behavior due to a political development (lax, 1982). when the determinants of the political risk are analyzed for democratic countries, elections and the conflicts between political parties and the power holding groups issues stand out, even if the process is democratic çıkabilir (phillips, 2006). political risk sources include frequent or unexpected government changes, changes in government policies, economic instability, nationalization, privatization, civil unrest, corruption or lack of infrastructure (minor, 2003) . in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e political risk and turkey 2002-2019 219 political risk assessment refers to the risk that a government action will negatively affect the cash flows of international investors and is one of the most important factors underlying foreign direct investment (fdi) decisions. this framework definition whose features are discussed covers political actions that vary depending on location and period. in the study in which clare and gang (2009) examined the relationship between foreign direct investments (fdi), exchange rate risk and political risk, between 1999-2003, the exchange rate risk was analyzed for all developed and developing countries using data for 53 countries. in panel data analysis, it was observed that it had a significant and negative effect on foreign direct investment. in addition, it has been established that political stability has a positive impact on fdi, but it is only important for developing countries. in their work, they reached similar results: clare (1992), benassy-quere, fontagne, and lahreche-revil (2001), and brzozowski (2006). when it is searched for studies related to turkey (emir, uysal, & doğru, 2013) , one example is about the relations between foreign direct investment, country risk and macroeconomic variables. for the data period 1992: 1-2010: 4 they used, direct foreign investment and country risk, openness rate, foreign trade deficit, gross domestic product, political risk and real exchange rate. johansen co-integration analysis and error correction model were used to determine the relationship between the variables. as a result of the analysis, it was determined that fdi was positively affected by gdp and country risk. on the other hand, fdi is negatively affected by the variables of political risk and foreign trade deficit. econometric findings reveal a one-way causality relationship between fdi and political risk and country risk rating. in another study the impact on fdi of cds risk premia have been examined again via turkey (barut, 2019) by using data from 2000 to 2019 with time series analysis. it has been demonstrated that the results of the research showed especillly after 2000s, investors who invest in turkey, taking cds (credit default swap) risk premiums into account. accordingly, as cds risk premium increases, capital inflows decrease, and when cds risk premiums decrease, it is observed that capital inflows increase. there is an inverse proportional relationship between the two variables. fdi, as in most countries is also closely related to turkey's economy. republic of turkey, the current geopolitical situation, because of its proximity to the border regions of neighboring problematic issues and political risk assessment is in a disadvantageous position. even if it narrows the risk in its domestic politics, it can be negatively affected by the international environment and the situation of its neighboring countries. not only the neighboring countries but also the problems experienced by the actors in the international arena affect the country. this condition is described as volality, turkey as it is in all developing countries are exposed to the external impacts be felt heavily. 3. measurement of political risk today, measuring of the political risk is very important both to have information about a country's past and to create a future forecast. international companies or institutions need these analyzes to plan or organize their future activities. there are a wide variety of political risk determinants and measurement methods. however, accurate measurement involves empirical difficulties. because in order to prevent possible losses, the risk indicators related to the host country should include macroeconomic, political and social characteristics and data. although political risk analysis and the insurance market now offer a large number of indicators commonly used by private companies and academic researchers, empirical evidence suggests that their forecast performance is limited (stosberg, 2005, s. 113). while country risk can be measured more quantitatively, in the case of political risk, in most cases, a purely quantitative approach is not possible. political events such as revolutions, terrorist attacks, sudden changes in tariffs or expropriation actions are much more difficult to predict. therefore, human judgment plays a central role in political risk analysis. the data used in this study were obtained from political risk services / political risk services (prs group) and the variables used in scoring are shown in table 1. political risk scoring is examined by different research institutions under the country risk and is not examined as detailed as the prs group company. the reason for choosing this rating is that it is in the form of monthly data. table 1. prs group political risk scoring category component score kahraman arslan & tuğçenur ekinci furtana 220 a government stability 12 b socioeconomic conditions 12 c yatırım profili (investment profile) 12 d internal conflict 12 e external conflict 12 f corruption 6 g military in politics 6 h religious tensions 6 i law and order 6 j ethnic tensions 6 k democratic accountability 6 l bureaucracy quality 4 in this system, in which a total of 100 points are distributed according to the importance of the variables, the reliability of the countries increases as the score increases. in other words, countries scoring low in this scoring system have higher political risks. for example, according to the evaluations made in july 2016, the risk scores of various countries were determined as shown in table 2. accordingly, the country with the highest score is new zealand and its score is 88. switzerland and canada follow with a total score of 87.5. somalia is the country with the lowest score. as can be seen from the examples, the countries with the highest political risk are the ones scoring low from this scoring. when the prs ratings are compared with the ratings made by international credit rating agencies, it is seen that they are largely similar. the reason for this is that 3 organizations of usa origin, moody’s, s & p’s and fitch, can affect the reports of almost all other companies with the reports they publish. table 2. risk ratings comparision chart prs credendo s&p moody's fitch prs group 2016/06 score political risk short term political risk long term credit ratings 2020/01 2020 2020 new zealand 88,0 1 1 aa aa3 aa switzerland 87,5 1 1 aaa aaa aaa canada 84,0 1 1 aaa aa2 aaa u.k. 87,5 1 1 aa aa2 aa usa 81,5 1 1 aa+ ba2 bbb+ india 63,0 2 3 bbbbaa2 bbb south africa 62,5 3 4 bb ba1 bb russia 56,0 3 4 bbbbaa3 bbb turkey 54,5 4 5 b+ b1 bb iraq 39,5 6 6 bcaa1 b somali 32,5 7 7 political risk and turkey 2002-2019 221 source: (fitch, 2020) (s&p, 2020) (moody's, 2020) (credendo, 2020) (prs, 2020) according to the risk ratings comparison chart, prs group, credendo, s&p’s, moody’s and fitch research companies points are given for selected countries. these countries are choosen to comparion with turkey’s situation around the world. in all examples best points are given to new zealend, and the worst is somali, and some research companies did not even pointed this country. credit ratings are very important for the economies of developing countries in terms of attracting investors. for example, three different rating agencies made by evaluations of notes given to turkey, while in the speculative level until 2012. from 2009, in november 2012, then issued a fitch investment grade from moody's and considered fitch in may 2013 as a sub-investment can be made in the middle class. until january 2017 having made at least one investment grade from all three institutions turkey, he did not receive a positive note from someone ever since. 4. political risk analysis of turkey one of the most important factors that determine the political risk ratings of turkey is that, its geographical position and proximity to the troubled regions of the world. when possible situations involving political risks of turkey are analyzed, topics such as terrorism, foreign conflict, democratic accountability come to the fore. examples of different situations that affect the country's political risk score are given in table 3. dates analysis will be made from turkey's 2001 financial crisis was initiated after the period. after examining the issues between the years 2001* crisis period from 2002 to 2019 and has been managed by the same government in turkey has achieved a certain degree of political stability. however, even if the government stability variable was eliminated, the risk curve this time showed ups and downs due to different events. turkey’s political risk rating by prs group are shown on figure 1. and these ratings causes and case studies are tried to explained on the table 3. 48 52 56 60 64 68 72 2002 2004 2006 2008 2010 2012 2014 2016 2018 prs figure 1. turkey political risk rating chart 2002-2019 source: (prs group, 2019) when figure 2 is examined, it is determined that 6 different breaks occurred in 17 years. the first is the sudden fall in 2002/10 before the general elections and the sudden rise in the month after the elections. the second break in 2003 / '04 has experienced after the invasion of turkey's neighbor iraq by the us. the terrorist attack on the hsbc general magement office in the same year caused the third break in 2004/01. the upward trend, which will last for kahraman arslan & tuğçenur ekinci furtana 222 1 year after this date, will decrease afterwards. the fourth break is in 2014/03 the period when the first election will be made after the gezi events. and taking the lowest value in the period under study, it was the month when the political risk was rated the highest. the fifth break in 2015/09 coincides with the period when the cabinet could not be established after the election. the sixth break in 2016/09 marks the period after the july 15 coup attempt. the last break was experienced with the exchange rate crisis in 2018/08. as mentioned earlier, the increase in the political risk score on this chart is a positive situation. the increase in score indicates that the risk decreases. the total score of the country is calculated over the total value of 100 points. see table 1 for the calculation criteria. located below exemplify the theory with facts and provisions specified in turkey over the years, including political risks are detailed in table 3. table 3. turkey political risk analysis table 2002-2019 turkey's political risk analysis 2002-2019 political and economic events affected variables 2002 general elections in november, after the 2001 economic crisis government stability internal conflict socioeconomic conditions bureaucracy quality 2003 the invasion of turkey's neighbor iraq by the usa on march, the terrorist attack on the hsbc general magement office external conflict / international environment risk, geopolitical risk terrorism 2004 local elections usa presidential elections government stability internal conflict socioeconomic conditions bureaucracy quality 2005 perception of stability negotiations with the eu stabilization positive effect 2006 attack on the 2nd chamber of the council of state fluctuation in international markets terrorism internal conflict law and order socioeconomic conditions 2007 the hrant dink assassination in january e-memorandum in april, live bomb attack in ankara, ulus, july-general elections october constitutional referendum terrorism internal conflict law and order military in politics government stability political risk and turkey 2002-2019 223 2008 cross-border operation to iraq russia's intervention in georgia us presidential election external conflict geopolitical risk external conflict 2009 davos crisis in january iran nuclear weapons studies local elections in march external conflict geopolitical risk external factors government stability 2010 balyoz coup investigation israel's sinking ihh ship constitutional referendum internal conflict military in politics external conflict law and order 2011 general elections government stability 2012 internal policy is stable usa presidential elections external factors 2013 gezi' events that started in june corruption and bribery operations internal conflict corruption law and order 2014 local elections presidential elections government stability socioeconomic condition democratic accountability corruption law and order 2015 general elections for june cabinet cannot be installed increased terrorist acts repeating elections novemberdropping the russian warplane government stability terrorism internal conflict external conflict 2016 januarysultanahmet bomb attack marchistiklal avenue bomb attack july 15 coup attempt august-syrian operation of 'fırat kalkanı' the killing of russian ambassador to ankara karlov terrorism military in politics internal conflict external conflict 2017 bomb attack on reina on new year's eve diplomacy crisis with the netherlands presidential system people's vote terrorism external factors government stability 2018 junegeneral elections and presidential elections government stability external factors kahraman arslan & tuğçenur ekinci furtana 224 august-foreign exchange crisis socioeconomic conditions investment profile 2019 local elections and repetition of elections government stability law and order source: informations on political developments are taken from newspapers and magazines and compiled by the author (bbc news, 2020) (haberturk, 2020) (ntv archive, 2019). affacted variables are taken from prs group political risk analysis table (prs group, 2020) in table 3, prs group grading method used in variables, turkey between the years of 2002-2019, examples of which are thought to affect the scoring events were investigated. when case studies are examined, in theory, the issues of government stability, internal conflict and terrorism are mostly encountered. then comes external factors, geopolitical risk, and the military's role in politics. 5. conclusion in today's global business environment, international managers need to constantly monitor and evaluate economic, social and political risks. a change in any of these factors can affect their operations, investment decisions, exposure to risk, or the profitability of companies and organizations. when working or consulting for a multinational company, an international bank or government agency, managers need to be up to date on current events and future trends and risks and opportunities in other markets. one of these information is the country's political risk, past perception and future prospects. the political risk in international investment stems from a variety of factors that can adversely affect a company's income or complicate its business strategy. these factors include macroeconomic issues such as high interest rates and social issues such as civil unrest. the experiences of the country in the past are also examples for the future. in the period analyzed, exemplifying turkey's political risk situations and associated with the theory. efforts should be made to avoid repeating these example situations. these events resulted in higher cds premiums and falling fdi to turkey in the international business arena. most recent studies in the economic literature have concluded that key investment parameters are influenced by political factors when making managerial decisions such as investment level, investment type and risk premium requirements. although the relationship between the volume and nature of fdi and political risk is still empirically controversial, political risk is still considered as an additional risk in the institutional perspective and a factor that reduces growth from the host country perspective. here again, it makes the state intervention risk, which is one of the main concepts of political risk, the most important factor affecting fdi. the negative relationship between political risk and fdi has been demonstrated with many examples. while one is increasing, the other is increasing. based on these results, developing countries can improve their investment climate by creating a quality institutional structure and effectively fighting corruption. thus, they can establish sound macroeconomic policies that reduce cost, uncertainty and risk. in this case, political risk will decrease, so it can receive more fdi. the empirical studies conducted in different years for turkey in particular shows that cds premia and credit fdi affected by political risk ratings. in this study, the variables used in cases involving political risks in turkey international institutions ratings were examined by the case. it is determined that the perception of political risk has damaged the country's economy, growth, investment and future. in particular, it will be in the country's best interest to minimize the impact of factors such as government stability, socioeconomic conditions, internal conflict and external conflict. making policy by paying attention to these ratings affecting investors' decision will benefit the future of the country. references aydın, k., 2013. uluslararası pazarlama açısından politik risk ve önemi. dosyaankara sanayi odası, pp. 25-39. barut, m. e., 2019. 2000-2019 yılları arasında türkiye'ye giren yabancı sermayenin gelişimi üzerinde cds (credit default swap) risk primlerinin etkisi. diyarbakır, dicle universitesi, pp. 324337. political risk and turkey 2002-2019 225 bbc news, 2020, [online], available at : 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[online] available at: https://www.spglobal.com/ratings/en/about/understanding-ratings stosberg, j., 2005. political risk and national institutions.peter lang ag.. international journal of commerce and finance, vol. 2, issue 1, 2016, 103-111 a comprehensive analysis of inter-relationships among overall service quality, trust, satisfaction and learner’s loyalty within the supportive vocational education and training figen yıldırım, (phd) istanbul commerce university, turkey özgür çengel, (phd) istanbul commerce university, turkey cihad demirli, (phd) istanbul commerce university, turkey ali altuğ biçer, (phd) istanbul commerce university, turkey mehmet sağlam, (phd) istanbul commerce university, turkey abstract: it is seen that education institutes use many techniques to increase the quality of the services being provided. however, as competition in the education sector has been rising dramatically, it is hard to differentiate the services offered. in this perspective, it is becoming hard to attract and keep loyal learners in education institutes. so, lifelong learning and continuing professional development are the two tools that enhance the level of loyalty to the education institutes. in this study, an attempt has been made to understand the factors that define learner’s loyalty in the vocational education institutes. in addition, the relation of trust to the institute, satisfaction, and learner’s loyalty variables to the service quality will be researched. in this sense, 184 questionnaires have been conducted to students who have attended the public oversight board education program offered by istanbul commerce university’s lifelong learning center. data has been analyzed by structural equation modelling. according to the results of the study, education institutes who deal solely with the issue of trust, satisfaction, and learner’s loyalty can have the potential to keep their learners on hand on a life-long basis thereby earning their loyalty to the fullest extent. keywords: lifelong learning, learner’s loyalty, service quality, trust, satisfaction 1. introduction one of the most important factors in a brand is the quality associated with the product. especially service brands can be able to differentiate themselves in this manner. education quality is defined as the level of meeting the functions and goals of the education. in cultural, social and political fields, education institutions have the power to attract and integrate with the society. in order to have qualified workforce, education institutes should perform in certain standards. as competition is on the rise in recent periods, universities and complementary education institutions have generated strong marketing strategies. in order to differentiate their services from the competitor, education institutes should pay the most attention to perceived quality in services marketing. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 104 figen yıldırım, özgür çengel, cihad demirli, ali altuğ biçer, mehmet sağlam http://ijcf.ticaret.edu.tr perceived quality has direct influence on the purchasing decision and loyalty. according zeithaml et al (1996), in order to earn customer loyalty, companies try to exercise and keep a high level of service quality. this is why a company’s overall success in the market is high related with wide and loyal customer portfolio and sustainability of such strategy is crucial in this sense. an important aspect of service quality is the level of customer satisfaction. the terminology of satisfaction is related with the concept of customer’s choice as a means to satisfy his/her minimal needs or exceed such needs in the pre-purchase consideration. the dissatisfaction is the result of negative expectations. based on the cause and effect relationship, the level of satisfaction is defined as the process that follows as result of revealing service quality as a result of post purchase dissonance. on the other side, satisfaction has roots in strong associations, images, preference and loyalty. grönroos (1984) clarifies the concept of service quality in terms of perceived judgment that had emerged from customers comparing their expectations with the service they actually received in the context of their perception. in his study, the service quality is divided into two namely technical quality (what is done) and functional quality (how it is done). it is indicated that functional quality is more important when compared with the technical quality. technical quality assures the guarantee of the quality in terms of assessing effective systems, procedures, and techniques. it is hard to measure and standardize the functional quality. additionally, grönroos (1984) identifies the service quality in two aspects which are listed as expected service and perceived service. besides, berry et al (1988) state that service quality is the major determining factor in brands and how brands compete within each other. sasser et al (1978) reveals services performance in three aspects. these are listed as personnel level, facilities level, and material level. parasuraman et al (1988) has done a research on four different services sector. based on the research, 10 general items have been generated. these are tangibles, trust, responsiveness, competition, respect, credibility, security, accessibility, communication, and understanding. afterwards, these items have been minimized into 5 by establishing the servqual. these 5 items are empathy, responsiveness, reliability, assurance, tangibles. in some studies, servqual scale is not sufficient in order to measure the total service quality considering scope and implementation. in loyalty studies, trust is the main focus of interest. moorman et al (1992) state the terminology trust as “a willingness to rely on an exchange partner in whom one has confidence, as the belief that a partner’s word or promise is reliable and a party will fulfill his or her obligations in the relationship. according to grönroos (1984), trust is built with the customer. this establishes a relationship with the customer. especially in services sector, as employees engage in the “share of heart” of the customers, meeting the customer needs and ability solve customer problems honestly and skillfully are the two primary factors. customer trust can solely be developed with the aid of offering detailed product merchandise availability along with the fashion knowledge. as positive service interaction with the company is being inferred and benefits arise from this interaction, trust starts to be developed. however, the factors of service quality need to be indexed extensively in this sequence. in services marketing, customer loyalty is the overall target. the major concern of interest that is related with the terminology of loyalty is associated with the emergence of favorable attitudes towards a particular brand while customer end up purchasing repeatedly. in education institutions, learner’s loyalty is defined as the learner’s level of loyalty to the education institution and the loyalty to the services being offered. the loyalty in the education institutes depends upon keeping the loyal students and earning new students. in education institutions, learner’s interactiveness process with the institution brings a high level of loyalty to the education institute. learner’s loyalty depends on the student’s level of satisfaction it is being inferred from a certain institution. there are three points of interest that end up in the loyalty in the education institutes. these are listed as the level of belonging to the institution, the quality of the education, and the will to reselect the same institution. recently, many studies have been generated on the scope of life-long learning. specifically, education institutions put the main effort in establishing a continuous relationship with the learner on the concept of customer orientation. supportive vocational education is an additional education that has been offered to the students in addition to sufficient education that the students already have. so the students already have a level of proficiency in a certain field. in this terminology, the major aim to update the knowledge and skills as means to offer continuous vocational advancement. the major goal of today’s society is to offer more qualified goods and services thereby increasing economic output and the quality of the humans. this is why the qualifications of the workforce resources should be strengthened on a life-long basis. in this sense, vocational training serves the needs of meeting such goals. the needs to vocational a comprehensive analysis of inter-relationships among overall service quality, trust, satisfaction … 105 http://ijcf.ticaret.edu.tr training can be classified in individual, social, economic, and national aspects. among the many individual needs, it is shown that there is a need for development in the occupations that adults hold, putting the main focus on the issue of continuous enhancement in knowledge and skills. thus, there is a need on behalf of such groups to attend vocational training programs. in terms of social aspects, vocational training helps people to be involved in social activities to the highest extent, share the social work among the society, and engage in the production activities thereby contributing to the overall sustainability of the society. society’s natural resources, workforce, and the level of benefits attained thereof eventually increase the welfare of the society. thus, the vocational training serves to meet the needs of the workforce, increase the efficiency and quality in production, and use the resources based upon effectiveness, efficiency, and rationalization priorities. in this perspective, a great economic value is offered through vocational training. in the context of national aspects and concern that are related with the needs of vocational training, it can be said that it increases the individual’s production capacity and efficiency of the national workforce, and promotes the economic and social importance of the activity performed (alkan et al, 1996). in practice, vocational training can vary in terms of serving different goals, training period, level, and types. one of the major vocational training is what is called “non-formal vocational education and training” where it is conducted on a life-long basis including all the activities such as training, production, consulting, and implementation. this type of vocational training aims to help individuals develop their qualifications and themselves through offering short term and additional training programs. especially, supportive extensive vocational training targets to provide current up-to-date information or to renew information to individuals who already have a certain level of expertise and prior qualification earned on this field. in this globe, the other aspect of these programs is to offer continuous development to individuals. in the implementation phase of these programs, several approaches can be initiated. certificate programs that are offered in higher education institutions can be studied in this perspective. in such consumer services namely legal services, accounting services, and healthcare services, the concept of life-long learning and continuing development of professional competence is crucial. especially, in accounting services, international education standards are being implemented (ies). the scope and goal of this standard is to promote the concept of life-long learning to the accounting professionals. however, it should be cited that life-long learning responsibility depends upon the learner’s involvement to the process. according to framework for international education standards for professional accountants, it is stated that “continuing professional development refers to learning and development that develops and maintains capabilities to enable professional accountants to perform their roles competently”. professional associations that are motivated to offer benefits to their shareholders (employees, companies etc.) should promote the concept of life-long learning as well. there is a direct relationship between continuing development of professional competence and high service quality (in terms of outcome). the process of life-long learning process starts at early ages. then the individual attends the education program to become qualified as a professional accountant followed by advancement in individual’s career. the continuous education still continues as a life-long basis even though the individual has received his/her license to actively take part in the work force. in the supportive vocational education marketing in the scope of education institutes, trust, service quality, satisfaction, and loyalty formation policies are important to analyze. in order to keep sustainability, education’s scope, content, service provider, and physical environment are the main considerations to take into account. provided that such initiatives are taken into account, repeated sales would occur in the long run. it should also be noted that education lasts a long time and in terms of strategy formation, the purpose of the education institute as an attempt to set its positioning among the customers is to be the first brand recalled when a learner searches for an education institute to meet his/her needs and wants. 106 figen yıldırım, özgür çengel, cihad demirli, ali altuğ biçer, mehmet sağlam http://ijcf.ticaret.edu.tr 2. method research design as data collection tool, a questionnaire was made based on theoretical framework driven by wong & sohal (2006)’s study which was done in retail environment. overall service quality was adopted from dabholkar et al. (2000) study, “it has an excellent overall service”; “has a service of very high quality”; “provides a high standard of service”, and “delivers superior service in every way”. trust was measured with three items studied by morgan and hunt (1994): “the employees of this institution can be trusted at all times”; “the institution can be counted on to do what is right”, and “the employees of the institution have high integrity”. four items for learner’s loyalty were adopted from the reconfigured behavioral intentions. battery (parasuraman et al., 1994): “i say positive things about this course to other people”; “i recommend this course to someone who seeks my advice”; “i encourage friends and relatives to get this course”, and “i consider this institution as my first choice in the next few years”. different than wong & sohal (2006)’s study, satisfaction was measured with 3 items following brady et. al.(2001).”i am satisfied with my decision”, “i made a wise judgment to join to this course”, “when i finish the course, i thought i did the right thing”. the questionnaire contained 19 items in which 14 items were assigned to 4 latent variables (customer loyalty, service quality, trust, satisfaction,) and 5 items to demographics variables. the questionnaire design included two parts. the first section consisted of 14 items measuring learner’s loyalty, service quality, trust, satisfaction. items that had a standardized factor loadings below the 0,3 was deleted and not included to the further analysis (joreskog, 1993). then the measurement structure was comprised of 12 items. all items in the questionnaire section 1 were measured by likert’s five-point scale on a 5-point likert type scale ranging from disagree strongly (1) to agree strongly (5). the second part of the questionnaire asked participants to complete 5 demographic questions regarding gender, age, educational status, professional title and professional seniority. sample and data collection 184 questionnaires have been conducted to students who have attended the public oversight board education program offered by istanbul commerce university’s lifelong learning center. the sample of the study was consisted of students who have attended the public oversight board education program offered by istanbul commerce university’s lifelong learning center. employing convenience sampling, a total of 248 students participated to study and questionnaires were mailed to 248 students. one month later a second mailing was sent out and the data collection completed during a two-month period. a total of 192 completed questionnaires were obtained-response rate of 87,5 percent. from the total sample collected 184 questionnaires were valid and used for the final analysis. description of the sample of the 184 participants, (learner) 69,3% were female while 30,7% were male. ages of the respondents were 31 age to 40 age (17,2%), 41 age to 50 age (36,5%),51 age to 60 age (36,1%), over 60 age (10,3%). 77,7% of respondents were college graduate, 22,3% were postgraduate. while 62,7% of professional names of the respondents were certified public accountant (cpa),37,3% were sworn in certified public accountant (sworn-in cpa). finally, distributions of the professional seniorities were as follows: 15,9% is under 15 years, 30% is 15 to 20 years, 18,5% is 21 to 25 years, 15% is 26 to 30 years and 20,6% is over 30 years. table 1 more detailed address the demographic characteristics of the sample. a comprehensive analysis of inter-relationships among overall service quality, trust, satisfaction … 107 http://ijcf.ticaret.edu.tr table 1. demographic results frequency percentage (%) gender female 128 69,30 male 56 30,70 age 31 age to 40 age 32 17,20 41 age to 50 age 67 36,50 51 age to 60 age 66 36,10 over 60 age 19 10,30 employment status college graduate 143 77,70 postgraduate 41 22,30 professional title certified public accountant (cpa) 115 62,70 sworn in certified public accountant (swornin cpa) 69 37,30 professional seniority under 15 years 29 15,90 15 to 20 years 56 30,00 21 to 25 years 34 18,50 26 to 30 years 28 15,00 over 30 years 37 20,60 data analysis the statistical techniques which are spss 21.0 and amos 21.0 were used in data analysis. while spss 21.0 was used to compute reliability, normality and descriptive statistics, a structural equation modeling (sem) program, amos 21.0 was used to perform first order confirmatory factor analysis (cfa) to verify the appropriate structural model. in data analysis were followed the two-step approach recommended by anderson and gerbing (1988) and the analysis was made from two sections. in the first section, a first order confirmatory factor analysis was performed to specify the appropriate structure between latent variables and observed indicators and to test the validity constructs. in the second section, the structural equation model was examined to explain the relationship among customer loyalty, service quality, trust, satisfaction and the hypotheses of the relationships between latent variables were tested. 3. results structural model the structural model analyses the interrelationships between constructs and how they influence directly or indirectly other constructs in the model (byrne 2001). in this study, an attempt has been made to understand the factors that define learner’s loyalty in the vocational education institutes relationships among learner’s loyalty, service quality, trust, satisfaction, is examined through structural equation model. figure 1 illustrates conceptual framework of the study. figure 1. conceptual framework of the study fit indices of the model β2:0,320 custom β1:0,919 service quality trust learner’ s loyalty satisfactio n β3: 0,668 β4: 0,972 108 figen yıldırım, özgür çengel, cihad demirli, ali altuğ biçer, mehmet sağlam http://ijcf.ticaret.edu.tr hu and bentler (1999) suggested the model fit criteria for both measurement and the structural model. accepted model should have (x2)/df ≤3, goodness of fit (gfi) ≥0.90, adjusted goodness of fit (agfi) ≥0.80, comparative fit index (cfi) ≥0.90, root mean square residual (rmr)≤0.10, and root mean square error of approximation (rmsea)≤0.10. structural model to test the proposed model resulted in as indicated in table 2 the following fit statistics: x2/df=2,695; gfi=0,953; agfi=0,921; cfi=0,982, and srmr=0,0226) table 2. results of fit indices of the model model x2 df x2 / df gfi agfi cfi srmr measurement model 123,978 46 2,695 ,953 ,921 ,982 ,0226 structural model 156,861 48 3,268 ,940 ,903 ,975 ,0269 recommended value < 3.0 or 5.0 ≥ 0,90 ≥ 0,90 ≥ 0,90 < 0,08 in assessing the structural model, all the fit measures indicated that most fit statistics met recommended values and the structural model was moderately acceptable. convergent and discriminant validity measures convergent validity explains how well observed variables posited to a latent construct converges or shares a high proportion of variance. on the other hand, discriminant validity provides evidence that each construct can capture its own unique information not obtained from other constructs in the model. this means that each observed variable should be posited to one and only one construct, therefore any evidence of cross-loadings would be a violation of discriminant validity (douglas, mills & phelan, 2010). to determine convergent validity, hair et al. (2010) recommends analyzing the factor loadings (path coefficients) and calculating the average variance extracted (ave) and construct or composite reliability (cr). fornell and larcker (1981) suggest that ave values be at least .500 while fornell and bookstein (1982) and hair et al. (2010) state that cr values of at least .600 are acceptable. table 3 presents the convergent validity of all the constructs using composite reliability. all factor loadings in the measurement model were significant and ranged from .744 to .902 satisfying the convergent validity criteria. composite reliability scores for each latent construct ranged from .852 to .900 whereas average variance extracted ranged from .657 to .770 as indicated in table 3. table 3. a comprehensive analysis of inter-relationships among overall service quality, trust, satisfaction … 109 http://ijcf.ticaret.edu.tr convergent validity construct & indicators factor loadings t-value composite reliability average variance extracted service quality 0,886 0,662 sq1 0,885 19,014 sq2 0,866 18,552 sq3 0,744 18,863 sq4 0,749 λ set to 1 trust 0,900 0,751 tr1 0,902 λ set to 1 tr2 0,893 27,321 tr3 0,801 21,834 satisfaction 0,852 0,657 stf1 0,759 18,603 stf2 0,847 19,736 stf3 0,824 λ set to 1 loyalty 0,870 0,770 ly1 0,889 λ set to 1 ly2 0,866 24,749 table 4 provides the correlations among latent variables of interest in the study and the correlations were specified as well. table 4. correlation among latent variables 1 2 3 4 sq 1 trst ,821** 1 sat ,755** ,768** 1 loy ,837** ,804** ,759** 1 note:**. correlation is significant at the 0.01 level (2-tailed). the intercorrelation between trust and service quality (r=,821),satisfaction and service quality (r=,755), satisfaction and trust (r=,768), learner’s loyalty and service quality (r=,837, learner’s loyalty and trust (r=,804) and learner’s loyalty and satisfaction (r=,759) were significant and all positive as shown under the table 2 on note. research hypotheses testing and path coefficients four hypotheses were proposed to assess the statistical significance of the proposed relationships among customer loyalty, service quality, trust, satisfaction and p-value was examined. the research hypotheses are: h1: service quality has a significance positive direct effect on trust. h2: trust has a significance positive direct effect on satisfaction. h3: service quality has a significance positive direct effect on satisfaction. h4: satisfaction has a significance positive direct effect on learner’s loyalty. the results of the hypothesis testing and standardized path coefficients for the model were explained below. the results indicated that the first hypothesis was confirmed and service quality was found to influence trust positively were significant at p<0,001 level (h1: β 1=0,919, p<0.001). also in path coefficient was extracted that there was a positive and strong causation between service quality and trust. hypothesis two was confirmed and trust also had a positive direct influence on satisfaction (h 2: β2=0,320, p<0.001).there was a positive but weak causation between trust and satisfaction. hypothesis three was supported in a same way. service quality had a positive influence on satisfaction (h3: β3 =0,668, p<0.001). there was a positive and moderate causation between service quality and satisfaction. 110 figen yıldırım, özgür çengel, cihad demirli, ali altuğ biçer, mehmet sağlam http://ijcf.ticaret.edu.tr fourth hypothesis was confirmed and satisfaction had a significance positive effect on learner’s loyalty (h4: β4=0,972, p<0.001). there was a positive and quite strong causation between satisfaction and learner’s loyalty. 4. conclusion: as competition has been rising, the concept of marketing has changed based upon the changing needs and wants of the customers. instead of high profitability, companies nowadays prefer loyal customers and loyalty has been the main focus of conducting business in the era of competition. companies, therefore, adapt customer-oriented strategies. the high level of customer satisfaction eventually leads to the development of loyalty programs. customers either complain or give up using the brand in the case that they are not fully satisfied. changing needs of the consumers have to be identified and met in the education sector within the context of services sector. as depicted throughout the paper, a special interest has been devoted to the concept of life-long learning in the context of education institutes. in this globe, continuing professional development is directly related with the emergence of life-learning concept. besides, learner’s loyalty is another issue that has been researched throughout this paper. learner’s loyalty, as stated, depends upon trust to the institute, satisfaction, and overall service quality. overall, such relations in comparison to life-long learning and continuing professional development have been studied. based on the research outcome and analysis, it can be claimed that quality of the service (and the quality perception) received by the individual as a result of the education program is a major indicator of how a loyalty can be enhanced in education institutes. besides, trust to the education institute is the primary aspect of how trust can be structured in these institutes. education institutes who deal solely with the issue of trust, satisfaction, and learner’s loyalty can have the potential to keep their learners on hand on a life-long basis thereby earning their loyalty to the fullest extent. it is believed that this study would be a good reference to future studies in the scope of extending the applicable information to education institutes in establishing their loyalty formation policies. in the case that education institution image and lifestyle factors are being included in the model for further studies, different findings can possibly be reached. references alkan c., doğan, h. & sezgin, i̇. 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jumarding.ahmad@universitasbosowa.ac.id *** stie amkop makassar, indonesia, ahamrullah5@gmail.com 75 the role of zakat in national economic transformation through regional economic growth in south sulawesi province abdul karim* ahmad jumarding** amrullah ahmad*** submitted: 08.01.2022 accepted: 08.09.2022 published: 01.11.2022 abstract this study aims to determine the contribution of zakat to economic growth in south sulawesi province. the economy of south sulawesi in the second quarter grew significantly by 7.66 percent, higher than the first quarter of 2021 which recorded a contraction of 0.21 percent. the economic recovery was mainly supported by domestic consumption, which rebounded in line with the increasing mobility of the people. the regional income of south sulawesi province was idr 4.19 trillion, dominated by transfer income. regional revenue and expenditure budget expenditures were realized at idr 3.44 trillion in the second quarter of 2021 (31.28% of the 2021 ceiling). lower than the second quarter of 2020 which reached 41.39%? most of the budget absorption was realized for operational expenditures (58.79% share) and capital expenditures (25.34%). the business sector, transportation, warehousing, trade, and construction are the main contributors to economic improvement in south sulawesi province, which experienced growth during the national economic recovery period of 73.95 percent. keywords: zakat; national economic transformation; regional economic growth. international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 76 1. introduction 1.1. background south sulawesi province with a plain area of 46.72 thousand km2 and 197 people per km2 with a population of 9.19 million people. the average population growth rate of south sulawesi province is 1.18 percent (maddatuang et al, 2021). the highest population was recorded in makassar city as many as 1,423,877 people, while the lowest population was recorded in the selayar islands regency as many as 137,071 people. south sulawesi province is one of 34 provinces in indonesia, which is the third-largest province outside of java and sumatra. a total of 4.56 million men and 4.63 million women have great potential to develop the role of the sharia economy and finance. the islamic economy as an economy of improvement has become a trigger for strengthening and recovering the national economy, towards the transformation of the national economy, especially during the covid-19 pandemic. the population of south sulawesi province that has the potential to implement the sharia economy is 8.26 million people (89.87%) of the population who are muslim (kailani & slama, 2020). one way to move the economy through the transformation of the national economy is to empower the potential of the sharia economy as a new direction in the national economy through regional economic growth (nurjanah et al, 2019). the potential sectors are tourism and agriculture, where currently the two market players in these sectors are still dominated by muslims. zakat potential in indonesia of idr 327.6 trillion comes from five sectors namely; 1) corporate zakat of idr 144.5 trillion; 2) agricultural zakat of idr 19.79 trillion; 3) zakat income of idr 139.07 trillion; 4) zakat on livestock is idr 9.51 trillion, and: 5) zakat on money is idr 58.76 trillion. the 2020 national zakat collection has only reached 3.8 percent of the potential zakat or idr 12.5 trillion. the majority of the zakat collected came from income zakat, which was 38.6 percent; the second-largest source was infaq/untrusted alms of 25.2 percent, while the property zakat agency only contributed 3 percent of the total national zakat collection (baznas, 2021). south sulawesi's economic growth in the second quarter of 2021 compared to the second quarter of 2020 grew by 7.66 percent. international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 77 1.2. objective the highest growth was achieved by transportation and warehousing of 73.95 percent; followed by corporate services by 29.83 percent; then other services by 27.77 percent; provision of accommodation, food, and drink by 26.98 percent. meanwhile, the business field category that experienced contraction growth was only mining and quarrying by -5.82 percent. south sulawesi's economic growth in the second quarter of 2021 (bi, 2021), the highest growth came from the transportation and warehousing business sector by 1.33 percent, wholesale and retail trade by 1.08 percent, construction by 0.92 percent, and education services by 0.75 percent. figure 1: south sulawesi grdp growth in several business sectors in quarter ii-2021 international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 78 figure 2: sources of south sulawesi grdp growth quarter ii-2021 south sulawesi's economic growth was positive during the covid-19 pandemic, not much changing the structure of south sulawesi's gross regional domestic product by business field in the second quarter of 2021. south sulawesi's economy is still dominated by the agriculture, forestry, and fisheries business fields by 23.89 percent; followed by wholesale and retail trade at 14.66 percent, construction at 13.34 percent and processing industry at 11.80 percent (bappenas, 2021). the role of these four business fields in the economy of south sulawesi reached 63.68 percent. south sulawesi's economic growth in the second quarter of 2021 compared to the first quarter of 2021 was 7.44 percent. 2. literature review 2.1.background theory the covid-19 economic recession has an impact on economic growth in 34 provinces in indonesia, including south sulawesi. as noted by the central statistics agency, indonesia's cumulative growth from q1 – q3 of 2020 recorded a contraction of -20.3 percent compared to q1 – q3 of 2019. in the context of national zakat, of course, this condition has a significant international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 79 impact on the management of zakat management organization (rosidah, 2020). the behavior of indonesians in donating can be a positive factor, especially for the prospect of zakat growth in 2021. this can be a positive note to see the prospects for indonesia's zakat in 2021. this section discusses the prospect of zakat growth in 2021 under conditions of uncertainty due to the covid-19 outbreak. include: (1) projected collection of zakat, infaq, and sadaqah (zis) 2021, (2) projection of distribution of zakat, infaq, and sadaqah (zis) 2021, (3) projection of allocation to collection ratio (acr) 2021, (4) projected growth of zakat givers, and (5) projected distribution of zakat recipients. zis 2021 collection is projected to be in the range of idr 12,273,532,567,866.00 – idr 13,530,613,929,974.60. in detail, the assumption opinion method increases >0.30 and the assumption increases <0.20 resulting in a projection of zakat collection in 2021 in the amount of idr 12,273,532,567,866.00 – idr 13,296,326,948,521.50. while the straight line, geometric curve and straight line arithmetic methods project the collection of zakat in 2021, respectively in the numbers of idr 12,338,289,929,843.00, idr 13,059,735,015,111.60 and idr 13,530,613,929,974.60. the distribution of zakat in 2021 is projected to be in the range of idr 10,576,303,335,511.00 – idr 14,683,093,886,058.30. the results of the assumption opinion method increase >0.30 and the assumption increases <0.20 predicts the distribution of zakat in 2021 will be in the range of idr 12,511,038,577,469.80 – idr 14,683,093,886,058.30. while predictions using the arithmetic straight line, geometric curve and straight line methods, it is projected that the distribution of zakat in 2021 will be in the figures of idr 10,576,303,335,511.00, idr 11,267,982,717,287.20 and idr 12,543,787,463,645.90, respectively. the 2021 acr is projected to be effective, standing at 0.85 percent. meanwhile, the growth of zakat givers and recipients (donors other than zakat givers) in 2021 is projected to be in the range of 9,390,045 14,875,358 people. the assumption method goes up >0.30 and the assumption increases by <0.20. it projects that zakat givers and recipients in 2021 will number around 12,674,861 14,875,358 people. meanwhile, with the straight-line arithmetic method, it is projected that there will be around 9,390,045 people. meanwhile, with the geometric curve method, the growth of zakat givers and recipients in 2021 is projected to be at 9,443,424 people. international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 80 2.2.previous studies in indonesia, there are many companies, both listed on the indonesia stock exchange and those that have not been listed. based on the baznas strategic study center, there are at least 200 thousand companies spread throughout indonesia, it is recorded that the potential zakat that can be collected from companies reaches idr 144.5 trillion. if optimized, zakat paid by companies has a significant contribution in strengthening zakat distribution programs (shaikh & ismail, 2017), especially now that these programs are aimed at strengthening and increasing the economic capacity of the poor who are affected by the covid-19 pandemic (baznas, 2021). the content of the national zakat of south sulawesi province is 0.48 in 2020 with a fairly good category nationally. this value is a weighting of the two dimensions that make up the content of the national zakat, namely the macro and micro dimensions (shabbir, 2020). the value of the macro dimension of the zakat agency in south sulawesi province is 0.79 with a good category. there are three indicators that make up the macro dimension, namely regulation, support from the regional revenue and expenditure budget, and a database of zakat institutions (utami et al, 2021a). the perfect score of 1.00 was achieved by the regulatory indicator which shows that the regional head has actively participated in zakat work and there are zakat management regulations at the south sulawesi province level. meanwhile, the index value of 0.75 is supported by the regional revenue and expenditure budget. the local government has been able to cover a 50% reduction in operational costs from the potential zakat in south sulawesi province of idr 12.5 trillion (bi, 2021). the national economic transformation policy consists of 5 (five) main pillars, namely: (1) optimization of infrastructure development; (2) strengthening the implementation of economic equity policies; (3) minimization of dependence on short-term foreign capital; (4) labor market efficiency and improving the quality of human resources; and (5) investment configuration to support economic growth. economic transformation is pursued through strengthening leading sectors, including the development of the sharia economy as a source of new economic growth (utami et al, 2021b). the development of the national islamic economy and finance is an important part of realizing inclusive and sustainable growth (redha et al, 2016). the basic principle of islamic economics is to encourage the optimization of the utilization of all resources and technology, which will always lead to productive economic activities (khasandy & badrudin, 2019). the implementation of these basic principles in the islamic finance sector is manifested in its transaction activities which are always based on real project activities international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 81 (olanipekun et al, 2015). islamic economics and finance play an important role in supporting the improvement of the economic structure, development of the real sector, and encouraging sustainable economic growth (nurzaman et al, 2017). the contribution of islamic banking to indonesia's economic growth has considerable potential for growth and development (harapah, 2018). the penetration of the islamic economy and finance in indonesia is evidenced by the market share of islamic banking in indonesia of 5.94% in 2019. the islamic finance sector has not been able to support economic growth optimally, causing a slowdown in economic growth in indonesia. the islamic finance industry in the capital market sector increased from -1.57% to 3.09%, but the banking sector actually decreased from 13% to only 9%. in addition, in the sector of third-party fund asset growth and islamic banking financing in june 2020, they were 9.22% and 10.13%, respectively. the development of the islamic economy and finance in indonesia still faces various challenges. this can be faced by raising public awareness in helping islamic economic activities (arfah et al, 2020). the formulation of strategic policies carried out by islamic banking by mapping competencies and authorities will be able to provide concrete results in the development of the islamic economy in indonesia. january 2021, shows that islamic financial assets have grown by 14.2% nationally (ojk, 2021). 2.3.conceptual framework regulations in indonesia also allow private institutions to establish zakat institutions in the form of private zakat institutions (abdullahi, 2019). the zakat institution has the task of assisting the beneficiaries government zakat agency (baznas) in collecting, reporting, managing, and distributing zakat funds to the entitled groups (hudaefi & beik, 2021). in short, it can be concluded that the management of zakat in indonesia has been regulated in a structured and systematic manner as stipulated in the law, where the collection, management, and distribution are carried out centrally by the beneficiaries government zakat agency (baznas) and assisted by private zakat institutions. in general, the management of zakat in indonesia is shown in figure 3. international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 82 figure 3: model of zakat management in indonesia 3. methodology the total projected distribution of beneficiaries (in items per distribution sector) is predicted to be in the range of 24,824,402.00 39,724,565.40 people in 2021. this range describes 33,848,150.40 39,724,565.40 people using the assumption method to increase >0.30 and the assumption to increase <0.20. there are 24,824,402.00 people using the straight-line arithmetic method, 24,923,545.66 people using the geometric curve method, and predictions of 37,551,265.60 people using the straight-line method. projection of zakat growth based on opinion and projection based on statistics. this projection method is based on opinion using scenario assumptions. zakat statistics projection uses three methods, namely straight line arithmetic, geometric curve arithmetic, and straight-line forecasting. international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 83 tabel 1: zakat income projection method and statistics method description and formula scenario assumption optimistic scenario with >30% growth, moderate scenario assuming 20%-30% growth, and pessimistic scenario assuming <20% growth with calculations:  optimistic scenario: 𝒐𝒔 =(𝑥.0.30) + 𝑥  pessimist scenario: 𝒑𝒔 =(𝑥.0.20) + 𝑥 where:  𝒐𝒔 is an optimistic scenario and 𝒑𝒔 is a pessimistic scenario  𝑥 is the previous year's value arithmetic straight line this method is the simplest, calculated using straight-line arithmetic, with the formula: 𝑦𝑐 – 𝑎 + 𝑦𝑖 – 1  𝑎 = 𝑦𝑛 𝑦𝑐 / 𝑛– 1  𝑦𝑐 = initial value (day/month/year)  𝑦𝑛 = final value  𝑦𝑖 = value (day/month/last year)  𝑛 = total (day/month/last year) arithmetic geometric curve this method uses an arithmetic geometric curve, with the formula: 𝑏 = 𝑦𝑖 + 1 1 + 𝑟  𝑦𝑖 + 1 = value for next year  𝑟 = average increase rate international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 84 straight line forecasting 𝑦𝑐 = 𝑎 + 𝑏𝑥 𝑎 = ∑ 𝑦 𝑛 𝑏 = ∑ 𝑦 𝑛 explanation:  𝑦𝑐 = future data  𝑦 = previous data  𝑥 = regression value  𝑎 = average actual value data (moving average)  𝑏 = the regression coefficient for variable “𝑥” or rate of change in " 𝑦 " for changes that occur in “𝑥”  𝑛 = the amount of data is calculated from the base year (units can be weeks, months, semesters, years) source: various sources are processed by the author as detailed. 4. results and discussion 4.1. results south sulawesi province in all provinces in indonesia is a fairly good category from the 2020 national zakat index value of 0.76 percent and the micro dimension value of 0.54 percent. the results of the measurement of the national zakat index of south sulawesi province were obtained from all baznas with the database of the national zakat index data entry (esen, 2015). overall, of the total baznas in indonesia, 12.50 percent received a score in the poor category (21.25%), a good enough category and the remaining 56.25 percent received a score for the national zakat index in the good category. on the macro dimension, regional baznas is in the poor category (6.25%), quite a good category (31.25%), good category (50.00%), and the rest are in the very good category (12.50 %). meanwhile, the micro dimensions of regional baznas are in the poor category (25.00%), quite good category (43.75%), and quite good (31.25%). in 2020, the value of the national zakat index of south sulawesi province is 0.48 percent with the predicate of a fairly good category. this value is a weighting of 2 (two) dimensions (zakaria et al, 2021), namely macro and micro. international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 85 table 2: value of the macro dimensional index of the baznas of south sulawesi province in 2020 variable index indicator index dimension regional regulations 1.00 regulation 1.00 regional revenue and expenditure budget support for baznas 0.75 regional income and expenditure support for baznas 0.75 macro 0.79 number of official zakat institutions, zakat recipients and givers 1.00 the ratio of the number of zakat givers/individuals to households at the provincial level 0.00 zakat institution database 0.60 the ratio of the number of zakat givers/business entities to business entities at the provincial level 1.00 the micro dimension of the baznas of south sulawesi province is 0.35 percent or in the poor category. the micro dimension is formed from two indicators, namely institutional and the impact of zakat. the institutional index value of the baznas of south sulawesi province is 0.42 percent or a fairly good category. this indicator is formed from four variables, namely collection, management, distribution, and reporting (fikri et al, 2019). the first variable, namely the collection gets a value of 0.13 percent because the growth of the collection has decreased by 17 percent and the amount of the collection is in the range of idr 100 million to idr 1 billion. the second variable, namely management, gets a value of 0.50 percent because the baznas of south sulawesi province already has at least 2 (two) of the operational standards and procedures for zakat management, strategic plans, iso certification/quality management, and annual work programs. international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 86 table 3: value of the micro dimensional index of the baznas of south sulawesi province in 2020 variable index indicator index dimension collection 0.13 institutional 0.42 micro 0.35 management 0.50 distribution 0.44 reporting 0.75 community welfare index 0.00 the impact of zakat 0.30 modification of human development index 0.75 independence 0.50 in the distribution variable, the value obtained is 0.44. this is because the distribution process is measured in the range of 50-69% with the total distribution being between idr 500 million to idr 5 billion. the planning process until the realization of the distribution of consumptive zakat is relatively fast, which is less than 2 months and for productive zakat; it is less than 1 month. the last variable, namely reporting, baznas of south sulawesi province has received a value of 0.75 because it only has unqualified audited financial statements and publishes periodic reports. meanwhile, the baznas of south sulawesi province does not yet have a sharia audit report (bayinah, 2017). the second indicator value forming the micro dimension is the impact of zakat, which is 0.30 percent or in the less good category. this second indicator is formed from three variables, namely the community welfare index, modification of the human development index, and independence (malik, 2020). the value of the community welfare index obtained by the baznas of south sulawesi province is in a bad category, namely 0.00 percent, which means that there are no samples of zakat recipients who are in quadrant 1 or spiritually and materially rich. in the modified variable of the human development index, the value obtained is 0.75 percent, which means that there is a good impact in terms of education (desi, 2021) and health of zakat recipients. the last variable, namely independence, is the value obtained is 0.50 percent. this value indicates that the majority of the samples of zakat recipients already have a fixed income/business but not many are doing saving activities. international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 87 in line with the performance of commercial banks, the performance of islamic banking financing in south sulawesi also increased (karim et al, 2021). financing carried out by islamic banks based in south sulawesi grew 10.58 percent, higher than the previous period which grew 8.03 percent. the improvement in financing performance by islamic banking (pudjihardjo et al, 2021) was driven by working capital and investment financing which grew significantly from the previous period. working capital financing grew 0.24 percent, much better than the previous quarter which contracted 10.92 percent. meanwhile, investment financing, although experiencing contraction, was also much better than the previous quarter. investment financing by islamic banking (juhandi et al, 2019) contracted by 0.84 percent, better than -11.83 percent in the previous quarter. meanwhile, consumer credit, which has the largest share, restrained financing growth by 15.00 percent. the share of sharia financing distribution is 6.33 percent of the total financing in south sulawesi. islamic consumption financing dominates the financing provided by islamic banking with a share of 73 percent. meanwhile, working capital financing and investment financings were 15 and 11 percent, respectively. the economic growth rate of south sulawesi province is based on business fields in quarter’s i-2021, adjusted for positive and negative categories. table 4: economic growth rate by business field, quarter i-2021 positive growth (+) negative growth (-) description share (%) growth (%) description share (%) growth (%) agriculture, forestry, and fisheries 23.42 7.14 mining and excavation 4.56 -9.57 electricity and gas supply 0.06 0.067 processing industry 12.63 -1.92 water supply 0.10 1.00 construction 13.71 -2.22 information and communication 5.89 8.73 wholesale and retail 13.11 -3.51 real estate 3.84 1.17 transportation and warehousing 3.27 -18.04 government administration 4.68 0.42 accommodation and drinks 1.29 -7.21 international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 88 education services 5.47 0.75 financial and insurance services 3.85 -1.18 health services 2.33 2.32 company services 0.45 -4.82 other services 1.35 -4.87 total 45.79 5.12 total 54.21 -4.39 figure 4: south sulawesi province economic growth quarter i-2021 (q to q) figure 5: economic growth of south sulawesi province in quarter i-2021 (yoy) 0.35 6.75 5.14 -5.45 -2.9 -0.41 8.16 -4.98 -2.5 q1/2019 q2/2019 q3/2019 q4/2019 q1/2020 q2/2020 q3/2020 q4/2020 q1/2021 q-to-q quarterly growth rate for south sulawesi province 6.56 7.38 7.16 6.49 3.05 -3.87 -1.1 -0.62 -0.21 q1/2019 q2/2019 q3/2019 q4/2019 q1/2020 q2/2020 q3/2020 q4/2020 q1/2021 y-on-y quarterly growth rate south sulawesi province international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 89 4.2.discussion the south sulawesi economy based on the amount of gross regional domestic product (grdp) based on current prices in the second quarter of 2021 reached idr 136.21 trillion and based on constant prices in 2010 it reached idr 85.89 trillion. the economy of south sulawesi in the second quarter of 2021 compared to the second quarter of 2020 grew optimistically by 7.66 percent. almost all sectors of the business field experienced positive growth. only the mining and quarrying sector experienced contraction (suprayitno et al, 2017). the highest growth was experienced by the transportation and warehousing business field of 73.95 percent, followed by corporate services and other services with the growth of 29.83 percent and 27.77 percent, respectively. the economy of south sulawesi in the second quarter of 2021 is still dominated by the agriculture, forestry, and fisheries business fields by 23.89 percent; followed by wholesale and retail trade; car and motorcycle repair by 14.66 percent; construction by 13.34 percent; and processing industry by 11.80 percent. the role of these four business fields in the economy of south sulawesi reached 63.68 percent. south sulawesi also still provides the largest contribution to the gross regional domestic product (grdp) of sulawesi island, which is 47.26 percent in the second quarter of 2021, followed by central sulawesi province at 20.98 percent. this means that of the idr 1 billion produced by the island of sulawesi, around 472.6 million came from the province of south sulawesi to the rate of national economic growth. the number of poor people in indonesia in march 2020 reached 26.42 million people. compared to september 2019, the number of poor people increased by 1.63 million people. meanwhile, when compared to march 2019, the number of poor people increased by 1.28 million people. the percentage of poor people in march 2020 was recorded at 9.78 percent, an increase of 0.56 percentage points against september 2019 and an increase of 0.37 percentage points against march 2019. indonesia is the largest muslim country in the world and islam has one instrument that can be a solution. effective in alleviating the problem of poverty, the instrument is zakat. indonesian zakat has such great potential (meerangani, 2019), so it is estimated that it can alleviate indonesia's economic problems such as poverty. in other islamic finance sectors, along with the development of the financial technology (fetch) ecosystem, islamic fetch assets in indonesia grew to reach idr 134 billion in june 2021, representing 3 percent of the total fetch assets in indonesia. although the contributions to international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 90 overall fetch assets is relatively small, islamic fetch assets have increased more than 50 times in the last 2.5 years. eight provinces in indonesia that have the potential for sharia economic development are shown in the following table. table 5: potential for sharia economic development in 8 provinces in indonesia province main economic sectors (to gdp) potential sectors for sharia economic development aceh  agriculture, forestry, and fisheries (29.60%)  wholesale trade, retail, and motor vehicle repair (16.07%)  government administration, defense, and mandatory social security (9.56%)  islamic finance  halal food & drink  halal tourism west sumatra  agriculture, forestry, and fisheries (23.55%)  wholesale, retail, repair of motor vehicles (15.05%)  transportation and warehousing (12.64%)  halal tourism  halal food & drink west java  processing industry (42.29%)  wholesale, retail, repair of motor vehicles (15.10%)  construction (8.26%)  fashion models  halal food & drink  halal tourism east java  processing industry (29.03%)  wholesale, retail, repair of motor vehicles (18.18%)  agriculture, forestry, and fisheries (12.08%)  halal food & drink  halal tourism  msme yogyakarta  processing industry (13.12%)  provision of accommodation, food, and drink (10.32%)  agriculture (10.01%)  halal food & drink  halal tourism  halal media and recreation  modest fashion international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 91 west nusa tenggara  agriculture, forestry, and fisheries (21.97%)  mining and quarrying (19.45%)  wholesale, retail, repair of motor vehicles (13.22%)  halal tourism  agriculture  msme south sulawesi  agriculture, forestry, and fisheries (22.9%)  wholesale trade, retail, and repair of motor vehicles (13.9%)  processing industry (13.7%)  halal food & drink  halal tourism  halal cosmetics south kalimantan  mining and quarrying (20.75%)  agriculture, forestry, and fisheries (14.59%)  processing industry (14.39%)  halal food & drink  halal tourism the principle of the sharia economic system is to uphold the value of justice and sustainability. the achievement is to bring the national economy to growth that is inclusive, sustainable, and strong in facing the crisis (hudaefi et al, 2021). in order to support future national economic recovery and realize the transformation of the national economy, all financial service actors are deemed necessary to continue various efforts and policies that encourage the resilience and competitiveness of islamic finance. the development of the islamic economy and finance needs to be strengthened, among others through institutional strengthening, synergy, and collaboration with various parties, encouraging the strengthening of sharia financial infrastructure, including through digitization of products and services of sharia financial institutions, development of sharia economic and financial ecosystems, increasing awareness of business actors, and society towards islamic economy and finance. it is integrated with an ecosystem of economic development and islamic finance in indonesia (noor & pickup, 2017). formally, the direction of the development of the islamic finance sector is summarized in a roadmap for the development of islamic finance in each sector. the following is the statistical data of islamic banking institutions in indonesia as of june 2021. international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 92 table 6: cost of promotion, education and training sharia rural bank (in million idr) indicator the year 2021 jan feb mar apr may june cost of promotion 1,444 2,542 3,742 5,524 7,379 8,759 cost of education and training 1,035 1,913 3,013 4,232 4,858 6,423 total 2,479 4,455 6,755 9,756 12,237 15,182 table 7: non performing financing of sharia rural bank based on economic sector (in m idr) type of usage the year 2021 jan feb mar apr may june agriculture, forestry and agricultural facilities 45,394 50,097 49,528 50,149 50,794 51,030 mining 3,260 3,490 5 084 2 771 3 069 2 462 manufacturing 20,798 23,485 23,212 22,496 23,687 25,409 water, gas and electricity 866 2,045 2,557 2,073 2,369 2,218 construction 95,932 104,853 105,621 107,492 118,041 110,509 trade, restaurants and hotels 206,249 220 58 245,790 225,132 229,447 230,977 transport, cargo storage and communication 26,527 26,386 9,023 30,604 28,654 27,803 business services 37,480 38,395 37,626 39,048 40,067 42,577 social services 162,750 155,170 167,622 169,582 174,598 165,906 others 221,802 221,499 236,051 251,358 258,087 257,887 total 821,059 846,004 882,114 900,706 928,814 916,778 international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 93 as the development of islamic financial institutions in indonesia supports the transformation of the national economy, the assumption of projected zakat income has a very positive trend. zakat collection in 2021 using the income assumption method, namely a growth scenario of less than 20 percent, is predicted to be less than idr 14,728,239,081,439.20. meanwhile, assuming growth of more than 30 percent, the growth is predicted to be more than idr 17,285,225,033,077.90. meanwhile, with a moderate assumption of 20-30 percent, it is predicted that the collection of zakat in 2021 will be in the range of idr 14,728,239,081,439.20 idr 17,285,225,033,077.90. the table below details the results of the calculation of the projected collection of zakat as follows. table 8: projection of zakat collection in 2021 nationally projection growth pessimistic scenario <20% (idr) scenario moderate growth 20%-30% (idr) scenario optimistic growth >30% (idr) the year 2020 12,273,532,567,866 12,273,532,567,866 13,296,326,948,521 13,296,326,948,521 the year 2021 14,728,239,081,439 14,728,239,081,439 17,285,225,033,077 17,285,225,033,077 figure 6: projection of zakat in indonesia in 2021 0 5 10 15 20 25 30 35 40 zakat collection (in trillion idr) distribution of zakat (in trillion idr) giver and recipient of zakat (million people) beneficiaries (million people) 17.3 14.6 14.9 39.7 12.3 10.5 9.3 24.8 12.1 11.2 9.4 24.9 13.5 12.5 0 37.5 method optimistic scenario arithmetic method straight line arithmetic method geometric method straight line international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 94 5. conclusion and recommendation 5.1.conclusion in the last decade, islamic economics and finance contributed to indonesia showing consistent and positive growth, islamic banking assets on the banking side were recorded at 15.6% and assets have reached idr 598.2 trillion. this shows that the performance of islamic banking is much better than the conventional banking system. a positive growth trend also occurred in the islamic capital market sector. the number of investors recorded an increase of 9.3% in the first quarter of 2021. meanwhile, outstanding indonesian sukuk reached idr 1,076 trillion in july 2021 or grew 10.75% on an annual basis. the economy of south sulawesi in the first semester of 2021 compared to the first quarter of 2020 increased by 3.71 percent. positive growth occurred in 16 categories of business fields with the highest growth achieved by transportation and warehousing at 11.05 percent, followed by corporate services at 9.85 percent, and health services and social activities at 8.97 percent. grdp growth of several business fields in the first semester of 2021 against the first quarter of 2020. south sulawesi also still provides the largest contribution to the gross regional domestic product, sulawesi island, which is 47.26 percent in the second quarter of 2021, followed by central sulawesi province at 20.98 percent. this means that of the idr 1 billion produced by the island of sulawesi, around 472.6 million came from the province of south sulawesi. meanwhile, the highest growth was in the second quarter of 2021. south sulawesi's economic growth in the second quarter of 2021 compared to the first quarter of 2021 (q-to-q) grew by 7.44 percent. all business sectors grew positively, the highest was achieved by wholesale and retail trade; car and motorcycle repairs by 19.70 percent; then government administration, defense, and compulsory social security by 17.82 percent; education services grew by 12.57 percent. 5.2.recommendation zakat during the covid-19 pandemic has a fairly large role, considering that in 2019, the recipient government zakat agency (baznas) and the indonesian private zakat agency (laz), especially in south sulawesi province have a joint commitment to reduce poverty by 1% by 2020. the role of zakat in realizing the transformation of the national economy is in 4 international journal of commerce and finance abdul karim & ahmad jumarding & amrullah ahmad 95 sectors in south sulawesi 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(2021) 0297–0303. https://doi.org/10/13106/jafeb.2021.vol.8.no10.0297 https://doi.org/10.26555/ijish.v4i1.1960 https://doi.org/10.13106/ajbe.2021.vol11.no3.45 https://doi.org/10/13106/jafeb.2021.vol.8.no10.0297 international journal of commerce and finance, vol. 6, issue 2, 2020, 33-39 33 phenomenological study of exploring integrity culture during covid-19 in ethiopia debebe alemu kebede, jimma university, jimma, ethiopia mesfin lemma jimma university, jimma, ethiopia received: may 19, 2020 accepted: june 18, 2020 published: oct 02, 2020 abstract integrity is a common issue regardless of level of economy and conditions. the aim of this study was to explore what integrity looks like in ethiopia during covid-19. the study philosophical stances will be objectivist ontology and critical realist epistemology. to achieve the objective of the study, the qualitative phenomenological method will be applied to illustrate the issue. the necessary data was collected from purposively selected stakeholders by using semi-structured interview and observation as well document analysis for the secondary data. the study revealed there is a problem of awareness about the pandemic specifically in rural areas of the country, there is also a problem on existing media making the pandemic their prior issues, the business ethics are highly violated and leaders of political parties prioritizing issues of election rather than pandemic. commonly prioritization of the current worldwide pandemics is what expected from different stakeholders in the country. keywords: phenomenology; integrity; ethiopia; covid-19 1. introduction in the current dynamic environment modern organizations face challenges to “do the right thing” and ensure organizational effectiveness as the result of system volatility (lawler and worley, 2006; armenakis and harris, 2009). to deal with such a complex and dynamic environment, organizations need organizational system integrity. cameron et al., (2004) consider that the ethical factors in organizations can be measured by organizational integrity among other four factors such as organizational forgiveness, organizational trust, organizational optimism, and organizational compassion. thereby, to develop beneficial cooperation between persons and organizations, it is required trust-generating integrity (axelrod, 1984). shafter, et al. (2016) also stated as integrity is the most valued and respected quality of leadership and one of the most important management skills organization need to attain. integrity is an organization functioning consistently with the purposes and values for which it was created (molina, 2016). along these lines, it is crucial for an organization to effectively articulate its mission and values for its members to internalize and integrate them into dayto-day work. it is expected from management and leadership of the organization to formulate strong system integrity for the aligned implementation of organizational policies that institutionalize ongoing moral improvement within and between organizations (petrick & quinn, 2000). hence, to avoid the possibility of what hicks (2007) terms “systemic ethical failure” in organization, it is important to sustain an ethical organizational culture framework for maintaining and promoting organizational management integrity and for understanding and managing people in organizational settings. therefore, improving integrity has become a major concern in the organizations including the public sectors. public servants assist in the supervision of public resources, perform policy-making functions, and interact with citizens. in this sense, fostering integrity and prevent unethical behavior in the public sector are essential in sustain confidence in government and its institutions also helps to guard against the abuse of powers (thompson, 1992) regardless of comforting the integrity slogans on the home page of the company website and main organizational principles. simons (2008) has argued that integrity is the main feature that touches every aspect of a business. great strategies are nothing if they cannot be implemented perfectly (pearce & robinson 2010). according to witsen churchill “price of greatness is responsibility” so great strategies can only be formulated and implement with responsible management and leadership. there are abundant of studies within the ethiopian context regarding the in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e debebe alemu kebede & mesfin lemma 34 problem of public and private sectors in relation to their customer and complaint handling mechanism, service quality, competition; effect, role and impact of management and leadership in organizational performance and commitment. however, there is lack of empirical study that assessed from integrity perspective and during pandemic. however, it is currently during covid-19 observed in ethiopia increasing levels of unethical business activities, illegal acts, suspicion and leader malfunction (pilot survey, 2019). lacks of integrity leads partiality on service providing, problem on service they provide, service delay, usually changing rule and regulation, concerned body of organization act abnormally, declining performance because of previous leader transferred to another position and a single change have constraint on function of organizations. organizations in ethiopian is not exceptional. a culture of integrity adds value to the firm. the true measure of integrity in a firm is not comforting slogans on the home page of the company website, but how employees feel about whether top management and how customers feel about the organization, through its actions and behaviors, is living up to the promise in words and reason for establishment. the purpose of this survey was to describe what integrity seems like in ethiopian during covid-19 pandemic. specifically, the study will try to address: • to assess the societies awareness towards covid-19 in ethiopia • to analyze the role media played during the pandemic • to identify the current integrity status of business sectors in ethiopia • to identify the current integrity status of leadership in ethiopia 2. research methods philosophy impacts upon management research because research based on a different philosophy can produce a different result. since it will not only influence how research is going to be conducting but also the criteria by which it should be evaluated (cassell & johnson, 2006). mingers (2003) describes that ontology is the assumption about the nature of reality and taking a stance on ontology is to recognize the existence of different types of objects and relations while a stance on epistemology is to recognize that there are different ways of knowing the world. therefore, the study philosophical stances will be objectivist ontology and critical realist epistemology. since media, business unit and leadership is an objective entity that the researcher decided to adopt an objectivist stance to the study of integrity. the study epistemological stance will be critical realist (saunders, et al., 2009). critical realists argue that what we experience are sensations, the images of the things in the real world, not the things directly. business and management research are concerned with the social world in which we live. it is better to agree with writers such as bhaskar (1989) who identify with the epistemology of critical realists which states we will only be able to understand what is going on in the social world if we understand the social structures that have given rise to the phenomena that we are trying to understand. in other words, what we see is only part of the bigger picture. further, the critical realist’s position that the social world is constantly changing is much more in line with the purpose of business and management research which is too often to understand the reason for phenomena as a forerunner to recommending change. that is the reason critical realist epistemology will be applied for this study. the purpose of this study is to explore integrity through illustrating it from a society, media, business unit and leaderships perspectives so as to contribute to the concept of integrity during the pandemics, an inductive and qualitative research approach is well suited. further, to achieve the objective of the study, the phenomenological method will be applied. thus, to conduct this study both primary and secondary data’s will be collected. the primary data source was 20 population from societies, media (public, private and social media), 20 population from business units and government body, while, the sources of secondary data were strategic plan document of the government related to pandemics, internets and journals. the potential data collection method were observation and telephone interview. convenience sampling were used to reach the target population. after the data is collected the researcher tried to make the data ready for analysis. tracy (2013) advocates forms of data analysis and interpretation in case study research as follows: categorical aggregation form, the researcher seeks a collection of instances from the data, hoping that issue-relevant meanings will emerge. it is a process of pulling the data apart and putting them back together in more meaningful ways. also, the researcher establishes patterns and looks for a correspondence between two or more categories. this study will follow categorical aggregation forms of data analysis and interpretation since result can be analyzed for important themes. themes are identified by the frequency phenomenological study of exploring integrity culture during covid-19 in ethiopia 35 with which the same term (or a synonym) arises in the narrative description. the themes may be useful in discovering variables that are relevant to potential explanations (zikmund, et al., 2009). also, while conducting this study qualitative research validation and reliability will be checked. creswell (2013) consider “validation” in qualitative research to be an attempt to assess the “accuracy” of the findings, as best described by the researcher and the participants. internal validity refers to correct mapping of the phenomenon with findings. this is through triangulation which is make use of multiple and different sources, methods, investigators, and theories to provide corroborating evidence. so, integrity is evaluated through collaborating evidence from different sources to shed light on perspective. further, prolonged engagement and persistent observation in the field will takes place to check for misinformation that stems from distortions introduced by the researcher or informants. external validity refers to generalizability of findings. to assure the generalizability of the study the researcher will collect the information from target population which is interdependent group systematically as it describes the detail of the participants or setting under study using strong action verbs, and quotes. while reliability in qualitative research refers to the stability of responses and is closely related to replicability. reliability will be assured through asking question of the same concept. all necessary requirements were considered will collecting the data. the research results discussed, analyzed and reported without actually side with the participants on issues that emanated from spending considerable time with them. 3. results and discussions from the telephone interview undertaken with respondent’s majority of them replied as they are more or less aware about the covid-19 from different medias and volunteers since they are found where frequency of radio and television program is appropriately reaches. almost all of the respondents describe as the first two weeks awareness creation was focused only on hand wash. for this a lot of volunteers are participating on street hand washing program. every body was wash and move here and there, the road was a full of journeyer because of the school and government organizations was closed. some of the respondents also informed as they meet those don’t know about the pandemics in the cities and additionally, their family in the country side haven’t any awareness about the covid-19. majority of respondents raised as it was difficult for them what ministry of health announced about keeping social and physical distance as the result of its difficulty with our living standards, culture and lack of infrastructures. inadequacy of water supply, difficulty of getting sanitizers and its expenses was what raised by the respondents and observed in ethiopia. this implies as societies specially those have access for information are aware about the covid-19 in spite of difficulty of getting necessary materials. also, the role that played by medias whether it is private, public or social media was the issues that interviewed. the respondent’s thanks those media that works day and night for creating awareness to the societies about the pandemics. the result from the interview undertaken with some media and respondents the role that was played by media are aware the societies through: producing and distributing short films, debates and discussion with health professionals and societies, informing the existing gap of government. however, the program designed to distribute for societies are up to their frequency coverage, not reachable at country side specially where no power. it is also observed as there was a media that forgotten the current worldwide pandemics and focused on political issues. this implied as there is shortage of media coverage on pandemics in ethiopia. there are the media in the country those are not properly participating on reason for what the media is established. additionally, business unit was considered while interview was undertaken. majority of the respondents indicated as business ethics was violated during this pandemic as the result of business organization increase the price of products, secrete the products to form shortage in the markets, selling low quality products and contrabands covid-19 protection materials. almost all respondents indicated as what business units did to his societies are out of culture and unethical. this shows as business units in the country didn’t respect the integrity slogan they attached on their website or basic principles. lastly, interview and observation result with respect to leadership. majority of respondents replied as what leaders of different political parties crying about this year national election rather than the pandemic is out of mind. some of respondents raised whom this political parties going to lead? there are also leaders that cares about societies day and night specially addis ababa mayor that systematically leading the city by preparing food bank, encouraging the debebe alemu kebede & mesfin lemma 36 investors to invest on protection materials. one of the respondents raised unethical and corrupted individuals with those was appointed to check whether private and public organizations readiness to protect the covid-19. it also observed 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profound contribution of tourism industry to the growth of real income. this study examines the long-term impact of international tourism on economic growth in ethiopia, using a series of annual data spanning from 1995 to 2018. we contribute to the existing empirical literature on tourism-led growth hypothesis, by adopting the conventional least squares framework and the engle-granger cointegration test between tourism receipts, trade openness, expenditures on physical capital, expenditures on tertiary education and economic growth in ethiopia. the engle-granger (1987) tested stable long-term relation between the variables considered. this partly guarantees the tlg hypothesis. however, contrary to the predictions of tlg, we have estimated insignificant impact of tourism receipts on the long-run growth of ethiopian economy, while challenging trustworthiness of the hypothesis in the context of ethiopia. our results revealed that the theory itself is incomplete. besides, the foreign direct investment and domestic investments in physical capital were found significant contributor of long-run real income growth in ethiopia. it is recommended that the government of ethiopia should encourage private sector participation to develop the necessary infrastructures in order to achieve higher room tenancy. keywords: cointegration; economic growth; ethiopia; international tourism, tlg hypothesis 1. introduction modeling the long-run relations between tourism and economic growth has thoughtful attention in academia and policy zones; more notably the past decade/or so periods. though the share of developing countries in tourism literatures is petite, it has grown substantially since recently. tourism, being labor-intensive industry, is argued exceptionally relevant for least developed economies. this sort of quarrel has been linked to its potential of generating employment to tremendous employment demands across ldcs. globally; tourism industry absorbs a significant portion of labor, either directly or indirectly. the world tourism organization report indicates that; of the global employment, more than 2.5 per cent is accommodated by activities related to tourism. the share is projected to reach 3.5 per cent by the end of 2025 (world bank, 2017). this projection offers incredible lesson to ldcs, where unemployment is trending up unswervingly. since tourism industry is labour-intensive, it has profound implication to reducing unemployment and fostering productivity. besides, tourism sector offers several other effects; from micro perspective, direct spending by tourists nurtures local sales, business income and tax revenues to local government. national aggregate of these gains from tourism sector has intense contribution to economic growth and developments. through its ‘multiplier effect’, tourism sector is argued positively affect other sectors of the economy. multipliers signify economic interdependencies between sectors constituting the general economy (bouzahzah & menyari, 2013; croes & vanegas, 2008; massidda & mattana, 2013). in this paper, we give especial emphasis to the international aspect of tourism marketing due to its peculiarity, compared to domestic tourism. international tourism possesses unique features; while redistributing wealth from developed to underdeveloped nations and generating foreign currency to host country. basing on this, croes and vanegas (2008) described the wealth transfer “democratization of the dollar” to signify world claims over dollar, embodying global wealth. the transfer of wealth, in turn, leads to generation of employment prospects and production enhancement across all sectors within an economy. all this fosters income growth as well as living in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e testing the stability of tourism-led growth hypothesis for ethiopia 19 standards of developing nations. according to the world development indicator published by the world bank, receipts from international tourism could include direct receipts on foreign touring carriers and expenditures on the purchase of domestic products (world bank, 2017). the later subsidiary expenditures in the host country should be regarded as tourism receipts as they were basically initiated by touring intents. international tourism market has remained the main source of forex in least developed countries, where manufacturing base is yet fragile to serve the international currency needs. besides, tourism sector is associated with domestic service sector (both in volume as well as quality), widespread capital investments with farther incentive to growing employment opportunities, rising production, increasing sales; hence, improved tax revenue to the government (lean & tang, 2010; kibara et al., 2012; agboola, 2018). indeed, raising international tourism receipt is with direct implication to the host country’s importing capability. of the remarkable challenges ldcs’ are facing is inadequate foreign exchange. since greater of their export constitute mainly of primary commodities whose demand is highly elastic, their current account balance is usually weakened (berentsen et al., 2017; nwosa, 2014). on the other hand, foreign currency is vital to import intermediate goods requisite in the development of manufacturing base and economic transformation in developing countries. that’s why developed international tourism market has been accredited to fill international currency gaps in most ldcs. for targets of foreign currency in least developed country, maintaining international tourism is relatively an excellent scheme than to export millions of tons of primary commodities. besides to that, because production in ldcs is inefficient compared to developed counterparts, ldcs exports are usually costly; unable to take competitive advantages in the global market. more importantly, capital requirement for tourism industry is much less compared to other sectors. once established tourism destinations may not need routine investments. from economic perspective, the rate of return from tourism is much higher compared to others necessitating routine as well as sophisticated technologies (dritsakis, 2012; du et al., 2017; chen & devereux, 1999; brida & risso, 2010). consequently, particular emphasis to the international aspect of tourism operation in a country like ethiopia has a paramount significance. recognizing its manifold gains, ethiopia has devoted to developing tourism, since the past ten to fifteen years. however, the gdp share of tourism sector though showing some improvements didn’t contribute at potential. this is associated to different inadequacies as political instabilities (sisay, 2013; unesco, 2008; kidane-mariam, 2015), underdevelopment of the industry (uneca, 2015), poor provision of infrastructure (nafbek, 2018; moct, 2016). empirically, the relationship between tourism development and economic growth has been extensively examined. however, particular focus to international tourism receipts has not, if any only rarely, given in previous empirical works. especially to ethiopia the topic has been overlooked. therefore, the present study is motivated to model the long-run relations between international tourism receipts and economic growth in ethiopia using time series data spanning from 1995 to 2018. we examine the following null hypothesis in line with our research objectives;  receipt from international tourism has no significant impact on economic growth;  there is no significant association between fdi and economic growth in ethiopia. 2. literature review a notable insight on the relations between economic growth and tourism industry is what has been known to be tourism-led growth hypothesis. the theory emphasizes the relevance of foreign currency in boosting ldcs economy. tourism-led growth extends the traditional solow growth model, constituting only physical and human capital, by incorporating the export sector. thus tlg theory hypothesizes that, an income growth is not only explained by the level of investments in labor and capital, but also expanding export capacity is essential approach for achieving persistent growth (akama and kieti, 2007; honey and gilpin, 2009). the theoretical justification for tourism industry is that, they are feasible alternatives to ldcs compared to other sectors, to gain competitive advantage from the international markets. these gains are achieved through foreign receipts, having profound implication to ldcs’ economy. the relevance of tourism industry to small economy is exceptionally accredited, due to ldcs possessing less opportunity cost of developing tourism industry compared to investments in manufacturing industry, basically linked to technical and economic reasons. this theory comforts our argument in this study, associating tourism to the foreign exchange receipts. we value more foreign currency receipts than the quantity of income earned. this development gives extra economic minyahil alemu haile & girma daba megerssa 20 relevance to international tourism industry due to its profound implication in the determination of ethiopia’s international competitive advantages. another conceptual perspective on the economic role of tourism industry comes from the so called theory of tourism consumption. this theory considers the production and consumption advantages in the goods manufacturing industry, which are primarily induced by tourism activities. the theory maintains that, activities in tourism industry have potentials of influencing production, employment and consumption decisions in the rest of the economy. therefore, the economic effect of tourism activities multiply to other sectors of the economy, and that the overall economy improves with the level of tourism developments. the theory of tourism consumption postulates that, as tourism activities influence the decisions and behaviors of tourists in related activities, these patterns induce the use and purchase of products in the domestic markets, providing farther incentives to host country (woodside and roberta, 1994). this theory links tourism to the general economy through more of secondary effects from tourism, with least emphasis to its direct implication. however, the theory is recognized in literatures for bolding out the multiplier effects. still it is also criticized for being incomplete as it provides no detail on the specific channels between tourism industry and the rest of the economy. irrespective of these criticisms, theory remained influential in studies linking tourism and economic growth. though theories favor international tourism as a source of economic growth, its practical impact has remained controversial. chen and devereux (1999) argued for the likely negative welfare impact of international tourism in countries with high trade restriction (in form of export taxes and import subsidies). basing on the framework of international trade, they claimed that direct investments in tourism development causes significant social benefits, but with collapsing production and growth. empirically, the relationship between tourism development and economic growth has been extensively examined. however, particular focus to international tourism receipts has not, or only rarely, given in previous empirical works. especially to ethiopia, the topic is missing in the collection of empirical works. but, relatively sufficient number of works exists linking ethiopian general tourism to economic growth. a recent empirical consideration is a study by mohamed and younesse (2013), where they have examined the relationship between international tourism and economic growth employing time series data with temporal coverage ranging from 1980-2010. their causality analysis has confirmed a positive effect of international tourism receipts on economic growth only in the short run to both countries. in contrast to tourism-led growth hypothesis, only unidirectional causality from economic growth to international tourism was revealed. their analysis was, however, limited to only two regressors (international tourism and exchange rate), where impossible to control impacts of extraneous variables on the economic growth. besides, there is no theoretical guideline suggesting such a growth model; in this sense, the model specified was incomplete. kibara et al. (2012), in turn, examined the dynamic relationship between tourism development and economic growth using annual time series data to kenya. this study found a positive significant influence of international tourism receipts on kenya’s economic growth. in their study, the positive impulse transmits via its positive effect of international trade. erick (2016) has analyzed the relationship between international tourism receipts and economic growth using a time series data ranging from 1980-2013 from kenya. in his study, he found insignificant impact of international tourism receipts on kenya’s economic growth, in contrast to the hypothesis of tourism-led growth. the justification for the estimated insignificant impact of international tourism on kenya’s economic growth was that, tourism industry in kenya mostly belongs to foreigners; hence they could repatriate an important part gains to their foreign country. moreover, erick (2016) has estimated insignificant growth impact of expenditures on education, as the marginal benefits from education are not growing as high as the growth marginal benefits of providing education. he also associated to poor quality education and lack of institutions to administer the growing labor. gross fixed capital formation was suggested to contribute positively to the growth of kenya’s economy. du et al. (2017) has gone through extensive analysis on the relationship between international tourism and economic growth by employing a cross-section of 109 countries. their result has shown that, tourism receipts alone is not sufficient to foster economic growth in the long term, it would be most effective when it is integrated into a broad development strategy that has a primary focus on the development of standard income determinants. the implication follows that, international tourism receipts could make important contribution to economic growth only if those receipts are reinvested with the objective of enhancing physical as well as human capital developments. however, their analysis is limited only to two regressors, which could likely suffer from the omitted variables bias. testing the stability of tourism-led growth hypothesis for ethiopia 21 fayissa et al. (2007) has estimated a robust association between tourism development and economic growth for 42 african countries. their findings proved that receipts from the tourism industry significantly contribute both to current gdp and the economic growth of sub-saharan african countries, while giving empirical support to tlgh. besides to this, there exist empirical studies consistent to tourism-led growth hypothesis (odhiambo, 2011; payne and mervar, 2010; katircioglu, 2009; and lee, 2008). a problem in referring to these studies is that, they are mostly outdated, which might not fit into current economic environment. moreover, akinboade and braimoh (2010); brida and risso (2010); belloumi (2010); lean and tang (2010) and narayan et al. (2010) confirmed a robust impact of international tourism receipts on the growth rate of real gdp, while validating the hypothesis of tourism-led growth model. of the recent evidences, a positive impact of international tourism on economic growth was also confirmed for italy (massidda and mattana, 2013); the four pacific island countries (narayan et al., 2010); and sample mediterranean states (dritsakis, 2012). 3. research methodology 3.1. the data the world bank data base was our exclusive reference. the study employs a series of annual observation spanning from 1995 to 2018. therefore, the sample coverage with the study is 23 years, which is fairly sufficient for cointegration analysis. 3.2. data analysis the data were analyzed descriptively and using regression framework. individual development in ethiopia’s international tourism receipts and joint trends with rgdp and tourism receipts were assessed by descriptive tools as standard deviation, mean, maximum as well as minimum values. the course of descriptive analysis has been subjected to relevant graphical aspects where necessary. besides, the inferential aspect was examined using conventional least squares method. sections below provide details of the inferential analysis. 3.2.1. model specification and variable measurement we measure the elasticity of ethiopia’s economic growth with respect to changes in international tourism receipt. in due course, we need to consider the conventional growth model, incorporating important theoretical variables. the variables reflected are mainly those suggested in traditional growth theories, mainly by solow and new growth theory (snowdon and vane, 2005; mankiw, 2010). these include; investments in physical as well as human capital, country’s exposure to international trade, foreign direct investment. since we aim to determine how income growth bounces with tourism earnings, international tourism receipts entered the growth model as a principal regressor. we first specify the following log-linear cobb-douglas production function; lnrgdpt = β0 + β1lntedut + β2lnoppt + β3lntrmt + β4gcft + β5fdit + εt……….. (1) where β1 – β5 measure the responsiveness of corresponding regressors to changes in rgdp; β0 is an intercept. rgdp is real gross domestic product; tedu represents government expenditure on tertiary education; opp measures the degree of ethiopia’s exposure to international markets, which is ratio of the sum of current imports and exports to gdp; trm is ethiopia’s international tourism receipt; fdi indicates the flow of foreign direct investment; and gcf is gross capital formation. while ln is natural log of each term, ε is white noise error; and t is the time trend. we expect positive response of economic growth to changes in international tourism receipts due to tourism-led growth hypothesis. that is, we presume β3 to be positive in equation (1) above. the relationship between economic growth and investment in physical as well as human capital is obvious; hence, we expect β1 and β4 to be positive. likewise, as explained by international trade and theories, we expect to estimate positive coefficient for β2, associated to opp notation in equation (1). in the context of ldc like ethiopia, where domestic investment is fragile yet, we expect positive association between economic growth and the fdi flows. to estimate β parameters in equation (1), we employed the conventional least squares regression framework due to (ali and abdull, 2014; mbongo et al., 2014). a major improvement rests on the extension of the size of observations as well as number of regressors. minyahil alemu haile & girma daba megerssa 22 3.2.2. stationarity test a priori with time series is examination of unit root properties of each series under consideration. the requirement with predictive model is that, all series should be stationary; i.e., must not contain a unit root. an important condition with forecasting models is that, all variables used in the analysis should have time invariant mean and variance (gujarati, 2004; wooldridge, 2013). a serious emphasis also requires stable covariance of each variable. stationarity conditions were examined via augmented dickey-fuller (adf) test (dickey and fuller, 1979). adf is based on regression of the first difference of y (δyt) on a constant, time trend (yt-1) and various lags of y, specified as follows; yt = α0 +  t + yt-1 + yt-i + t…………………………… (2) where  is first difference operator; α0 is a constant; γ represents trend coefficient; t stands for time trend; and k represents lag length. null the presence of unit root problem in y. adf is based on the t-ratio of yt-1. if it exceeds adf critical at any one of the three benchmarks (reported at 1%, 5% or 10%), the null hypothesis will be rejected. nevertheless, if yt is tested non-stationary, the first difference δyt should then be tested for stationarity using the same procedure; and the procedure will continue until it is stationary. but, in most of the cases economic and financial data are stationary at first differences. the length of time lag in regressions of ecm and adf models is often determined empirically; to take sufficient size so that the error term is indeed serially uncorrelated. the suitable lag (k) is set, for instance, based on minimizing akaike information criterion (see gujarati, 2004; wooldridge, 2013; maddala, 1992). in this paper k was determined based on aic due to (gujarati, 2004). 3.2.3. the cointegration test as long as the monetarists’ demonstration focuses on the long-term, we first need to examine whether the variables exhibit long-run equilibrium stable relationship. if no cointegration is tested in advance, the analysis must break with no need of moving ahead. for cointegration purpose, the engle-granger (1987) method was employed to test a null of no cointegration, against the alternative. the null hypothesis depicts that, the ols residual obtained from level form regression contains a unit root, examined through adf test. if the null hypothesis is true, then the variables couldn’t exhibit common long-run path. thus, we conclude the series are not cointegrated. engle-granger examines if residuals of the equilibrium relationship are stationary. details for this approach can be understood using the below static model; yt = 0 + 1xt + t……………………………….. (3) satisfied, we run ols regression using equation (3) to obtain ols residuals. we, then, run adf regression on the residual at level to determine if it is stationary. if the residual is non-stationary, conclude that there is no cointegration between the dependent and independent variables (engle-granger, 1987; gujarati, 2004). note that, stata statistical software package version 14 was used for every regression analysis throughout this study. 4. results and discussions 4.1. descriptive results 4.1.1. trend analysis for ethiopia’s international tourism receipts since receipts from international tourism are associated to foreign currency (all denominated to usd), we put the trend analysis on the development of international tourism in ethiopia in terms of unite state’s dollar. the series of our data set begins from 1995 and ends 2018. the temporal coverage in our analysis ranges between 1995/96 and 2018/19 the base year (1995/96) has registered about 177,000.000 usd receipts from international tourism, but immediately fell to 170,000.000 usd the next fiscal year. the receipts declined by 3.95 per cent in 1996/97 fiscal year compared to the base year. between 1996/97 to 1998/99, ethiopia’s receipt from international tourism has persisted declining. it is evident from figure (1) negative growth in ethiopia’s international receipt for three consecutive years. testing the stability of tourism-led growth hypothesis for ethiopia 23 fig. (1): developments in ethiopia’s international tourism receipts (1995-2018) source: own computation based on the wb (2020) ethiopia’s international tourism receipt has shown remarkable improvement between 1999 and 2008 (figure 1). the country’s receipt from international tourism has been rising tremendously for ten successive years, with ever higher rate of 49.87 per cent in 2008/09 fiscal year. the period was pronounced as an era of revolution in the international tourism industry. this remarkable achievement was mainly linked to the then ethiopian millennium festivity and allied international as well as regional clouds. moreover, period between 1999/2000 and 2008/09 is featured by relative political stability as well as the country’s mass recovery. however, the year 2008/09 was followed by the worst episode in the international tourism. during 2009/10, ethiopia’s receipt from international tourism fell by 5.49 per cent from previous year, associated basically to the then parliamentary election. it gives clear relevance to peace and internal stability in consideration to country’s economy. as with most developing countries, national elections in africa have usually been followed by mass demonstrations, chaos and multifaceted destructions. fearing these and related life risks, tourists usually lose confidence to travel, both before and after the election schedule. this time lag has clear implication to the host country’s tourism industry. more importantly, the year 2008/09 marked the worst global financial crises. as the effect usually holdups, the 2009 tourism downturn in ethiopia could likely result from the then global crisis. as with other sectors, tourism has greatly affected of the crisis whereby restricting international movements and cross country trade. thus, collapse in ethiopia’s international tourism receipt would be primarily subjected to the then global incidence. the next two consecutive years revealed upsurge in ethiopia’s international tourism receipts, with 28.15 per cent in 2010/11 and 39.33 per cent in 2011/12. in turn, the country’s receipt has fallen by 0.90 per cent during 2012. the lost revenue in absolute terms was 18,000,000 usd. between 2013/14-2018/19 period, ethiopia’s receipt from international tourism has been oscillating, with considerable improvements in the latter two years. while 2017/18 has recorded a growth rate of 17.17 per cent, the year 2018/19 has exhibited about 41.64 per cent growth rate, which is the second largest achievement in the history of ethiopian international tourism. this could be associated with profound political as well as economic reforms undertaken in the country for the past two years. part of these reforms involved creating conducive environment to enhance tourism industry. concurrent developments in the sector, including the launch of unity park and other tourism oriented projects in addis, provide farther opportunities to ethiopian tourism industry. moreover, the years 2014/15 and 2016/17 have revealed negative growth in ethiopia’s international receipts from tourism operation, mainly due to frequent internal instabilities and political tensions during these periods. generally, though ethiopia’s international tourism receipts show improvements, the growth has been not persistent. there has not been continuity in the growth of international tourism receipts. periods of negative growth were associated with various international and internal inadequacies, which have considerably limited international movements. most of the growth breaks were either during international incidents (like the financial crisis of 2008/09) or country specific challenges such as political turmoil and related tension. these imply the role of globally interconnectedness in determination of individual economy. we also noticed the relevance of internal solidity to intensifying the development of international tourism, and fostering economic growth at the same time. minyahil alemu haile & girma daba megerssa 24 4.1.2. relations of tourism receipts and economic growth: joint trend analysis common trend analysis is intended to initiate visions for inferential analysis (to be addressed in subsequent sections), as it helps understand if both series exhibit long-term common path. besides, the pattern of movements among both series reveals the nature of relationships between them. as tourism industry makes part of gdp, we expect positive correlation; but we aim to examine how strong such relationship will be in the context of ethiopian economy. inspection into the history of ethiopian economy since 1995/96 evidenced negative growth rates only twice; with 3.46 per cent in 1998/99 and 2.16 per cent decline in 2003/04. during 1998/99 period, ethiopia’s international tourism receipt has also declined by 3.18 per cent. here we that, both variables revealed negative growth in the same year. more importantly, they both declined almost in equal rates in that year, demonstrating strong positive correlation. but in 2003/04, tourism receipt registered positive growth of 28.74 percent, while the rgdp contracted by 2.16 per cent from previous year. this demonstrates the dropped gdp share of other sectors, more importantly of agriculture, despite considerable improvements from international tourism. this economic collapse has been associated with the then national parliamentary election in the country, which had likely diverted resources towards election campaign. as with the case in most developing countries, little attention has been paid to production sector during periods of election campaign in the country. figure below reveals growth trends in international tourism receipt and economic growth of ethiopia, since 1995/96 onwards. fig. (2): relationship between international tourism and economic growth (1995-2018) source: own manipulation based on the world bank (2020) the first three years marked negative growth in ethiopia’s international tourism, while rgdp has been improving slightly. for example, ethiopia’s economy has been growing continuously during 1995-1997, while tourism receipt persisted declining during the same period. this shows the minimal role of international tourism in determination of the general economy. one possible observation from figure 2 is a much higher growth in tourisms receipts compared to real gdp growth. irrespective of enormous improvements in tourism receipt, rgdp responded only moderately; most considerably after 1999/2000. in most of our observation period, both series seem to trend in common, but with weak association. irrespective of substantial swings in tourism receipts, the rgdp growth exhibited stable rate, demonstrating insignificance of international tourism development on economic growth; at least, during those periods. for example; for consecutive years from 2002/3-2004/5, tourism revenue has been improving substantially, while the economic growth during those periods was near to zero. a notable year can be 2003/04; during which tourism receipt has grown at a rate of 28.74 per cent, while the economy has declined by 2.16 per cent. this demonstrates that, receipts from international tourism have not been contributing to the economic growth of ethiopia. a caution should be noticed here not to undermine the profound role foreign exchange has in determination of ldc’s economy, like ethiopia. the irregular trend may be justified in various ways in the context of ethiopian economy. one possibility may be that, those international receipts were likely utilized in nonproductively. besides, these receipts might most probably be kept at foreign reserves account without letting them go in the production sector. between the years 2004-2008, tourism receipt has shown substantial improvement, while the growth rate in rgdp was stable. tourism revenue has registered an ever largest growth rate of 49.87 per cent in 2008, with 10.79 per cent growth from rgdp. prior to this year, growth rates of tourism receipts and rgdp were 23.63 and 11.46 per cents. testing the stability of tourism-led growth hypothesis for ethiopia 25 between 2004/05-2018/19, ethiopian economy revealed positive and persistent growth, with slight fluctuation. during these periods, tourism receipts have been fluctuating, even with four times downturn. in the final year of our observation period, tourism receipt has grown by 41.64 per cent, while the economy registering only 6.82 per cent. it signifies less responsiveness of economic growth to developments from international tourism revenue. the joint trend analysis for ethiopia’s international tourism receipt and economic growth posits two important implications. firstly, tourism revenue has been growing in much higher rate of economic growth in ethiopia during our sample period. secondly, irrespective of large fluctuations in the growth of ethiopia’s tourism receipt, rgdp has been growing at average stable rate. this indicates that, the responsiveness of rgdp to changes in tourism revenue was law. therefore, we expect a positive and insignificant impact of international tourism on ethiopia’s economic growth, later in our inferential analysis. 4.2.inferential analysis 4.2.1. stationarity condition the series were all subjected to augmented dickey fuller (adf) stationarity test and all were found to contain a unit root problem without differencing. but, all were tested stationary at their first differences. the maximum number of lag suggested for stationary examination each case was one. table below reports adf test statistics: table (1): the adf stationarity test results: temporal coverage (1995-2018) adf statistic at first difference, yt variables t-stat. critical at: 1% 5% 10% lninrgdpt-1 -3.679** -3.750 -3.000 -2.630 lntrsmt-1 -2.828* -3.750 -3.000 -2.630 lngcft-1 -2.822* -3.750 -3.000 -2.630 lnoppt-1 -3.885*** -3.750 -3.000 -2.630 lnfdit-1 -4.381*** -3.750 -3.000 -2.630 lntedut-1 -4.941*** -3.750 -3.000 -2.630 ***, ** and *, respectively, reject the null hypothesis at 1%, 5% and 10% significance level. source: own computation using stata 14 (2020) table (1) evidences that, all variables entered the regression model are integrated of first order, though significance level varies. the adf statistics for opp, fdi and tedu tested significant at 1 per cent, while tourism receipt and gross capital formation were stationary at 10 per cent. adf statistic for rgdp was tested significant at 5 per cent. the appropriate lag length used for stationarity test was one; therefore, the subsequent analyses also uses a 1 period lagged terms of each series of interest. 4.2.2. cointegration analysis stationarity with all variables allows us forecast the long run dynamics of the growth model in a relation to regressors considered in this study. according to (gujarati, 2004; wooldridge, 2013) with non-stationary variables it is impossible to make inferences, but only to the sample period covered. on the other hand, a linear transformation of non-stationary variables can be stationary. this joint stationarity among a set of time series variables is known as cointegration. testing for cointegration is a precondition for analyzing the long-run behaviors of economic and financial variables. engle-granger (1987) cointegration test was employed to determine if the variables possess long-term equilibrium relations. the e-g(1981) method examines the null hypothesis that, the variables are not cointegrated. the procedure of e-g(1987) cointegration is based adf regression on the predicted residuals from the conventional least squares model. the adf test was again employed to examine the unit root property of residuals obtained from regression of conventional least squares model in level form. if adf reports stationarity in the residuals, the e minyahil alemu haile & girma daba megerssa 26 g(1987) test rejects the null of no cointegration. table (2) reports the adf regression results for the predicted residuals: table (2): the cointegration test for ols residuals adf critical: t-stat. 0.01 0.05 0.1 decision ectt-1 -3.538** -3.750 -3.000 -2.630 reject the null hypothesis dependent variable: ectt-1 null hypothesis: ect is non-stationary *** rejection of the null at 5 % significance level source: own computation using stata 14 table (2) reveals significant adf statistic of the predicted residuals at 5 per cent, while rejecting the null hypothesis of no cointegration with e-g (1987) test. therefore, the variables entered the growth model possess stable long-term equilibrium. once the existence of long-term relationship is confirmed, the next task is to estimate how strong such relationship is for individual variables. this is achieved by modeling the suggested long-run relationships and estimating the coefficients using the data collected. 4.2.3. the long-run relationship analyses we examined the long-run dynamics employing the conventional least squares regression. ols was specified by differencing all variables once as stationarity was suggested at first orders of each series. methodological prerequisites with ols framework were all tested robust. residual normality, homoscedasticity, residual independence, omitted variables bias and multicollinearity issues were all examined and none has failed corresponding validity test. then, ols model was directly estimated with all variables differenced once. the below table presents the long-run coefficients: table (3): the long-run model regression results regressors coef. std. err. t-ratio lntrsmt-1 0.1079 0.0633 1.70 lngcft-1 0.2754*** 0.0377 7.30 lnfdit-1 0.1563** 0.0622 2.51 lnoppt-1 lntedut-1 ectt-1 constant, β0 0.1664 0.3862** -0.6235 0.3968 0.2689 0.2779 0.42 1.44 -2.24 ***&**, respectively, indicate rejection of the null at 1 and 5 per cent level of significance source: own computation using stata 14 a preliminary analysis to global significance has been verified through f-test and the adjusted coefficient of determination. with r ̅^2=0.85, we see the regressors jointly account for about 85% of ethiopia’s economic growth, demonstrating the robustness of our specification. moreover, the significant f-statistic also authorizes the universal significance of the long-run model. from table (3) we observe that, the coefficient of the error correction term (ect) is appropriate and in sign and significant too, demonstrating the presence of long-term equilibrium relations among the variables in the model. hence, the engle-granger cointegration methodology rejects the null hypothesis of no cointegration, permitting modeling the long-run relationships between variables of interest. the cointegration equation for the variables entered the growth model in the present study is, therefore, specified as; testing the stability of tourism-led growth hypothesis for ethiopia 27 δlnrgdpt=β0+βi t-i+βj t-j+βk t-j+βl t-j+ βm t-j + β6ectt-1 + εt……………………………………….. (4) ect represents error correction term; εt is the residual. the inclusion of ect into equation (4) is to indicate the presence of cointegrating relations among the series in the specification. evident from table (3) above is a positive, but insignificant coefficient of tourism receipts, rejecting hypothesis of tlg to ethiopian context. so far in our descriptive analysis, we made similar conclusion based on observed trends between tourism receipts and real gdp for the sample period. a result from inferential analysis is consistent to descriptive marks demonstrating the worthlessness of international tourism receipts on the long-run growth processes of ethiopian economy. a caution is here not to undermine the profound implication with foreign exchanges in the development of, exceptionally to the least developed countries’ economy, like those of sub-saharan africa. the insinuation with the appraised outcome might be that; those receipts were not productively utilized as justified by (he and zheng, 2011; oh, 2005; mohamed and youness, 2013; kibara et al., 2012; katircioglu, 2010; erick, 2016). besides, those tourism receipts may contribute insignificantly if inadequate (du et al., 2017; fayissa et al., 2008; belloumi, 2010); and when they are rather misused and embezzled by those government agents close to them. according to (chen and devereux, 1999; belloumi, 2010) it would be possible to meaningfully interpret those receipts from international tourism if policy schemes are directed towards the efficient utilization of these resources in productive manner. the fdi has been important in the long-run growth process of ethiopian economy. evident from table (3) shows that, fdi has been the most important contributor of economic growth in the long-run. the estimated coefficient being 0.1563(0.022) was positive and significant at 5 per cent, entailing its persistent economic relevance. theoretical justification on the positive role of foreign direct investment is forward. fdi is acknowledged to foster the recipient’s productive capacity via enhanced technological innovation and skill transfer with its implication to refining domestic employment, effective resource utilization, increasing exports (and imports of intermediate goods) as well as increasing manufacturing capability, the foreign direct investment inflows are highly favored. our finding is consistent to most previous research outputs such as those of (berentsen et al., 2017; ayesha, 2013; minyahil et al., 2016; banda, 2016; labonte, 2016; tenzin, 2019). gross capital formation has been found effective in fostering the long-run economic growth of ethiopia. this is indicated by the positive and significant coefficient for the variable gcf in the table above. that means the country’s effort in increasing investments in physical capital for the past periods was successful in maintaining economic growth. investments in physical capital are not only meant to boosting productivity of existing labor, but also absorption of idle capacity into the productive sector is also likely. thus, the significant impact of expenditures on physical capital is also expected to foster employment, and reduce inflation rate via the output channel. the estimated positive impact of investments in physical capital is straight forward gives empirical support to growth theories such as those of (samuelson and solow, 1960; gordon, 2011). according to new growth theory, expansions in physical capital are effective in boosting output via increasing economy’s productive potential and productivity of the labor force. the present finding is also the same to most previous findings, of which some include (zoran, 2015; mohseni and jouzaryan, 2015; agboola et al., 2018; attahir, 2016; nwosa, 2014). the long-term economic contribution of public spending on tertiary education was suggested insignificant. the finding looks controversial to arguments in favor of education to be passionate in actualizing dependable growth via its influence on human capital development. education is argued to foster workers’ technical, analytical, communication as well as managerial skills; and finally contribute to labor productivity (mankiw, 2010; romer, 1996). at the national level, expenditures in tertiary education are adopted as schemes to enhance development of human capital. theoretical perspective on the multifaceted relevance of investments in human capital development is straight. of the competing rationales with human capital development is to foster labor productivity and production (romer, 1996; snowdon and vane, 2005). the history of asian tigers has been importantly associated with their profound devotion to human capital development through expansion of education in science and technology. unfortunately, we estimated the insignificant coefficient of investments in tertiary education on ethiopia’s economy, though positive. possible explanations have been forwarded for the insignificant association between education and economic growth; some associate to the quality of education (hanushek, 2004; wolf, 2004), while others relate to the minyahil alemu haile & girma daba megerssa 28 institutional inadequacy (soares, 2003; pirim et al., 2014). a large body of growing literature also affirms that it is challenging to evaluate the impact and measure the returns from investing in education as education is a very longterm investment that needs commitment and patience to realize the benefits (ventelou and xavier 2006; hanushek and woessmann 2008; pirim et al., 2014; hanushek 2004; owings and kaplan, 2013). 5. conclusion and some policy implications ethiopia’s international tourism receipt has been found insignificant contributor to the country’s long-term economic growth. a possible explanation follows that, tourism receipts have not been productively utilized in the production sector. besides, the receipts from international tourism may be insufficient to profoundly contribute to national income, which is mostly related to policy directive of enhancing tourism industry in the country. hence, an effective scheme for international tourism development should be evaluated in terms of its contribution in the development objectives of the country. in this regard, it is recommended that the government of ethiopia should encourage private sector participation to develop the necessary infrastructures in order to achieve higher room tenancy. besides, diplomatic relations to improve the country’s image together with inside efforts of restoring political stability should be reinforced. it would be suitable to allocate part of the gains generated from tourism activities in local development through the realization of new infrastructures. net flows from foreign direct investments have been essential in driving long-term economic growth of ethiopia. thus, fdi helped ethiopian economy in line with hypothetical channels of technological innovation, skill and knowledge flows as well as direct contribution to domestic employment. therefore, it would be appropriate to enhance the flow of more fdi to actualize the multifaceted gains from around the global environment. this could be achieved by extensive effort towards improving the country’s image and; above all through ensuring domestic stability. finally, investments in physical capital have also significant long-term contribution to ethiopia’s economic growth. it implies that, expansion of capital have long been fostering the country’s productive capacity. thus, it would be appropriate to encourage both private and public investments through identification of key investment corridors in domestic economy. enhancing the growth of fdi could also be essential strategy to this end. limitations and suggestions for future studies this study focuses only on the long-term economic benefits of international tourism receipts in ethiopia. therefore, it would be better to also examine the short-run economic gains from international tourism. besides, as long as tourism plays a profound role in reducing unemployment, any future study should also consider analyzing the role international tourism plays in the domestic effort to reduce unemployment rate overtime. references agboola, s. 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(2015). analysis of the impact of public education expenditure on economic growth of european union and brics. research paper in economics, economic analysis, 48(1-2); pp.19-38 international journal of commerce and finance, vol. 6, issue 1, 2020, 127-142 127 optimal portfolio construction using sharpe’s single-index model: evidence from chittagong stock exchange imroz mahmud university of asia pacific, bangladesh abstract the study aims to apply sharpe’s single-index model of portfolio construction and evaluate the model’s performance on the securities traded on chittagong stock exchange (cse). for this purpose, the last seven years' daily closing price data of 122 sample securities as well as the daily closing index value of the benchmark market index, caspi, has been utilized. sharpe’s model smoothens the intricate process of portfolio construction by suggesting a unique number, called the cutoff rate, to measure the desirability of each security ’s inclusion in the final portfolio. in this study, 38 securities qualified to be a part of the final portfolio, hence, the optimal investment weight for each of them is calculated. an industry-wise analysis reveals that four industries account for about 68 percent of the final portfolio weight. the constructed portfolio yields a daily mean return of 0.1095 percent, which is equivalent to about 49 percent in effective annual terms. the overall portfolio risk, indicated by standard deviation, is found to be only 0.6425 percent. the portfolio beta of 0.3496 also indicates that there is significant nonexistence of systematic risk. an evaluation of the portfolio parameters explicitly reveals that it has outperformed every sample security as well as the market index, in offering the best risk-return combinations, by a large margin. therefore, the study found sharpe’s model of portfolio construction highly effective in optimizing risk and return in the context of cse. keywords: single-index model, sharpe, optimal portfolio, portfolio management, chittagong stock exchange jel codes: g10, g11 1. introduction 1.1. research background the pursuit of return always involves some element of risk. although risk is an inevitable component of any investment, every rational investor strives for minimizing risk and maximizing return at the same time (paudel and koirala, 2007). to achieve this often-conflicting goal, one needs to invest in more than one asset. this practice of investing in multiple assets to obtain optimum return with minimum risk is universally known as portfolio construction. the key purpose of portfolio construction is diversification by combining assets (or securities) having less than perfect positive correlations in their returns. the idea of investment in portfolios is deep-rooted in today’s financial world, but this was nonexistent before the late 1960s. before the advent of portfolio theory, people used to form portfolios but with very different perceptions. at that time, the focus of portfolio investment was to locate the security of well-performing firms at the best price (beattie, 2019). no one cared about risk until a 25-year grad student in operations research, harry markowitz, revolutionized the way we think of portfolio management. markowitz’s pioneering work on “portfolio selection” published in 1952 marked the dawn of modern portfolio theory. according to markowitz (1952), the crux of any portfolio is its risk, not the best price. the model developed by markowitz (1952) pertains to forming an optimal portfolio of securities by risk-averse investors. according to his model, a risk-averse investor ought to pick an efficient portfolio of securities, which is defined as the portfolio that maximizes return for a certain level of risk or minimizes risk for a certain level of return. although markowitz’s work laid the foundation of modern portfolio theory, his model is rarely used in practice (elton et al., 1976). because this elegant model required staggering amounts of input, and this made it a time consuming and an expensive solution. if anyone wants to form a portfolio with “n” number of securities, markowitz’s model would require n×(n-1)/2 correlation coefficients (elton et al., 2009). the magnitude of work and acumen required to form a portfolio using markowitz’s model was well beyond the capacity of all but a few in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e imroz mahmud investment professionals, let alone the individual investors. conceding these limitations, researchers and investment professionals started looking for a portfolio model that simplifies the process and provides an efficient solution. in pursuit of a solution, william f. sharpe came out with a simplified variant to the markowitz model in 1963. sharpe’s model of portfolio formulation, popularly known as single-index model (sim), is based on the assumption that securities’ prices move together because of a common response to market changes (sharpe, 1963). as per sim, the return on a broad market index is taken as a proxy for the common macro-economic factor (bodie et al., 2009). this implies that return on a broad market index is the only macro-economic factor responsible for influencing the systematic portion in a security’s return. sharpe’s model smoothens the intricate process of portfolio construction by suggesting a unique number, called the cutoff rate, to measure the desirability of each security’s inclusion in the final portfolio. in comparison to markowitz’s model, sharpe’s sim drastically reduces the parameter estimates needed to form a portfolio. therefore, this six-decade aged model is still popular among investment professionals and is regarded as one of the effectual ways for portfolio formation. 1.2. research objective since the advent of sim, extensive studies have been carried out across the capital markets of developed economies to investigate the model’s effectiveness as a tool for optimizing risk and return. however, a few studies have been conducted on the capital markets of developing economies. besides, none of the studies from developing economies consisted of securities from wide-ranging industrial sectors or covered a longer time horizon. also, previous studies focused on monthly closing data at best. data of higher frequency may result in better risk-reward optimization. owing to the incomprehensiveness of the previous works, studies on developing economies cannot fully reveal the potential of sim. bangladesh, once labeled as a bottomless basket, has become the role model for developing economies. the story of bangladesh’s growth is nothing short of a miracle. according to the world bank (2019), bangladesh ranked second among the fastest growing economies in south asia. another report by the united nations (2019), projected a gdp growth rate of 7.4 percent for bangladesh, which makes the country the third fastest growing economy in the world. despite the impressive growth potential, the country’s capital market is still in its infancy. in 2018, the market capitalization of listed bangladeshi companies was only 28.242 percent of its gdp (world bank, 2018). frequent political unrest, lack of good governance, corruption, and other massive anomalies have been responsible for the poor performance of bangladesh’s capital market (rahaman et al., 2013). the market is yet to recover from the calamitous crash of 2010, which has significantly affected investors’ confidence and led to their massive exodus from the bourses. however, a sound and thriving capital market is a prerequisite if the country wants to fuel and sustain its robust economic growth. this bearish trend of the market poses an enormous challenge for the capital market investors. a well-diversified portfolio can assist them to earn a generous return while keeping the unsystematic risk at bay. the present study aims to apply sharpe’s sim of portfolio construction and evaluate the model’s performance on the securities traded on chittagong stock exchange (cse), the port city bourse of bangladesh. besides, this study has been carried out to assist the investors as well as investment professionals of cse to ease the intricate process of portfolio construction, and thereby, optimizing their risk and return. there has not been a single study on the application and evaluation of sim on the securities traded on cse. being the first of its kind, this study presents a unique opportunity to apply the model and assess its performance on cse. the rest of the paper is therefore structured as follows. part 2 gives a review of the literature regarding this issue followed by a brief description of cse in part 3. part 4 focuses on research methodology. afterward, the research findings are reported in part 5. finally, part 6 concludes the study and offers avenues for future research. 2. literature review the concept of portfolio investment has become vastly ingrained in contemporary theories of investment and finance, but it was non-existent until the 1960s (beattie, 2019). before markowitz’s work, investors used to buy securities that have the best potential of earning rewards at the lowest possible price. this heuristic approach of past completely ignored risk diversification and viewed each security investment as a standalone option. according to markowitz (1952), mean, standard deviation, and correlation with other securities are the key statistics for creating an optimal portfolio. however, his elegant model lacked simplicity, which led successive researchers and investment optimal portfolio construction using sharpe’s single-index model: evidence from chittagong stock exchange 129 professionals in the pursuit of a solution. in 1963, william f. sharpe came up with a simplified variant to the markowitz model called sharpe’s single-index model (sim). since then a lot of researchers and investment professionals weighed the pros and cons of both models and tried to gauge their performance in portfolio optimization. bowen (1984) criticized markowitz’s model by comparing it with a useless creature having a prodigious craving for data. he also found the existence of semantic and statistical barriers, which prevent an average investor from coming to grips with this model. despite its theoretical elegance, markowitz’s model is regarded as impractical and is used less frequently by the investment companies as they are not structured to apply a mean-variance optimization approach (michaud, 1989). after applying and comparing single-index, multi-index, and constant correlation models of portfolio selection; elton et al. (1976, 1977, 1978) suggested using sim for its efficacy and simplicity. in another study, haugen (1993) found sim to be applicable in the case of a large population of securities and recommended its use in place of the classical mean-variance approach of portfolio optimization. paudel and koirala (2007) applied both markowitz and sharpe’s model of portfolio construction on a sample of 30 securities traded on the nepalese stock market. following the evaluation of both portfolios, they found both solutions to be equally effective in optimizing risk and return. however, they advocated using sharpe’s model because it is more utilitarian in generating an efficient frontier. in contrary to the previous studies, briec and kerstens (2009) found markowitz’s model to be more useful than sim for long-term investments. they also opined that sim is unsuitable for optimizing portfolio performance having tenures of multiple periods. nanda et al. (2010) attempted to integrate three clustering techniques: k-means, som, and fuzzy c-means into portfolio management. in their study, clustering proved to be more time-efficient in asset selection and efficient portfolio identification. frankfurter et al. (1976) concluded that sharpe’s model is only a simplified solution to the markowitz’s model, and under conditions of certainty, both models produced identical results. however, sim outperformed its predecessor in portfolio optimization under conditions of uncertainty. their study also revealed that markowitz’s model performed better when a short span of historical data was used. the study outcome of omet (1995) is also in line with most of the previous ones. he suggested using either of the models for portfolio investments but preferred sim for its straightforwardness. rani and bahl (2012) constructed two portfolios on stocks selected from the bombay stock exchange (bse) using sim, one allowing short sales while the other prohibiting it. in their study on thirty stocks, both portfolios generated the best risk-return combinations. nonetheless, the portfolio forbidding short sales did slightly better than the one permitting it. following the footsteps of the previous study, sen and fattawat (2014) constructed two portfolios from thirty stocks traded on bse, one using the sharpe’s model and the other using markowitz’s model. their study also recommended using sharpe’s model. singh and gautam (2014) also reached a similar conclusion after forming an optimal portfolio of stocks selected from the banking industry of national stock exchange (nse), mumbai. in a recent study on dhaka stock exchange (dse), mahmud (2019) found sim to be very effective in diversifying risk and optimizing return. the constructed portfolio of fifty-four equity securities outshined every individual stock under consideration and the benchmark market index (dsex) in regards to offering the optimum risk-reward combination. from the literatures reviewed, it is evident that most of the portfolio optimization studies were carried out in the context developed economies. although a few studies were conducted in the developing ones, none of them were comprehensive enough to unearth the optimization potential of sharpe’s model. besides, there has not been a single study on the application and evaluation of sharpe’s sim on the securities traded on cse. there exists a lacuna of research, which the present study aims to fill-up. 3. a brief overview of cse the port city bourse of bangladesh called chittagong stock exchange (cse) started its operation on october 10, 1995, as a company limited by guarantee and also as a non-profit organization. after the demutualization in 2013, cse was transformed into a “for-profit” organization (chittagong stock exchange, 2018). although cse is about 41 years younger than the country’s first stock exchange named dhaka stock exchange (dse), it has been playing a imroz mahmud pioneering role in automating the trading activities and introducing innovative technologies in the capital market. in 2019, cse reported having 324 listed securities, of which 285 are equity securities, 38 mutual funds, and only 1 corporate bond (chittagong stock exchange, 2019). as revealed by cse’s annual report of 2019, the total market capitalization in fy 2018-19 was bdt 3,293,302 million. currently, cse has five market indices: caspi, cse50, cse30, csi, and cscx. cse all share price index (caspi) is the only index cse has been maintaining since its inception and is considered as the bourse’s benchmark index. in comparison to other major asia-pacific markets, cse is still in a nascent stage. in july 2019, chittagong stock exchange (2019) reported a market capitalization to gdp ratio of 12.95 percent, which is considerably lower than that of neighboring stock exchanges. with a fairly inactive as well as under-developed bond market and the absence of derivative products, cse is an extremely equitybased capital market, which has a long way to go before it can properly cater to the capital requirements of bangladesh. 4. research methodology 4.1. data source and sampling to construct an optimal portfolio of securities traded on cse, daily closing price data has been used for the period ranging from march 14, 2012, to march 14, 2019. cse all share price index (caspi), has been used as a proxy for the market. thereby, the daily closing value of caspi has been used for the same period. the cutoff yield of 91-day treasury bill issued on march 18, 2019, has been used as a proxy for the risk-free rate of return (bangladesh bank, 2019). the data used in this study is secondary in nature, and are sourced from cse library and bangladesh bank. the sample used in this study were selected based on the following criteria: initially, the study aimed at all, precisely 254, “a” category securities listed on cse. according to chittagong stock exchange (2019), companies that have declared a dividend of 10 percent or more in the last calendar year and are regular in holding annual general meetings (agms) are classified as “a” category companies. since the study incorporates the data of last seven years, only securities listed on/before march 14, 2012, with cse are selected in the sample. there were 71 securities that did not meet the criterion, hence excluded from the sample (refer to table 1). finally, only securities offering a positive mean daily return in the aforementioned study period are considered for the sample. since short selling is not allowed in bangladesh, securities having negative mean daily returns are excluded, which leads us to a final sample size of 122 securities (refer to table 1). table 1: industry-wise representation of sample securities name of the industry/sector total number of companies number of "a" category companies listed on/before 3/14/2012 positive mean return (final sample) data coverage bank 29 28 28 10 34.5% cement 7 6 5 5 71.4% ceramic 5 3 3 1 20.0% corporate bond 1 1 1 1 100.0% energy 17 15 11 7 41.2% eng. & electrical 31 22 11 7 22.6% foods & allied 12 8 7 6 50.0% general insurance 30 28 27 17 56.7% ict 9 7 4 4 44.4% leasing & finance 22 16 15 7 31.8% leather & footwear 6 4 4 4 66.7% life insurance 12 9 9 3 25.0% miscellaneous 15 9 7 5 33.3% optimal portfolio construction using sharpe’s single-index model: evidence from chittagong stock exchange 131 name of the industry/sector total number of companies number of "a" category companies listed on/before 3/14/2012 positive mean return (final sample) data coverage mutual funds 38 38 25 23 60.5% papers & printing 5 2 1 1 20.0% pharma & chemical 26 21 13 12 46.2% services & property 7 5 3 2 28.6% telecommunication 2 1 1 1 50.0% textile & clothing 50 31 8 6 12.0% total 324 254 183 122 37.7% source: secondary data processed, 2019 the final sample of 122 securities, from nineteen industrial sectors, represent 37.7 percent of all securities listed on cse. to analyze various risk-return characteristics of the sample securities and construct an optimal portfolio using sim, a number of statistical techniques have been applied. microsoft excel 2016, a spreadsheet application, has been used to perform the analyses. as the study incorporates daily closing data of seven years and represents a substantial portion of the population, the likelihood of sampling error and the impact of temporary variations to distort the final outcome have been minimized. therefore, the sample size can be assumed adequate to make nifty investment decisions. 4.2. sharpe’s single-index model (sim) according to sharpe (1963), the co-movement between securities’ return is due to movement in return of a broad market index, which is caspi in our study. the principal equation underlying sim is: (1) where, = expected return on security i, intercept of the straight line or alpha co-efficient (constant), slope of straight line or beta co-efficient, the rate of return on market index, and error term. the two elements of random variable ( are alpha co-efficient ( and error term . since the error term has an expected value of zero, the mean return on a security can be expressed as: (2) in addition to measurement of return, measurement of risk is also required for optimal portfolio construction. therefore, the dispersion and co-movement of return are calculated using the following equations: (3) where, total variance of a security’s return, market related variance, variance of a security's movement that is not associated with the movement of the market index, also known as the security's unsystematic risk. (4) where, the covariance of returns between securities i and j, beta of security i, beta of security j, and variance of market return. the daily return of sample securities traded on cse is measured using the following equation: (5) imroz mahmud where, daily return on security i at time t, daily closing price of the security i at time t, and daily closing price of the security i at time t-1. likewise, the daily return of the cse benchmark market index, caspi, is measured applying the following equation: (6) where, daily return on caspi at time t, daily closing caspi value at time t, and daily closing caspi value at time t-1. beta coefficient ( is used to measure the sensitivity of a security’s return to movement in market’s return. it is also called the measurement of a security’s systematic risk and calculated as follows: (7) where, covariance of the security i return with the market return, and variance of the market return. the risk premium expected by investors from their investment in a risky asset, such as securities traded on cse, is also known as excess return. the excess return can be found by subtracting the risk-free rate from each security’s expected return. the risk-free rate assumed in this study was 3.53 percent per annum, which was taken from the cutoff yield of a 91-day treasury bill issued on 18th march 2019 (bangladesh bank, 2019). 4.2.1. the formulation of optimal portfolio using the mathematical equations portrayed above, it will require a few more steps to create our optimal portfolio. sharpe’s sim greatly simplified the optimization process by taking a single value to measure the desirability of any security’s inclusion in the portfolio. according to sim, a security’s desirability depends on its excess return to beta ratio (elton et. al., 2009). the mathematical equation of excess return to beta ratio is: (8) where, expected return on stock i, return on a riskless asset, and beta coefficient on security i. the additional return on a security for each unit of market specific risk is measured by this ratio. following the calculation of excess return to beta ratio, each security under consideration is ranked in descending order of their corresponding ratio to measure their desirability. as short selling is debarred, any security with negative excess return to beta ratio are eliminated from further perusal. each security’s inclusion in the optimal portfolio is subject to a unique cutoff rate. all securities with excess return to beta ratio above the cutoff rate are included in the optimal portfolio, and the ones below the cuoff rate are excluded. the cuoff point, denoted by c*, is calculated from the properties of all the securities that are a part of the optimal portfolio. if we designate as a representative for c*, its value can be found when i securities are assumed to be a part of the optimal portfolio. for a portfolio of i stocks is given by: (9) where, the variance in the market index or caspi, and the variance of a security’s movement that is not associated with the movement of market index, which is also referred to as security’s unsystematic risk. following the calculation of for all sample securities, the result of each security is compared with its respective excess return to beta ratio. under the principle of sim, all securities used in the computation of cutoff point have an excess return to beta above , and therefore selected in the portfolio. on the other hand, all securities not used in the computation of cutoff point have an excess return to beta below and are eliminated from the portfolio. there will always be one and only one with this characteristic and it is called the cutoff point, c*. after the selection of securities in the optimal portfolio, the proportion of fund to be invested in each of them for optimizing risk and return is found by: optimal portfolio construction using sharpe’s single-index model: evidence from chittagong stock exchange 133 (10) where, (11) equation 10 indicates the share of each security in the optimal portfolio and the results add up to one. the subsequent equation, i.e. equation 11, is used to find the relative investment in each security. the residual variance has a significant role in its calculation. 4.2.2. evaluation of portfolio performance finally, to measure the performance of constructed portfolio, its beta and alpha are estimated. the portfolio beta is the weighted average of the individual beta of each security incuded in the portfolio, and is denoted by: (12) in the same way, the alpha on the portfolio is calculated as: (13) therefore, the portfolio return is found by: (14) lastly, the portfolio risk or the standard deviation is measured by: (15) the equations mentioned above (equation 1 to 15) are sourced from the work of elton et al. (2009). 5. findings and analysis 5.1. risk-return analysis risk and return have always been the two crucial determinants of any investment decision. all the portfolio construction models focus on minimizing risk and maximizing return. the application of sim also requires the estimation of risk and return for each security under consideration. therefore, daily closing price data of the 122 sample securities and the daily closing value of caspi have been used to estimate different risk-return characteristics. a summary of the risk-return combinations offered by securities studied is portrayed in figure 1. figure 1: risk-return combinations (source: secondary data processed, 2019) imroz mahmud an examination of the risk-return combinations in figure 1 indicates that a typical security yielded a daily mean return of 0.5 percent while carrying a standard deviation of 2.75 percent. detailed results of various reward and risk indicators such as mean daily return, variance and standard deviation of return, covariance of each security’s return with caspi, and beta coefficient have been presented in appendix-1. analysis of the outcome in appendix-1 reveals that the security of monno ceramic industries ltd. offers the highest daily return (0.1910%) followed by rahima food corporation ltd. (0.1772%) and legacy footwear ltd. (0.1682%). as indicated by the standard deviation, the security of jmi syringes & medical devices ltd. carries the greatest risk (4%) followed by standard insurance ltd. (3.96%) and midas financing ltd. (3.92%). the study also found that 37 securities yielded a return below the market rate of 0.0213 percent. the results of beta coefficient indicate that there are 85 securities that bear a systematic risk below the market. application of sim requires separation of risk and return characteristics into two components: firm-specific part and market-related part. since market-related characteristics are beyond the control of an investor, this break down will assist us in developing an idea of how well the portfolio will perform. as most of the securities studied (about 70 percent) have a beta coefficient of less than 1 or the market beta, there is a significant possibility of unsystematic risk reduction. but we have to wait until the construction and evaluation of the final portfolio to validate this intuition. each security’s risk and return characteristics in separated form are exhibited in appendix-2. an in-depth analysis of the data presented in appendix-2 shows that for 58 percent of the securities studied, the firm-specific or unsystematic portion was the leading contributor of total return. in terms of risk, firm-specific or unsystematic variance was the principal contributor of the total variance in all of the securities studied. none of the securities had more than half of the variance arising from the systematic portion. these results also strongly suggest that the sample securities present a significant opportunity for risk diversification. 5.2.ranking securities as per the principles of sim, each security’s inclusion in the optimal portfolio depends on its excess return-to-beta ratio. hence, the excess return-to-beta ratio for each security has been computed and the securities are ranked in descending order of their respective ratios (appendix-3). as shown in appendix-3, the security of berger paints bangladesh ltd. (security no. 105) yielded the highest premium for each unit of market-specific or systematic risk. the security of marico bangladesh ltd. (security no. 109) and british american tobacco bangladesh company ltd. (security no. 74) respectively secured the second and third spot in terms of the highest excess return-to-beta generation. although these securities did not secure the top spots in generating returns, their significantly lower beta value was the reason these companies made their way to the top three in terms of excess return-to-beta ratio. the outcome also shows that about 11 percent of the securities yielded a return below the risk-free rate. 5.3. setting the cut-off point according to sharpe (1963), the inclusion of a security in the optimal portfolio is subject to the comparison between excess return-to-beta ratio and a cut-off rate. the securities having excess return-to-beta above the cut-off rate becomes part of the final portfolio, and the ones having lower ratios are ruled out. the following table (table 2) portrays the variables used for the calculation of the cut-off point. table 2: calculation of cut-off point rank security no. 1 105 0.014503 0.128871 0.128871 8.886114 8.886114 0.000011 2 109 0.007773 0.243163 0.372034 31.283655 40.169769 0.000031 3 74 0.006198 0.884224 1.256258 142.655792 182.825561 0.000102 4 21 0.005263 0.178528 1.434786 33.921199 216.746760 0.000117 5 118 0.004358 0.116659 1.551445 26.769497 243.516257 0.000126 6 75 0.004154 0.307870 1.859315 74.118534 317.634791 0.000150 optimal portfolio construction using sharpe’s single-index model: evidence from chittagong stock exchange 135 rank security no. 7 35 0.003609 0.032158 1.891472 8.910686 326.545477 0.000152 8 16 0.003386 0.706823 2.598296 208.722554 535.268031 0.000206 9 30 0.003288 0.265531 2.863827 80.755947 616.023978 0.000225 10 107 0.003030 0.194544 3.058370 64.201490 680.225468 0.000240 11 73 0.002814 0.186833 3.245203 66.390712 746.616180 0.000253 12 68 0.002707 0.385289 3.630492 142.319984 888.936164 0.000280 13 25 0.002499 0.379125 4.009617 151.711835 1040.648000 0.000306 14 27 0.002466 0.737140 4.746757 298.974719 1339.622718 0.000354 15 33 0.002284 0.412006 5.158763 180.393020 1520.015738 0.000379 16 69 0.002014 0.891937 6.050700 442.925453 1962.941191 0.000431 17 66 0.002000 0.173461 6.224161 86.712808 2049.653999 0.000440 18 32 0.001907 0.381693 6.605854 200.183287 2249.837286 0.000461 19 37 0.001786 1.160542 7.766396 649.761363 2899.598649 0.000518 20 76 0.001768 0.403168 8.169564 227.987568 3127.586217 0.000537 21 93 0.001755 0.157192 8.326756 89.592264 3217.178481 0.000544 22 53 0.001691 0.131777 8.458533 77.935441 3295.113923 0.000550 23 113 0.001587 0.430909 8.889442 271.458346 3566.572269 0.000568 24 26 0.001491 0.282465 9.171906 189.456170 3756.028438 0.000579 25 34 0.001443 0.530552 9.702458 367.666338 4123.694776 0.000599 26 104 0.001305 0.591124 10.293583 453.068098 4576.762874 0.000618 27 100 0.001217 0.255562 10.549145 210.002757 4786.765631 0.000625 28 115 0.001146 0.155544 10.704689 135.765456 4922.531088 0.000629 29 2 0.001074 0.671582 11.376271 625.520126 5548.051214 0.000645 30 52 0.001004 0.428041 11.804313 426.174285 5974.225499 0.000654 31 12 0.000882 0.921640 12.725953 1045.311147 7019.536646 0.000666 32 119 0.000822 0.502548 13.228501 611.480235 7631.016881 0.000671 33 59 0.000816 0.807728 14.036229 990.215664 8621.232545 0.000678 34 1 0.000802 1.855008 15.891237 2312.261583 10933.494128 0.000690 35 57 0.000778 1.285717 17.176954 1653.503457 12586.997585 0.000696 36 102 0.000730 0.808258 17.985212 1107.483104 13694.480689 0.000698 37 42 0.000722 0.301587 18.286799 417.546539 14112.027228 0.000698 38 103 0.000713 0.477494 18.764293 669.828272 14781.855500 0.000698 39 99 0.000687 0.078851 18.843144 114.767496 14896.622997 0.000698 40 101 0.000663 0.540855 19.383999 815.985853 15712.608850 0.000697 41 87 0.000655 0.237491 19.621491 362.837810 16075.446659 0.000697 42 92 0.000648 0.148359 19.769850 228.976659 16304.423318 0.000696 43 58 0.000636 0.893706 20.663557 1404.803395 17709.226713 0.000694 44 116 0.000631 2.545092 23.208649 4032.468472 21741.695185 0.000686 45 77 0.000621 0.347962 23.556610 560.774892 22302.470077 0.000685 46 36 0.000608 1.633478 25.190089 2684.836674 24987.306751 0.000680 imroz mahmud rank security no. 47 117 0.000581 0.595394 25.785482 1025.207766 26012.514516 0.000677 48 122 0.000562 1.089922 26.875404 1940.047384 27952.561901 0.000671 49 67 0.000514 0.790072 27.665476 1538.363110 29490.925011 0.000665 50 91 0.000510 0.027258 27.692734 53.455614 29544.380625 0.000665 51 70 0.000501 0.021004 27.713738 41.919202 29586.299827 0.000665 52 78 0.000494 0.302909 28.016647 613.188882 30199.488709 0.000663 53 61 0.000490 0.968455 28.985102 1976.928519 32176.417228 0.000655 54 5 0.000435 0.498175 29.483278 1143.955858 33320.373086 0.000649 55 56 0.000430 0.901771 30.385048 2094.984695 35415.357781 0.000640 56 13 0.000421 1.223857 31.608905 2906.231979 38321.589761 0.000627 57 90 0.000420 0.703884 32.312789 1676.283467 39997.873227 0.000620 58 110 0.000415 0.764566 33.077355 1840.560623 41838.433851 0.000613 59 22 0.000394 1.366165 34.443520 3467.585010 45306.018860 0.000600 60 31 0.000384 0.990098 35.433618 2581.479695 47887.498555 0.000591 61 84 0.000380 0.626589 36.060208 1648.198806 49535.697361 0.000585 62 11 0.000360 1.132595 37.192803 3143.150279 52678.847640 0.000574 63 79 0.000360 0.544738 37.737541 1511.841470 54190.689110 0.000569 64 94 0.000358 0.282478 38.020019 789.857095 54980.546205 0.000567 65 121 0.000352 0.539071 38.559090 1530.784451 56511.330656 0.000562 66 50 0.000334 0.326067 38.885157 975.867118 57487.197774 0.000559 67 63 0.000331 0.089982 38.975140 271.458581 57758.656355 0.000558 68 45 0.000301 0.300587 39.275727 997.033564 58755.689919 0.000554 69 98 0.000295 0.230652 39.506378 782.506031 59538.195950 0.000552 70 112 0.000295 0.432465 39.938843 1467.704880 61005.900830 0.000546 71 24 0.000254 0.409909 40.348752 1613.745835 62619.646665 0.000540 72 97 0.000243 0.247850 40.596602 1020.468647 63640.115313 0.000536 73 39 0.000239 0.150799 40.747401 630.564818 64270.680131 0.000534 74 72 0.000232 0.062081 40.809482 267.837994 64538.518125 0.000533 75 88 0.000210 0.171998 40.981480 820.557864 65359.075989 0.000529 76 15 0.000192 0.330982 41.312462 1722.045642 67081.121631 0.000522 77 29 0.000182 0.378811 41.691273 2076.784318 69157.905949 0.000513 78 20 0.000174 0.580546 42.271819 3332.774009 72490.679958 0.000500 79 3 0.000163 0.386951 42.658771 2372.539175 74863.219133 0.000491 80 10 0.000150 0.394409 43.053179 2628.933628 77492.152761 0.000481 81 23 0.000148 0.595586 43.648766 4030.792809 81522.945570 0.000466 82 114 0.000111 0.346551 43.995316 3119.383056 84642.328626 0.000455 83 80 0.000109 0.138003 44.133320 1268.713298 85911.041924 0.000450 84 19 0.000107 0.353078 44.486398 3299.017712 89210.059636 0.000439 85 86 0.000107 0.156392 44.642790 1463.281363 90673.340998 0.000434 86 106 0.000101 0.548398 45.191188 5403.649813 96076.990811 0.000418 87 41 0.000100 0.099138 45.290326 991.979361 97068.970172 0.000415 88 120 0.000096 0.226563 45.516889 2364.442066 99433.412238 0.000408 89 60 0.000083 0.341034 45.857923 4085.429698 103518.841936 0.000397 optimal portfolio construction using sharpe’s single-index model: evidence from chittagong stock exchange 137 rank security no. 90 83 0.000074 0.203282 46.061205 2737.392967 106256.234902 0.000389 91 8 0.000064 0.187947 46.249152 2924.976732 109181.211634 0.000381 92 95 0.000060 0.170403 46.419555 2836.310132 112017.521766 0.000374 93 54 0.000049 0.033453 46.453008 677.420399 112694.942165 0.000372 94 51 0.000041 0.035029 46.488037 850.082585 113545.024750 0.000370 95 96 0.000032 0.072618 46.560655 2249.050032 115794.074781 0.000364 96 64 0.000026 0.044263 46.604918 1691.345047 117485.419828 0.000360 97 18 0.000025 0.131906 46.736824 5249.202465 122734.622293 0.000347 98 44 0.000022 0.007693 46.744517 346.751695 123081.373988 0.000346 99 28 0.000019 0.089576 46.834093 4676.104821 127757.478809 0.000335 100 85 0.000018 0.011525 46.845618 630.309755 128387.788564 0.000333 101 47 0.000016 0.011108 46.856727 714.406976 129102.195540 0.000332 102 6 0.000014 0.035976 46.892703 2582.466595 131684.662135 0.000326 103 49 0.000007 0.005151 46.897854 724.572121 132409.234256 0.000325 104 62 0.000003 0.012767 46.910621 4956.386324 137365.620581 0.000314 105 9 0.000001 0.003610 46.914231 6505.517634 143871.138214 0.000301 106 55 0.000000 -0.000925 46.913306 3337.719902 147208.858116 0.000295 107 4 -0.000007 -0.031484 46.881822 4819.242245 152028.100361 0.000286 108 7 -0.000010 -0.011699 46.870123 1208.546476 153236.646838 0.000284 109 14 -0.000011 -0.049846 46.820277 4589.158859 157825.805697 0.000276 110 38 -0.000015 -0.024602 46.795675 1591.295843 159417.101540 0.000273 111 43 -0.000024 -0.010429 46.785246 427.515386 159844.616926 0.000272 112 48 -0.000047 -0.018849 46.766397 405.111532 160249.728459 0.000271 113 65 -0.000051 -0.149275 46.617122 2908.154234 163157.882693 0.000266 114 40 -0.000081 -0.142794 46.474328 1761.421689 164919.304382 0.000263 115 82 -0.000096 -0.181149 46.293179 1895.666530 166814.970912 0.000259 116 89 -0.000105 -0.137675 46.155504 1309.427077 168124.397988 0.000256 117 81 -0.000232 -0.020461 46.135043 88.031717 168212.429705 0.000256 118 46 -0.000335 -0.021956 46.113087 65.629018 168278.058723 0.000256 119 17 -0.001613 -0.030662 46.082425 19.006577 168297.065300 0.000255 120 71 -0.008226 -0.005713 46.076712 0.694526 168297.759826 0.000255 121 111 -0.022742 -0.108548 45.968164 4.773080 168302.532906 0.000255 122 108 -0.029239 -0.042517 45.925647 1.454120 168303.987026 0.000255 source: secondary data processed, 2019. as shown in table 2, the uppermost 𝐶𝑖 value is 0.000698 for advanced chemical industries ltd. (security number 103). therefore, the cut-off rate (𝐶∗) in this study is 0.000698. thirty-eight securities have an excess return-to-beta ratio above the cut-off rate, hence, qualified to be a part of the final portfolio. the remaining eighty-four securities with lower ratios are eliminated from the final portfolio. on an average, the securities selected in the final portfolio yielded a daily return of 0.0925 percent and carries a beta coefficient of 0.4765. imroz mahmud 5.4. constructing the optimal portfolio as per the guidelines of sim, the proportion of capital to be invested in each of the thirty-eight securities is calculated and depicted in the following table. table 3: investment proportion of each security in the optimal portfolio rank security no. security name weight 1 105 berger paints bangladesh ltd 1.656798 6.8620% 2 109 marico bangladesh limited 1.581526 6.5503% 3 74 british american tobacco bangladesh company ltd. 3.928036 16.2689% 4 21 linde bangladesh limited 1.365287 5.6547% 5 118 apex spinning & knitting mills limited 0.518102 2.1458% 6 75 jmi syringes & medical devices ltd. 0.746702 3.0926% 7 35 national tea company limited 0.461344 1.9108% 8 16 monno ceramic industries ltd. 1.048596 4.3430% 9 30 rangpur foundry ltd. 0.814788 3.3746% 10 107 kohinoor chemical co (bd) ltd. 0.612322 2.5361% 11 73 aramit limited 0.578060 2.3942% 12 68 bata shoe company (bd) limited 1.141843 4.7292% 13 25 anwar galvanizing limited 0.652424 2.7022% 14 27 eastern cables limited 0.911712 3.7761% 15 33 apex foods limited 0.674034 2.7917% 16 69 legacy footwear limited 0.740678 3.0677% 17 66 apex footwear limited 0.346630 1.4357% 18 32 agricultural marketing co ltd. 0.699789 2.8983% 19 37 rahima food corporation ltd. 0.754019 3.1230% 20 76 national polymer industries ltd. 0.501134 2.0756% 21 93 nli first mutual fund 0.441619 1.8291% 22 53 standard insurance limited 0.222181 0.9202% 23 113 the ibn sina pharmaceuticals ltd. 0.505023 2.0917% 24 26 bangladesh lamps limited 0.353801 1.4654% 25 34 bangas limited 0.424077 1.7564% 26 104 ambee pharmaceuticals limited 0.439617 1.8208% 27 100 southeast bank 1st mutual fund 0.294394 1.2193% 28 115 samorita hospital limited 0.164723 0.6822% 29 2 dutch-bangla bank limited 0.360637 1.4937% 30 52 sonar bangla insurance ltd. 0.192040 0.7954% 31 12 heidelberg cement bangladesh ltd. 0.320872 1.3290% 32 119 h.r.textile mills limited 0.083768 0.3469% 33 59 delta brac housing fin. corporation ltd. 0.156246 0.6471% 34 1 brac bank limited 0.263340 1.0907% 35 57 daffodil computers limited 0.115838 0.4798% 36 102 aci formulations limited 0.039412 0.1632% 37 42 eastern insurance company ltd. 0.015862 0.0657% 38 103 advanced chemical industries ltd. 0.017158 0.0711% optimal portfolio construction using sharpe’s single-index model: evidence from chittagong stock exchange 139 rank security no. security name weight 24.144429 100.00% source: secondary data processed, 2019. as recommended by sim, the largest investment of capital (16.2689%) should be made in british american tobacco bangladesh company ltd. and smallest in eastern insurance company ltd. (0.0657%). investment of total capital in the aforementioned proportions will assist an investor to achieve the best risk-return combinations possible. an industry-wise classification of the data presented in table 3 reveals that four industrial sectors account for about 68 percent of total investment weight. a pie chart showing industry-wise investment weight is provided in figure 2. figure 2: industry-wise investment weight (source: secondary data processed, 2019) although miscellaneous sector occupies the highest investment weight, pharma & chemical industry has the highest number of companies in the final portfolio. the other two industries are food & allied and engineering & electrical occupying 12 percent and 11 percent weight, respectively. initially, the sample used in this study comprised of securities from 19 industrial sectors, but the final portfolio has securities from 15 industries. no security from telecommunication, papers & printing, corporate bond, and life insurance industry made its way to the final portfolio. the findings of the study also indicate that the final portfolio weight is mostly represented by companies supplying daily necessities. 5.5. evaluation of portfolio performance following the selection of securities and their respective weight in the final portfolio, the only task left is to evaluate how the portfolio fared in minimizing risk and maximizing return. therefore, constructed portfolio’s performance imroz mahmud has been evaluated by using various risk-return indicators (refer to appendix-4). a summary of the key results from appendix-4 is presented in table 4. table 4: performance of constructed portfolio portfolio return calculation portfolio risk calculation alpha on portfolio = 0.00102 0.0000311702 beta on portfolio ( = 0.3496 = 0.0000101121 return on caspi = 0.0213% portfolio standard deviation 0.6425% portfolio return = 0.1095% portfolio coefficient of variation (cv) = 5.8688 source: secondary data processed, 2019. from the results presented in table 4, it is evident that the constructed portfolio yields an average return of 0.1095 percent. at a glance the portfolio return may appear insignificant, but we must not forget the fact that this is the daily average return. the effective annual return of the portfolio is about 49.09 percent. at such rate, an investment can grow by its own size within 1.74 years (approximately). as indicated by the standard deviation, the overall risk of the constructed portfolio is 0.6425 percent, which is significantly lower than the discrete standard deviation of any security studied. in comparison to the market beta, the portfolio beta of 0.3496 indicates that there is significant nonexistence of market specific risk. an investigation into the result of cv also leads us to similar conclusion. none of the 122 securities studied had a cv as low as or even close to the portfolio cv. an average security in this study had a cv of 220.5751, which is around 38 times bigger than that of the portfolio. all these results indicate that the portfolio formed using sim offers the best risk-return combinations, i.e. maximum return with minimum risk. hence, it can be concluded that the portfolio optimization objective has been met and the final portfolio is made of efficient securities. 6. conclusion, limitations and scope for further study 6.1.conclusion the findings of the study explicitly reveal that the constructed portfolio outperformed every sample security, in offering the best risk-return combinations, by a large margin. the portfolio constructed using sharpe’s sim indeed diversified risk and yielded the best possible return. the utility of sharpe’s sim is not limited to its optimization efficiency; the model is highly effective in simplifying the portfolio construction process. in fact, with 122 sample securities, markowitz’s model would require 7,625 pieces of information to construct an optimal portfolio. sharpe’s model did the job with only 368 pieces of information. hence, we can infer that the five-and-a-half-decade old model propounded by william f. sharpe works effectually for optimizing the risk and return statistics for the investors of cse. however, no portfolio optimization model can immune investors forever from changes in economic conditions. therefore, an investor has to actively evaluate the performance of each security at regular intervals and make necessary amendments in the portfolio accordingly. 6.2. limitations and scope for further study the study is subject to a number of limitations. firstly, the sample consist of securities that belong to category-a on cse, hence, future studies can work with securities from other categories. the study also incorporated the daily closing data of last seven years, thereby excluding the securities that were not listed on cse on/before the study period. finally, securities offering negative mean returns were eliminated from the sample as short selling is prohibited in bangladesh. but if it were allowed, the investors could also benefit from selling those securities. therefore, future studies can form portfolios with negative returns. as the study focuses on evaluating the effectiveness of sharpe’s sim on the securities traded on cse, application of other portfolio optimization models, like markowitz’s or constant correlation model, could enhance the robustness optimal portfolio construction using sharpe’s single-index model: evidence from chittagong stock exchange 141 of the study. according to the principles of sim, security prices move together because of common co-movement with the market. however, some studies provide evidence that there are influences beyond the market force (elton et al., 1976). to capture the non-market influences, future studies can also focus on applying multi-index model. references bangladesh bank (2019), “treasury bill/bond auctions”, available at https://www.bb.org.bd/monetaryactivity/treasury.php (accessed may 6, 2019). beattie, a. 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(2014), “the single index model & the construction of optimal portfolio: a case of banks listed on nse india”, risk governance & control: financial markets & institutions, 4 (2), 110-115. united nations (2019), “world economic situation and prospectus 2019”, retrieved from https://www.un.org/development/desa/dpad/document_gem/global-economic-monitoring-unit/world-economicsituation-and-prospects-wesp-report/ world bank (2018), “market capitalization of listed domestic companies (% of gdp)”, available at https://data.worldbank.org/indicator/cm.mkt.lcap.gd.zs (accessed november 25, 2019). world bank. (2019), “south asia economic focus, fall 2019: making (de) centralization work”. available at https://openknowledge.worldbank.org/handle/10986/32515 (accessed november 26, 2019). international journal of commerce and finance, vol. 6, issue 2, 2020, 139-144 139 digital transformation in financial field havane tembelo istanbul i̇l sağlık müdürlüğü, turkey received: sept 02, 2020 accepted: sept 25, 2020 published: oct 02, 2020 abstract in this study, digital transformation applications in the business world and in finance field are discussed in detail. the current and potential effects of digitalization on a wide spectrum from operational finance to portfolio management are examined. advantages and disadvantages of digital transformation have been examined in detail and a general evaluation has been made about the ongoing process. one of the most important milestones of digitalization in the financial world is cryptocurrency. it is totally based on blockchain technology that eliminates public authority intervention and intermediaries by establishing peer to peer (p2p) transactions via the decentralized platform. in particular, the possible effects of increasing digitalization efforts on the financial environment after covid-19 are interpreted. keywords: financial services industries, digital transformation, fintech, techfin, blockchain, cryptocurrency, ico jel codes: g10, g20 1. introduction first of all, digital transformation is about developing new or “updating current” business practices, culture and consumer service to satisfy changing industry and market demands through modern technologies. common positions like distribution, publicity and customer support are transcended. rather, digital transformation starts and ends by talking about consumers and influencing them. we have an opportunity to learn about how we do business – how we reach our clients – use new technologies by our side as we switch from paper to tablets and to smart apps to run our business. in this article, we will be talking about every detail in digital transformation in financial field. in first paragraph, we will define the meaning of digital transformation and explain its history. in second paragraph, its advantages and disadvantages will be investigated. in third paragraph, 4 digital transformation in financial environment will be discussed. in fourth paragraph, some articals will be shared beside the process of the digital transformation in finance after covid-19 will be mentioned. 2. digital transformation concept in business environment there is no need to set up the corporate procedures with small businesses and change them later. you will show the business from the very beginning. it is not feasible to create a business in the 21st century with stickies and hand written books. digitally thinking, organizing and constructing makes you agile, scalable and able to develop. most businesses take a step back and ask themselves if they are doing the right things. once they start digital change, find out the answers. moreover, the history of digital transition is an important subject today, it occurred in the late 1990s and again in the mid-2000s. about 30 years ago we began computerizing procedures. first of all, web platforms or sites, businesses linked to them and their customers. then consumer engagement was enabled by digital systems. with the rapid development of their global aspirations, they had to navigate emerging social and web platforms quickly by dedicated technology teams. it encouraged businesses to use digital data on their own events and experiences. clients, vendors and other parties involved, linked, companies noticed that wireless networks are in service. companies started linking all processes and tools to networks to allow efficient use of the vast volume of knowledge. drawing attention to connective capacity, companies, rather than the conventional way of doing business by intermediaries, rely on interactive networks to connect all network members. companies began experimenting with innovative modern business forms to allow more effective use of results, to generate more mobility and to attract talent. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e havane tembelo 140 2.1 advantages and disadvantages of digital transformation advantages and disadvantages of digital transformation should be mentioned, the advantages are the following: 2.1.1. more competitive business 44% of businesses have now adopted a digital first market plan, according to idg 's 2018 global company report. this also means that the rivals have taken up new technologies already. therefore, every new player on the market concentrates on positive digital growth, with the goal of putting the start-up at the forefront. there will be more traditional rivals. better innovations allow you to be agile, responsive and competitive and increase your company's roi. there is a powerful reason to make technological implementation a focus for digital change for the best and for the poorer. 2.1.2. more productive employees. the business transition continues with the staff and increases the efficiency of the organization as a whole as their efficiency is increased by successful use of technology. automation of manufacturing has traditionally produced beneficial outcomes for whiteand blue-collar employees. montage row, machine robot icing, and ai have all given people more access to academic research. new technology has been developed to automate the workflow. crms have been originally developed to bring accounting and customer service together and to reduce routine promotion and delivery activities. such accelerators are designed to allow workers to reach their potential. only basic communications or cloud computing systems can only improve the efficiency of workers by quick access to information. the mckinsey global institute has found that an average workplace productivity is rising by 25%. 2.1.3. a better experience for customers the outstanding company experience (cx) is one of the basic concepts of market management. the us resident uses physical space for about 12 hours a day. mining, sports, and money consumption are just two of the operations. there is the easy solution for your clients, and they can shop from your digital platforms with a seamless experience. digital innovation helps businesses to help serve the needs of their clients through smart product use. if a stronger website, new application and other digital offering intelligent technologies and quick consumer growth are the secret to cx performance, or any digital service. on the other hand, the disadvantages of digital transformations are: 2.1.4. constantly changes this is inevitable in terms of the adverse consequences of our global transition. in the near future, scientific development is limitless. the digital transition must therefore be a continuous operation. the digital economy has grown rapidly and aggressively. forbes notes that the rapid rise of the it sector was the biggest theme of 2019. none will be shocked by this. as new, science validated technologies enter the industry, you need to be ready for more technology change rapidly. 2.1.5. new technologies takes time to see their affection while most of us know how to deliver e-mails or tablets, it takes a little more time and energy to implement modern business technology technologies. the telegraph notes that the best platform is one of the most important problems for businessmen. too many outlets will in turn contribute to confusion. in turn. it takes time to check and test for the most suitable resources for the business. it takes time for workers to be qualified to make successful use of them. to speed time to maturity, a technology adoption platform (dap) is strongly recommended. 2.1.6. it causes employees uncertainty your workers face the pressure of ongoing digital shifts. while 87% of workers state they are prepared to learn new skills, everybody will embrace stresses differently. therefore, as educated, workers use digital devices, they need a customized approach. it is prohibiting expensive and a practical nightmare using conventional teaching techniques. however, workers with a dap will undergo customized instruction in real time without needing to abandon the digital transformation in financial field 141 program they use. it is important to provide workers with the help they need to be empowered to give 100 percent and feel safe in their work in these periods of continuous digital transformation. 3. digital transformation in financial environment digital transformation in financial environment and the perspective of the employees is template "employee experience" means how employees feel about their companies both growth and capacity development opportunities, willingness of workers to keep working with their current companies. the following tests show that the experience of employees is blind digital effort spot of financial service industries (fsi) companies: • a total of 76% of respondents believe it to be very important or extremely important to work for a digitally enabled organization or to be a digital leader. • only 38% of fsi participants agree or accept completely that the company offers tools or improvement of expertise for workers. they will have to capitalize on opening. digital world. web world. • almost half 41% of respondents to the survey intend to remain with their current organizations three or less years. to prepare fsi companies better for a digital future, a combination of customer experience and employee experience is essential. in a recent interview, donna morris, ceo and experienced employed at adobe systems, explained, "we are able to create rich customer experience through high levels of employee engagement by combining employee experiences with the customer." yet how do fsi businesses boost their relationship with employees? this will happen if a company is effectively matched with the market, organizational and customer models seen in modern organizations – a set of principles, attitudes and actions influencing ‘home-thing is finished’. this is primarily because traditional strategies that require the adaptability, job style, leadership style, decision-making or risk aversion in a competitive digital world cannot fit. in meanwhile, the world pandemic “covid-19” spread has affected many things and changed them. in this paragraph how the pandemic affected digital transformation will be discussed. covid-19 has experienced a huge shift in our social and personal lives over a brief amount of time which has pushed us to follow modern ethical norms and more technologies. a recent study by gordon heskett, perhaps the most famous example, showed that one in three americans ordered food online after the pandemic, which was their first on-line purchase for 41 percent of that population. in this changing attitude, companies that have invested in digital technology, they were able to digitize end to end processes such as order processing, supply chain and accounting, thus capitalizing in this unsure period. transformation took advantage of its ability. digital transformation has been crucial to the survival of organizations and the continued emphasis on the use of technologies would help covid-19 to thrive. as a driving force for the change, the financial institution has been created, and cfos also lead digital transformation efforts, serving as the first driving force behind innovative technologies and collaborating with practical means to measure the gains and show cost savings or efficiencies. finance should also have the full idea of the pace of digitalisation work best with the existing operating model of the company, or change the current operating model to optimize technology use. what is obvious is that digital transformation is also essential for companies who are struggling to survive and for those that have stable financial capital. four case studies are conducted in a variety of industries to demonstrate this point. 3.1. fintech corporations fintech (financial technology) is the new financial industry that uses technology to improve financial services. competing with traditional financial services with their technological power, fintechs act with the philosophy of facilitating the lives of their customers all over the world. fintechs, which were seen as the more technological versions of traditional financial services in their early periods, have an impact far beyond the estimations at the point reached today. investments made by fintech startups that expand their sphere of influence with the widespread use of internet and mobile applications all over the world prove this situation. fintech startups, which received $ 22.5 billion in 2017 worldwide, received $ 57.9 billion in investment in the first half of 2018. here are the examples where we can explain the difference between fintechs and traditional financial services in the simplest way: havane tembelo 142 in the past, to open a bank account, you had to go to a bank branch with many documents. fintechs, on the other hand, allow you to do this process via mobile application wherever you are. at the same time, with an innovation brought to our lives by fintechs, you can turn your smart phone into a "digital wallet" and spend the money in your account as you wish. all these examples are just some of the areas where fintechs make our lives easier. the following outputs in the recent deloitte report on the finance industry also reveal the values that fintechs add to their customers' lives: “customers today expect financial institutions to enable a seamless digital onboarding process, fast loan approvals and free money transfers. in short, they demand all the innovations that fintechs bring to their lives from financial institutions. although we cannot say that fintechs have dominated the market under today's conditions, we can easily say that they create value in the lives of consumers and have a very strong position. " we can examine the values that fintech adds to the lives of its users under the following headings: • practicality: fintechs offer their solutions to their users in digital environments. this naturally adds convenience and speed to the lives of its users. • price advantage: fintech organizations do not need to spend on branch networks and similar physical structures. for this reason, fintechs have price advantages over traditional financial services at many points. • more service options: fintechs, which can provide services to their customers regardless of their location, are therefore more diverse than traditional financial services. 4. digital transformation in finance field after covid-19 the covid-19 epidemic, which has affected the world, has already changed the way people live and work. while changes are expected in many sectors such as travel and health after the epidemic, there may be a serious transformation for financial services. many people started working from their homes after quarantine applications were brought to prevent the spread of the virus. forcing companies to work from home also brought the necessity to use digital technologies more frequently. in addition, the banking and finance sector, which was seriously affected by the epidemic, turned to digital technologies to heal its wounds. the crisis has clearly shown us how necessary it is to invest in digitalization. financial services can also be prepared more strongly for the future by taking advantage of the trends brought by this digitalization after the epidemic. 4.1. digitalization of old systems with the epidemic, it is seen once again that many financial institutions are still not ready for digitalization. these institutions built on old and outdated systems find it difficult to keep up with developments. according to the latest report of nodesagency, 55 percent of banks have not reached digital level. with the awareness created by the epidemic, the digitalization efforts of financial institutions that continue to use old systems are expected to be seen frequently. 4.2. telecommuting in this period when everyone should stay at home, financial institutions have met the reality of working remotely, as in almost every sector. however, there are exceptions in the financial sector compared to other sectors. a significant portion of consumers still go to banks to perform banking transactions. many banks do not have online applications for transactions such as completing loans and opening accounts. in addition, banks with many employees need to work connected to banking servers for real-time information. this requires a very high capacity internet access. with the epidemic, banks and regulators started to adapt to this new reality. finra has published new guidelines to assist remote financial companies. in the next period, we will observe the efforts of financial institutions to optimize remote work. complete service and security issues in particular will be the main focus of these efforts. 4.3. robotic process automation robotic process automation (rpa) was an on the rise in the fintech world before the epidemic. used as the term for a virtual robotic workforce that performs mundane and repetitive tasks alongside humans, rpa is an extremely suitable technology for handling such tasks in the financial sector. for example, operations such as changing lost or digital transformation in financial field 143 stolen credit cards, reconciling the scanned files with the timelines of the consultants, and managing the process of monitoring new compliance regulations can be carried out by rpa. with covid-19, rpa seems to be the focus of the financial industry once again. with rpa, companies will want to increase employee productivity while significantly reducing costs. 4.4. digital identity one of the most important issues in this process was digital identity. collecting a person's medical history, banking information or any data that can be digitized in a single pot can be said to be the dream of the financial sector. with covid-19, the speed of realization of this dream may increase. with the epidemic, the issue that air passengers of the person had to prove their medical history before flying came to the agenda. however, the fact that many state offices were closed during social distance applications caused people who wanted to perform their transactions to be victimized. however, a digital identity can help eliminate many problems. the increasing need for digital identities in almost every field will positively affect the financial sector. 4.5. cashless society we can say that in the last few years, people have moved away from the use of paper money. with the virus epidemic, this situation reached its peak. with the statements made by the world health organization that paper money could be a virus carrier, people turned to digital payment methods in order to reduce contact. this pushes financial institutions to reconsider an opportunity that already exists. in addition, digital money contests came to the fore frequently in this period. it did not go unnoticed that china, which survived the epidemic, accelerated its work in this area. while digital transactions increased dramatically in this period, this trend is expected to continue afterwards. 5. conclusion there are crucial advantages of digital transformation for the business enterprises. it helps users to gain better user experience, whether employees or customers. particularly after covid-19, digitalization process will accelerate. this will be resulted by the shift in customer preferences from traditional baking to fintech corporations. fintechs as smaller firms are more able to focus customers’ some selected needs. thanks to focusing specific areas, they will create more added value for their customers compared to big but traditional banks. although fintechs have not been dominating market yet, in next future, they will grab more customer attraction then other organizations. as a result, nowadays fintech startups are able to raise huge capital as investors believe their business model and future growth opportunities. there is also another actor that have some comparative advantages compared to fintechs are techfins. thanks to their solid brand power, wide customer network, significant customer experiences and having huge accumulated financial capitals, they are able to take a part in the financial environment. they do not have adequate technical knowledge in financial issues as much as fintechs but they have customer’s trust, loyalty and huge fund resources that provide trust to the target customers. in the next future, the firms which will be able to be sustainable are firms that are establishing collaborations instead of destructive competitions. financial technologies market are ready to observe many merger and acquisitions (m&a) activities that will be held between techfins and fintechs. they will be more efficient and sustainable by combining their strengths to create more added value for the both current and potential customers. havane tembelo 144 references beachboard, m. r. 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(2019, june). five management pillars for digital transformation integrating the lean thinking philosophy. in 2019 ieee international conference on engineering, technology and innovation (ice/itmc) (pp. 1-8). ieee. shuck, m. b., rocco, t. s., & albornoz, c. a. (2011). exploring employee engagement from the employee perspective: implications for hrd. journal of european industrial training. wuest, t., kusiak, a., dai, t., & tayur, s. r. (2020). impact of covid-19 on manufacturing and supply networks—the case for ai-inspired digital transformation. available at ssrn 3593540. zetzsche, dirk andreas and buckley, ross p. and arner, douglas w. and barberis, janos nathan, from fintech to techfin: the regulatory challenges of data-driven finance (april 28, 2017). new york university journal of law and business, forthcoming, european banking institute working paper series 2017 no. 6, university of hong kong faculty of law research paper no. 2017/007, university of luxembourg law working paper no. 2017-001, http://dx.doi.org/10.2139/ssrn.2959925 international journal of commerce and finance, vol. 4, issue 1, 2018, 76-83 76 impact of lmx and emotional labor on performance and commitment merve tarim istanbul commerce university, turkey abstract leader-member relations are important for an organization’s future, because in a dynamic changing world, an organization’s survival depends on the strength of its culture and the ties between both leader and the members this kin. in order to build this kind of power, it is necessary to spend much labor from both sides. in this research, two different private university and three different groups were compared to each other. the main aim was to find out the relationship between lmx and emotional labor. it was showed that labor is the keyword to carry the commitment and performance further by creating a real relationship between both sides. keywords: lmx, emotional labor, commitment, performance 1. introduction leader is the person who can manage the organization and lead the members to achieve common goals. however, it is not always about the leader’s effort to establish strong ties. because of that leadermember relations is an exchange process, both leader and the members are active in this process. the members have to spend emotional labor to control their feelings and to strengthen ties and the leaders also have to spend emotional labor to control feelings and moreover to treat the members equally. if a member thinks that there is no equality in an organization, there will be in-groups and out-groups which will harm the organization in the long term. it is hard to talk about justice and trust in non-equal organizations. it is known from the literature that adams’ equity theory is one the justice theories which depend on the comparison of ratios of inputs and output of someone to another. that is why, a leader needs to make the members feel equal according to each other to build a trust based organization and to make the equality valid for everybody in the organization, and leader should spend emotional labor. it is not easy to manage feelings, sometimes it can be possible only to reflect a fake impression just to save that moment. however, sometimes controlling can be deeper and a person can act as if it were real. sometimes there is no need to pretend because that behavior belongs to intimate level. in this study, there are two different private universities and from these universities three different groups are participating this research which includes both academic and administrative personals. the study has the importance because there are fewer researches about taking lmx and emotional labor concepts together. the aim is to find a relationship between lmx and emotional labor, then to find out that both of them can affect commitment and performance positively. 2. literature review and hypotheses leader-member exchange process has been studying by scholars, to find the way to describe a better organization for survival. because of that there is an exchange process; labor is the keyword for both sides. leader is the person to lead the whole process but members have the rights to effect the process too. 2.1 leader-member exchange theory this theory focuses on three elements; these are the leader, the member and their dyadic relationship. their relationship and the processes are depends on these ties’ strength. to establish strong ties, there are three important factors. these are trust, responsibility and respect. while establishing the strong ties, the leader must be equal and there should not be an in group-out group diversity. since this theory began to scrutinize, there has been an in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e impact of lmx and emotional labor on performance and commitment 77 improvement about the theory because from vdl to lmx, there has been a misunderstanding. because vdl (vertical dyadic linkage) had a formal way of dyadic relation and the main goal was to achieve common goals. however, lmx focuses on the relationship between the leader and each member to survive. the ties established can protect an organization from every dynamic disaster. to talk about the existence of lmx in an organization, there must be trust, effect, respect and contribution. these are the duties of the leader but it is not such easy way to establish strong ties. there must be justice, honesty, openness, and equality to build trust. otherwise, there is no reason for both sides to spend emotional labor. (bauer & green, 1996) (dinesch & liden, 1986) (erdogan, liden, & kraimer, 2006) (graen, chun, & taylor, 2006) (hochwater, lmx and job tension: linear and non-linear effects and affectivity, 2005) (hofmann, morgeson, & gerras, climate as a moderator of the relationship between leadermember exchange and content specific citizenship: safety climate as an exemplar, 2003) (jansen & van yperen, 2004) (tarım, genç, magnusson, & zaim, 2017)(tarım, 2017). 2.2. equity theory of adams according to equity theory, put forward by adams (1963-1965), focuses on the consequences of employees' perception of equality and this perceived equality / inequality. if the employee has the idea that his / her output / input ratio is not equal when comparing the output / input ratio of another employee; the inequality sense is starting to enter the circuit. this perception becomes anger in time. when the emotion reaches the maximum level, the idea that the inequality can no longer be removed. (brockner, greenberg, brockner, bortz, davy, & carter, 1986) (martin & peterson, 1987) (huseman, hatfield, & miles, 1987) (folger & cropanzano, 1998) (greenberg j. , 1990) (cropanzano, byrne, bobocel, & rupp, 2001) (farh, podsakoff, & organ, 1990) (graen & uhl-bien, 1995)(tarım,2017) 2.3 emotional labor emotional labor is the fulfillment of the behavior of the individual as determined by the organization in the service process. emotional labor consists of three phases. these are surface acting, deep acting and sincere behavior. when acting is surface acting; the person does not feel the emotion but acts as if he feels emotion using his voice tone and his mimics. the process is expressed only by a superficial change. the deepening of the act is a process in which one tries to feel and feel the emotion. individuals use a variety of methods to reflect the desired emotions. they can connect with them by bringing them to their previous experiences in order to be able to appeal to them or give them the desired emotion. (humphrey b. e., 1993) (grandey a. a., 2003) (morris & feldman, 1996)(tarım, 2017) leaders are also tasked with this process. leaders who build strong ties with their employees, motivate them, and improve their performances, internalize their emotions, and even rely on them. this can be accomplished primarily by leaders who can control their own emotions and strive to ensure that their employees are not exposed to any emotional exhaustion. the individual's labor to reflect the desired emotion; especially when internalization has not been achieved, leads to emotional exhaustion or mismatches of emotions. the person's emotional fatigue life can be transformed into depletion at a later stage. emotional attention in the labor process and the time to control the behavior is important. the longer the person needs to act, the more emotionally it wears out and loses the control. (grandey c. m., 2002) (morris & feldman, 1997) (humphrey r. h., 2012)(tarım, 2017) 2.4. hypotheses h1: lmx and emotional labor have positive relationship h2: emotional labor and performance have positive relationship h3: emotional labor and commitment have positive relationship 3. methodogy and analysis with the 11 participants from two different universities, face to face interviews were conducted. the collected data was coded and added to package programs for analysis. two different programs were used for completing both of their results. these programs are theme and nvivo. merve tarim 78 3.1 sample data in this study, there are two different private universities and from these universities three different groups are participating this research which includes both academic and administrative personals. there are 11 people participating this research. it was important to get easy accessibility and accurate data in the selection of the sample. taking two different universities was important to make a comparison between them. 3.2 data collection researchers have resorted to various forms of data collection within the historical flow. the development of technology also plays a role in the diversity of tools. face-to-face data collection method, together with the use of the phone, has left the place to the method of collecting data via telephone. however, by collecting data via telephone; there are some disadvantages compared to the face-to-face data collection method. since the participant in the call can not interact with the researcher individually, a trusting environment can not be created and the data can not be obtained correctly. participants; they may be suspicious that the researcher is sensitive about sharing his or her identity and answers. so they will be less honest about their answers. (holbrook, green, & krosnick, 2003) (wilson, roe, & wright, 1998)(tarım, 2017) because of these possible disadvantages about getting the correct answer, face to face interviews were preferred in this research. 3.2.1 nvivo to conduct qualitative research with the development of technology, new package programs have emerged and thus facilitated the processes of qualitative research. nvivo makes it easy to base the literature on the research. to take nvivo reading notes, link them to the research journal and justify their ongoing role in the conceptual / theoretical development; it is possible to use annexed notes. (çelik & ekşi, 2015) (hutchison, johnston, & breckon, 2010) (bazeley & jackson, 2013)(tarım, 2017) 3.2.2 theme theme is a computer program developed and implemented with the algorithm of matching was invented by dr. magnus s. magnusson. the proposed model typology and perception algorithm is based on the identification and perception of a particular relationship between event pairs in a time series called critical interval relation. t-pattern. t-pattern is a hierarchical time-based pattern type. the algorithm first detects patterns that are simpler. then, with more complex and complete patterns easier, the pattern evolves with completion competition and pattern selection. (magnusson m. s., 2000) (magnusson s. m., 2016)(tarım, 2017) 3.3 analysis the data was coded according to both leaders’ and members’ answers. the coded data was added to theme and nvivo. the results supported each other to actualize the hypotheses. the coded data was analyzed in nvivo, and lmx and both the members’ and the leaders’ emotional labors' relationship, their relations with commitment and performance were searched. table 1: lmx ratios according to interviews (tarım, 2017) impact of lmx and emotional labor on performance and commitment 79 according to table 1, three groups’ answers’ compared to see lmx ratios from group to group. (1: completely, 0,5: a little, 0: none) it is seen that, group 2 has the highest lmx ratio, group 3 follows and group 1 has the lowest ratio of lmx. 3.3.1 theme results in theme, the coded answers’ harmony and consistency were searched to find out that lmx was exist or not. theme results supports the results of table 1. table 2: theme analysisgroup 1 (tarım, 2017) in table 2, it is possible to that there is no complete harmony in first group’s answers. members (e codes) are sharing “none” answers but the leader (m) and e3 have the same number of “completely” answers. because of these different answers, it is hard to talk about lmx for this group. table 3: theme analysisgroup 2 (tarım, 2017) table 3 shows that second group’s answers have more harmony and consistency according to group 1. most of their “completely” answers are almost at the same numbers. it is possible to say that inside of this group, it has a unity. lmx can be valid for this group. table 4: theme analysisgroup 3 merve tarim 80 (tarım, 2017) in table 4, the answers have close harmony and consistency to each other. e22 has different answers from the others but the most of the group has a harmony. it is possible talk about lmx in here. 3.3.2 nvivo results after theme, the coded data was added to nvivo to explain the relationship between the concepts. comparing both the leaders’ and members’ answers the analysis of the concepts were revealed. figure 1: nvivo correlation results of the members’ (tarım, 2017) according to figure 1, lmx and emotional labor have positive relationship. emotional labor and commitment have positive relationship. emotional labor and performance have positive relationship. lmx have positive relationship with commitment and performance. figure 2: nvivo correlation results of the leaders’ (tarım, 2017) according to figure 2, when leaders’ added their emotional labor into the process, the commitment and performance affected positively. labor, is the keyword to make the relations real and help the ties get strengthen. impact of lmx and emotional labor on performance and commitment 81 4. conclusion and discussion three hypotheses have been proven in this research. with theme results, from group to group, it is possible to analyze lmx levels. group 2, is the most harmonious and consistent one. lmx’s existence is easier to see according to other groups. in group 1, the answers have no harmony, because both the leader and the members gave different answers to same questions. for this group, lmx revealed less according to others. group 3, have more harmony than group 1, it is possible to talk about lmx. in nvivo results, the relations between the concepts were researched and the hypotheses were tried to prove. according to answers of 11 participants, lmx has a positive relationship with emotional labor. emotional labor and commitment have a positive relationship. emotional labor also has a positive relationship with performance. and lmx affects commitment and performance. this research is, one of the few researches taking lmx and emotional labor together. it is also important to be a qualitative research which has the answers accuracy. the research is in the education sector so different sectors; different institutions and different cultures can give different results. more participants can also affect the results. however, for later researches this one can be a beginning. references bauer, t. n., & green, s. g. 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(1997). managing emotions in the workplace. journal of managerial issues, 257 274. tarım, m., genç, n., magnusson, m. s., & zaim, s. (2017). examining leader member exchange process by using verbal and non-verbal actions:comparing two groups and zanalyzing with t-pattern. journal of global strategic management, 17-26. impact of lmx and emotional labor on performance and commitment 83 tarım, m., (2017) lider-üye i̇lişkilerinde liderin olumlu ve olumsuz özellikler göstermesi ile ortaya konulan duygusal emeğin üyelerin bağlılık ve performansı üzerindeki etkisi-(phd thesis),istanbul commerce university wilson, k., roe, b., & wright, l. (1998). telephone or face!to!face interviews<] a decision made on the basis of a pilot study. international journal of nursing studies, 314-321. international journal of commerce and finance, vol. 3, issue 2, 2017, 37-47 37 an analysis of macroeconomic variables affecting real sector confidence index: the case of turkey i̇smail canöz, (res. asst) istanbul arel university abstract traditional finance theories are not sufficient to explain investor’s sentiment and psychology. this situation leads to emergence of behavioural finance. the aim of this paper is to analyse the macroeconomic factors affecting real sector confidence index (rsci) of central bank of the republic of turkey (cbrt). within this scope, monthly data for the period between 2007:01 and 2017:03 is analysed by using johansen cointegration test and granger causality test. according to the results of the analysis, cbrt composite leading indicators index, capacity utilization rate of manufacturing industry (curmi), turkish lira reference interest rate (trlibor) and bist100 return index affect rsci. keywords: behavioural finance, real sector confidence index, johansen cointegration test, granger causality test jel codes: g20, g02 1. introduction traditional finance theories indicate that investors are rational and they consider all the information on the market in the decision-making process. within this scope, many finance theories have been developed and models have been generated. however, the studies show that investors do not behave rationally as stated in the theories (kıyılar and akkaya, 2016, p. 110). the basis of the expected utility theory is suggested by bernoulli (1738) and then developed by von neumann and morgenstein (1945). the theory is based on the maximization of expected utility and the assumption that people behave rationally. samuelson (1965) proves in his study that that the future spot prices would walk randomly. the result of his study briefly indicates that today’s best guess of tomorrow’s forecast is simply today’s forecast (sheffrin, 1996, p. 109). the random walk theory has taken its place in the finance literature by this study. fama (1970) reveals the efficient market hypothesis by developing the random walk theory. he shows that stock prices follow a random walk. the presence of an effective market can be mentioned when market prices of securities are always available and reflect full information. according to him, investors are rational and the transactions made by irrational investors do not affect the prices in the market. yet, the efficient market hypothesis excluding behavioral factors has not explained the fluctuations and crises seen in financial markets in recent years. the prospect theory developed by kahneman and tversky (1979), which is the basis of behavioral finance, suggests that individuals give different weight to income and loss at different probability levels. the prospect theory, in contrast to the expected utility theory, takes psychological factors into account (köse and akkaya, 2016, p. 4). investors’ sensitivity is quite effective in financial markets. investors do not pay attention only to the economic or financial indicators when they decide on financial markets. investors’ sensitivity refers to important information about the intentions and future expectations for economy. thus, surveys are used to measure future expectations of in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e i̇smail canöz 38 economic agents. through these surveys, confidence and sensitivity indicators are identified and they are significant for the assessment of the economic situation. furthermore, consumer behaviors play an important role in the future expectations of economic-decision-maker. consumer demand is one of the important determinants of investment, production and employment in an economy. besides consumers, another economic factors is the real sector. the measurement of real sector confidence provides benefit for the interpretation of the future expectation of the economy. it is assumed that there is a strong relationship between confidence indices and macroeconomic variables. confidence indices are needful to determine the tendency of economic agents. in parallel to this aspect, the present study aims to identify the determinants of real sector confidence index (rsci) in turkey. accordingly, the sample period runs from the first month of 2007 to the third month of 2017. additionally, cointegration and causality tests are applied so as to achieve this objective. as a result of the analysis, it will be possible to understand the macroeconomic variables influencing rsci in turkey. 2. literature review the relationship between investor psychology and stock returns on financial markets has been an attractive subject for researchers. since investor psychology and sensitivity is a socio-psychological phenomenon and not directly observable, various indices such as business confidence index and consumer confidence index are created. there are several studies in the literature to analyze and measure confidence indices. some of them are given in table 1. table 1: a summary of literature authors method scope result darling (1955) regression usa there is a statistically significant co-variance between stock market price and business confidence index. santero and westerlund (1996) correlation, granger causality 11 oecd countries there is a statistically significant relationship between business confidence and gdp, industrial production, and real business investment. otoo (1999) regression, granger causality usa a strong relationship between consumer confidence index and stock prices when an increase in equity values boost sentiment. kershoff (2000) south africa there is a relationship between business confidence index and gdp growth rate. özsağır (2007) correlation turkey rsci has a positive impact on gdp growth rate. korkmaz and çevik (2009) egarch, dynamic causality turkey an increase in imkb 100 index positively affects rsci. an analysis of macroeconomic variables affecting real sector confidence index: the case of turkey 39 arısoy (2012) var turkey rsci has an impact on industry production index and imkb index. mariana (2012) granger causality romania, france, italy, germany industrial confidence index is statistically associated with industrial production index. sum and chorlian (2013) regression usa consumer confidence and business confidence jointly affect to stock market risk premium. sum (2014) regression 31 different countries consumer confidence has a stronger influence on stock returns than business confidence. ayuningtyas and koesrindartoto (2014) regression indonesia a positive relationship between change in business confidence and jci, lq45, jii, and sectors index. nguyen et. al. (2015) regression vietnam consumer confidence has an impact on the stock market risk premium greater than business confidence. köse and akkaya (2016) regression, var turkey there is a statistically significant relationship between rsci and bist100 return index. kale and akkaya (2016) var turkey there is a two-way causality between rsci and bist100 return index. koy and akkaya (2017) ms-var turkey the shocks of bist100 have a stronger impact on consumer indices despite there is a bi-directional interaction between them. first part of the literature covers studies related to the relationship between confidence indices and stock market. one of the previous studies is carried out by paul g. darling. darling (1955) firstly aims to propose a statistical technique for measuring business confidence, and second, to investigate the relationship between business confidence and stock price in usa. he analyzes a sample of 125 industrial common stocks including quarterly data for the period 1935-1953 by using regression analysis and concludes that business confidence index exhibits a statistically significant co-variation with stock market prices. afterwards, katona (1968) measures consumer spending by using michigan university confidence index designed by him. the contemporary popularity of this subject stems from otoo’s study (1999). he analyzes monthly data from 1980 to 1990 by using regression analysis. it has found that the increase in stock market price augments consumer confidence index.sum and chorlian (2013) investigate the relationship between confidence indicators and stock market risk premium in usa. they determine that business confidence and consumer confidence together explain around 7.42% of the variation of stock market risk premium. they reach a conclusion that consumer confidence has an impact on the stock market risk premiums greater than business confidence. nguyen et. al. (2015) confirm similar results supporting sum and chorlian’s study by using same method in vietnam. i̇smail canöz 40 sum and chorlian (2013) investigate the relationship between confidence indicators and stock market risk premium in usa. they identifies that business confidence and consumer confidence together explain around 7.42% of the variation of stock market risk premium. they reach the conclusion that consumer confidence has an impact on the stock market risk premiums greater than business confidence. nguyen et. al. (2015) obtains similar results supporting sum and chorlian’s study by using same method in vietnam. sum (2014) examines the impacts of business and consumer confidence on stock returns. for 31 countries 7206 monthly data sets are analyzed by using regression model. according to result of the analysis, there is a crosssectional evidence of the effects of consumer and business confidence on stock returns. in addition to this study, korkmaz and çevik (2009), köse and akkaya (2016) and kale and akkaya (2016) have also conclude that there is a significant relationship between confidence indices and stock market return. ayuningtyas and koesrindartoto (2014) examine the effects of business confidence on jakarta composite index (jci), lq45 , jakarta islamic index (jii), and sector index consisting of ten sectors in indonesia. the study covers 2000:q1-2013:q4 period which includes 54 data for each index as dependent variables. they observe that a change in business confidence has significant and positive effect on jci, lq45, jii, and all sectors index. one of the current studies about consumer confidence belongs to koy and akkaya (2017). they first examine whether there is a mutual regime switching behavior between the consumer indices and equity index, and second, investigate their dynamics in response to each other in different regimes. they apply the markov regime switching model to the monthly data for the period between 2007:01 and 2016:06. the result of the analysis indicates that the shocks of bist100 have a strong influence on consumer indices. second part of the literature is related to the effects of macroeconomic variables on confidence indices. santero and westerlund (1996) examine the relationship between economic confidence indicators based on consumer and business surveys and the economic situation of the 11 oecd countries. they specify that there are low, middle and high correlation between business confidence and gdp, industrial production and real business investment. moreover, the result of granger causality test shows that the relationship between business confidence and these three macroeconomic variables is statistically significant in some oecd countries. mariana (2012) studies the relationship between the industrial confidence indicator and industrial production index in four member states of the european union: romania, germany, france, and italy. according to the results of granger causality test, it is possible to say that there is a statistically significant relationship between the industrial confidence index and the industrial production index. however, this relationship is quite weak for romania and germany. kershoff (2000) states that there is a relationship between the business confidence index and gdp growth rate. similarly, özsağır (2007) analyzes whether there is a relationship between rsci and gdp growth rate by using correlation analysis. the study consists of 18 annual observations made between the years 1988 and 2005. the correlation coefficient is found to be 0.9. it is crucial to state that this high value means the existence of a positive relationship between rsci and gdp growth rate. with creating two different var models, the impact of confidence indices on stock market, consumption expenditures and employment is analyzed by arısoy (2012). he observes that rsci statistically affects the imkb index and the industrial production index. to sum up, there is a great deal of research on the relationship between confidence indices and stock market. however, only a very limited number of these studies examine the effects of macroeconomic indicators on these indices. thus the present study, considering the lack of the research on the topic, attempts to contribute to the relevant literature by focusing on the impact of macroeconomic variables on business and consumer confidence. an analysis of macroeconomic variables affecting real sector confidence index: the case of turkey 41 3. literature review 3.1. data set and methodology this study includes 21 macroeconomic variables in order to determine which one has an influence on the rsci (see table 2) and 123 monthly data for the periods between 2007:01 and 2017:03. it analyzes the raw data obtained in 2017 from the websites of the turkish statistical institute, central bank of the republic of turkey and republic of turkey prime ministry undersecretariat of treasury. additionally, johansen cointegration test is applied to examine the long-run relationship between the rsci and macroeconomic variables. afterwards, granger causality test is used in order to determine macroeconomic variables affecting rsci. 3.2. results it is necessary to test the stability of the series as the spurious regressions can occur despite the high r 2 and significant t-statistical values in the studies conducted with non-stationary time series (gujarati, 1999, p. 709). in the analysis process, first, it is tested whether the 22 variables are stationary or not by using augmented dickey fuller (adf) unit root test. details of the adf test are given in table 2. table 2: adf unit root test variables original level the first difference level t-statistic p value t-statistic p value banking sector-domestic credit volume 5.457133 1.0000 -4.82721 0.0001 consumer price index 3.373936 1.0000 -6.819191 0.0000 domestic debt stock 0.560806 0.9881 -8.183673 0.0000 gold price (a gram) 0.370612 0.9809 -9.5978 0.0000 cbrt composite leading indicators index 0.071783 0.9623 -13.1791 0.0000 bist100 return index -0.897622 0.7862 -10.64375 0.0000 real exchange rate -1.692528 0.4325 -8.306395 0.0000 net international reserves -1.972161 0.2988 -9.215989 0.0000 turkish lira reference interest rate -2.280489 0.1800 -7.758362 0.0000 real sector confidence index -2.587347 0.0984 -8.520689 0.0000 export -2.659556 0.0842 -12.87062 0.0000 import -2.695782 0.0777 -15.11522 0.0000 trade balance -2.915367 0.0465 -14.87883 0.0000 direct investment -2.961053 0.0416 -11.67977 0.0000 capacity utilization rate of manufacturing industry -3.296201 0.0172 -9.407381 0.0000 current account deficit -4.798598 0.0001 portfolio investment -7.525596 0.0000 net errors and omissions -9.183809 0.0000 budget deficit -12.96285 0.0000 primary balance -14.02173 0.0000 industrial production index -0.190891 0.9352 -2.450142 0.1307 i̇smail canöz 42 unemployment rate -2.71737 0.0743 -2.33205 0.1639 table 2 shows that the level value of 17 variables is greater than 0.01 and the level value of 5 variables is less than 0.01. as a consequence, these 5 variables cannot be included in the model. in other words, 17 variables are not stationary at original level value. therefore, it is looked at the first differences of the relevant variables and 15 variables are stationary at the first difference level. the industrial production index and unemployment rate can also not be included in the study since they are not stationary at the first difference level. thus, the study is conducted with 15 variables. the data used in the study during the review period is stationary at the same level and this fact demonstrates that the first step required for the cointegration test is provided. the appropriate lag length for the johansen cointegration test should be determined by var model. table 3: calculation of optimal lag length lag logl lr fpe aic sc hq 0 -12155.12 na 7.28e+71 208.0363 208.3904 208.1800 1 -10525.62 2813.322 2.79e+61 184.0278 189.6938* 186.3281* 2 -10294.37 339.9644 2.97e+61 183.9208 194.8987 188.3777 3 -10081.01 258.9445 5.84e+61 184.1199 200.4096 190.7333 4 -9812.996 256.5632 7.88e+61 183.3846 204.9862 192.1545 5 -9456.251 250.0267 6.40e+61 181.1325 208.0460 192.0590 6 -8802.393 290.6037* 2.55e+60* 173.8016* 206.0269 186.8847 * indicates lag order selected by the criterion lr: sequential modified lr test statistic (each test at 5% level) fpe: final prediction error aic: akaike information criterion sc: schwarz information criterion hq: hannan-quinn information criterion maximum lag interval was chosen as 6. fpe and aic criteria give the minimum value for 6 lags and the lr criterion gives the maximum value for 6 lags (table 3). therefore, the appropriate lag length is defined as 6 for the johansen cointegration test based on the fpe, aic and lr criteria. afterwards, in order to determine whether the established model is stable in the selected lag length, the autocorrelation is analyzed by the lm test and the presence of the heteroscedasticity is investigated by white test. table 4: autocorrelation lm test lags lm statistic value p value 1 253.8802 0.0904 2 251.2919 0.1102 3 260.6259 0.0516 4 213.6853 0.6953 5 238.2509 0.2598 6 241.3655 0.2163 an analysis of macroeconomic variables affecting real sector confidence index: the case of turkey 43 the result of the autocorrelation lm test demonstrates that the probability value is greater than 0.05 at 6 lags and it is clear that there is no autocorrelation (table 4). table 5: white test chi-sq (χ2) df p value 7260.000 7200 0.3071 as a result of the white test applied for 6 lags, the probability value is greater than 0.05 and there is no heteroscedasticity (table 5). table 6: johansen cointegration test null hypothesis alternative hypothesis max-eigen statistic 0.05 critical value p value r = 0 r ≥ 1 173.4998 na na r ≤ 1 r ≥ 2 159.3988 na na r ≤ 2 r ≥ 3 127.3507 na na r ≤ 3 r ≥ 4 116.3027 76.57843 0.0000 r ≤ 4 r ≥ 5 109.7985 70.53513 0.0000 r ≤ 5 r ≥ 6 82.34556 64.50472 0.0005 r ≤ 6 r ≥ 7 74.59541 58.43354 0.0007 r ≤ 7 r ≥ 8 63.57252 52.36261 0.0025 r ≤ 8 r ≥ 9 47.64607 46.23142 0.0350 r ≤ 9 r ≥ 10 40.14090 40.07757 0.0492 r ≤ 10 r ≥ 11 36.93445 33.87687 0.0209 r ≤ 11 r ≥ 12 27.52667 27.58434 0.0508 the results of the johansen cointegration test on multiple relationships applied for 6 lags are given in table 6. the null hypothesis (r ≤ 11), which means that there are at most 11 cointegrating relationships, is accepted against the alternative hypothesis (r ≥ 12). thus, the result of the johansen cointegration test indicates that rsci and macroeconomic variables are in cointegrating relationships at the 0.05 level of probability value (table 6). table 7: granger causality results the direction of causality p value is there a causality? cbrt composite leading indicators index → rsci 6.e-06* yes capacity utilization rate of manufacturing industry → rsci 0.0035* yes turkish lira reference interest rate → rsci 0.0088* yes bist100 return index → rsci 0.0136* yes direct investment → rsci 0.0777 no real exchange rate → rsci 0.1729 no import → rsci 0.2153 no gold price → rsci 0.2836 no trade balance → rsci 0.3234 no export → rsci 0.3772 no i̇smail canöz 44 consumer price index → rsci 0.5013 no domestic debt stock → rsci 0.5223 no net international reserves → rsci 0.5329 no banking sector-domestic credit volume → rsci 0.6441 no lag length: 6 ‘‘*’’ represents a statistical significance at 5% level. table 7 shows the granger causality results. the probability values of the cbrt composite leading indicators index, capacity utilization rate of manufacturing industry (curmi), turkish lira reference interest rate (trlibor) and bist100 return index are less than 0.05. this means that these numbers are statistically significant. actually, there is a causality relationship between the rsci and these four variables. the direction of causality is from these four variables to the rsci. there is one-way causality. the cbrt composite leading indicators index, curmi, trlibor and bist100 return index have effects on the rsci. table 8: granger causality results the direction of causality p value is there a causality? capacity utilization rate of manufacturing industry ← rsci 9.e-10* yes import ← rsci 8.e-05* yes export ← rsci 0.0025* yes domestic debt stock ← rsci 0.0085* yes trade balance ← rsci 0.0165* yes banking sector-domestic credit volume ← rsci 0.0278* yes turkish lira reference interest rate ← rsci 0.0989 no cbrt composite leading indicators index ← rsci 0.1670 no direct investment ← rsci 0.2284 no gold price ← rsci 0.3205 no bist100 return index ← rsci 0.5131 no net international reserves ← rsci 0.6124 no consumer price index ← rsci 0.6746 no real exchange rate ← rsci 0.9621 no lag length: 6 ‘‘*’’ represents a statistical significance at 5% level. table 8 indicates the direction of causality from rsci to the variables used in this study. the probability values of curmi, import, export, domestic debt stock, trade balance and banking sector-domestic credit volume are less than 0.05. this situation refers to that these numbers are statistically significant. in other words, there is a causality relationship between the rsci and these six variables from rsci to them. 4. discussion and conclusion the anomalies and irrational behaviour in financial markets affect asset prices, financial decisions and markets. traditional finance theories and the efficient market hypothesis are not powerful to explain the anomalies in the market. behavioural finance is in an effort to fill this gap. behavioural finance is based on investors’ sentiment and psychology. an analysis of macroeconomic variables affecting real sector confidence index: the case of turkey 45 nowadays, confidence indicators are important to assess conjuncture in the short term. these sensitivity indicators provide important information about the intentions and future expectations of economic decision-makers. moreover, there is a strong correlation between macroeconomic variables and confidence indices. in this study, the relationship between the confidence indices, which reflect investors’ anticipation about the future of the economy, and the general indicators of the economic situation has been analysed. according to johansen cointegration test result, rsci and the 14 macroeconomic variables are at most 11 cointegrating relationships. also, granger causality test indicates that the cbrt composite leading indicators index, curmi, trlibor and bist100 return index have an impact on the rsci and meanwhile, rsci affects these six variables: curmi, import, export, domestic debt stock, trade balance and banking sector-domestic credit volume. there is only a two-way causality relationship between the rsci and the curmi. rsci seems to be influential in the stock market. the real sector managers closely monitor the financial market and instantly evaluate current economic situations. furthermore, their prospects for the future are efficient for the company's returns. similar results are found in the studies conducted in turkey and abroad. korkmaz and çevik (2009), arısoy (2012), sum (2014), ayuningtyas and koesrindartoto (2014), köse and akkaya (2016) and kale and akkaya (2016) report that stock return has a significant effect on rsci. the manufacturing industry is generally considered as the sub-sector with the largest share of the industrial sector. thus, it would not be wrong to say that the manufacturing industry has a key role in the real sector. the curmi is determined by the business tendency survey applied by the central bank to the businesses operating in the manufacturing industry sector. rsci is also calculated by using the business tendency survey. therefore, it is clear that there is a relationship between the rsci and curmi. the main objective of cbrt composite leading indicators index is to predetermine the return points in the economy. electricity production amount, interest rate weighted treasury auction with sales quantity, import of intermediate goods and four questions from business tendency survey are used to calculate this index. actually, it can be said that it is closely associated with real sector. hence, it is one of the influencing factors of rsci. trlibor shows the interest rate that a bank can borrow at certain maturities from another bank or financial institution. financial institutions use this ratio as the reference interest rate for many financial transactions such as government and private sector debt securities, credit cards, student loans, lending, swap transactions and forward rate agreements. moreover, trlibor-indexed pricing is started to be used by real sector for long-term loans. the increase or decrease in trlibor can help us to interpret the future economy anticipation. real sector managers also decide for investment by looking at interest rates, because low interest rates lead to consumption and a good financial situation for investments such as low credit rates and bond financing. shortly, trlibor is influential on investors' decisions to invest or not and consumers’ decisions to buy or not. for these reasons, it can be said that trlibor closely influences rsci. there are also some limitations in the study. firstly, it is useful to interpret curmi and cbrt composite leading indicators index together with the industrial production index. furthermore, it is thought that there is a relationship between rsci and industrial production index. adf results show that it cannot be included into study because it is stationary at level value. secondly, there is a relationship between rsci and gdp growth rate. but, gdp growth rate cannot be included into the study because gdp is a quarterly-announced variable. despite these limitations, it is believed this research will light the future studies. i̇smail canöz 46 references arısoy, i̇. 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(1945). theory of games and economic behavior. princeton university press. international journal of commerce and finance, vol. 6, issue 2, 2020, 92-103 92 factors affecting effectiveness of centralized public procurement system: evidence from selected ethiopian higher public education institutions kedir abrahim, jimma university, ethiopia ganfure tarekegn jimma university, ethiopia received: aug 10, 2020 accepted: sept 01, 2020 published: oct 02, 2020 abstract this study focuses on factors affecting centralized procurement system effectiveness in higher ethiopian public educational institutions. to achieve this objective the researchers employed the explanatory research design with a primary data sources from 82 employees through questionnaires and interview in purposively selected of public educational institutions and public property procurement team leaders of pppdsa at federal level. the pearson correlation analysis outcome showed that all explanatory variables were positively influencing the effectiveness of centralized procurement system but at different degree of correlation. the multiple linear regression analysis result of the study also revealed that public policy, control activities and staffs’ educational competency of sampled public education institutions strongly and positively affected centralized procurement system effectiveness at 4.2 percent, 0.01 percent and 0.01 percent respectively. similarly, monitoring and contract management affected the centralized procurement system effectiveness at 0.00.01 and 5.2 percent respectively. therefore, to avoid the return of defect goods, malpractices, high compliance and untimely response of procurement orders, the pppds and sampled ethiopian higher public educational institutions should design very clear procurement planning criteria that fits the national procurement guideline, strong internal control system with good evaluation system. moreover, it also advisable if the sampled ethiopian higher public educational institutions train their staffs that partake in procurement processes and apply a computerized procurement system to support their procurement policies and further improve their overall centralized procurement system effectiveness. keywords: centralized procurement, contract management, effectiveness, procurement policy, staff competence, regression. 1. introduction in most countries and particularly in developing countries, the procurement function become one of the decisive and effective socio-economic elements that is able to influence decisions of government, quality of services for customers, honesty of workforces, accountably achieving organizational performance and development goals. procurement is defined as acquiring goods, works and services from outside suppliers and it is expected to reflect public interests and overall development goals in an efficient manner (hartmann et al., 2012). for a decade, public procurement has shown rapid demand changes and it became the showground where huge public resources are abundantly spent. for example; in sub saharan african countries, out of the total public resources, procurement of goods, works and services accounts about 70 percent, in ethiopia accounts more than 60 percent and as a globe it about 20 percent from the total public expenditure(chekol & tehulu, 2014). in another term, as compared to import economic activities, public procurement account for up to 50%-70% of total imports of developing nations (yukins & schnitzer, 2015) and public procurement also represents 18.42% of the world gdp(mahmood, 2013). in this context, governments and government agencies remain the biggest entity that does procurement on a large scale and it is a business that attracts numerous of stakeholders (munyao & moronge, 2017). in ethiopia, according to council of ministers financial regulation no 17/1997 proclamation and ministry of finance and economic development (2007) directives, public procurement and property disposal services have to be centrally performed by public property procurement and disposal service agency. the main objective of this proclamation is to obtain goods, works, consultancy services and other services at the right quality, in the right quantity, from the right sources, at the right time, place and price to achieve organizational objectives. in another term, it was drawn to reduce corruption, increase competitiveness, bringing efficient utilization of government budget and other public resources. even though the rationale for establishment of this agency is theoretically right, practically due to rapid in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e factors affecting effectiveness of centralized public procurement system: evidence from selected ethiopian higher public education institutions 93 changes of business environment, the competency levels of staffs involved in procurement and procedures of procurement itself the implementation of centralized public procurement system for public organizations have been facing serious challenges. according to schultz & søreide (2008), in centralized procurement there is the possibility of encouraging corruption while it can involve large-scale favoritism. consequently, neither competition encouraged nor will lower price be obtained. a procurement policy defines the approval process for procurement contracts, roles of purchasers, to some extent procuring staffs conduct and operational issues, but it does not show which procurement procedures for which organizational structure, quality of internal communication system and workforce were not included. these pave a way for ineffectiveness procurement especially in public institutions. in 2018 research findings service delivery would significantly get better if procurement activities are decentralized as a result of enhanced participation ((bahl & bird, 2018). therefore, public procurement system and processes are affected both internal and external challenges. 1.2. statement of the problem in a many country that follows centralized public procurement and procurement processes have and will experience many challenges internally and externally. after review of the public procurement administrations in ethiopia,(ndercaj & ringwald, 2014), revealed that deficiency of experienced management and procurement staffs, lack of clearly defined principal oversight, lack of transparency, and unfamiliarity of procurement process with recognized international or organizational arrangement, are the major bottlenecks of ethiopian public procurement performances. to overcome these challenges and improve the public procurement system that substantially impact the growing economy of ethiopia, the federal government of ethiopia procurement and property administration proclamation no 649/2009 and pronounced centralized procurement system than previous decentralized procurement laws and procedures (tolessa, 2016). being following centralized procurement, in ethiopia many public projects works’ performances were extended from one to another year including the great ethiopian renaissance dam due to lack of effective procurement process; inadequacy of skills of procurement staffs, lack of well integrated procurement plans, poor procurement planning and management of the procurement process(damte, 2018 ; bulcha, 2018). on other way, these implies that ineffectiveness of ethiopian procurement administration model and the effectiveness of responsible institutions pppds. (mugambi, 2019) reviewed the role of central government procurement performance and found out that government agents have no well integrated communication channels with each other and this creates inappropriateness and ineffectiveness in procurement activities. similarly, (hiidensalo, 2016) elucidated that centralized procurement can lead to purchases of semi-standard goods and services as the specification settled by the end users. but, effectiveness of the procurement process is measured through achievement of key performance parameters namely the timeliness, quality and quantity of the purchase (barasa, 2014). due to centralized approach, the ethiopian higher public educational institutions procurement system is characterized by poor procurement planning and pppds’s untimeliness response for procurement orders, not purchase of a right goods, works and services. based on these facts the main aim of this paper is to study the effectiveness of centralized procurement system in ethiopian higher public educational institutions. 1.3. specific objectives of the study • to investigate the effect of procurement policy mechanisms on effectiveness of centralized procurement system • to evaluate the effect of internal control system on effectiveness of centralized procurement system. • to investigate how contract management influence performance of centralized procurement. • to examine how supplier relationship management influence performance of centralized procurement. • to analyse the effect of staff competence on effectiveness of centralized public procurement system. • to analyse the impact of monitoring on performance of centralized public procurement effectiveness kedir abrahim & ganfure tarekegn 94 2. literature review 2.1 definition procurement and procurement performance public procurement is broadly defined as the acquisition and employment of goods, works and services, of goods, supplies, construction works and services by the public organizations using regional or federal resources such as state budget, domestic and foreign loan (ambe & badenhorst-weiss, 2012). centralized procurement will exist in the situation where procurement is fully centralized when the key decisions on the purchase of goods, works and services (what, how and when) are adopted by the central procurement entity and it is formed with the aim of meeting the procurement needs of an organizations’ divisions’ (thai, 2017). the procurement process does not only deal with the acquisition of goods, services and works but also the complete process from planning to contract management. public procurement practice should be responsive to aspirations to the target society and there is also a need for transparency to enhance openness and clarity on procurement policy and its delivery(amemba et al., 2013). if each public procurement functions are properly it is pivotal for the successes of any organization can reduce transaction costs up to 25 percent (fussell et al., 2006). even though it depends on the its approaches, procurement performance covers a number of quality and quantity-enhancing standards, that diminishes transaction costs, shorten time spent, and the quality and quantity of goods delivered. according to (kakwezi & nyeko, 2010) failure to establish performance of the procurement function can lead to irregular and biased decisions that have high consequences to any public procuring entity. thus, the focus of this study is examining the effects and relationship between procurement performance and its factors. 2.2. approaches of procurement and procurement performance in most countries, the rapid changes of technological way of doing business, poverty reduction and development goals of countries placed pressure on how the procurement has to operate in its internal and external processes and procedures. based on these factors countries including ethiopia has made reforms regarding organizational procurement approaches (centralized or decentralized or hybrid), procurement process, procurement rules, and guidance, internal control policies, and workforce (ouma & ochiri, 2017). according to (brezovnik et al., 2015) centralized public procurement structure important to practice in the situation where there is high degree of uniformity and consistency in all forms of organizations activities. even though a corporate wideframework purchase agreements were preferred in helsinki, (karjalainen, 2011) found that centralized procurement structure has its own drawback like prolonged procurement process, limiting the participation of local suppliers, poor procurement planning, contract management system, lack of transparency and competent procurement staffs become major impediments to the effective centralized procurement system. moreover, centralized procurement is unfortunately an area vulnerable to mismanagement and corruption, lack of adequate needs assessment and poor business cases (basheka, 2008). in ethiopia, according to council of ministers financial regulation no 17/1997 and ministry of finance and economic development (2007), public procurement and property disposal has been centrally performed by public property procurement and disposal service(tesfahun, 2011). even though the rationale for establishment of this agency is theoretically right, practically due to rapid changes of business environment, the competency of staffs involved in procurement and approaches of procurement itself the implementation of centralized public procurement system for public organizations have been facing serious challenges. moreover, the responsible public body, public property procurement and disposal service (pppdsa), has been pragmatic and contented its mandate is questionable due to several reasons and activities involved in procurement processes. in the contrary, decentralized public procurement system encourages responsiveness and it conducts its functions timely based on the demands of target groups or organizational divisions (masiko, 2013). 2.3. challenges in procurement processes and procurement performance procurement commonly involves purchase planning, standards determination, specifications development, supplier research and selection, value analysis, price negotiation, making the purchase, supply contract administration, inventory control and stores, and disposal functions (mesa, 2018). according to (emaru, 2016) established that the main challenges faced by the stakeholders in the procurement process include inadequate understanding of the roles of stakeholders in the procurement process, principles of public procurement, procurement planning and developing statements of requirements. procurement planning and policy entails the identification of what needs to be procured, how the organizations needs can best be met, the scope of the goods, works or services required, what procurement factors affecting effectiveness of centralized public procurement system: evidence from selected ethiopian higher public education institutions 95 strategies or methods to be deployed, setting the time frames, and the accountability for the full procurement process (thai, 2008). procurement planning is required to consider the current procurement situation functions and the strategic direction in which its condition might change. poor procurement planning has been one of the major stumbling blocks to the economic development of africa and it has been clear that a number of african countries have not paid adequate attention to the proper management of public resources (onyango, 2012). even this day, very limited scientific research has been done to examine the extent to which efforts in procurement planning can contribute to effective public organizations performance (basheka, 2008). control theory states that an internal control is a system built within an organization that encompasses solutions for keeping positive performances, corrective actions and to bring system stability for which it designed for (mohammed, 2018). unethical behavior of contracting groups and staffs involved in procurement processes stimulates fraud and theft of public funds (ferraris et al., 2016). according to (chan et al., 2008) the primary purpose of internal control systems is to provide reliable information about the assets, evidence-based work done on one hand and prevent assets loss and that failure to detect or prevent material error on a timely basis by the system on the other hand. according to ethiopian procurement manual (2009), internal control system includes, activities like record management practice, actual procurement plan, procurement order tracking system, contract enforcement, proper inspection and receiving of purchased goods and services(singh, 2020). thorough ethical conduct is essential to the creation of long-term relationships with suppliers of goods, works and services. since procurement staffs are the representatives of their organization, without considerations of their ethical aspects, it is impossible to claim professional ethical statuses in procurement processes. competencies indicate sufficiency of knowledge and skills that enable to act in a wide variety of situations (morales-sánchez & cabello-medina, 2013). a study done on evaluating the purchasing procedure in ethiopian grain trade enterprise by (assefa, 2006) found that poor quality of grain purchases, suppliers misleading purchasers, continuous price fluctuations, unclear purchasing procedures, no technical specifications for purchasers and incompetent purchasing staff. in kenyan ministry of energy; staff competency procurement planning, resource allocation, and contract management positively affected procurement performance at (kiage, 2013). that is why this study considered procurement planning and policy as one study variable. in public organizations, procurement officials who have the obligatory procurement and supply skills are able to implement and monitor their duties in a knowledgeable, empowered and motivated manner (khadija & kibet, 2015). in public entity, procurement performance is not an end in itself but it is a way to control and monitor the procurement functions for more competitive, and improves delivery of quality of services. the study conducted on the determinants of procurement performance in kenyan ministry of education by stephen gitau (2013) found management style, participants, resource dependency, and technology were common determinants. in ethiopian procurement guidelines 649/2009, commitment to continuous improvement by the supplier, level of trust placed on the suppliers, past performance of the supplier, lead times allowable and quality of goods/service suppliers provides were taken as the most seriou s factors to be consider while evaluating potential supplier for contract award. supplier selection of ppds as an agent purchaser, might face moral hazard and adverse selection that influences the output of the agent explained by failure to do exactly what the agents appointed to do (hazard (muhunyo & jagongo, 2018). therefore, contract management and supplier relationship highly influence the performances of procurement at central level. 3. methodology 3.1. research design this study focuses on factors affecting centralized procurement effectiveness in higher ethiopian public educational institutions and to achieve this objective the researchers employed the explanatory research design. 3.2.data sources, sampling and sample size the study area were purposively selected and the primary data sources from 82 employees of from property procurement teams, property administration teams, accountants and cashiers of four sampled universities and public property procurement team leaders of pppdsa at federal level were included in this study. the data was collected through questionnaires distributed to all responsible bodies of sampled universities and interviews were conducted with sampled universities procurement team leader and pppds procurement team leader at federal. kedir abrahim & ganfure tarekegn 96 3.3. method of data analysis in order to achieve the designed objective of the study, pearson correlation and a multiple regression analysis tool were used on stata 14 software package. 3.4.model specification table1: description of variables variable definition ppef centralized procurement effectiveness prpolicy procurement planning and policy internctrl internal control activities staffcpcty staffs educational competence monitor procurement process monitoring contmgt contract management ssreln suppliers relationship e error term i ambo, jimma, mettu, and wollega universities source: researchers design, 2019 4. results and discussion hereunder a pearson correlation analysis and a multiple regression model were used to determine the correlation between the procurement effectiveness and explanatory variables and again the influence of each explanatory variable that factors that affect the effectiveness of centralized public procurement system in ethiopian higher public educational institutions were presented as follows; 4.1. pearson correlation analysis the correlation between the procurement effectiveness and explanatory variables were analyzed by pearson correlation and found that all explanatory variables positively influences the effectiveness of procurement system in sampled ethiopian higher public institutions but each variable affects procurement at different degree of correlation. for instance, procurement policy influences procurement system effectiveness at 54.15 percent degree of influence. internal control, staff capacity and monitoring affect the procurement system effectiveness by 74.10, 49.58 and 44.57 percent respectively while contract management and supply relation with the procuring institution affects procurement system effectiveness by 3.53 and 5.68 percent degree of influence respectively. table 2. correlation analysis factors affecting effectiveness of centralized public procurement system: evidence from selected ethiopian higher public education institutions 97 | ppef prplcy inctrl stcpcty mntor ctmgt ssreln -------------+-------------------------------------------------------------- ppef | 1.0000 prplcy | 0.5415 1.0000 inctrl | 0.7410 0.4776 1.0000 stcpcty | 0.4958 0.4297 0.3406 1.0000 mntor | 0.4457 0.2017 0.2189 0.0340 1.0000 ctmgt | 0.0353 0.2466 0.1322 0.2779 -0.0793 1.0000 ssreln | 0.0568 -0.0987 -0.0834 0.0172 0.0974 -0.0403 1.0000 source: primary data, 2019 these findings indicated that any improvement in procurement policy, internal control, staff capacity, overall monitoring and a proper implementation and enforcement of the contract management system and will contribute a lion share degree of influence to the effectiveness of the procurement practices that improves the overall procurement performance of the sampled higher public institutions. 4.2. regression analysis result before normal regression was regressed, the researchers examined the assumption of the classical linear regression and the result of expected assumption were explained below. a. normality of residuals test the normality estimates of kernel density figure above shown the sign of normal distribution of the data and therefore, the residual has not the issue normality problem. b. heteroskedasticity of residuals test from the table below of heteroskedasticity of residuals showed total of 0.0014 which was below significance value of 5 percent. therefore, researchers concluded that there is no heteroskedasticity problem in this study. kedir abrahim & ganfure tarekegn 98 cameron & trivedi's decomposition of im-test -------------------------------------------------- source | chi2 df p ---------------------+---------------------------- heteroskedasticity | 48.36 27 0.0070 skewness | 14.21 6 0.0274 kurtosis | 1.38 1 0.2403 ---------------------+---------------------------- total | 63.95 34 0.0014 -------------------------------------------------- c. multicollinearity mean vif 1.60 is 1.19 0.842785 emp 1.19 0.838276 ii 1.34 0.745185 ema 1.50 0.664511 ic 2.12 0.471949 cr 2.27 0.439663 variable vif 1/vif . vif as it shown table above the vif of all independent variables are greater than 0.1 and the mean vif value of all the independent variables are also less than 10 (that is 1.60). therefore, there is no multicollinearity problem among each independent variable. d. multiple linear regression analysis result in this study, all explanatory variables were positively correlated with procurement system effectiveness. but which and how a variable is significantly influencing centralized procurement system effectiveness, needs further analysis of inferential statistics analysis. accordingly, a multiple linear regression analysis was employed and the results were presented below. ----------------------------------------------------------------------------- ppef | coef. std. err. t p>|t| [95% conf. interval] -------------+--------------------------------------------------------------- prplcy | .048924 .0236978 2.06 0.042 .0017155 .0961324 inctrl | .2598339 .0333571 7.79 0.000 .1933832 .3262846 stcpcty | .1396891 .0352261 3.97 0.000 .069515 .2098631 mntor | .1313045 .03031 4.33 0.000 .0709239 .191685 ctmgt | .0669876 .0339524 1.97 0.052 .1346242 .000649 ssreln | .0457394 .0341006 1.34 0.184 -.0221925 .1136712 _cons | .2136658 .2043437 1.05 0.299 -.1934077 .6207393 -----------------------------------------------------------------------------prob > f = 0.0001 n = 82 adj.r-sq: 71.61 source: stata outcome by researchers, 2019 procurement planning and policy factors affecting effectiveness of centralized public procurement system: evidence from selected ethiopian higher public education institutions 99 a properly designed and implemented procurement policy plays a pivotal role in providing a guiding framework for the effective implementation of procurement processes and practices (njeru et al., 2014). procurement policies are rules and regulations for governing procurement procedures in an organization and it further involves design procurement planning of each public sectors, submit the plan to the centralized public property procurement and disposal service (pppds) within scheduled time, announcing a public auction and appropriately select the bidder, making contract with a bid winner, allowing lead time (if necessary), perform framework procurement and distribute to the public sectors according to their procurement plan. from this one can understand that procurement system is one of the most complicated activity in public sector operation and it further affects the budget plan and final performance of each public institution. in this study to identify to what extent procurement policy or procedure affects effectiveness of the procurement system, the researcher applied a multiple linear regression and found that public policy affects procurement system effectiveness by 0.042 percent. therefore, each sampled higher public educational institution and pppdsa in ethiopia are expected to design and appropriately implement the procurement policy and procedures in a very clear manner. in addition to this, it also advisable that if they apply a computerized procurement system to support their procurement policies and reduce the degree of frauds that might arise at some point. internal control activates and centralized procurement system effectiveness internal control system is the additional important variable incorporated in this study comprising important factors that have an influence on the effectiveness of centralized public procurement practice. according to ethiopian procurement manual (2009), internal control system includes, activities like record management practice, actual procurement plan, procurement order tracking system, contract enforcement, proper inspection and receiving of purchased goods and services. all these segments of activities are highly correlated with competent staffs that perform them and effectiveness of the overall procurement system effectiveness of the sampled higher educational institutions. the final regression result reveals that internal control system and procedures of sampled public educational institutions in ethiopia strongly and positively affects their effectiveness of centralized procurement system at 1 percent significance level (0.000). therefore, to avoid the return of defect goods, high compliance on and untimely response of procurement report, misappropriates and malpractices in procurement system, the pppdsa and sampled ethiopian higher public educational institutions should design strong internal control system with good evaluation system. staff capacity and centralized procurement system effectiveness staff competency is the other variable that was included in this study to analyze the factors that affects public procurement system effectiveness. in ethiopia, public procurement system has not been yet effectively implemented since most of the procurement functions are subjected to manual procedures that are slow, inaccurate and infective. competencies indicate sufficiency of knowledge and skills that enable to act in a wide variety of situations(spencer & spencer, 2008). in procurement perspective, if the staffs are not adequately educated, serious consequences that include breaches of codes of conduct and mal practices may occur (shick, 2003). thus, in public sectors, procurement officials who have the obligatory procurement and supply skills are able to implement and monitor their duties in a knowledgeable and motivated method. the regression result showed that in sampled ethiopia higher public educational institutions and pppds staffs’ capacity positively and significantly affects the procurement system effectiveness at 1 percent (0.000) significance level. therefore, it is advisable if educated and well-experienced well trained staffs are has to be employed and assigned to execute procurement system of the institutions otherwise less experienced staffs are has to be regularly trained about the procurement policy of the country, procurement planning, how stakeholders participate and what procedures should be followed by each public body and how procurement report has to be made. to further reduce the burden of the staffs and improve the performance of a procurement system, it is recommendable if the manual procurement procedures are replaced computerized procurement systems. because computerized procurement system reduces, information asymmetry, equal requirements of procurement criteria among public sectors, reduces the burden of the staffs, and it further demonstrates efficient use time and budget. kedir abrahim & ganfure tarekegn 100 contract management and centralized procurement system effectiveness contact management includes different factors corruption, unresponsive bids, ignorance of ppds guidelines, accountability, transparency and relationship between public procurement and property disposal service agency. when public educational institutions procurement teams prepare annual procurement planning and sent to pppdsa, according to public procurement manual, the pppdsa and the public higher education institutions are in contract. since 2009, to avoid corruption and misappropriations, ethiopia has been following a centralized public procurement system for huge amount of procurement. to analyze the impact of procurement contract management on procurement system effectiveness, the researchers applied a multiple regression and found that contract management affected procurement effectiveness of sampled ethiopian higher public educational institutions by 5.2 percent. in another term an improvement in contract management enhances the procurement effectiveness by 6.69 percent. therefore, a sampled budget and procurement teams of sampled ethiopian higher public universities need to improve their contract management efficiently and effectively by combining competent staffs on procurement planning, and budget teams of their respective universities. monitoring and centralized procurement system effectiveness monitoring is the process of continuously evaluating the internal control system and improves or modifies the necessary procedures when it is needed. monitoring covers assessing all components of procurement policies & procedures, procurement contract management, internal control system of the institution under operation, and finally identify the loopholes and recommend the management to take correction actions based on its evaluation findings. accordingly, the overall annual procurement system effectiveness was boosted and contributes to organizational performance. in this study, monitoring is included as one factor and the statistical analysis result displayed that monitoring affected the procurement system effectiveness at 1 percent significance level (0.000). therefore, the sampled ethiopian higher public education institutions ought to have a separate procurement system monitoring team and independent verifiers of the procurement performance based on the annual procurement plan. 5. conclusion and recommendation the pearson correlation analysis between procurement effectiveness of a sampled ethiopian higher public educational institutions and explanatory variables were done and the result showed procurement policy (54.15%), internal control (74.10%), staff capacity (49.58%) monitoring (44.57%) contract management (3.53%) and supply relation (5.68%) were the main factors that affect the procurement effectiveness. these indicates all explanatory variables were positively influencing the effectiveness of procurement system but each variable affects procurement at different degree of correlation. the multiple linear regression analysis result exhibited that public policy affected procurement system effectiveness of the sampled ethiopian higher public educational institution by 0.042 percent. therefore, each sampled higher public educational institution and pppdsa in ethiopia are expected to design and appropriately implement the procurement policy and procedures in a very clear manner. internal control system and procedures of sampled public educational institutions in ethiopia strongly and positively affects their effectiveness of procurement system at 1 percent significance level (0.000). therefore, to avoid the return of defect goods, malpractices, high compliance and untimely response of procurement orders, the pppds and sampled ethiopian higher public educational institutions should design very clear procurement planning criteria that fits the national procurement guideline, strong internal control system with good evaluation system. monitoring affected the procurement system effectiveness at 1 percent significance level (0.000). therefore, the sampled ethiopian higher public education institutions ought to have a separate procurement system monitoring team and independent verifiers of the procurement performance based on the annual procurement plan. an improvement in contract management enhances the procurement effectiveness by 6.69 percent and it was also affected procurement effectiveness of sampled ethiopian higher public educational institutions by 5.2 percent. therefore, a sampled budget and procurement teams of sampled ethiopian higher public universities need to improve their contract management efficiently and effectively by combining competent staffs, procurement planning, and budget teams with procurement teams of pppdsa at central level. moreover, it also advisable that if the sampled ethiopian higher public educational institutions apply a computerized procurement system to support their procurement policies and reduce the degree of frauds that might arise at some point of procurement processes. factors affecting effectiveness of centralized public procurement system: evidence from 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(2015). gpa accession: lessons learned on the strengths and weaknesses of the wto government procurement agreement. trade l. & dev., 7, 89. international journal of commerce and finance, vol. 3, issue 2, 2017, 53-70 53 anti-dumping taxes and the paper sector merkut lanpir, (phd candidate) istanbul commerce university, turkey abstract: importation and exportation are essential elements of foreign trade. the desired condition is to keep importation and exportation in balance as well as to preserve national reserves via currency control established over the balanced currency. in cases when foreign trade is unbalanced government may take measures to direct, prohibit and restrict money flow in importation and exportation (ekşi, nuray, p.3.1.). the first measure was implemented by canada in 1904, provisional customs tariff law. in turkey the first case is seen in regulation regarding prevention of unfair competition in importation enacted in 1989. the first global implementation in paper business was the anti-damping tax resolution adopted as the conclusion of the case pended between switzerland and australia in 1998 (https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds119_e.htm); the first implementation in turkey was “communiqué regarding the prevention of unfair competition in importation” promulgated in official gazette under 2015/28 number by the ministry of economy. keywords: anti-dumping, trade policies, tax, paper, import 1. introduction antidumping taxes are policies aimed at protecting the local producers from the industry-based damage caused by aggressive import actions and thereby preventing unfair competition in importation, one of the international trade defense instruments. in accordance with the import legislation, dumping is the export of a product at a price lower than the normal value in the domestic market in which it is produced. the anti-dumping tax is the trade policy developed by the importing country with aim of protecting its domestic producers and the local market in respect of the exported product. the paper industry includes the conversion of cellulose (from wood), pulp (from annual plants) and recycled paper pulp (from waste paper) into paper via various mechanical and chemical operations. the products of the paper industry then serve in turn as the raw materials for the printing and packaging industries as capitaland energy-intensive medium/heavy industry branches as well. the anti-dumping panel of the republic of korea and indonesia in 2004 is about this issue (https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds312_e.htm); in 2007, china complained about the antidumping taxes applied by the united states in the world trade organization (https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds368_e.htm), arguing that they are unfair and based on sbjective decisions. other disagreements such as those between (https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds374_e.htm) indonesia and (https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds470_e.htm) south africa in 2008, indonesia and pakistan in 2013 and indonesia and united states (https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds491_e.htm) in 2015 are also cases which were brought to the world trade organization for a resolution. in turkey, the damping investigation case published in the official gazette on 22.07.2014 with no. 29068 based on the communique 2015/28 on the prevention of unfair competition in importation was justified and a decision to apply anti-dumping tax on non-bleached kraft liner papers not exceeding 175 grams of us origin was given. to date, there has been no request for an agreement submitted by the us authorities to turkey or any panel application to the world trade organization against this anti-dumping tax applied against products of us origin (official gazette, july 14, 2015, issue: 29416) to the best of our knowledge, anti-dumping applications and anti-dumping taxes in turkish paper industry have not been examined yet in literature. in this paper, we aim to facilitate the discussions for different approaches and analyses for improvement projects by evaluating the topic from different perspectives and raising questions. the first in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e merkut lanpir 54 part of this study covers the dumping and anti-dumping concepts as well as economic, political and legal aspects. the second part includes cases of dispute from around the world and the general application procedure in turkey. the third part covers an industry-based interpretation of results obtained in the light of information acquired from official governmental agencies. the last part of this study covers the conclusion and recommendations. 2. dumping and anti dumping from an etymological point of view, the english word dump (tuncer, 2001, p. 326) / 'to dump' means 'to deposit or dispose of (rubbish, waste or unwanted material), typically in a careless or hurried way (kaya, heval savaş, 2010, p. 5). it turns into 'dumping' according to the purpose of use and finds a field of use in the field of economics at the same time. furthermore, there is an article on 'dumping' in turkish law of 1944. from an economic point of view (tuncer, 2001, p. 327), the dictionary of economics defines dumping as the sale of goods at a value below its normal cost in another country(the penguin (english economy glossary) 'the sale of a good under a marginal cost in a foreign market'). in the customs taxes section of his 1979 publication (tuncer, 2001, p. 327) titled “turkish tax system (türk vergi sistemi)”, prof.dr. kenan bulutoglu explains dumping as entering of the products of a country into the domestic market of another country for very low prices. in the same publication, the antidumping tax is described as a different tax than the regular customs tax for it is a protective measure and not calculated according to the regular customs tariff, yet no implementation of anti-dumping tax can be found around the time of this publication. the concept of dumping has been analyzed (dişbudak; türkcan, p. 67-68) in detail by viner (1925) and divided into 3 groups: (1) occasional dumping (e.g. exceptional dumping implementation due to seasonal reasons), (2) periodical dumping applied in short time-periods (e.g. dumping applied when entering new markets), (3) long-term continuous dumping (e.g. dumping applied to utilize the maximum production capacity while protecting the prices in the domestic markets). viner also concluded that an intervention becomes necessary when the negative effects on the domestic production industry is bigger than the benefits obtained by the consumers. the author also concluded that periodical dumping applied in short time-periods must be avoided more than the other two dumping types when the effects of all three are compared. however, against the opinion of the time that the domestic supply would not last for long periods, belderbos and holmes (1995) as well as scherer and roos (1990) argued that long-term dumping practices could harm the free-market economy by creating a monopoly environment. viner has used the term “strategic dumping” in 1995. according to this definition, if the country in which the firm applying the dumping is closing its domestic market to importer countries’ firms, this creates an economically risky situation. following the 80s, the issue has been examined both from theoretical and practical perspectives and studies have come to emerge regarding the results of anti-dumping investigation cases. regarding the policies followed in our country (turkstat, foreign trade statistics, october 2016) the tüi̇k (turkish statistical institute) data indicates the economical and foreign-trade politics in the republic era. following the transition to the republic, open foreign trade policy applied in accordance with the lausanne treaty lasted until the great depression in 1929. in 1929, the export of domestic industry was promoted with export oriented practices, and a method of import substitution was adopted. this policy continued until the end of the world war ii. at the end of the war, restrictive obstacles to foreign trade were lifted and an open foreign trade policy was adopted again, but with the rising unemployment and high inflation rates together with the liberal movement brought back the protective policies once more.on january 24, 1980, a new era was introduced in turkey from a planned economy that had been followed since 1961 (dişbudak, türkcan, kemal, p. 5759) following the acceleration of liberalization with the decisions of 24 january, turkey is based on a model based on exports al ong with a rapidly advancing liberal movement. the reasons for this decision are the inability to reach the expected figures in exports with the methods practiced in 1973, the oil crises in 1973, , the stagnation of economic growth (dişbudak, türkcan, kemal, p. 162165). the 1990 gatt (the customs tariffs and trade treaty signed in 1947 and signed in 1948, signed by turkey in 1953) was transformed into wto (world trade organization) on january 1, 1995 and expanded while turkey was included as a party. the treaty of the gatt and the customs union treaty signed between the eu (european anti-dumping taxes and the paper sector 55 union) and turkey on january 1, 1996 are a very decisive treaties for the foreign trade policy.the general agreement on tariffs and trade (gatt), first signed in 1947 and negotiated in eight rounds, annecy, torquay, geneva, dillon, kennedy, tokyo, uruguay, until 1994, has become an official organization in line with the purposes of drawing the general boundaries of international trade (kaya, p. 11, 13). the gatt deals with commercial vehicles that distort two major competitive environments in the context of unfair commercial practice, the first being the use of subsidized goods for export; and the second is the dumping effect of the exported goods on the imported markets (world trade system, 1999, q: 163).in accordance with subsidies and countervailing measures (scm) and the treaties and the anti-dumping agreements (ada), importer countries have the right to implement tax protection for unfair competition and the legal basis for this authorizations is article 4 of gatt. the use of this authority is bounded in three ways; the first is the exporting country's harm to the domestic industry of the importer, the second is the threat of harm, and the third is the obstruction of the establishment of the domestic industry (world trade system, 1999, q: 163). although the main aim of this practice is to achieve the conditions for fair trade, the prejudice that possible use of this practice as a commercial interests of the countries and it can be influenced by political activities is still a concern. although the process of claiming the right through the court of justice of the european union (cjeu) or the world trade organization (wto) has been carried out, there is a view that the necessity of reform of the procedure of conducting the investigations and at least the improvement of the evaluation standards may be a solution to the doubts in this regard (davis, 04 / 2009) thus, according to the information received from the undersecretariat of foreign trade, anti-dumping tax is a tool that includes its own risk: when the importing country imposes anti-dumping tax on an exporter country, the exporter country also goes to investigate other products of the importer country (in an act of retaliation). an example of this is the investigation into the importation of cotton with us origin by turkey, against a country such as the us who is known to have opened too many investigations against turkey (göktepe, p. 453). in some cases, it is possible to see the diversion of the origin as a countermeasure against the dumping. for example, an investigation has been launched by the ministry of economy on 20.10.2006 with official gazette number 26325 regarding the importation of plywood originating from the people's republic of china via bulgaria and vietnam (göktepe, p. 452). when the turkish paper sector has been compared to the other countries in america, europe and far east, it can be seen that it has high costs in terms of cost and price, showing similarities in other sectors. in order to reach a competitive structure, it is important for our country to keep up with the import-export figures, specialization ratios, technological capacity, production, productivity, employment, incentives, in short, all the normal business indicators regarding paper production. 3. anti dumping implementations around the world 3.1. united states and anti-dumping although anti-dumping was not used extensively in the us in 1916 or until the 1970s, it was not only a pioneer in the international arena but one of the those that apply anti-dumping measures most (göktepe, p. 113, 114). us, eu, canada and australia have been the countries/union that have been the primary users of anti-dumping measures until the mid 90s (bown, p. 2). moreover, the us laws are more extensive that the gatt in terms of not only antidumping content but other protective measures. according to these laws, the decision to take measures depends on two criteria: first, sales of goods exported to america are below normal value; second, due to this pricing, domestic producers suffer losses due to material reasons. in countries such as the us where the private sector is very powerful, the size of the share of aforementioned import in trade keeps the politics closely-aligned with the trade sector in cases of large losses. at this point, however, it should be noted that the commission, which conducts the anti-dumping investigations in all anti-dumping enforcing countries, has a private bureaucratic status independent from the political structure (bolingen, prusa, 2001, p. 7). still, political pressure is inevitable not only in the us but in other member states as well. moreover, another aim of the anti-dumping implementation is transparency, yet some countries keep their trade data secret or are unwilling to share their calculation methods and many countries utilize anti-dumping solely to increase their domestic market gains. merkut lanpir 56 3.2. european union and anti-dumping the kennedy round talks in 1967 were taken as a basis before the customs tariff in the european economic community went into force in 1968 and the first anti-dumping regulation was adopted on 1 july 1969 (öz, bozdoğan, p. 111, 112). anti-dumping was adopted as a policy in foreign trade practices as a protective measure against dumping and subsidized imports in the trade between member and non-member countries, on the condition of detected dumping in a certain importing action, a proven financial loss due to the detected dumping and a requirement for the community to act in favour of its own best interests. 3.3. decisions of the european union judicial organs and world trade organization decisions the european union (eu) has made it clear that the world trade organization (wto) treaties are legally-binding for the union under “pacta sunt servanda” principle. the union has adopted a number of secondary legislations to fulfill obligations as treaties entered into force. on the other hand, it also has admitted that the corresponding wto treaties are not directly applicable in eu law. many clauses of the wto treaties are open, precise and unconditional at a level suitable for direct application, however this does not change the nature of direct applicability.in a similar manner, it was also accepted in turkey that the wto treaties are equivalent with laws in terms of power, there is no direct obligation to provide legislative power to these treaties apart from the principle of “pacta sunt servanda” (allowing the treaties a direct legal influence allows the involved parties to file actions at the domestic courts based on the treaties in question – which creates an additional obligation). for example, strong countries such as china, japan, canada and the us do not recognize a direct legal influence whereas the eu has not adopted any regulations regarding the direct legal influence, although a regulation exists regarding the adaptation to anti-dumping and antisubsidy issue reports. moreover, there is neither a regulation nor a case regarding this issue in turkey. nevertheless, when individual cases are investigated, domestic legal interpretations are prioritized over the eu interests with respect to the interests of the parties and progression of the legal case (ulusoy, p. 253 – 319). for instance, in the preliminary case of ikea wholesale which was settled by the court of justice of the european union (cjeu) in 2007, as a result of the anti-dumping investigation conducted by the eu on bedside exports to pakistan, india and egypt, anti-dumping tax implementation was initiated in 1997 with commission regulation 1069/97 against the forementioned countries. india applied to the panel in wto for this implementation of eu. the result of the panel was that eu's resetting application was found to be contrary according to wto, the panel report was appealed, the appeals body confirmed the panel’s decision, then the eu accepted the new legislation in 2001 and suspended the case. following the decision to suspend the implementation of the charter, india filed a lawsuit seeking the repayment of retroactive taxes on the uk. finally, based on the new regulation adopted in 2001, the european union court of justice announced that it did not allow the retrofit of the panel and appellate body reports against the union (http://eur-lex.europa.eu/legalcontent/en/txt/?qid=1482694273915&uri=celex:62004cj0351; http://curia.europa.eu/juris/liste.jsf?language=en&num=c-351/04) for this reason, it is more likely approach for turkey to consider the issue differently for two eu member states of finland and poland in the investigation opened regarding importation of kraft liner paper from 4 countries (finland, russia, poland and brasil). on the other hand, the anti-dumping action against kraft liner paper import from brasil and south africa origins was ended with a committee decision dated 4 march 1988. an application was filed to the commission regarding kraft liner paper import corresponding to codes 4804 11 11, 15 and 19 along with the proof of dumping from the european union of paperboard manufacturers’ association dates 17 march 1987 (by stating the council charter no 2176/84 dated 23 july 1984 regarding the protection against dumping and subsidized import from non-european economic community member states) (http://eur-lex.europa.eu/legalcontent/en/txt/?uri=oj%3al%3a1988%3a062%3atoc). http://eur-lex.europa.eu/legal-content/en/txt/?uri=oj%3al%3a1988%3a062%3atoc http://eur-lex.europa.eu/legal-content/en/txt/?uri=oj%3al%3a1988%3a062%3atoc anti-dumping taxes and the paper sector 57 it cannot be said that every complaint submitted to the world trade organization has gone through the panel stage of the consultation request for each anti-dumping implementation as a result of antidumping taxes or vice versa. for example, us requested consultation for anti-dumping taxes and compensatory duty that us imposed on chinese origin coated free papers on 14 september 2007, but on 24 february , 2010, being the most recent update, there was not a step, progress and an outcome of this application determined (https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds368_e.htm). there are also situations where the two sides agree, for example, swiss-australia (anti-dumping measures on imports of coated woodfree paper sheets). switzerland, is a member of an efta and is a member of gatt since 1966 and is a member of wto since 1995. on 20 february, 1998, a request was made for an inquiry for the temporary anti-dumping measures applied by australia into the importation of coated pulp paper speculating that they were incompatible with articles 3 and 5 of the gatt, and on 25 may 1998, the two sides concluded in agreement within a short period of time (https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds119_e.htm) 4. anti-impression implementations in turkey 4.1. examples of disagreement and anti-dumping investigations of turkey in the world trade organization turkey anti-dumping duty on steel pipe fittings, on 9 october, 2000, brazil requested consultation on the antidumping tax measures imposed by turkey on imports of 26 iron and steel pipes from turkey, but not the panel. in addition, there are also no notifications in the records indicating that mutual agreement has been reached (https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds208_e.htm). turkey restrictions on imports of textile and clothing products, turkey requested a consultation from south africa on april 10, 2003. the reason is the roll-shaped blanket imported from turkey by africa, but there is no report on whether a solution has been reached, since there was no attempt for the panel establishment following the request for consultation (https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds47_e.htm) investigation of synthetic polyester fiber originating from south korea and indonesia, synthetic discontinuous fibers of polyesters originating from republic of korea (south korea) and republic of indonesia (indonesia) and in 5503.20.00.00.00 customs tariff statistics position (ctsp), have been subjected to anti-dumping prevention of cif values in different ratios between 11.9% and 24.6% for south korea and 6.2% and 37.4% for indonesia according to the communiqué no. 2000/2 on the prevention of unfair competition in imports published in the official gazette dated 13/03/2000 and numbered 23992 (ministry of economy, report, p. 2). fan coil investigation originating from people's republic of china, with the communiqué on the prevention of unfair competition in imports (2010/16) published in the official gazette dated 31/05/2010 and numbered 27597 for the sthcaa registered under the gtsp of 8415.83.00.90.00, 34.27% of the cif price was placed against the dumping measure (http://www.resmigazete.gov.tr/eskiler/2016/02/20160212-4.htm). 4.2. implementation example in turkey the law on the prevention of unfair competition in import numbered 3577 dated 14.06.1989, the cabinet decree on the prevention of unfair competition in imports, numbered. 99/13482 dated 20.10.1999, and legislation from the regulation on the prevention of unfair competition in imports numbered 23861 dated 30.10.1999 published in official gazette constitutes the legal basis and scope for the dumping investigation. the investigation is initiated officially as a result the evaluation and justification of the evidence and statistical information which establishes a relation of casuality and the damage threat which the indigenous manufacturer of the product in question prepared for the dumping claim ( official gazette, issue 29873). if the total production of the main applicant producer or producers in the field of production is 50% higher than the sum of the productions of the applicant supporting producers or unsupporting producers, the inquiry will be opened on behalf of the producer and carried out by the directorate general of import. following the decision of the investigation, the phases of collection of information https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds368_e.htm https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds119_e.htm http://www.resmigazete.gov.tr/eskiler/2016/02/20160212-4.htm merkut lanpir 58 are started with questionnaires; the embassies in ankara are notified for the companies which are importing the relevant product determined by the ministry and who are also producers and / or exporters abroad. the written and oral follow-up of the inquiry is conducted in turkish and is structured in a way that allows the understanding of the main information, which is not confidential for all the information, documents and opinions transmitted in the confidentiality record. in some cases, the parties should explain the reason why they cannot be summarized. the response time of the questionnaires is 37 days from the date of submission of the notification, if the time requirement is not complied with, misleading declaration is made or access to information is blocked, it is regarded as avoidance of cooperativeness and evaluation is made in the decision part which is made after the investigation. during the investigation period, transitional measures may be taken or a retrospective application decision may be made (başkol, p. 110) in the process of reaching the decision stage of the investigation, on-the-spot verification tests are carried out after the written and verbal information provided by the parties are evaluated and then technical items including production and quality acceptability issues are investigated. after the technical examination, initial determinations regarding the import volume of the national base, the share of the consumption rate in the country, the price progress rate are made by the help of the market conditions that exporters and importers in, the sales policies and the price comparisons. these determinations ultimately lead to a review of the domestic production sector (production, capacity utilization rate, domestic sales and exports, market share, stocks, employment, wages, productivity, costs and profitability, cash flow, net profitability, equity capital and investment earnings, growth, equity capital increase, progress of investment), all indicators are analyzed. if a causal link between dumping imports and losses can be established, communiqué regarding the anti-dumping taxes as strict measures against dumping comes into force by the date of its publication and shall be executed by the minister of economy (official gazette, issue 29416) below are graphs of monthly import quantities (from january 2014 and september 2016) of klb (non bleached kraft liner paper) papers originating from the usa and 4 european countries which are under investigation which have been reached by converting the sources accessed from tüi̇k site into reports (official gazette, issue 29068). these reports are in accordance with the opening dates of an investigation into four european countries that resulted in an anti-dumping tax on the investigation of july 14, 2015 after the us initiated anti-dumping investigation of us-origin klb products on july 22, 2014, and then exported the same product on october 30, 2016, all klb papers are in line with the us originated klb papers with anti-dumping tax, and the import quota of the 4 european countries investigated during the period when the import volume of us origin paper is decreasing. in the pie charts containing total annual import amounts, us-origin klb had a share of 52% before applying anti-dumping taxes, in 2015 it was 46% and with the anti-dumping tax decision, it decreased to 29%. on the other hand, it was seen that the imports from 4 european countries, who are now in investigation, had a share of 10% in 2014, 16% in 2015 and this had increased up to 26% of the total, because the import of us origin anti-dumping tax papers headed towards europe. 22 july 2014 anti-dumping investigation of us origin products 14 july 2015 us anti-dumping tax 30 october 2016 investigation of imports from 4 countries (finland, russia, poland and brazil) anti-dumping taxes and the paper sector 59 merkut lanpir 60 5. econometric model empirical work on anti-dumping issues has been intensifying since the 1980’s. the anti-dumping decisions of finger in 1982, which was practiced by the us, were examined in political and economic terms and it was stated that political power was effectively in practice (dişbudak, türkcan, p. 157). in 1994, krupp's investigated the antidumping decisions in us chemical industry in terms of micro-economy and after that sabry (2000) investigated the link between the us industrial sector and anti-dumping practices. in the anti-dumping decisions, the import quantity of the related industry, the choking rate and the anti-dumping rate calculations of the anti-dumping applicants are the most important variables (dişbudak, türkcan, p. 157, 158). hansen and prusa (1997) examined us anti-dumping practices by using data from imports, political pressures and industry, and argue that politics has an important role on anti-dumping decisions in developed countries (dişbudak, anti-dumping taxes and the paper sector 61 türkcan, p. 157, 158; özer, erkal, 2016, p. 444). knetter and prusa (2000) stated that according to their model which was established with data of investigations between the us, canada, australia, and the european union, real exchange rates, gdp growth rates and growth rates of other countries, an increase in real exchange rate has led to an increase in anti-dumping investigations (dişbudak, türkcan, p. 158). in 2003, lee and mah found that antidumping practices increased as the unemployment rate with us anti-dumpling practice, gdp growth rate, foreign trade balance and ratio of imports to gdp and gdp ratio increased too (ibid). while irwin (2004) worked with unemployment rate and nominal exchange rate in developed countries, according to the study of aggarwal (2004) in which the gdp growth rate, trade balance, import growth rate, customs tariffs, and the number of anti-dumping duties applied to a country in the past were used, it was stated that as the problems in the balance of foreign trade increased, the number of anti-dumping investigations increased in developing countries (ibid). in a study using the nbr model in 2014 it found that anti-dumping investigations were in direct proportion to the financial strength of the industry, and that the idea of knetter and prusa in corresponding economy which states that during the recession periods, local producers tended to apply to anti-dumping more frequently (avşar, p. 47) according to utton, countries have a tendency to hold preliminary plans from a very national perspective, rather than the fair trade at global level (utton, p. 19), it is also true that lobbying is important in terms of providing political support (davis, pp. 2 4). considering the existing empirical approaches in the literature, in this model, logarithmic calculations of which unit of measure were performed by using the multiple linear regression analysis method and the least squares method in the eviews program, the assumptions of regression were examined and it was concluded that there is no autocorrelation, heteroscedasticity, and multicollinearity (eşiyok, p. 96 – 126). the main data source is the published information about the years 2014-2015 2016 taken from turkish statistical institute. the reports obtained by processing raw information were then used to investigate the significancy of the relationships between dependent and independent variables through econometric modelling. klb all import quantity kg import dollar usd klb taxed import quantity kg import dollar usd klb untaxed import quantity kg y11 y21 y12 y 22 y13 ly11 ly12 ly13 lpap 0,93 lpap 1,07 lpap 0,67 ly11 (-1) 0,37 *** ly12 (-1) 0,38 *** r2 0,46 r2 0,4 r2 0,1 f-statistic 13,24 * f-statistic 10,23 * f-statistic 3,8 *** d-w 2,04 d-w 2,28 d-w 1,53 merkut lanpir 62 ly21 ly22 ly23 lpap 1,10 lpap 1,11 lpap 1,26 lman -2,61 lman -4,18 ly21 (-1) 0,32 *** ly22 (-1) 0,38 *** r2 0,67 r2 0,62 r2 0,42 f-statistic 20,29 * f-statistic 15,84 * f-statistic 23,36 * d-w 2,04 d-w 2,22 d-w 1,68 *** indicates a level of 1%.significance ** indicates a level of 5% significance * indicates a level 10% significance according to the ly 11 dependent variable investigation, an increase of 1% in log of import amount (kg) of kraft liner (klb) paper, has led an increase of 0.93% in log of the total import value (million usd) of all paper and paper products. in addition, 46% of log of the changes in the import quantity variable of all kraft liner papers, which are being dependent variable, are explained by the explanatory variables included in the model and an increase of 1% in the log of import amount (kg) of all kraft liner (klb) paper in one period delay, has led to an increase of 0.37%. according to the ly 12 dependent variable investigation, an increase of 1% in log of import amount (kg) of kraft liner(klb) paper who apply anti-dumping tax, has led an increase of 1.07% in log of the total import value (million usd) of all paper and paper products. in addition, 40% of log of the changes in the import quantity variable of all kraft liner papers, which are being dependent variable, are explained by the explanatory variables included in the model and an increase of 1% in the log of import amount (kg) of all kraft liner (klb) paper in one period delay, has led to an increase of 0.38%. according to the ly 13 dependent variable investigation, an increase of 1% in log of amount (kg) of kraft liner(klb) paper imported (who is import free), has led an increase of 0.67% in log of the total import value (million usd) of all paper and paper products. in addition, 10% of log of the changes in the import quantity variable of import-free kraft liner papers, which are being dependent variable, are explained by the explanatory variables included in the model. according to the ly 21 dependent variable investigation, an increase of 1% in log of import amount of (kg) of all kraft liner (klb) paper, has led an increase of 1.10% in log of the total import value (million usd) of all paper and paper products. in addition, 67% of log of the changes in the import quantity variable of all kraft liner papers, which are being dependent variable, are explained by the explanatory variables included in the model and an increase of 1% in the log of import amount (kg) of all kraft liner (klb) paper in one period delay, has led to an increase of 0.32%, while an increase of 1% in the same variable (log of import amount of all kraft liner papers) resulted in an decrease of 2.6% in the capacity utilization rate of the whole manufacturing industry of the paper and paper products sector. finally, according to the ly 22 dependent variable investigation, an increase of 1% in log of import amount (kg) of kraft liner(klb) paper who has anti-dumping tax, has led an increase of 1.11% in log of the total import value (million usd) of all paper and paper products. in addition, 62% of log of the changes in the import quantity variable of all kraft liner papers, which are being dependent variable, are explained by the explanatory variables included in the model and an increase of 1% in log of import amount (kg) of kraft liner(klb) paper which is subject to anti-dumping tax, in one period delay, has led to an increase of 0.38%, while an increase of 1% in the same variable (log of import amount of all kraft liner papers) resulted in an decrease of 4.18% in the capacity utilization rate of the whole manufacturing industry of paper and paper products in terms of sector. anti-dumping taxes and the paper sector 63 6. results and recommendations the import substitution growth adopted in the economy before the 1980's were replaced by the growth based export after the 1980's. on the other hand, turkey has become dependent on imports, while maintaining its position of emphasizing exports because of its integration with wto and the customs union requirements in the 1990's. in other words, exports induce imports and thus it has been creating the effect of sustaining the problem of foreign trade deficit (topbaş, p. 45 – 46). if the price we mention is the dumped price of imported goods, it is a factor that negatively affects the domestic market. because competing with dumped prices means lowering costs, and lowering costs often means reducing quality, service or keeping up to date with the latest techologies (yalçınkaya, çakır, 2004, no. 194). even though it seems that the liberalization of the economy had a positive effect on gdp and export figures, it cannot be said that this increase is due to the fact that intermediate goods and investment goods are imported because they cannot be produced in the local market and therefore the importation is triggered and the hypothesis represented in the economic theories (vernon 1966 keynesian policies) which state that an increase in the country's competition power, capacity of investment and technological development increases the economic growth increases is realized. for this reason, the solution is an industrial transition in which intermediate goods and investment goods can be produced (saraç, pp. 190 191).our country is in a tough situation due to the fact that the energy, water, electricity, technology, raw materials and auxiliary materials (filling materials such as kaolin and calcium carbonate) which are the inputs for the paper sector are costly and we do not have forests which have a comparative advantage in terms of geographical and climatic conditions, but this situation can be brought to a point where it can compete with other countries by choosing the right location, with educated experienced personnel, technology, economic stability provided by state support, high-capacity factories and by analysis to decrease the production costs and savings aimed at the scale of production facilities.numerical data showed that anti-dumping tax practice did not have a restrictive impact on imports but this impact can be attained with an additional tax to be applied in conjunction with the anti-dumping tax, because in this application, the tax is applied to the product with the relevant tariff code regardless of origin (köse, ali, pp. 197 – 200).it is expected that the restriction of imports will have two effects on the domestic producer: the brand known as the only domestic producer for kraft liner developing, capacity increasing, increasing the capacity to meet the domestic demand and also increase in demand of the paper produced by the domestic producers through conversion of waste paper known as imitation kraft liner. for the paper sector, the establishment of certified forests, the activation of local producers with idle capacity within the scope of incentives, the development of legislation aimed at the main target by the state foreign trade units, the measures to reduce the financial weight of production input costs, supply of state support in accordance with environmental law article 29 (environment law; p. 15) and european union environmental directive are among the solutions to make a positive impact. qualified solutions are necessary since the social improvement and development based on production (directive 2008/98 / ec of the european parliment and of the council, of 19 november 2008, on waste and repeating certain directives). with national interpretation, 'national income = domestic product + net foreign income'; 'national income + capital income + labour income'; with global interpretation 'the total income of the world = the total production in the world (piketty, thomas; p. 52). no matter how it is evaluated, national or international, production is the dominant function for the growth of the economy, with the growing economy employment increases, gdp per capita increases, technology develops,education level increases, the quality of social services gets better and society undergoes change and transformation investigations have shown that a growth of 1% per annum causes a change in the growth rate of 35% in a period of thirty years; the depth of the effect of a growth of 1.5% per annum will be over 50% in a period of thirty years (ibid., p.101). merkut lanpir 64 as a result, foreign trade measures, state supports and incentives, economic measures, tax policies are some tools that can be implemented in order to increase national production. production is the only way to reach a strong economy which is the main purpose. 6. references avşar, v. (2014) türkiye'nin antidamping soruşturmalarını etkileyen faktörler: sanayi verileri ile ekonometrik bir analiz (factors affecting turkish antidamping investigations: an econometric analysis with industry data), eskişehir osmangazi university journal of economics and administrative sciences, 9 (1), pp. 41 54 başkol, m.o (2006) i̇thalatta haksız rekabetin önlenmesinde anti-damping soruşturmalarının etkinliği (the effectiveness of anti-damping investigations in the prevention of unfair competition in imports), uludağ university journal of economics and science, volume 2, issue 1, 2010 issn: 1309-8020 (online) bowne, c. p. (2005) global antidumping database version 1.0, brandeis university, in 2005, wps3737, sa.3.1. enviromental law, 11/8/1983 no: 18132, p. 15 davis, l., anti-dumping investigation in the eu: how does it work?, european center for international political economy (ecipe), working paper no. 3.1. directive 2008/98 / ec of the european parliment and of the council, of 19 november 2008, on waste and repeating certain directives dişbudak, c. & türkcan, k. (2005)uluslararası ticarette yeni korumacılık politikası: antidamping', stratejik araştırmalar dergisi (the new protectionism in international trade: antidumping', journal of strategic researches), 2005, year: 3, issue: 5, isbn: 1303-698x, pp. 52 82 ekşi, n. (2005) kambiyo mevzuatında i̇thalat / i̇hracat hesapları ve bu hesapların kapatılamamasına i̇lişkin suçlar (import / export accounts in foreign exchange legislation and crimes related to failure to close these accounts, istanbul, pp. 44-47 eşiyok, b. a. (2014) türkiye–ab arasında dış ticaretin teknolojik yapısı, rekabet gücü ve endüstri-içi ticaret: ampirik bir değerlendirme (the technological structure of foreign trade between turkey and the eu, competitiveness and intra-industry trade: an empirical evaluation), ankara european studies journal, 2014, vol.13, no.1, pp. 96-126 göktepe, h. (2015) i̇thalatta haksız rekabet ve türkiye'de anti-damping uygulamaları (unfair competition in imports and anti-dumping practices in turkey), international conference on eurasian economies 2015, session 4c: international trade ii, pp. 445 454 iso (2015) paper and paper products manufacturing sector report, istanbul kaya, h. s. (2010) avrupa birliği’nde anti-damping (karşı düşürüm soruşturması) uygulamaları (anti-damping practices in the european union), dokuz eylül university, department of public law, european union law program, master thesis, pp. 5 17 kaya, t. (2015) dünya ticaret örgütü (dtö) anlaşmalarının i̇ç hukukta uygulanması (implementation of world trade organization (wto) agreements in internal law), ankara, pp. 11 -71 köse, a., (2013) uluslararası ticarette tarife dışı engeller: anti damping vergilerinin ve i̇lave gümrük vergilerinin türk tekstil ve hazır giyim sektörlerine etkileri (the effect of anti-tariffs on international trade: anti-dumping taxes and additional customs taxes on turkish textile and ready-to-wear sectors), istanbul university, istanbul, pp. 197 200 anti-dumping taxes and the paper sector 65 ministry of economy (2014) i̇thalatta haksız rekabetin önlenmesine i̇lişkin tebliğ (communiqué on prevention of unfair competition in imports) (communiqué no: 2014/26), official gazette, 22 july 2014 ministry of economy (2015) i̇thalatta haksız rekabetin önlenmesine i̇lişkin tebliğ (communiqué on prevention of unfair competition in imports) (communiqué no: 2015/28), official gazette, july 14, 2015 ministry of economy (2016) i̇thalatta haksız rekabetin önlenmesine i̇lişkin tebliğ (communiqué on prevention of unfair competition in imports) (communiqué no: 2016/46), official gazette, 30 october 2016 ministry of economy (2012) nihai gözden geçirme soruşturması nihai bildirim raporu (general directorate of import, final report on final inspection investigation), 2012, damping and subsidy research office, no: 2 öz, e. & bozdogan, k.g. (2012) (anti-dumping taxes and their effects on examples from turkey and world applications), journal of accounting and tax applications, 2012-3, p. 105 128 özer, h. & erkal, g., 'econometric analysis of turkey's antidumping practices', atatürk university journal of economics and administrative sciences, vol: 30, 2016, issue 2, pp. 441 454 piketty, t. (2014) yirmi birinci yüzyılda kapital (twenty-first century capital), pp. 46 60 saraç, t. b. (2013) i̇hracat ve i̇thalatin ekonomik büyüme üzerindeki etkisi: türkiye örneği’, ege akademik bakış (the impact of export and importation on economic growth: the case of turkey), aegean academic view, 13: issue: 2-april2013, pp.181 194 tobb (2012) turkey paper and paper merchant sector report, ankara topbaş, n. (2012) türk ekonomisinin dış ticaret yapısı ve ekonomik büyüme (foreign trade structure and economic growth of the turkish economy), finance political & economic comments 2012 vol: 49 no: 569 tuncer, s. (2001) gümrükler ve gümrük vergileri ( teori ve uygulama )(customs and customs taxes (theory and practice)), ankara, pp. 325 340 turkstat, foreign trade statistics, october 2016 türkcan, k. & dişbudak, c. (2005) antidamping uygulamalarının ekonometrik analizi: türkiye örneği (econometric analysis of antidumping practices: the case of turkey), economics business and finance, review and research, pp. 149-164 ulusoy, ü. h. (2009) dünya ticaret örgütü’nde uyuşmazlıkların çözümü mekanizması (dispute resolution mechanism in world trade organization), ankara, pp. 253 319 utton, michael a.(2006) 'international competition policy maintaining open markets in the global economy', 2006, p. 19 world trade system, itc / p33.ets / hrds / 99-viii, isbn 0-85092-621.1, translated into turkish by icv with the permission of itc and commomwhealth secretariat, 1999, pp. 148 176 yalçınkaya, t. & çakır, a. (2004) küresel rekabet ekseninde i̇hracatçı firmalar için bir risk faktörü: sosyal ve ekonomik damping (a risk factor for exporters in the global competitive axis: social and economic damping), volume 6, issue 1, line 7, no 194 http://curia.europa.eu/jcms/jcms/j_6/en/ http://curia.europa.eu/jcms/jcms/j_6/en/ merkut lanpir 66 http://eur-lex.europa.eu/ http://www.ekonomi.gov.tr/ http://www.resmigazete.gov.tr/default.aspx http://www.sksv.org/tr/ http://www.tuik.gov.tr/ https://www.wto.org/ appendix tables exports in terms sub-sectors (million dollars) code product description 2007 2008 2009 2010 2011 2012 2013 48 paper and cardboard 861 1.078 1.005 1.217 1.427 1.687 1.963 4802-4805 4810-4811 4823 paper and cardboard 170 215 171 202 245 269 304 48034818*9619* cleaning & toilet paper, diaper 400 536 523 644 754 945 1.154 4819 paper and cardboard packaging products 188 212 210 250 294 319 355 4816-4817 4820-4821 paper stationery products 76 81 70 72 82 89 95 http://www.ekonomi.gov.tr/ http://www.resmigazete.gov.tr/default.aspx http://www.sksv.org/tr/ http://www.tuik.gov.tr/ https://www.wto.org/ anti-dumping taxes and the paper sector 67 4801480448064807 4808-4809 4812-4813 4814-4822 other paper and cardboard products 27 33 30 49 53 65 56 * the product number 481840 gtip has been coded with 961900 gtip number since 2012 source: istanbul chamber of industry (iso), paper and paper products manufacturing sector report, 2015, istanbul export in terms sub-sectors (million dollars) code product description 2007 2008 2009 2010 2011 2012 2013 48 paper and cardboard 2.470 2.605 2.211 2.820 3.110 2.963 3.171 4802-4805 4810-4811 4823 paper and cardboard 1.468 1.520 1.319 1.704 1.883 1.808 1.967 48034818*9619* cleaning & toilet paper, diaper 63 65 87 87 98 121 117 4819 paper and cardboard packaging products 67 68 57 69 65 68 68 4816-4817 4820-4821 paper stationery products 106 110 84 117 119 112 106 4801480448064807 4808-4809 4812-4813 4814-4822 other paper and cardboard products 765 843 665 844 945 854 913 * the product number 481840 gtip has been coded with 961900 gtip number since 2012 source: istanbul chamber of industry (iso), paper and paper products manufacturing sector report, 2015, istanbul global paper production (thousand tons) 2008 2009 2010 2011 2012 2013 paper pulp 151.410 148.690 150.427 151.344 152.678 153.878 paper and 262.140 251.125 258.420 262.880 263.724 265.202 merkut lanpir 68 products newspaper paper 32.124 30.320 29.880 28.866 28.125 27.452 writing and printing papers 95.916 89.539 91.846 92.020 92.143 91.343 home and cleaning papers 21.124 20.615 20.346 20.412 20.220 20.037 packing and label paper 104.856 102.961 108.536 114.038 115.791 119.059 other paper and cardboard products 8.120 7.690 7.812 7.544 7.445 7.311 paper industry net exchange income (million dollars) years paper export (million dollars) paper import (million dollars) net exchange income (million dollars) 2005 582 1.767 -1.185 2006 625 2.043 -1.418 2007 861 2.470 -1.609 2008 1.078 2.605 -1.527 2009 1.005 2.214 -1.209 2010 1.217 2.820 -1.603 2011 1.427 3.110 -1.683 2012 1.687 2.963 -1.276 2013 1.963 3.171 -1.208 source: turkish statistical institute global paper and paper products manufacturers capacity and production (thousand tons in 2013) countries production capacity production china 104.000 101.000 usa 80.224 73.723 japan 30.213 26.242 germany 24.276 22.395 brazil 13.045 10.444 anti-dumping taxes and the paper sector 69 finland 12.649 10.592 canada 12.384 11.149 korea 11.781 11.801 sweden 11.714 10.781 russia 9.800 7.746 italy 9.610 8.536 france 9.534 8.043 spain 6.787 6.181 mexico 5.962 4.835 austria 5.438 5.840 great britain 5.023 4.561 largest markets of global paper and products consumption (thousand tons) countries 2009 2010 2011 2012 2013 china(*) 76.000 79.000 83.000 86.000 89.000 usa 72.498 77.328 74.272 68.483 68.843 germany 18.494 19.959 20.255 20.070 19.898 italy 9.859 11.139 11.080 10.210 9.920 great britain 10.416 10.628 10.255 9.268 9.150 france 9.298 9.771 9.515 9.056 8.787 russia 5.742 4.521 6.642 6.643 6.431 spain 6.742 7.766 6.544 6.132 6.091 turkey 4.325 5.060 5.174 5.343 5.658 canada 5.945 5.938 5.449 5.494 5.404 poland 4.407 4.808 4.922 4.929 5.201 netherlands 3.525 3.625 3.138 3.389 3.380 belgium 2.767 2.521 2.813 2.858 2.808 austria 1.951 2.300 2.281 2.276 2.247 sweden 1.932 23.215 1.700 2.328 1.528 global paper production capacity predictions (thousand tons) 2013 2014 2015 2016 2017 2018 paper pulp 152.838 153.750 155.733 157.825 159.757 160.449 merkut lanpir 70 paper and products 273.954 273.055 274.715 276.542 278.268 279.106 newspaper paper 24.921 24.122 23906 23.971 24.302 24.303 writing and printing paper. 76.933 75.656 75.540 75.860 75.985 76.262 home and cleaning paper 22.124 22.455 22.745 23.049 23.237 23.420 packing and label paper 138.592 139.365 141.248 142.517 143.177 144.075 other paper and cardboard products 13.380 13.184 13.125 13.170 13.199 13.282 international journal of commerce and finance, vol. 2, issue 1, 2016, 91-101 why go public? an empirical analysis of ipo’s competitive effect on turkish firms yakup ergincan, (ph.d.) central securities depository of turkey, turkey fatih kiraz, (ph.d.) central securities depository of turkey, turkey özgür uysal, (ph.d.) central securities depository of turkey, turkey abstract: the motivation of this study is to approach the ipo issue from a different perspective. most of the studies in the existing l iterature deal with three broad issues which are operating performance, stock performance, and the reasons to go public. however, there aren’t many studies which tackle the ipo issue from a pure competitive perspective which enables limited but clear results. this study contributes to the literature, not by answering a broad and old question but by providing new and partial evidence which seem to contradict the whole at first glance. most of the 60 bist (borsa istanbul) listed large industrial firms in this study have improved their relative ranks after their ipos, when compared to their own large competitors most of which are not listed in bist. these ranks are available in turkey’s top 1.000 industrial enterprises annual lists and they are officially assigned by ici (istanbul chamber of industry) according to firms’ sales revenue figures. thus, they provide us with the single and clear window to observe. keeping in mind that this window is limited, this study comes up with some non-negligible findings and then elaborates on their significance for the ipo literature, raising more questions than answers for the sake of a more solid theory. keywords: initial public offerings (ipo), borsa istanbul (bist), competitive effect, finance and product market competition, large industrial firms 1. introduction there is a vast amount of studies on ipo subject which can be divided into at least three broad categories. naturally, first of them is the basic question that why do firms go public. more specifically, why the motivation to do an ipo does ever exist and why it is stronger in some situations or times. there are a few theories in the literature, including entrepreneurs’ chance to sell their companies/shares to a higher price (zingales, 1995), control regain opportunity for entrepreneurs in favorable conditions (black and gilson, 1998), raising funds for further growth (pagano et al., 1998), allowing more dispersion of ownership (chemmanur and fulghieri, 1999), inspiring more faith in the firm (maksimovic and pichler, 2001), first-mover advantage (schultz and zaman, 2001), ipo timing models based on asymmetric information (lucas and mcdonald, 1990), and window of opportunity due to investor sentiment (baker and wurgler, 2000). these are just some examples for the first category. the second category, short/long term stock performance after ipo, has very much to do with the concept of ‘underpricing’. the main theories trying to explain it can be grouped as the ones which focus; asymmetric information between issuers and investors, legal liabilities of the issuers, share allocation concerns, and valuation methods. a very good review of these issues is available in ritter and welch (2002). however, neither stock performance nor the reasons and timings of ipos is interesting for us for the time being, because the core subject of this study falls to the third and the last broad category which is operating performance before and after an ipo. our interest in this latter category was aroused by a naive question that we in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 92 yakup ergincan, fatih kiraz, özgür uysal http://ijcf.ticaret.edu.tr want to answer and also by the availability of a very good dataset to help us come up with that answer. that basic question is ‘whether going public is a really bad signal, in general, for the future of the firm itself or not’. the important thing here is that we focus our attention on the firm itself and not on issuers, investors, or other thir d parties such as government bodies. sure, we are aware that even this narrowed version of the issue has many dimensions to consider, but if we were forced to make a sweeping generalization, the quick and dirty result, from the literature, would be poor overall operating performance after ipos. this is something that the authors of this study and some other researchers find hard to believe and to say out loud. main reason for this ignorance is that one can, within seconds, think of many possible theoretical/practical reasons for things to go well for ipo firms. secondary reasons are supplied by our own market experience and the results from a few related studies from the literature. thus, we hypothesized that firms, at least relatively large firms if not all, would become more competitive after their ipos. in this situation of a possible conflict, we needed to provide new, clear, and reliable evidence either for or against the seemingly prevailing claim. istanbul chamber of industry’s (ici) publicly available yearly dataset came in to rescue, providing us with the actual ranks of industrial firms over the years. the next part of this paper is a brief summary of the related literature on the effects of going public on operating performances and competitiveness of firms. part three, first by describing the data, presents the methodology and results. the last part concludes by highlighting the main findings and possible future directions. 2. literature review there are many studies on operating performance after ipo. however, only a few of them approach the issue from a competition perspective or use turkish data. there is no study focusing on the competitiveness of turkish large firms which have gone public in any year since 1993. below is a brief review of the general ipo performance literature. jain and kini (1994), by analyzing 682 ipos performed during 1976-1988, find a significant decline in performance (market-to-book ratio, price/earnings ratio, and earnings per share) subsequent to the initial public offering. they also claim that there is a significant positive relation between post-ipo operating performance and equity retention by the original entrepreneurs. on the other hand, cai and wei (1997), relying on their regression results for 180 japanese firms, state that managerial ownership structure is not a significant determinant of performance. thus, for the new issue puzzle, they do favor ‘window of opportunity’ explanation against ‘ownership’. spiess and pettway (1997) approach the problem from a different perspective and they claim that the only thing matters is the way the firms define an ipo. more specifically, the firms which have low corporate governance scores and see ipo as a single financing event not as a process to be planned, are more likely to be the underperformers. these papers are just some examples of studies which do not directly deal with sales growth or market share. like the ones above, there are many studies which support underperformance hypothesis but differ in the reason(s) outlined. however, there are also some studies which do not find convincing evidence of underperformance. brav and gompers (1997) is one good example for this. they argue that not ipo but size matters because crises, such as the one in mid -1980s, do affect smaller firms more. when controlled for size, they do not find a significant difference between the performances of ipo firms and other firms. there is another group of papers which find some mixed evidence on underperformance in some financial ratios but improvement in sales growth performance. thus, this is the most interesting group for the authors of this study. one of the earliest members of this group is kim et al. (2004). they analyze, mainly, three different operating performance measures of 133 firms quoted at thailand stock exchange during 1987-1993. their key measures are; sales growth, profitability of assets, and turnover of assets. for the period beginning with ipo date (t) and ending at three years later (t+3), they do find declines in all measures but sales growth. however, instead of focusing on this questionable contradiction, they focus on explaining the causes of lower profits. main cause they find is the level of managerial ownership. when the level is intermediate, the relationship with change in profitability is negative whereas the level is high or low enough, that relationship becomes positive. thus, naturally, they discuss these findings under the light of ‘entrenchment’ and ‘alignment-of-interest’ hypotheses. although the variable at the center of discussion is ‘profitability’ here and not ‘competitiveness’ or more specifically ‘ranks based on sales’, this study is still a good example since it differentiates between sales growth and other operating measures in terms of ipo. there are two very similar studies analyzing the ipos at bist some of which are the observations of our study as well. first of these two studies is kurtaran and er (2008) in which the sample consists of all firms which have gone why go public? an empirical analysis of ipo’s competitive effect on turkish firms 93 http://ijcf.ticaret.edu.tr public at bist between 1992 and 2000. the same sample of 205 firms is used in bulut et al. (2009) but this latter study is written in turkish. all of the three articles mentioned in this paragraph have something in common. the authors want to analyze the effects of managerial and ownership structure changes, not the ipo concept as a whole. thus, they consider ipo event just as an opportunity since every ipo changes the structure to a degree. as another common point, they find that sales growth behavior is not like other operating measures’ after ipo. this finding was promising at the beginning. however, it surely is not a direct proof of improved competitive power since none of these studies take the rivals, including also the firms which have not gone public, into account. in fact, the lack of this proof is one of the big motivations for our study. a more recent paper, spiegel and tookes (2015), is another study which aims to see ‘competition’ in the big ipo picture. their main question is ‘how one firm’s decision to switch from being private to public impacts its rivals’. to answer this, they develop a continuous time model in which heterogeneous firms producing heterogeneous goods compete for consumers. their general results imply that ipos forecast future industry changes but do not cause them. this may seem to be in conflict with our findings. however, there are important differences in methodologies of these two studies. firstly, their paper is more theoretical than empirical. secondly, they focus on rivals’ average profitability and market value, not the new ipo firm’s rank based on sales. finally and the most importantly, their sample includes mostly small firms with already small market shares whereas our sample consists of relatively large firms. on the other hand, hsu et al. (2010) investigate the returns and operating performance of publicly traded competitors around the time of 134 large ipos in their industries. they find that industry competitors experience negative stock price reactions around ipos and a significant deterioration in their operating performance after these ipos. they also claim that these large ipos are responsible for this underperformance, since they see that publicly traded competitors respond positively to the withdrawal of an ipo in their industry. this finding is in line with our main finding. they say competitors become worse and we say newly public firms become better, relatively. however, there is one thing that might be important; they do not include non-public firms in the competitors group. thus, the private rivals are missing in this picture. chemmanur and he (2011) provide us with the missing part, since they develop a model to compare newly public firm against a non-public competitor in a set of different external conditions such as existence/inexistence of productivity shocks and ipo waves. then they test this model empirically as well. this study has a lot to say on ipo waves but what is more interesting for us is one of their general findings; “going public, though costly, not only allows a firm to raise external capital cheaply, but also enables it to grab market share from its private competitors”. tests of our data provide partial support for the general claim that new ipo firms grab market share from both private and public rivals. support is partial, because our dataset includes only relatively large firms, whether they are new ipos or private/public rivals. to summarize this section, there is a very long literature on ipos but the literature seems to have only recently turned its attention to the issue of competition effects of ipos. our study falls under this young category. although our main question, methods, and datasets are somewhat different from these recent studies’, as explained throughout the study, our main finding is not that different. 3. data, methodology, and findings we used the publicly available dataset of ici which include, as the key variable, sales revenue figures of top 1,000 industrial firms in turkey. ici has been providing this yearly data since 1993 so that it was possible to create rank histories for all firms in those datasets, whether or not they are selected to be in the final sample of this study. final sample consists of 60 ipo firms and the selection process is as follows: (1) any of 111 industrial firms which performed an ipo at bist (formerly istanbul stock exchange) after year 1993 is a candidate. (2) each of these 111 firms has a “t” value representing its own ipo year. (3) the ones which have valid data for all of their own “t-1”, “t”, “t+1” periods are included in the final sample of 60 firms. during this process, 51 firms were eliminated because we do not have data about their performance in pre and/or post ipo periods. absence of this data has two reasons. first, some firms do not let ici to publish their names in some years, so we know their ranks but we do not know to which firms those ranks belong. for example, 55 of the top 1,000 firms in 2014 fall into this category. including them was an option but we would need some assumptions in that case and we rejected to base our analyses on some questionable assumptions. second and more important reason for the missing data is simply that some firms could not find a place for themselves in top 1,000 lists for some related periods. the reader may rightfully think that 94 yakup ergincan, fatih kiraz, özgür uysal http://ijcf.ticaret.edu.tr eliminating these firms from the final sample may result in a survivorship bias and thus may provide an artificial and unjust support to the findings of this study. in fact, the opposite seems to be true, since there are only 4 firms which were in top 1,000 before their ipos but were not in top 1,000 during or right after the ipo. on the other hand, there are 32 different examples for the reverse case, which makes one think that firms get better ranks after ipo event. as a consequence, by omitting all these firms and refusing to rely on any assumptions, we are actually purposefully reducing the probability of rejecting equal or less post-ipo performance when compared to pre-ipo performance. once the final sample is decided, the key variable of this study is calculated for the years around ipo by the following formula: (1) i,t+c si,t+c i,t+c comp =meanrank -rank where (i) represents the firm, (t) represents the ipo year of that firm, (c) is an integer between -3 and +3, and (si) represents the sector of that firm which includes itself and its competitors. ‘rank’ variable is already available in ici dataset. the dataset also provides sector codes for all firms assigned by ici according to ‘international standard industrial classification of all economic activities, rev.2’ (isic rev2). ‘meanrank’ variable gives the sector average rank for the related year. from the top 1,000 list, all firms in the related sector, whether they are quoted at bist or not, are included in the following formula.      , , (2) j t c si t c t c rank meanrank n where (j) stands for all firms in the related sector and (n) is the total number of these firms. as in formula (1), (t+c) represents the years around the ipo of firm (i). there may be at least three important issues to discuss here. firstly, non-quoted firms’ inclusion is necessary because we are interested in all rivals and ‘not going public’ may well be a wise decision at some circumstances. secondly, ‘median’ could be utilized instead of ‘mean’ but the overall results do not change in our case. finally, sector average/median may suddenly change from year to year, at least theoretically, since we have data for at most 1,000 firms for each year. to make things more clear, let’s consider the following example. suppose that there are only three firms in a sector in (t) moment. first firm’s rank is 1, second firm’s is 500, and the last firm’s is 999 in the top 1,000 list. let the second firm be an ipo firm and be in our final sample. in this case, the sector average rank is 500 and our ipo firm’s performance is neither better nor worse when compared to its sector. one year later (t+1), suppose that both first and our ipo firm protected their positions at 1 and 500 respectively. however, the third firm is no longer at top 1,000 list since its rank is now more than 1,000 and we have no chance to know exactly what the new figure is. now, the sector average is 250.5, much better than our ipo firm’s rank. applying formula 1, we should deduce that the ipo firm performed poorly and lost some of its competitiveness just after its going public. in fact, there is no such thing and our ipo firm is at least as competitive as it was one year ago. thus, one can claim that our key variable calculation/interpretation process is clearly biased by design. nevertheless, the important thing is that it is biased towards only one direction and this is intentional. what this design actually performs for us is to decrease the probability of failing to reject a false improvement signal for ipo firms. fortunately, the opposite is not true since, in the actual dataset, there is no firm which was better than its sector average at a year and then was suddenly out of the list in the following year. the idea experiment above is about only two or three firms within a sector, just to clarify something. in our real dataset, number of firms within any sector at any year is generally much more than three. table 1 below may give a hint about this issue. as expected, the distribution is not uniform, some sectors are overrepresented, but since the motivation of this study is not comparing the sectors, this does not pose a significant problem for the time being and this issue is revisited at the findings part. however, another feature, the total number of different firms in the final dataset, is somewhat striking. 2,067 is a low figure when you compare it with a potential maximum value of 20,000 (think about a completely different firm list in each year since 1993). this means that turnover is low for top 1,000 lists, making our calculated figures more reliable for testing our hypotheses. in fact, the total number of firms which appeared at least once in one of the top 1,000 lists is 2,371. the difference, a group of 304 firms, is missing because their sectors do not have any representatives in the final sample of 60 ipo why go public? an empirical analysis of ipo’s competitive effect on turkish firms 95 http://ijcf.ticaret.edu.tr firms for this period. trying to explain why these sectors seem to refrain from going public is beyond the scope of this study and it might be an interesting future work, especially for the policy makers. table 1. sectoral frequency distribution of all firms in ici top 1,000 lists sector code number of firms % 321 396 19.2 311 295 14.3 322 200 9.7 384 167 8.1 352 137 6.6 383 135 6.5 371 125 6 369 116 5.6 382 93 4.5 381 75 3.6 356 74 3.6 341 53 2.6 351 37 1.8 342 36 1.7 400 30 1.5 313 27 1.3 324 20 1 332 19 0.9 361 18 0.9 390 14 0.7 total 2067 100 returning back to our original path, we are now ready to discuss the most important variable which is ‘comp’. ‘comp’ is a very good proxy of a firm’s competitive power, since it shows the relative rank against rivals. calculating it for five different moments, from (t-1) to (t+3), for each ipo firm, enables the direct comparison of pre and post ipo periods. results for a broader version, from (t-3) to (t+3), are also available but in that case number of firms without missing data falls from 60 to 26. nevertheless, as figure 1&2 illustrates, results and interpretations below are quite similar for these two cases. to compare pre and post periods, nonparametric tests were preferred because shapiro-wilk test results rejected normality for ‘comp t+3’ (p = .002). besides this fact, the same quantitative variable is measured at different times from the same sample in this study, thus friedman test is appropriate to check whether the distributions are the same or not. figure 2 below shows the distributions of ‘comp’ variable in each of the five important periods. friedman test statistic (30.413, p=.000) clearly points out a significant change in distribution through the years. furthermore, the change seems to be in only one direction. figure 1. changes in distributions of comp, for 26 firms from t-3 to t+3 96 yakup ergincan, fatih kiraz, özgür uysal http://ijcf.ticaret.edu.tr figure 2. changes in distributions of comp, for 60 firms from t-1 to t+3 looking at these figures, especially figure 1, readers may think that ipo firms do better than their competitors also before their ipo years. besides, they may think that this is in line with pagano et al. (1998) claims about growth and ipo decision and/or timing. that paper, analyzing ipos in italy, implies that firms are more likely to go public after large investments and abnormal growth and they might be seeing an ipo event just as a tool to raise the needed funds for additional growth. however, this is not a valid explanation in our case, for two reasons. firstly, please remember the discussion on 36 ipo firms purposefully discarded from this study. 32 of them were not in the top 1000 list before their own ipos, but they are successful enough to be in top 1000 list only after their ipos. so, including these 36 firms would certainly lower the mean rank figures observed in pre-ipo periods. secondly, ipo is not a single point event, but it is a process. the important thing is deciding to do ipo and getting ready for it and finally timing it. this process and its possible positive effects might have begun even before t-3. in other words, ‘making the decision to do an ipo at a future time’ might be preceding the growth as well. as pagano et al. (1998) suggests and as the firms know, the probability of successfully going public increases according to firm size. thus, ipo may be one of the major aims for a firm’s life, not just an ordinary tool to raise fund. however, whether we see it as an important goal/aim or as a simple tool, our main finding is not affected. in the special case of large industrial turkish firms, the competition-based results of complete ipo process seem to be favorable for ipo firms and not very good news for their (private or not) competitors. friedman post-hoc analysis results are presented in table 2, for a better understanding of the aforementioned general difference in distributions. pre-ipo (compt-1) and post-ipo (compt+3) values seem to be mostly responsible for that difference. table 2. pairwise comparisons of comp, for 60 firms from t-1 to t+3 pair test statistic std. error std. test statistic significance adj. significance compt-1 compt -0.333 0.289 -1.155 0.248 1.000 compt-1 compt+1 -0.433 0.289 -1.501 0.133 1.000 compt-1 compt+2 -0.983 0.289 -3.406 0.001 0.007** why go public? an empirical analysis of ipo’s competitive effect on turkish firms 97 http://ijcf.ticaret.edu.tr compt-1 compt+3 -1.417 0.289 -4.907 0.000 0.000** compt compt+1 -0.100 0.289 -0.346 0.729 1.000 compt compt+2 -0.650 0.289 -2.252 0.024 0.243 compt compt+3 -1.083 0.289 -3.753 0.000 0.002** compt+1 compt+2 -0.550 0.289 -1.905 0.057 0.567 compt+1 compt+3 -0.983 0.289 -3.406 0.001 0.007** compt+2 compt+3 -0.433 0.289 -1.501 0.133 1.000 **: significant at 99% confidence level in general, ipo firms seem to have improved their positions (ranks based on sales) within their sectors after their ipos. however, we need to calculate the median of the differences to test this hypothesis. hence, wilcoxon signed rank test for related samples is proper here and table 3 provides the detailed results for each meaningful term-pair. table 3. wilcoxon signed rank test results for comp, for 60 firms from t-1 to t+3 year1 year2 no of positive differences no of negative differences wilcoxon test score p t-1 t 39 21 3.188 0.010* t-1 t+1 33 27 2.282 0.022* t-1 t+2 40 20 3.754 0.000** t-1 t+3 46 14 4.262 0.000** t t+1 35 25 0.942 0.346 t t+2 39 21 2.356 0.018* t t+3 43 17 3.379 0.001** t+1 t+2 36 24 1.855 0.064 t+1 t+3 44 16 3.364 0.001** t+2 t+3 34 26 1.980 0.048* *: significant at 95% confidence level **: significant at 99% confidence level as seen above, the difference of ‘year2’ and ‘year1’ figures is significantly higher than zero in most of the cases. exceptional pairs are (t) and (t+1), (t+1) and (t+2). for those periods, the difference is still positive but not significant. on the other hand, the most obvious improvement is observed at pair (t-1) and (t+3), which are the beginning and the end of this study’s time period. 46 out of 60 firms seem to be in better positions against their rivals three years after their ipos when compared to their pre-ipo ranks within their sectors. although the number of firms, which have improved their relative positions, changes in both ways from year to year, there are at least 20 firms which showed continuous improvement till the end, beginning with their ipos. there are 7 examples for 98 yakup ergincan, fatih kiraz, özgür uysal http://ijcf.ticaret.edu.tr exactly the opposite case, but 4 of those firms are actually in better positions when compared to their pre-ipo years. 33 firms have experienced both up and downs in their post-ipo years, yet most of them enjoyed higher ranks than their pre-ipo ranks at least once. given these facts, only 3 firms’ market positions seem to have become totally worse after their ipos. to present a general and more clear picture of these findings, we derive another variable which we call general success score (gss). it is, as stated in formula 3, average post-ipo scores minus just before ipo scores.  (3) i,t+p i i,t-1 comp gss = -comp 3 where (i) represents the firm, (t) represents the ipo year of that firm, (p) is an integer between +1 and +3. tables 4, 5, and 6, together, present detailed info on the gss’s distribution. table 4. descriptive statistics for gss statistic std. error mean 95.43 20.73 %95 confidence interval for mean lower bound 53.95 upper bound 136.91 %5 trimmed mean 98.13 median 116.99 variance 25779.45 std. deviation 160.56 minimum -272.64 maximum 447.38 range 720.02 interquartile range 241.60 skewness -0.36 0.31 kurtosis -0.38 0.61 n 60 table 5. one-sample wilcoxon signed rank test results for gss paira total n test statistic std. error std. test statistic asymptotic significance why go public? an empirical analysis of ipo’s competitive effect on turkish firms 99 http://ijcf.ticaret.edu.tr observed vs hypothetical 60 1459.000 135.840 4.005 0.000** a: observed median= 116.99 and hypothetical median= 0 **: significant at 99% confidence level table 6. one-sample t-test results for gss statistic total n 60 mean difference 95.43 %95 confidence interval of the difference lower bound 53.95 upper bound 136.91 table 6 (cont’d) statistic t 4.60 df 59 significance 0.000** **: significant at 99% confidence level as seen above, mean and median are both significantly higher than zero (p=.000) and thus the distribution is left skewed. this is the macro-level assessment. if we look at it at micro level, 44 firms out of 60 have got a positive score. in other words, more than 73% of ipo firms seem to have enjoyed some benefits of going public and as a result increased their market shares against the closest rivals. these figures may be somewhat surprising to some readers, especially when our aforementioned strict ‘final sample selection process’, which obviously favors the null hypothesis of equal performance, is considered. with a more flexible missing data handling procedure, the percentage figure above would easily be more than 79% (76/96). all findings up to now lead us to a one single direction which is simply ‘going public is a good option if an industrial firm cares about improving its near future market share levels’. however, before jumping into that conclusion, we should elaborate on the issue a bit more. whether ipo decision is the most important reason for the up and downs or not, as expected, does not have a straightforward answer. a crystal clear answer requires a thorough elimination or importance ranking process of all other possible reasons. to make things even worse, this should also be done case by case for each firm, since firmspecific attributes may always alter the process. however, fortunately, the way we derive our key variable ‘comp’ inherently prevents our results from being significantly biased by time-specific and sector-specific attributes/shocks at least. if ‘comp’ were an absolute measure not a relative one and/or if t moments had represented the same calendar years for all firms, we should have utilized some extra control variables to eliminate the possible biases as much as we could. but, again, we still need to assume that the effects of these external shocks are perfectly or at least almost uniform across the firms within the same sectors. firm-specific attributes mostly come into play at this stage. in a few circumstances, they may increase the chance of a violation of the uniformity assumption above but proving, if possible at all, that they are not a significant part of the equation requires extensive case studies with a much richer dataset. however, such an effort is needless for the time being, since this study’s aim is neither a factor decomposition of relative success/failure nor identifying the ideal time and conditions for a firm to go public. the aim is providing some missing evidence from an emerging market, which should never be overlooked by any comprehensive approach to ipo field. the summary of what we have learnt from the related ipo literature and the findings of this study is that an ipo, especially a relatively large one, is bad news for the rivals. their performance ratios, profitability being at the top of them, and their market shares as well are very likely to be adversely affected. on the other hand, this is not totally true for that newly public firm since its market share is very likely to improve. there have been a few recent direct/indirect promising attempts to explain some parts of this situation. hsu et al. (2010) discuss the issue through 100 yakup ergincan, fatih kiraz, özgür uysal http://ijcf.ticaret.edu.tr loosening of financial constraints, financial intermediary certification, and the presence of knowledge capital. chemmanur and he (2011) deal with ipo waves and relate performance directly to timing. going public; off the wave, during a wave, earlier in a wave, or later in a wave, does matter according to them. each of these possibilities affects performance in a different way. timing seems to be important also from a different perspective. ruan and qian (2014) results suggest that industry rivals' earnings news, during the book-building period of a first-time issuer firm, exert a competitive effect on that issuer. on the other hand, spiegel and tookes (2014) stress the profitability issue within the industry. they find that post ipo industry profits per unit of market share decline and customers become easier to steal. however, they see an ipo as a canary in the coal mine. in other words, ipos do not cause danger but do just inform that something bad will happen. these attempts described in this paragraph are just some examples worth to explore further. these and alike should be tested, jointly whenever possible, in different settings. this would lead us through a sort of unified competition based theory which is required to fill a very important gap in broad ipo literature. 4. conclusion ipo literature is voluminous, however there are not many studies approaching the issue from a pure competition perspective. furthermore, most of these already few studies deal with only rivals or the general changes in the competitive environments within sectors after ipos. thus, there is an important gap here. by directly focusing on the relative competitive powers of big ipo firms in an emerging country for twenty years, this study tries to fill this gap. main finding of the study is that going public seems to be a good option if an industrial firm cares much about improving its relative market share ranks. thus, it also provides support to the idea that an ipo is generally bad news for the rivals. as discussed in the methodology part, any comprehensive ipo study should take this evidence seriously. however, before accepting it as a given and general fact, we all should see some similar results for other stock markets and different time periods. trying a similar methodology in some different settings would be fruitful and the authors of this study sincerely believe that those new evidence would support this study’s findings. after then, a natural continuation might be trying to form a sort of unified competition based theory, from the promising but not yet conclusive attempts aforementioned and may be a few new ones as well. connecting it successfully to the broad ipo literature would finalize the issue. without this solid connection, something will always be missing in this field. references baker, m. p. & wurgler, j. (2000) the equity share in new issues and aggregate stock returns. journal of finance, 55, 2219–2257. black, b. s. & gilson, r. j. (1998) venture capital and the structure of capital markets: banks versus stock markets. journal of financial economics, 47, 243–277. brav, a. & gompers, p. a. (1997) myth or reality? the long-run underperformance of initial public offerings: evidence from venture and nonventure capital-backed companies. journal of finance, 52 (5), 1791-1821. bulut h.i̇., çankaya f. and er b. (2009) yönetici-sahiplik düzeyinin düşük fiyatlandırma ve halka arz sonrası faaliyet performansına etkisi: i̇mkb örneği. gazi üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi, 11, 101-120. cai, j. & wei, j. (1997) the investment and operating performance of japanese initial public offerings. pacific-basin finance journal, 5, 389-417. chemmanur, t. j. & fulghieri, p. (1999) a theory of the going-public decision. review of financial studies, 12, 249– 279. chemmanur, t. j. & he j. (2011) ipo waves, product market competition and the going public decision: theory and evidence. journal of financial economics, 101, 382-412. hsu, h., reed, a. v. & rocholl, j. (2010) the new game in town: competitive effects of ipos. journal of finance, 65, 495-528. jain, b. & kini, o. (1994) the post-issue operating performance of ipo firms. journal of finance, 49 (5), 1699-1726. kim, k. a., kitsabunnarat, p. and nofsinger, j. r. (2004) ownership and operating performance in an emerging market, evidence from thai ipo firms. journal of corporate finance, 10, 355-381. why go public? an empirical analysis of ipo’s competitive effect on turkish firms 101 http://ijcf.ticaret.edu.tr kurtaran, a. & er, b. (2008) the post-issue operating performance of ipo in an emerging market: evidence from istanbul stock exchange. investment management and financial innovations journal, 5 (4), 54. lucas, d. & mcdonald, r. (1990) equity issues and stock price dynamics. journal of finance, 45, 1019–1043. maksimovic, v. & pichler, p. (2001) technological innovation and initial public offerings. review of financial studies, 14, 459–494. pagano, m., panetta, f. and zingales, l. (1998) why do companies go public? an empirical analysis. journal of finance, 53, 27-64. ritter, j. r. & welch, i. (2002) a review of ipo activity, pricing, and allocations. journal of finance, 57, 1795-1828. ruan, t. & qian, h. (2014) the competitive effect of rivals' earnings news on initial public offerings. asian finance association (asianfa) 2014 conference paper. available: ssrn:http://ssrn.com/abstract=1508482 or http://dx.doi.org/10.2139/ssrn.1508482 [20th may 2016] schultz, p. h. & zaman, m. (2001) do the individuals closest to internet firms believe they are overvalued?. journal of financial economics, 59, 347–381. spiegel, m. i. & tookes, h. (2015) an ipo's impact on rival firms. available: ssrn:http://ssrn.com/abstract=2437027 or http://dx.doi.org/10.2139/ssrn.2437027 [20th may 2016] spiess, d.k. & pettway, r.h. (1997) the ipo and first seasoned equity sale: issue proceeds, owner/manager wealth, and the underpricing signal. journal of banking and finance, 21, 7, 967–988. zingales, l. (1995) insider ownership and the decision to go public. review of economic studies, 62, 425–448. http://ssrn.com/abstract=1508482 http://dx.doi.org/10.2139/ssrn.1508482 http://ssrn.com/abstract=2437027 http://dx.doi.org/10.2139/ssrn.2437027 international journal of commerce and finance, vol. 6, issue 1, 2020, 166-180 166 the effect of implementing e-filing systems on personal tax compliance with internet knowledge as moderated variables (case study on personal taxpayers at kpp pratama jakarta kramatjati) hasian purba, universitas mercu buana, jakarta indonesia siti sarpingah, universitas mercu buana, jakarta indonesia lucky nugroho, universitas mercu buana, jakarta indonesia abstract the objectives of this study are as follows: 1) finding empirical evidence regarding the perception of the application of the e-filing system to taxpayer compliance, and 2) finding empirical evidence regarding the extent of knowledge the internet can moderate the relationship between the implementation of e-filing systems and the level of taxpayer compliance.the type of research used in this study is causal research. the population in this study was all individual taxpayers registered at kpp pratama jakarta kramatjati. selection of samples of the convenience sampling method. the analytical method used to test the hypothesis is the moderated regression analysis (mra).the results of the study show, 1) the application of e-filing systems has a positive and significant effect on taxpayer compliance; 2) knowledge the internet has been proven to moderate the relationship between the implementation of e-filing systems and the level of taxpayer compliance. keywords: e-filing system, internet knowledge, taxpayer compliance 1. introduction the evolution of e-government is an endeavor of the indonesian government to ameliorate the tone of public inspection and repairs and the operation of the bureaucracy towards the recognition of proper administration. egovernment has been brought out in indonesia through the republic indonesia presidential instruction no. 6 of 2001 concerning telematics (telecommunications, media, and informatics), which says that government officials must use telematics technology to sustain sound governance and accelerate the cognitive operation of majority rule. the benefits of e-government itself is for efficiency, effectiveness, transparency, innovation, and participation in government administration. with e-government, it can complete government administration activities to be faster and provide a friendly way for governments to communicate with external entities such as the public and business circles through technological media. systems designed to serve community needs, such as e-government, are used to provide several innovative services for citizens. services for e-government are simple services such as supplying data through web sites with sophisticated functions such as tax reporting. in the cognitive operation of government transformation through the utilization of information and communication technology, it is expected to bring in cost reduction and better services for the community (herliansyah, 2018; nugroho & chowdhury, 2016; prasetyo, 2017). nevertheless, the critical success of implementation is motivating users in the role of e-government systems (sahu & gupta, 2007; van deursen et al., 2006). the role of e-government schemes in indonesia is still far beneath those of developed countries due to the lack of community awareness to accept new technologies. in a study conducted by waseda in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the effect of implementing e-filing systems on personal tax compliance with internet knowledge as moderated variables (case study on personal taxpayers at kpp pratama jakarta kramatjati) 167 university in 2012, indonesian e-government users ranked 33 out of 55 states. the information can be seen in table 1.1. table 1.1 ranking of use of e-government sources: kominfo, go.id in 2003, de facto and de yure, the government released a national policy and strategy for the maturation of egovernment through presidential instruction number 3 of 2003. the regulation triggered more and more government offices throughout indonesia that had used computers to carry out their duties. e-government means utilizing technology and communication to better government performance. one rule that supports e-government is electronic tax filing (e-filing).e-filing is a method for delivering annual tax information (spt) that is carried out online and in real-time. in the decision of the director-general of tax, number kep-88/pj/2004 dated 14 may 2004 concerning the submission of electronic notification, and it is stated that the submission of e-spt is made through the application service provider designated by the director-general of taxes. for further regulation, the director-general of tax regulation no. kep-05/pj/2005 was issued on 12 january 2005 concerning procedures for submitting electronic notification (e-filing) through application service providers (asp). the development of the e-filing system implemented at dgt continues to progress; this can be seen from the data on the tax information technology department (tip) of the directorate general of taxes stating that the number of taxpayers who submit e-filing tax returns continues to increase which significant until 2014. in table 1.2, the data on the number of spts will be presented through e-filing from 2005 to 2013. final rankings score no final rankings score no final rankings score 1 singapore 93.8 20 netherlands 69.0 39 brunei 52.1 2 usa 93.8 21 portugal 68.8 40 uae 48.3 3 korea 91.5 22 spain 67.5 41 chile 48.1 4 finland 88.7 23 thailand 67.1 42 pakistan 47.5 5 denmark 86.5 24 malaysia 67.1 43 venezuela 47.0 6 sweden 84.1 25 mexico 66.3 44 peru 46.9 7 australia 82.8 26 israel 65.3 45 romania 46.2 8 japan 81.5 27 hongkong 63.2 46 argentina 45.5 9 uk 81.0 28 czech republik 62.1 47 kazakhstan 44.5 10 taiwan 80.1 29 china 61.5 48 tunisia 44.1 11 canada 80.1 30 turkey 61.0 49 fiji 43.6 12 germany 79.2 31 philippines 58.2 50 egypt 42.1 13 new zealand 76.7 32 south africa 57.5 51 cambodia 40.4 14 belgium 75.2 33 indonesia 56.2 52 iran 39.0 15 switzerland 73.5 34 brazil 55.6 53 nigeria 38.4 16 norway 73.5 35 india 54.7 54 uzbekistan 37.1 17 france 71.9 36 macau 54.4 55 georgia 36.8 18 italy 71.3 37 rusia 53.4 19 estonia 70.8 38 vietnam 52.1 hasian purba & siti sarpingah & lucky nugroho table 1.2 number of spt delivered through-filing tax submission (year) listed tax payer e-filing asp e-filing website directorate general of taxation (djp) 2005 4.358.014 1.204 2006 4.805.209 8.112 2007 7.137.023 18.261 2008 10.682.099 24.776 2009 15.911.576 51.852 2010 19.112.590 101.521 2011 22.319.073 231.042 2012 25.000.000 319.584 7.507 2013 25.857.390 72.980 24.474 sources: department of tax information technology (tip) based on table 1.2, it can be seen that the interest of wpop who delivered their annual spt in e-filing is still minimal compared to the number of taxpayers registered with the dgt. therefore, the directorate of tax information technology of the directorate general of taxes continues to increase the number of annual income tax return (pph) reporting through e-filing. one of the main challenges faced by the tax authority is changing people's habits in reporting their spt. this is because people still choose to report spt manually by going to the nearest tax office to report the tax (hentriwati et al., 2018; silalahi et al., 2018). administratively, e-filing might offer potential benefits to the government because the process of tax returns by citizens can be managed effectively through information technology. a critical factor in implementing e-filing is the acceptance of taxpayers as users want to switch from traditional reporting systems to online reporting systems via the internet. the internet is a supporting medium for e-filing systems, where the use of an e-filing system requires a good knowledge of the internet. this is also an essential factor for taxpayers to use e-filing because with a good knowledge of the internet, the higher the desire of taxpayers to use e-filing. established on the description, the main problems that will be discussed in this study can be formulated, namely: 1) does the implementation of the e-filing system affect taxpayer compliance ?; 2) can knowledge of the internet as moderating the relationship between the implementation of the e-filing system with taxpayer compliance? the effect of implementing e-filing systems on personal tax compliance with internet knowledge as moderated variables (case study on personal taxpayers at kpp pratama jakarta kramatjati) 169 2. literature review 2.1 compliance theory compliance theory, according to sociology and psychology, is a theory that emphasizes a process of socialization in influencing one's compliance behavior (cialdini & goldstein, 2004; sutinen & kuperan, 1999). in taxation, compliance tends to be due to a necessity to pay taxes because the definition of tax is a required contribution to the state. the legitimacy commitment in indonesia today cannot be fully implemented because of the current tax regulations, there are still many gaps that become gray areas. taxpayers realize they have to pay taxes, but through tax, management strived to pay taxes to a minimum by utilizing the tax law leeway. compliance with taxes can mean that taxpayers are obliged to obey tax laws. according to nensi, (2017) and septiawan & harnovinsah (2019) with the promulgation of all tax laws in the state gazette and provisions on taxation regulations in state gazette it means that the public (taxpayers) must be aware and active to find out the contents and purpose of the provisions of the tax laws and regulations. taxpayer compliance can be identified from taxpayer compliance in registering, compliance to remit returns (spt), compliance in calculation and payment of tax payable, and compliance in payment of arrears (walsh, 2012). 2.2. e-filing system the definition of e-filing has a difference between one definition and another; one definition is the use of internet technology, the world wide web, and tax software for a wide range of tax administration and compliance purposes (bird, 2015; sondakh et al., 2014). e-filing is an information system application where citizens interact with complex it systems. in terms of service to the community, e-filing provides an essential dimension to e-government services in the field of tax administration, namely services that utilize the speed and effectiveness of costs through the internet (hussein et al., 2011). e-filing is simply an implementation of e-government implementation in tax administration, especially in spt reporting, e-filing has been used in several countries to support existing tax systems. there are two approach methods about e-filing systems, namely the united of the filling process also the batching process (wowor et al., 2014). in interactive filing, taxpayers interact directly with web-based applications to complete tax reporting online.in this interactive method there are 2 alternative technologies used, namely: 1). taxpayers interact directly with web servers hosted by tax authorities or by third parties who are partners of the tax authority. 2). taxpayers download software that contains an electronic form filling in the tax payable, taxpayers fills out files offline then connect to the e-filing website to send information files that have been filled. the reform and modernization of tax administration are expected to increase the trust of taxpayers towards the directorate general of taxation, which in turn increases taxpayer compliance in carrying out its tax obligations so that the expected tax gap, which is the difference in actual tax revenues and potential tax revenues, will be smaller. this is by the primary objective of the tax collection institution, namely the achievement of tax revenue with optimal tax effort. some determinants that affect the willingness of taxpayers to make tax payments voluntarily, namely:  effectiveness of tax administration;  macroeconomic considerations such as interest rates and inflation rates;  low cost of compliance with existing tax systems;  fairness and justice felt by taxpayers;  the simplicity of provisions, procedures, and procedures;  quality of tax administration services to the taxpayer community;  it can be accounted for money from the taxpayer community. regarding budiarso (2014), fast, easy, cheap and accurate service demands are the expectations of the community, by the directorate general of taxes the demand for services is responded to by the modernization of tax administration, the modernization of tax administration conducted by dgt includes: (1). organizational restructuring, (2). improvement of business processes through the use of information and communication hasian purba & siti sarpingah & lucky nugroho technology, (3). improvement of human resource management. improving services to taxpayers in delivering tax returns (spt), the directorate general of taxes develops the spt reporting system with e-filing. the e-filing system is a continuation of the submission of spt in the form of electronic spt or known as e-spt. e-filing was built at the end of 2004 and was inaugurated in 2005 by president susilo bambang yudhoyono. after the inauguration of the directorate general of tax e-filing held socialization to taxpayers in all regional offices. further, e-filing development was carried out in 2009. from the action plan of the directorate general of taxes, no further plans for the development and dissemination of e-filing were found in the future. 2.3. internet knowledge the internet is one form of up-to-date information and becomes a communication medium that is widely used throughout the world in the interconnection between computer networks formed through means such as internet access providers. until now, the internet has become one of the effective and efficient media of information in disseminating and knowledge for information without being obstructed by distance, time differences, and also geographical factors for someone who wants to access information. in the opinion of mills (1994), the internet stands for interconnection networking. the internet comes from the latin "inter," which means between. in words, the word internet means a network between or connecting, so the conclusion of the definition of the internet is a relationship between various types of computers and networks in different operating systems and applications where the relationship utilizes the progress of communication (telephone and satellite) that uses standard protocols in communication, namely tcp/ip (transmission control/internet protocol). the internet is also referred to as a source of information, which meaning of storing information. in everyday life, information can be found anywhere, at home, places of worship, schools, libraries (ratchford et al., 2001)). every time new information can be created, which is input from various sources such as the results of research, ideas, experiences, then the information findings require a container for storage. internet media provide many places for storing and disseminating information findings. according to data from the association of internet service providers in indonesia, internet usage has increased rapidly every year. in 2011 internet usage reached 55 million, in 2012 63 million people, in 2013 82 million, and in 2014 reached 107 million. this year, in 2015, internet users in indonesia have reached 139 million (apjii). as an information source, the internet has many tools called applications in disseminating information stored in its database data. the tools intended in the form of applications are called search engines, engines, web logs, news groups, message boards, websites, and others. with these tools, users are expected to be able to find the information needed, such as information on entertainment, education, news, journaling, business information according to the needs of information users. the internet is beneficial for everyday life; the information provided on the internet is very useful and needed by users. this usefulness can be seen by the existence of the internet so that users can easily, quickly, safely use e-filing. the internet is also one source of knowledge for life. taxpayers will find it easier to know the regulations and legislation in taxation, and of course, that knowledge is very beneficial for taxpayers. in its use, the internet provides speed to access it. taxpayers can submit tax returns anytime and anywhere. the internet provides speed in accessing various information, knowledge, and other interests. an example is the presence of the internet will facilitate and accelerate taxpayers in accessing e-filing and receiving verification. 2.4. taxpayer compliance regarding (savitri & musfialdy, 2016) explains that: "taxpayer compliance is compliance and awareness of fulfilling tax obligations, reflected in situations where:  taxpayers understand or attempt to understand all provisions of tax laws and regulations;  fill out the tax form entirely and clearly;  calculate the amount of tax owed correctly;  pay the tax due on time. nevertheless, according to irmayani & mildawati (2009) explained that taxpayer compliance could be identified from compliance in registering, compliance to reporting back notification letters, compliance in calculation and payment of tax payable, and compliance in payment of arrears. furthermore, tax compliance is the action of taxpayers in fulfilling their tax obligations by the provisions of laws and regulations and the implementation of taxation applicable in a country (fuadi & mangoting, 2013). based on the definitions, tax compliance can be concluded that obedient the effect of implementing e-filing systems on personal tax compliance with internet knowledge as moderated variables (case study on personal taxpayers at kpp pratama jakarta kramatjati) 171 taxpayers who are aware of taxes, understand their tax rights, tax obligations, and are expected to care about taxes, namely implementing tax obligations correctly and on time to report back the notice of tax return (spt). according to sarunan (2015), taxpayers are individuals or entities, including taxpayers and tax collectors who have tax rights and obligations by the provisions of tax laws and regulations. nevertheless, there are two types of compliance, namely:  formal compliance is a condition in which the taxpayer fulfills formal obligations by the provisions of the tax law;  material compliance is a condition where the taxpayer substantively or substantially fulfills all material provisions of taxation, namely by the contents and soul of the tax law. material compliance can also include formal compliance. tax evasion is a phenomenon that is very difficult to observe and examine. the difficulty of this observation is inseparable from the difficulty of controlling and verifying the behavior of taxpayers. as an illustration, when receiving an income/ profit, taxpayers must choose one of the following two options: (1) reporting actual income as taxable income (pkp); (2) report lower pkp than actual income. 2.5. previous research regarding noviandhini (2012) in his research entitled the effect of perception of use, perception of ease of use, and satisfaction of taxpayers on the use of e-filing for taxpayers in yogyakarta, the results indicate that usefulness, ease of use and user satisfaction affect the level of use of e-filing. the higher the usefulness, ease, and satisfaction of users in operating e-filing, the taxpayer will increasingly use e-filing. regarding tresno & rizky (2012) in his research entitled the effect of perception of the application of e-filing system on corporate taxpayer compliance levels with taxpayer behavior as intervening variables and compliance costs as moderating variables (case study at the pratama pulogadung tax office in east jakarta). the results of this study indicate that the perception of the application of the e-filing system partially affects the level of tax compliance. moreover, regarding wowor et al., (2014), in his research entitled "analysis of factors affecting the behavior of taxpayers to use efiling. the results of this study indicate that the perception of experience has a significant effect, perceptions of security and confidentiality significantly influence, and perceptions of speed does not significantly influence the behavior of using e-filing on corporate taxpayers in the city of manado. suprayogo & hasymi (2018), in their research entitled "the effect of the application of e-filing system on the compliance of individual taxpayers with knowledge the internet as a moderating variable in the pratama jakarta tax office jatinegara." the results of the study show that the application of the e-filing system has a positive and significant effect on individual taxpayer compliance. internet knowledge is a pure moderator and has a positive influence on the relationship between the application of e-filing systems and individual taxpayer compliance. 2.6. conceptual framework based on the theoretical foundation and the results of previous research and the problems that have been raised, then as a basis for formulating hypotheses, the following framework is presented which is an outline in the research model in figure 2.1: hasian purba & siti sarpingah & lucky nugroho figure 2.1 framework hypothesis the research hypothesis proposed is as follows: ha1 = application of e-filing system has a positive effect on taxpayer compliance ha2 = understanding or knowledge the internet can moderate the relationship between the application of e-filing systems and taxpayer compliance 3. methodology 3.1. type of research this research is causal, which will test the hypothesis about the effect of one or several independent variables on the dependent variable. causal research is research conducted to identify causal relationships between variables (donald b. rubin, 1974). causal research is aim at knowing which variables function as causes (independent variables) and which variables function as a result (dependent variable). 3.2. variable operational definition the variables used in this study consisted of dependent variables and independent variables. operational variable research effect of e-filing system application on compliance with individual taxpayers with internet knowledge as moderating variables can be summarized in table 3.1 table 3.1 variable operational type of variable dimension indicator scale independent application of e-filing (lai, obid, & meera, 2004) performance expectancy, i always use e-filling every time i report tax interval effort expectancy, i will always use e-filling to report tax because it has features that help me work social expectancy. i want to continue using e-filling in the future moderator internet knowledge understand right about what is the internet and know how to use the internet get information, increase knowledge and speed of access. interval dependent taxpayer compliance (suryadi, 2006) tax audits with changes made by the directorate general of taxes, registration of taxpayers to obtain npwp at this time can be done quickly to facilitate taxpayers in carrying out their obligations. interval the effect of implementing e-filing systems on personal tax compliance with internet knowledge as moderated variables (case study on personal taxpayers at kpp pratama jakarta kramatjati) 173 type of variable dimension indicator scale law enforcement the application of strict sanctions for violations by taxpayers increases taxpayer compliance to substantially fulfill all tax material provisions. tax compensation administrative reform carried out by the directorate general of taxes by utilizing information technology facilitates spt reporting, thus encouraging taxpayers to report before the deadline expires. tax obligations that can be paid easily, increasing taxpayer compliance to carry out obligations before the deadline expires. increasing the quality and integrity of the tax apparatus, encouraging taxpayers to fill spt honestly. 3.3. variable measurement the research instrument was a questionnaire compiled based on the research indicators of each variable so that there were 3 (three) questionnaires in this study, namely the questionnaire on the implementation of the e-filing system, internet knowledge questionnaire, and taxpayer compliance questionnaire. questionnaires are arranged using the interval scale using the five answer choices as follows:  strongly agree (ss) = score 5  agree (s) = score 4  doubt (r) = score 3  disagree (ts) = score 2  very disagree (sts) = score 1 3.4. research population and sample the population of this study is all individual taxpayers registered at kpp pratama jakarta kramatjati. sampling in this study was carried out using the convenience sampling method. the technique of determining samples for a specific purpose or can mean sampling that determines the target of a particular group. to determine what minimum sample is needed if the population size is proper, it can use the slovin formula, namely: hasian purba & siti sarpingah & lucky nugroho based on these calculations, the number of samples in this study is 100 individual taxpayers registered at kpp pratama jakarta kramatjati. the method of data collection in this research is done by sampling method, which is a way of an investigation that is held to obtain facts or symptoms that exist and look for information factually. data collection is done through a questionnaire given to individual taxpayers registered at kpp pratama jakarta kramatjati. the survey contains questions that represent each variable in this study. the type of data in this study is primary data obtained from respondents' responses to the questionnaire sent, while the source of the data comes from the answers of individual taxpayers registered at kpp pratama jakarta kramatjati. descriptive statistics in this study are used to describe the character of the research variable by using a frequency distribution table that shows the model number, range of scores, and standard divisions 3.5. hypothesis testing the statistical analysis uses regression with moderating variables, and there are three tests, namely: (1) interaction test; (2) absolute difference test, and; (3) residual test. this research was conducted to examine the effect of independent variables on the dependent variable using moderating variables. this moderating variable will strengthen the relationship between independent variables and dependent variables. regression models that can be used to test the effect of moderating variables are interaction tests, total difference test scores, and residual tests. this study uses interaction testing. interaction testing, or often called moderated regression analysis (mra), is a particular application of multiple linear regression where the regression equation contains elements of interaction (two or more independent multiplications). multiplication variable between e-filing system application (x) with internet knowledge (z) which is a moderating variable because it describes the moderating influence of the internet knowledge variable (z) on the relationship of e-filing system application (x) with taxpayer compliance (y) continued, first tested the moderator variable by regression of the following equation: y = α + β1x + ɛ (1) y = α + β1x + β2z + ɛ (2) y = α + β1x + β2z + β3x*z + ɛ (3) according to the regression equations above, several possibilities can occur as follows:  if the moderator variable (z) interacts with the predictor / independent variable (x) but is related to the criterion / dependent variable (y) then the z variable is not a moderator variable but rather an intervening variable or independent variable;  if the moderator variable (z) interacts with the independent variable (x) but is not related to the dependent variable (y) then the variable z is the moderator variable;  if the moderator variable (z) interacts with the independent variable (x) and also has a significant relationship with the dependent variable (y), the z variable is the quasi moderator variable (pseudo moderator). this is because the z variable can act as a moderator as well as an independent variable;  if the moderator variable (z) interacts with the independent variable (x) but is not significantly related to the dependent variable (y), the z variable is the pure moderator variable (pure moderator). the effect of implementing e-filing systems on personal tax compliance with internet knowledge as moderated variables (case study on personal taxpayers at kpp pratama jakarta kramatjati) 175 furthermore, if the test results show that the observed variable is indeed a moderator variable, the equations to be analyzed are as follows: y = α + β1x + ɛ (1) y = α + β1x + β2z + ɛ (2) analysis with this interaction test was carried out with the help of spss (release package for social sciences) program release 22.0 for windows so that the coefficient of determination could be obtained, the statistical value f and the statistical value t used in testing the hypothesis. 4. results and discussion 4.1. result descriptive analysis is calculated based on the percentage of respondents' answers to the research question by using the mean value of each indicator proposed to describe the perceptions of all respondents. based on these mean values, then the perceptions of respondents' perceptions were carried out using the three-box method criteria (ferdinand, 2006), namely: 10.00 40 = low, 40.01 70 = moderate, and 70.01 100 = high. table 4.1 results of descriptive statistics variable index value minimum maximum mean std. deviation implementation of efilingsystem 68,47 40 60 51,36 5,262 internet knowledge 82,48 22 29 24,74 2,251 taxpayer compliance 83,94 30 44 37,59 3,451 source: primary data processed (2019) according to table 4.1, the variable of e-filing system implementation has the minimum value of the respondent's answer of 40 and a maximum of 60. the average respondent's answer is 51.36, with a standard deviation of 5,262. while the frequency index value is 68.47, with a frequency index value of 68.47, it can be concluded that the perceptions of respondents' answers to the e-filing system implementation variable are in the moderate category, because they are in the range of values between 40.01 70. internet knowledge variables have a minimum value of respondents' answers to 22 and a maximum of 29. the average respondent's answer is 24.74, with a standard deviation of 2.251. while the frequency index value is 82.48, with a frequency index value of 82.48, it can be concluded that the perception of respondents' answers to the internet knowledge variable is in the high category, because it is in the range of values between 70.01 100. the taxpayer compliance variable has a minimum value of 30 and a maximum of 44. the average respondent's answer is 37.59, with a standard deviation of 3.451. while the frequency index value is 83.94, with a frequency index value of 83.94, it can be concluded that the perception of respondents' answers to the taxpayer compliance variable is in the high category, because it is in the range of values between 70.01 – 100. 4.2. validity test hasian purba & siti sarpingah & lucky nugroho this test is intended to measure whether or not a questionnaire is valid in measuring a contract. moreover, at the same time, strengthen the results of previous calculations that all variables measured using the likert scale can be used for further processing of data. the results of the validation test of each variable can be seen in table 4.2: table 4.2 the result of testing validity variable no. item correlation value status implementation of e-filing system q1 0,638 valid q2 0,690 valid q3 0,613 valid q4 0,652 valid q5 0,608 valid q6 0,745 valid q7 0,631 valid q8 0,608 valid q9 0,717 valid q10 0,625 valid q11 0,642 valid q12 0,660 valid q13 0,619 valid q14 0,540 valid q15 0,553 valid internet knowledge q16 0,707 valid q17 0,844 valid q18 0,711 valid q19 0,681 valid q20 0,700 valid q21 0,712 valid taxpayer compliance q22 0,541 valid q23 0,621 valid q24 0,699 valid q25 0,761 valid q26 0,736 valid q27 0,678 valid q28 0,676 valid q29 0,588 valid q30 0,677 valid source: primary data processed (2019) 4.3. normality test normality testing using the lilliefors test. the provision in the error test is if the statistic l count<l table (α = 0.05), then the error data is usually distributed. however, if the l count> l table (α = 0.05), then the data is not normally distributed. thus the overall results of the calculation of the normality test using the lilliefors test can be seen in the summary in table 4.3. table 4.3 normality test summary no estimated error n l count l table decision α = 0.05 α = 0.01 the effect of implementing e-filing systems on personal tax compliance with internet knowledge as moderated variables (case study on personal taxpayers at kpp pratama jakarta kramatjati) 177 no estimated error n l count l table decision α = 0.05 α = 0.01 1 y onx 90 -0,1048 0,0934 0,1087 normal 2 y on z 90 -0,0958 0,0934 0,1087 normal source: primary data processed (2019) 4.4. multiple linear regression analysis interaction testing, or often called moderated regression analysis (mra), is a particular application of multiple linear regression where the regression equation contains elements of interaction (two or more independent multiplications). analysis with this interaction test carried out with the help of the spss program (statistical package for social sciences) release 22.0 for windows showed the following results in table 4.4: table 4.4 the results of the regression analysis model b t-count sig ttabel adj r 2 f-count sig 1 (constant) -0,070 1,663 0,897 258,557 0,000 x 1,340 4,791 0,000 z 1,288 2,219 0,029 xz -0,050 -4,525 0,000 based on the results of the regression test above an equation can be formed as follows:y = -0,070 + 1,340x+ 1,288z0,050xz + ɛ the adjusted r square value indicates the coefficient of determination. the adjusted r-square value of the regression model is used to find out how much the ability of the independent variable (independent) to explain the dependent variable (dependent). from table 4.1, it is known that the adjusted r square value is 0.897. this means that 89.7% of taxpayer compliance can be explained by variations in the independent variables, namely the application of the e-filing system, internet knowledge, and x * z, the remaining 10.3% (100% 89.7%) explained by other reasons outside the model. simultaneous significance test (f test) is used to show whether all the independent variables included in the model have a joint influence on the dependent variable. if the analysis using the f test shows that all independent variables simultaneously are explanations of the significance of the dependent variable. the e-filing system variable has a positive effect on taxpayer compliance, which can be seen from the comparison between t-table and t-count, which is t-table is smaller than t-count, with t-table value 1.663 and t-count 4.791 and significance level below 0.05. thus ha1 is accepted. the internet knowledge variable can moderate the relationship between the application of e-filing system with the level of taxpayer compliance, which can be seen from the comparison between t-table and t-count, namely t table smaller than t-count, with t-table 1.663 and t-count 4.525 and significance level below 0.05. thus ha2 is accepted. 4.5. discussion effect of e-filing system implementation on tax compliance the application of the e-filing system has a positive and significant effect on taxpayer compliance. this shows that the better the implementation of the e-filing system, the better the taxpayer's compliance. e-filing is part of tax hasian purba & siti sarpingah & lucky nugroho administration reform aimed at facilitating taxpayers in making and submitting spt reports to the directorate general of taxes. the application of the e filing system is expected to provide comfort and satisfaction for taxpayers in fulfilling their tax obligations so that the implementation of the e-filing system is expected to increase taxpayer compliance. hardiningsih (2011) states that the modernization of the taxation system within dgt by utilizing a reliable and up-to-date information system (e-filing) is one of the strategies taken to achieve a high level of tax compliance. the results of this study support the findings of tresno & rizky (2012), suprayogo & hasymi (2018), which states that the application of e-filing affects the level of taxpayer compliance because taxpayers can report their tax returns on scheduled and more efficient manner. internet knowledge can moderate the relationship between the application of e-filing systems and the level of taxpayer compliance internet knowledge has been proven to moderate the relationship between the implementation of e-filing systems and the level of taxpayer compliance. this is because the e-filing system is an electronic charging and delivery service for tax payer notification to the directorate general of taxation, which aims to provide comfort and convenience for taxpayers in delivering notification by utilizing internet communication networks. to be able to use the system, taxpayers are required to understand or understand the internet, namely knowing how to operate the internet. if the taxpayers cannot operate the internet, the implementation of the system does not affect the comfort and convenience of submitting tax returns to the tax office, which is expected to increase taxpayer compliance. the results of this study support the findings of suprayogo & hasymi (2018), showing that knowledge the internet influences the relationship between the application of e-filing systems and individual taxpayer compliance. 5. conclusion grounded along with the outcomes of the analysis and discussion that has been transmitted, the finishes can be given as follows: 1). the implementation of the e-filing system holds a positive and substantial effect on taxpayer compliance. this evidences that the better the implementation of the e-filing system, the taxpayer compliance will also be useful; 2) knowledge the internet has been tried to control the relationship between the implementation of e-filing systems and the level of taxpayer compliance. this is because the e-filing system is an electronic charging and delivery service for tax payer notification to the directorate general of taxation, which aims to offer ease and convenience for taxpayers in delivering notification by utilizing internet communication networks. this research is inseparable from shortcomings and limitations. the limitations of this study are as follows: 1 this study does not compare between one province and another; 2) this study does not compare between one province and another; 3) this study only uses an individual taxpayer as a sample; 4). respondents' perceptions conveyed in writing with the form of questionnaire instruments greatly influence the validity of the results of questionnaire filling because they are not accompanied, so the possibility of answers given is not by the actual size scale or not by the purpose and purpose of the question. refers to previously explained, this study contains limitations. however, the results of this study can at least motivate the next study. taking into account 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(2014). analisis faktor-faktor yang mempengaruhi perilaku wajib pajak untuk menggunakan e-filling. jurnal emba, 2(3), 1341–1349. international journal of commerce and finance, vol. 6, issue 2, 2020, 187-197 187 significance of human capital on the economic growth of the gambia musa sawaneh kocaeli university, turkey received: sept 09, 2020 accepted: oct 01, 2020 published: oct 02, 2020 abstract since time immemorial, economic growth has been a chief concern for macroeconomic policymakers in every country. the significance of human capital in achieving these concerns is making waves in the space of contemporary development economics. much theoretical a nd empirical evidence has shown that human capital accumulation (education and health) and their collective capabilities are a vital variable for economic development. this paper investigates the existing literature on the importance of human capital on the economic growth of the gambia from 19902019. using annual time series economic data, we applied the econometric techniques of the adf test to prove stationarity, rejection, and acceptance of the hypothesis of granger causality and rejection of the null hypothesis of johans en’s cointegration test. the vector error correction model (vecm) model was conducted, and the findings indicated a positive relationship between education and gdp in the long-run and a bidirectional relationship in the short-run. thus, we recommended the policymakers to create strategic and prudent policies that would promote accessible and quality education with modern technologies to improve the economic growth of the gambia. we concluded on the premise that investment in people translates to a country's economic growth. keywords: economic growth, human capital, the gambia, granger causality, vector error correction model test 1. introduction amid some natural and manmade disasters, the economic outlook of the african continent is indeed positive. the african development bank reported africa to be the world's second-fastest-growing economy with an estimated average growth of 3.4% in 2017, has stabilized in 2019, and expected to pick up to 2.9% in 2020. the world bank has forecasted sub-saharan africa to have a gdp growth rate of 3.4 percent by the end of 2019. economic growth is traditionally aligned with a country’s natural resource, productivity, exports, business growth, industrialization, population or labor, physical capital, water resources, agro-based industry, and so forth. arguably good government macroeconomic policy from the keynesians or monetarists is quite imperative to economic growth. however, in the last two centuries, economists have seen human capital as one of the determinants of economic growth, and the model is seen to be suitable for both developing and developed countries. this has made human capital the subject of emerging african youths whose priority is changing the narrative of the continent. human capital formation is an investment in human beings. it is considered as the process of acquiring knowledge and increasing the number of persons with education, skills, and experience which are critical for the economic and political development of a country. a nobel prize in economics gary becker argued that schooling, a computer training course, expenditures on medical care, and lectures on the virtues of punctuality and honesty are capital too in the sense that they improve health, raise earnings, or add to a person's appreciation of literature over much of his or her lifetime. the centrality of human capital is education and health. many economists argued that the development of humans is intrinsically the development of the world as human capital accumulation means a process of accelerating capacities and knowledge of the people of the world. in fact, the prospect of physical capital is essentially linked to human development. through education, the global health system has blossomed. the amelioration of the health sector is unarguably the advancement of educational technology. the hygienic status of the people has become better due to widespread educative sensitization. human capital in the form of education is also a great equalizer. the gender disparity gap has drastically decreased as the notion that if you educate a woman, you educate the world took a fine tune around the globe. despite the slow shrink of the gap, scores of statistics have proven that more women are being educated now than ever in the history of the world. the education of a woman has also been viewed as the antidote to the malthusian population catastrophe as more educated women generally have fewer children, more desirable health care, and higher infant survival rates. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e musa sawaneh 188 human capital also seems to be more consequential of child survival than household income and riches. africa has been seen as the habitat for dictators, but education is eroding these phenomena. both formal, semi and informal educational under goings have played an effective role in individuals’ cognitive abilities towards the democratization of the african continent. through cognitive skills, tolerance, openness, ethnic and religious diversity has become the norm in lieu of conflicts. criminality is crumbling due to its opportunity cost, education. people now prefer engaging in a self-developing process to create a favorable future for themselves which adam smith called the invincible hand in a country’s economic growth. moreover, human capital (education) is playing a pivotal part in attitudinal change towards the environment and its hazards such as climate change or greenhouse gases. economists such as mankiw, romer, and weil (mrw) also emphasize the significant role of education on economic development through their theories and the augmented solow growth model. the idea of human capital is related to the “social capability” concept of abramovitz (1986). social capabilities refer to the level of general education, norms, technical competence, and society’s disposition that allow them to do something. abramovitz emphasized the significance of social capabilities in the adoption and diffusion of technologies. he further argued that the extent to which human capital contributes to economic growth will be at least partly dependent on a country’s social capabilities. social capabilities include factors that allow economic agents to utilize their potential such as the quality of institutions, as reflected in the quality of governance, for instance. in other words, for technologically lagging countries to catch up with leaders, they need not only human capital, but also well-functioning institutions (olofsdotter, 1998). the amartya sen’s capability approach is the choice of focus upon the moral significance of individuals' capability of achieving the kind of lives they have reason to value. in his seminal contribution, sen (1983) argued that improvement in the quality of life of citizens should be the objective of economic policy, instead of focusing narrowly on increasing overall output. this approach suggests that human and productive capabilities should be improved to facilitate human capital and that a higher level of human capital can only affect productivity if it is efficiently utilized by the economic system. with the minimal availability of some natural resources like cruel oil, diamond, and other precious stones, the gambia’s most prestigious resource is its people. being cognizant of this fact, the past and present gambian governments are still yet to take a revolutionary step in investing in her people through education and health. since independence in 1965, the education system improved at a very slow pace because it was plagued by a number of problems such as accessibility, quality, and relevance of education. the second republic saw an improvement and in 1995, the average gross primary enrollment rate was 77.1 percent and the net primary enrollment rate became 64.7%. in 2015, (unicef, 2015) report states that the overall gross enrolment rates (ger) stands at 97% including the “madrasah” (arabic language muslim schools). in enrolment, the gambia ranked considerably high, surpassing the sub-saharan average of 69 percent. today the gambia has five universities, two colleges, hundreds of other tertiary institutions, and thousands of primary and secondary schools. in 2016, (cia, 2016) ranked the literacy rate in the gambia to be 63.9% for males and 47.6% for females. yet quality is an unfocused impediment. constitutionally, the gambia enshrined education as a basic right in 1997. the education policy (2004) and the children's act (2005) mandated free and compulsory basic education for all but remains inconsequential to the citizens of the gambia. the gambia’s education system follows the british system. the official school going age starts from seven years with six years of primary schooling, three years of junior secondary schooling, three years of senior secondary schooling, and four years of university education. the 21st century has seen an increase in primary school enrolment. the graph shows how female enrolment surpasses male enrolment as people's consciousness improved. significance of human capital on the economic growth of the gambia 189 female and male primary school enrolment from 1992-2018 the graph indicates that more female is enrolled than males. this is another proof that with more education, gender inequality has declined, and its eradication is a possibility in the gambia. the new 2016 government has now considered education as a priority in its national development plan (ndp). in it, the government pledged to enhance access to early childhood education, improve quality learning, with special emphasis on science, technology, engineering and mathematics (stem), health, agriculture and special needs at the basic, post-secondary/tertiary and higher education levels; promote technical, vocational, education and training and other skills enhancing initiatives to match the job market; and enhance access to non-formal education in order to build a more skilled and productive workforce in the health and economic system. to solidify the ndp, the approved 2020 budget has shown a better increment in the allocation of education at all levels. it is an indispensable means for 'unlocking' and protecting human, economic, and social rights by providing the framework required to secure good health, security, and economic well-being, social and political participation which is crucial for the development of the gambia. knowing that economic growth is necessary for a nation’s sustainable economic development, this paper aims to analyze the economic importance of human capital and social capabilities on the economic growth of the gambia from 1990 to 2019. during most of this period, the gambia had been ruled by dictatorship thus restricting all forms of personal and social capabilities. to many extents, human capital flight (brain drain) became at its highest ever as there was no freedom of speech and the sahara desert or mediterranean sea to spain or italy was the option to instant riches. this paper attempts to add to the existing findings and shall investigate the diversity of the human capital structure with its capacity to positively change the status quo; decrease unemployment and crime, increase cognitive ability, thus this could be an alternative aspect of concentration in our development goals. in our quest to determine their relationship, we shall determine if any causal relationship exists, that is, if education leads to economic growth or vice versa. through our findings, we shall recommend policymakers or government on the consequentiality of education towards gambia’s economic growth. 2. literature review in terms of the theoretical and empirical literature, there are numerous studies that have been conducted to find the nexus between education and economic growth; however, the debate with respect to education being a key factor for economic growth has been happening since time immemorial. the importance of education can be tracked down from the founding fathers of modern economic thought, the classical. the ideas of the classical economists on the wages of unskilled workers and skilled workers who are educated, by which they usually meant those who received general and more technical education in institutions of learning. smith (1776) stated that the difference between the wages of skilled labor and those of common labor was based on the principle that “it must be expected, over and above the usual wages of common labor, will replace to him the whole expense of his education, with at least the ordinary profits of equally valuable capital.” also, smith (1776) stated that educated workers had fewer delusions of enthusiasm and superstition and more decent and orderly than an ignorant and stupid one. the neo-classical continued by emphasizing on how impactful education is to economic growth. uzawa (1965) and lucas (1988) imply that education promotes growth by making the productivity of labor increase more rapidly and has a positive effect on income distribution by increasing wages. denison (1961), musa sawaneh 190 schultz (1963), becker (1964) all worked and investigated the positivity of education on growth or more generally the source of economic growth. in the empirical literature, there are multiple findings with regards to these studies and it has been substantiated by researchers and economists that there exists a relationship between education and economic growth; although some findings showed the addition of health in order to be impactful. for instance, papageorgiou (2003), made a research on benhabib and spiegel in examining the effect of human capital accumulation on economic growth. the paper was innovative in two ways. first, it took the r&d-based models more seriously which more structural specifications in which human capital affects growth as an input of final output and as a catalyst of technological innovation and imitation. second, owing to data availability it was possible to disaggregate human capital and assign different roles to primary and post-primary education. regression estimates obtained from these alternative specifications suggested that the relative contribution of human capital to technology adoption and final output production vary by country wealth. more importantly, regression estimates suggested that primary education contributes mainly to the production of the final output, whereas post-primary education contributes mainly to innovation and imitation of technology. similarly, barro (1991) asserted that for 98 countries in the period 1960-1985, the growth rate of real per capita gdp was positively related to initial human capital (proxied by 1960 school enrollment rates) and negatively related to the initial (1960) level of real per capita gdp. countries with higher human capital also have lower fertility rates and higher ratios of physical investment to gdp. growth is inversely related to the share of government consumption in gdp, but insignificantly related to the share of public investment. growth rates are positively related to measures of political stability and inversely related to a proxy for market distortions. başar (2007) investigated the effect of education on economic growth for 24 transition economies from 1998-2005 periods. for this purpose, some equations were estimated by dynamic panel regressions. when investigating the effect of education on economic growth, human capital, education index, enrollment ratio, and literacy rate data were proxies for education. in his one-step gmm estimation results, while human capital, education, and literacy rate positively affect economic growth, enrollment ratio has a positive but statistically insignificant effect in transition economies in the short run. even the effect of human capital and literacy were bigger than physical capital. the effect of human development and literacy rate continued in the long run. 3. methodology 3.1. variable and data the purpose of this paper is to examine the importance of human capital and social capabilities on the economic growth of the gambia. the study uses annual time series data set which was sourced from the world bank development indicator and african development bank database covering the period 1990-2019. the examination is based on five economic variables and they are gross domestic product. (gdp), education (ed), gross capital formation (gcf) agriculture (ag), and inflation (in). 3.2. model specification in the study, we used the neoclassical growth model as a base for the analysis. human capital has been added to the model to conform to the arguments made by endogenous theorists such as becker (1964) and luca (1988). yt = at k a t l h t h g t εt ,………………………..………..(1) in the neoclassical model, y is the output of production, a is technology, k is physical capital and l is labor. with the inclusion of h as a proxy for human capital in the model, y is represented by real annual gdp growth, a i s represented by annual inflation, k by annual gross capital formation, l by annual agricultural growth, and ε is the residual. a multiple linear regression model has been conducted as follows: gdp= β0 + β1 ed+ β2 gcf+ β3 ag+ β4in + εt………….…………(2) which is interpreted as; β 0 = the intercept β1 β4= coefficients of the explanatory variables ed= primary school enrollment ( human capital) gcf= gross capital formation significance of human capital on the economic growth of the gambia 191 ag= agriculture in= inflation εt= the error term in order to avoid heteroscedasticity, the model has been converted into their natural logarithms. lgdp= β0 + β1 led+ β2lgcf+ β3 lag+ β4in + μt……..………..…………(3) and l= log 3.3. estimation techniques we employed the unit roots test to check for stationarity attributes, granger causality test for causality, and cointegration test to determine the long-run relation between the two variables. the results from the cointegration would determine whether the vector autoregressive or vector error correction model will be used. 3.4. wald test in finding the connection between human capital and economic growth, the methods used for estimation were first, the wald test (also called the wald chi-square test) which we used to test the goodness of fit of an explanatory variable. it is a test that indicates the meaninglessness of the variable in the model. the hypothesis for the test is the 5% significance level. table 1. wald test test statistic value df probability f-statistic 11.54469 (4,25) 0.0000 chi-square 46.17874 4 0.0000 from table 1., the result shows that the p-value is less than the 5% significance level, thus the rejection of the null hypothesis. this proved that the variables are important and different from zero thus should be included in the model. 3.5. unit roots test upon confirming the significance of the variables from the wald test, we now test for unit root. unit root test is done to determine whether a variable stationary or not. the stationarity or non-stationarity of the data series could be tested by using many tests presented in economic literature such as the kpss test, phillps, and person (pp) test but the well-known test is the augmented dickey-fuller (adf) technique which we used here. the adf test at ar(2) is used and it consists of regressing the series of the first difference against the series lagged once, lagged difference terms in addition to the constant and time trend which is optional. it can be written as follows: δyt= α+δyt-1+ βδyt-1 + μt…………………………….(4) we added more lags in equation (5) in other to remove serial correlation from the error term which might not affect the consistency of our ols estimator but might disrupt its efficiency: δyt= α+δyt-1+ δyt-i + μt…………………………………………….(5) in the regression process, the unit root test is directed on the coefficient of yt-1 from equation (5). the set hypotheses: the null hypothesis is that the variable yt is non-stationary (h0: δ = 0) while the alternative is that yt is stationary (h1: δ ˂ 1). if the coefficient of yt is equal to zero, it means the variable yt contains a unit root otherwise n the other hand, if the coefficient is less than 1, we reject the null and conclude that yt is stationary. we used the eviews statistical software to run the regression on each data series and mackinnon (1996) one-sided p-values served as the benchmark for rejection and otherwise. musa sawaneh 192 3.6. granger causality test the granger causality test was developed to test if one time series is beneficial in forecasting another variable. it was proposed by clive granger in 1969 and he argued that if a variable (education) “granger-causes” another variable (gdp), then the past values of education should contain information that helps predict gdp. for better illustration, let’s consider the bivariate linear autoregression model of our two variables i.e. gdp and education by stating a basic ar(1) model: (gdp)t = α0 + β1(gdp)t-1 + μt……………………………….........(6) from the equation (6), we create our vector autoregressive (var) distributed lag model where the summation helps us to get rid of serial correlation. the equations are as follows: (gdp)t = α + i(gdp)t-i + i(ed)t-i + μt…………………..(7) (ed)t = α + i(gdp)t-i + i(ed)t-i + εt……………………(8) the p is the highest lagged value that can be included in the model and a and δ are the coefficients of the variable while μ and ε are the unused variables (error term). the hypotheses are as follows: h0: education (ed) does not granger cause economic growth (gdp) h1: economic growth (gdp) does not granger cause education (ed) in equation (7), education does not ganger cause gdp if the coefficient δ is insignificant (h0: δ= 0) but does if otherwise. from equation (8), gdp does not granger cause education if the coefficient a is insignificant (h0: δ= 0). in a similar manner, if the reduction in the variance of the error term μ (or ε) was due to the inclusion of ed (or gdp) in both equations, then we can infer that ed (or gdp) granger causes gdp (or ed). using e-views statistical software, our null and alternative hypotheses are as follows respectively: h0: education (ed) does not granger cause economic growth (gdp) and vice versa. h1: education (ed) does granger cause economic growth (gdp) and vice versa 3.7. cointegration test after observing for unit root and granger causality of the data series, we are to determine if there is a lon g-run relationship between the variables. so to investigate the long-run economic growth and education nexus, we applied the johansen cointegration using the maximum likelihood test procedure. this approach is based on two test statistics, the maximum eigenvalue test statistic and trace test statistics. the johansen test implies estimating unrestricted vector autoregressive (var) model: yt = ao + j yt-i + μt……………………(8) where yt = k which is a vector non-stationary i(1), ao is a vector of constant, p is the maximum lags value, aj is the matrix of variables that can be estimated and μt is the vector of innovation that is independent and identically distributed. this study used e-views statistical software to check if gdp and education have a long-run relationship. 3.8. lag length selection test we do not arbitrarily determine lags as it may cause the model to lose its degrees of freedom, bring statistically insignificant coefficient, multicollinearity, and specification error. we, therefore, use the lag length selection test to know which lag is the best fit for investigating the relationship between the variables. there are up to four ways to choose from the test such as final prediction error (fpe), akaike information criterion (aic), schwarz information criterion (sc), and hannan-quinn information criterion (hq). however, the most common is the akaike information criterion (aic) and schwarz information criterion (sc) and in this study, we use lag 3 in table 2 as it is the common one with the asterisk. significance of human capital on the economic growth of the gambia 193 table 2. lag length selection test lag logl lr fpe aic sc hq 0 -480.434 na 2.85e+09 35.95814 36.19811 36.02950 1 -407.792 112.9997 86648754 32.42906 33.86887* 32.85719 2 -373.696 40.40978* 54669878 31.75530 34.39496 32.54021 3 -335.768 30.90412 39780797* 30.79768* 34.63720 31.93937* source: author’s own calculation using e-views. 4. results, findings and discussion 4.1. stationarity test the stationarity of the model depends on the result of our unit root test. as explained above, we used the augmented dickey-fuller test on the model as shown in table 3 table 3: augmented dickey-fuller test results source: author’s own calculation using e-views. the results from table 3 show that the adf test for stationarity and the critical value of 10, 5, and 1 percent levels of significance were employed. the null hypothesis of the presence of unit root is accepted for ed at its level as the p-value is greater than 0.05 while gdp, gcf, ag, and in rejected the null hypothesis at their levels. however, all the variables rejected the null hypothesis at their first difference. therefore, in the first difference, the variables are stationary and integrated into the same order of one, which is i(1). 4.2. granger causality test results since all the variables were stationary at their first difference, the granger causality test has been conducted to investigate if past values of education help predict gdp or vice versa. table 4: granger causality test results null hypothesis f-statistic probability decision led does not granger cause lgdp 6.69394 0.0051 reject lgdp does not granger cause led 0.25524 0.7769 accept source: author’s own calculation using e-views table 4. results show the granger causality and the significant value used is alpha 0.05 percent level. citing from the probability value, the null hypothesis that education does not granger-cause gdp was rejected as the p-value was less than 0.05. but the hypothesis that gdp does not granger-cause export was accepted at a 5 percent level of significance. so the conclusion from the granger causality test is that the past values of education do affect gdp. critical values 1% critical values 5% critical values 10% t-value p-value tvalue pvalue gdp -3.68 -2.98 -2.63 -6.62 0.00 -6.54 0.00 ed -3.67 -2.97 -2.63 -0.59 0.86 -5.48 0.00 gcf -3.68 -2.97 -2.62 -6.56 0.00 -6.72 0.00 ag -3.69 -2.97 -2.62 -5.11 0.00 -6.79 0.00 in -369 -2.97 -2.63 -3.70 0.00 -4.82 0.00 variables level first difference musa sawaneh 194 4.3. cointegration test after conducting the lag length selection test which confirmed the use of 3 lag and all variables were stationary at first difference then a cointegration test has been conducted to examine the long-run relationship between education and economic growth. table 5: johansen’s cointegration test statistic hypothesized no. of ce (s) eigenvalue trace value 5 percent critical value prob.** none* at most 1* 0.990844 0.856352 197.4847 75.45753 69.81889 47.85613 0.0000 0.0000 hypothesized no. of ce (s) eigenvalue max-eigen statistic 5 percent critical value prob.** none* at most 1* 0.990844 0.856352 122.0270 50.45021 33.87687 27.58434 0.0000 0.0000 source: author’s own calculation using e-views our results from table 5. show the long-run relationship between gdp and education. the existence of cointegration implies the existence of granger causality at least in one direction (granger, 1988). the johansen cointegration method has been used in our investigation and the findings of the trace test portray a long-run relationship between education and gdp, in other words, we reject the null hypothesis of no cointegration between the two variables. the maximum eigenvalue test also ascertained this result. therefore, we can conclude that our two variables of investigation have a long-run relationship between them so we cannot use the vector autoregression (var) instead we use vector error correction model (vecm) test to appropriately examine the causal relationship between education and gdp. 4.4. vector error correction model (vecm) since there is a long-run relationship between education and economic growth, the vecm shall be conducted to determine the short-run dynamics of long-run equilibrium relationships of variables. vector error correction model (vecm) is a restricted var and uses the adjustment coefficients to measure the forces that push the relationship towards long-run equilibrium. however, the error correction term (ect) from the vecm measures the speed of adjustment towards long-run equilibrium. the equation for the ect is as follows: ectt-1 = (yt-1 δjxt-1 λmrt-1) it represents the cointegration equation and the long-run model. table 6. estimates for vector error correction model regression gdpt-1 = 0.217 edt-1 + 0.012gcft-1 + 0.059agt-1 0.052int-1 + 8.775 error correction d(gdp) d(ed) d(gcf) d(ag) d(in) coineq1 -0.384017 [-1.44712] -0.056738 [-0.48353] -3.047126 [-2.40493] -1.010469 [-1.27699] -0.564017 [-6.73864] d(gdp(1)) -0.199516 [-0.52437] 0.278828 [ 1.65726] 2.499509 [ 1.37585] 1.636446 [ 1.44234] 0.441902 [ 3.68221] d(gdp(2)) -0.014187 [-0.03721] 0.102466 [ 0.60782] 5.277128 [ 2.89907] 1.486547 [ 1.30765] 0.262132 [ 2.17996] d(ed(-1)) 0.398486 0.231448 -3.119310 -3.159902 -0.327360 significance of human capital on the economic growth of the gambia 195 source: author’s own calculation using e-views. from the cointegration equation, ceteris paribus, in the long-run each percentage-point increase in education will cause an increase of 21.7 percentage points in gdp. similarly, ceteris paribus, a percentage-point increase in both gross capital formation and agriculture will cause gdp to increase by 1.2 and 5.9 percentage points respectively in the long-run. however, other things equal, a percentage-point increase in inflation will cause gdp to decrease by 5.2percentage-point. also, in the short run, all things being equal, there is a positive relationship between lag 1 and 2 of education and gdp. a percentage-point increase in education lag 1 and 2 will lead to the increment of gdp by 39.8% and 59.7% respectively. similarly, ceteris paribus, there exist a positive cointegration between the lag 1and 2 of gdp and education. a percentage-point increase in gdp lag 1 and 2 will cause education to increase by 28.8% and 10.2% respectively in the short-run. so, it can be concluded that in the long-run, education has a positive impact on gdp, however, there exists a bidirectional relationship between education and gdp in the short-run. 5. conclusion and recommendation the argument that human capital is a determinant of economic growth is a heated topic of discussion in the economic development spectrum. some literatures and different empirical evidence shows different results. this research was conducted to examine the effect of human capital on economic growth for 30 years period in the gambia. in our quest to advance the existing research on the investment in humans, we employed the popular econometric methodologies by firstly using the wald test to check for the relevance of the variables in the model. the outcome of the wald test shows that the variables were relevant to be used. the adf unit root test was also conducted, and the findings discovered that all the data series were stationary at first difference. the granger causality procedure rejected the null hypothesis for the edu-gdp causality but accepted the null of no causality for the gdp-edu. after determining the best lag at 3, we used the johansen cointegration test and the indicated results [0.32072] [ 0.79060] [-0.98679] [-1.60063] [-1.56768] d(ed(-2)) 0.595768 [ 0.62885] 0.030606 [ 0.07306] 1.784223 [ 0.39444] 0.807129 [ 0.28571] -0.273064 [-0.91382] d(gcf(1)) 0.093956 [ 1.58371] 0.043175 [ 1.64582] -0.612431 [-2.16205] 0.355387 [ 2.00892] 0.033747 [ 1.80351] d(gcf(2)) 0.057417 [ 1.16857] 0.013909 [ 0.64020] -0.217591 [-0.92749] 0.264167 [ 1.80301] 0.006982 [ 0.45054] d(ag(-1)) 0.029823 [ 0.23565] -0.061928 [-1.10664] -0.281574 [-0.46599] -0.606063 [-1.60602] 0.029911 [ 0.74933] d(ag(-2)) 0.031387 [ 0.21948] 0.070787 [ 1.11943] -0.848687 [-1.24295] -0.126113 [-0.29574] 0.039827 [ 0.88299] d(in(-1)) -0.203634 [-0.30525] -0.354229 [-1.20082] 2.923315 [ 0.91777] -2.209081 [-1.11050] -0.028099 [-0.13354] d(in(-2)) 0.246965 [ 0.51210] -0.138044 [-0.64734] -2.932640 [-1.27361] 0.018078 [ 0.01257] -0.056769 [-0.37321] c 2.295313 [ 1.38121] 0.915392 [ 1.24572] 1.886792 [ 0.23779] 2.693304 [ 0.54351] 0.472387 [ 0.90124] r-squared 0.817190 0.442947 0.861809 0.702308 0.851135 arsquared 0.683129 0.034441 0.760469 0.484000 0.741968 f-statistic 6.09565 1.084310 8.504136 3.217056 7.796606 musa sawaneh 196 of the existence of cointegration in the two variables which permitted us to conduct the vector error correction model (vecm) test. the outcome of the vecm test showed a positive effect of human capital (education) on gdp in the long-run and a bidirectional relationship in the short-run. these findings are clear empirics that education (human capital) is vital to the economic growth of the gambia. the development of people means the development of the country because these people shall be doctors, teachers, entrepreneurs, businessmen, or women et al. thus, the government or policymakers are recommended to devise well-carved policies that are essential to the micro and macroeconomics of the country and invest in all educational sectors. education opens multiple doors for other sectors thus increase gdp. the education system policies should be revitalized to avoid a primitive, traditional system of schooling. teachers training programs should be encouraged and incentivized to allow qualified teachers to move from urban to rural or peri-urban schools in order to create an all-inclusive development where everyone’s right to quality education is achieved. the modern, innovative, and technological method should be encouraged to promote the 21st-century education system and make the gambia a learning hub in africa. references abramovitz, moses (1986). catching up, forging ahead, and falling behind. the journal of economic history (46), 385–406. african development bank group (2019). http://dataportal.opendataforafrica.org/nby en xf/afdb-socio-economicdatabase-1960-2020 barro, r. j. (1991). “economic growth in a cross section of countries,” quarterly journal of economics, (106), 407-43. borojo and yushi, (2015). the impact of human capital on economic growth in ethiopia. başar, selim (2007). “effect of education on economic growth in transition economies” assoc. ataturk university faculty of economics and administrative sciences department of economics. becker, gary s., (1964). “human capital,” (columbia university press for the national bureau of economic research, new york). bertin and sevin, (2006). social capital and the capability approach: a socio-economic theory. bils, mark and peter, j., (2000). "does schooling cause growth?" american economic review, 90 (5), 1160-1183. denison, edward f., (1961). “the sources of economic growth in the united states,” (committee for economic development, new york). dookhan and fauzel (2010). “the impact of education on economic growth: the caseof mauritius” https://www.researchgate.net/publication/284507634 gaber, abugamea (2017). “the impact of education on economic growth in palestine,” https://mpra.ub.unimuenchen.de/89749/ mpra paper no. 89749. lin, tin chun (2003). “education, technical progress, and economic growth: the case of taiwan,” southeastern louisiana university, department of general business, hammond, la 70402, usa. liao, liping., d, minzhe et al (2018). “the impact of educational investment on sustainable economic growth in guangdong, china:” a cointegration and causality analysis. lucas, robert jr., (1988). 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(2003). “distinguishing between the effects of primary and post-primary education on growth”, review of development economics, 7, (4), 622-635. sawaneh, musa (2019). the relationship between exports and economic growth: the case study of gambia, (ijriss) |volume iii, issue vi,|issn 2454-6186 self, sharmistha and grabowski, richard (2004). “does education at all levels cause growth? india, a case study,” department of economics, college of saint benedict, st. john’s university, st. joseph, mn 56374, and department of economics, southern illinois, us. sen, amartya (1983). development: which way now? the economic journal (93), 745–62. seuk, wai phoong (2017). “education and economic growth: a case study in malaysia,” https://www.researchgate.net/publication/322222847 schultz, theodore w., (1963). “the economic value of education” (columbia university press, new york). smith, adam (1776). “an inquiry into the nature and causes of the wealth of nations,” 1 (1 ed.). london: w. strahan. retrieved 7 december 2012., (2), 788 sylvie, petr, et al. 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(2011) “the gambia education country status report. world bank,” world bank report. https://openknowledge.worldbank.org/handle/10986/2799 license: cc by 3.0 international journal of commerce and finance, vol. 6, issue 2, 2020, 1-17 1 performance improvement of non-governmental organisations through financial management. a casestudy of young men's christian association of ghana benedict arthur zhongnan university of economics and law, ghana richard appiah-kubi zhengzhou university, china received: nov 08, 2019 accepted: dec 26, 2019 published: oct 02, 2020 abstract non-governmental organizations (ngos) in ghana have a history of being short-lived. however, young men's christian association (ymca) ghana, on the other hand has achieved notable success by impacting millions of lives over 50 years of working in ghana. apparently, this research investigates into the key financial management practices of ngos in ghana using the case of ymca ghana. the study revealed that, the quality of financial management staff and their responsibility is the most effective financial management indicator in ymca ghana amongst all the other well-functioning indicators. nevertheless, it is evident in the study that the challenge ymca ghana faces in its financial management practice is irregular external audit review of financial and accounting information. therefore, it is recommended that frequent subscription for external audit services should be established in ngos and also, cost effective monitoring, evaluation, accountability and learning (meal) programme management framework should be adopted by ngos in ghana. keywords: financial management; performance; ngos; ymca ghana. 1. introduction the nonprofit sector has experienced unprecedented growth over the past two decades, specifically among organizations that render human services. these organizations are rarely judged solely by their financial performance; instead, their worth is measured by the effectiveness of services rendered and how successful they are able to achieve their mission. and yet finances do matter. in most organizations, the ability to deliver effective services is not only dependent on solid funding for those services, but also on sound management practices, of which financial management is an essential piece (christine w., ryan & grossman, 1999). indeed, as public demand for more effective, efficient and accountable services has increased, good financial management has become more important. increasingly, nonprofit organizations such as ngos are expected to make creative use of scarce resources and take fiscal realities into account as they make programmatic decisions (jerome b, 2004) allis, et al, 2004 asserts that financial resource is considered as an essential resource to almost every institution and establishment. therefore, it must be effectively and efficiently managed to bring about the needed change and results from the activity for which the funds have been made available. on the contrary, sometimes this important resource is mismanaged and misappropriated by those put in charge (rosen & gayer, 2010). proper management of an organization’s finance provides quality fuel and regular service to ensure efficient functioning. if finances are not properly dealt with, an organization will experience challenges that may have severe repercussions on its growth and development. financial management is an essential managerial activity in any organization. financial management, as defined by khushi 2017, is the process of planning, organizing, controlling and monitoring financial resources with the objective of achieving organizational goals and stated objectives. the control of financial activities of an organization such as procurement of funds, utilization of funds, accounting, payments, risk assessment and every other thing related to money is an ideal practice. financial management is highly indispensable for every successful organization, whether it’s a private, government or non-government. successful enterprises have the record of haven watched their finances very keenly and taking the right decisions at the right time hence the success of the in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e benedict arthur & richard appiah-kubi 2 organization. most businesses have organized finance division responsible for looking after the accounts and finances of the company. contrary to this, ngos most often do not consider financial management to be a priority and lack adequate financial knowledge. this is often characterized by poor financial planning and inadequate financial systems in place. non-governmental organizations (ngos) have been widely criticized for failing to transform the lives of poor neighborhoods in ghana: the very objective for which these organizations were set up for. critics have variously attributed the failure of most ngo activities in the country to issues of insufficient funding support from external sources, inappropriate donor control, competition among recipient/agent ngos, and an inability to sustain collective action in beneficiary communities (stephen & francis, 2015). naturally, efforts at addressing the challenge of ngo’s poor performance have often emphasized a need for external donors to increase funding support, reduce control over ngo activities, and ensure collaboration rather than competition among agent ngos while overlooking at the poor management of the limited financial resources. the importance and sensitivity of financial management to an entity’s quest for growth has in recent times brought the issue of financial governance and accountability to the forefront of stakeholder issues (zadek, 2003). this emphasis became even more pronounced in the wake of the collapse of world giants like enron, tyco and worldcom among others and during the financial crisis of 2007-2009. for the ngo donor community, the concerns raised in the wake of the collapses of organizations due to weak financial governance and accountability as per financial management are not new to them. in fact, apart from the core issues that may elicit funding from such donor entities, another very important framework required by donors is a system of good governance and accountability of donor funds (kihato and rapoo, 1999) which is generally embodied in a comprehensive financial management system. the collapse of enron, worldcom and a host of other companies in the past and recent times has heightened the demand for sound accountability practices on regular and timely basis. financial control which is one of the effective internal control systems has become very important in modern business in the rise of fraudulent financial reporting in many countries around the globe. additionally, the rapidly changing business environment of not-for-profit organization is compelling corporate leaders to ensure sound and effective internal control system to achieve organizational objectives. it is noted that the implementation of sound and effective financial management and controls will significantly ensure the achievement of objectives especially in the profit-making businesses due to the profit maximizing motive. ngos on the other hand had previously depended on traditional and informal procedures to sustain their social agenda of impacting lives. quite unfortunately, looking at the recent spate of financial malfeasance recorded among ngos, it appears this is not yielding the desired results. accountability has been of major challenge for ngos. it was observed by ayom (2013) that despite donor’s support, many ngos are not performing well as expected. the management sciences for health (msh); an ngo in sudan, could not account for $17,788 proposed for vulnerable people of south sudan because of indication of fraudulent activities. a key observation was that most of donor funds to ngos for project implementation lacked accountability. ayom (2013) mentioned that a report conducted by msh between 2001-2013 showed credible evidence of fraudulent activities particularly inflated workshop activities/expenses, forged receipts and insufficient support documentations. it was further reported that management ignore its responsibility and control measures were ineffectively executed within the organization. many ngos in ghana are faced with poor financial management practices which in extreme cases has led to the collapse of some of them, despite having the necessary resources and funds to run them (boachie-mensah & marfoyiadom, 2005). it is not weird to hear of ngos funds being diverted to cater for other activities outside the scope and work plans of donors. for some, billing for non-existence events and inflating of invoices, inflation of operational costs, inflation of invoices produced internally for activities completed by own staff, billing for own contributions, and submission of forge receipts to cover expenditures are common forms of financial malpractices of ngos in the region (alhassan musah et al 2018). the situation has led to a number of ngos inability to carry out their constructive work objectives and hence poor performance. the study, therefore, strived to examine the persistent poor performance of ngos in ghana from the perspective of financial management which had hitherto been ignored. performance improvement of non-governmental organisations through financial management. a casestudy of young men's christian association of ghana 3 2. literature review this section reviews related literature of the study that was written by other researchers. this was in respect to the variables and keywords of the study which are ngos, performance, and financial management from which specific objectives were framed for this research. 2.1 overview of ngos in ghana ngo is a non-profit organization that operates independently of any government, typically one whose purpose is to address a social or political issue. the origin of ngos in ghana is dated back into time where through mutual assistance of the traditional ghanaian idea of self-support under the “nnoboa” system led to the invention of faithbased ngos by the missionaries. the formation and growth of ngos in ghana was slow that as at 1930 only three of them had been officially registered. the number of ngos increased systematic in the 1960s and 1970s and by december 1996, over 320 ngos; both foreign and local were operating in ghana. it is quite impossible to quote how many ngos are operating in the country because the literature on ngos in ghana is inadequate. notwithstanding, estimate number of ngos both local and foreign operating in ghana as of 2005 was between 900 1500 (ghanaweb.com). currently, as of 2014, the number of registered ngos from the statistics of the department of social welfare database since registration started over two decades ago is five thousand nine hundred and eight (5298) and cumulating yearly. the pre-independent era saw the rise of missionary activities that led in the establishment of religious groups mostly in rural communities (amanor et al., 1993; atingdui et al., 1997 grischow, 2008). with help from the colonial administration and minimal resistance from government, these groups setup their own hospitals; schools and other institutions to assist rural communities within the country for their welfare (atingdui et al., 1997). katsriku (1996) asserts that the pre-independent era of ghana also saw the formation of foreign ngos such as the red cross society and the society for the prevention of tuberculosis to help the vulnerable people in urban cities in ghana. the formation of ngos further intensified after the second world ward due to the desire and determination of the inhabitants to obtain independence from colonial rule and to resist racial discrimination (mohan, 2002). it is further argued that ngos were very instrumental in the struggle for independence (abdul-gafaru and quantson, 2008). the activities of these foreign ngos were extended to rural areas of the country during postindependence. in this current day modern ghana, there are two main processes for registration as an ngo in ghana: firstly, ngos are expected to get a certificate to commence business and incorporation at the registrar general’s department under the ministry of justice and attorney general. secondly, register as a local or international ngo at the department of social welfare under the ministry of employment and social welfare (japan international cooperation agency (jica), 2011). likewise, under the ngo policy regulation of ghana (2007), an ngo organization is expected to renew its registration every year. failure to renew amounts to termination of operations and will lead to the declaration of the organization as non-entity/invalid. ngos in ghana are not homogenous actors, they differ in activities, structure, organisation, resources, leadership, membership, ideology and aspiration yet they all possess some level of financial resources that need to be effectively managed to achieve their various objectives for which the organizations were established. ngos in ghana exist to provide services to mostly deprived communities in areas such as education, sanitation, health, research and development, water development, agriculture, environmental protection, vocational skills, food security, capacity building and poverty reduction programmes such as micro-credit (porter 2003). ngos in ghana may be national as well as international; secular as well as faith based; and membership or non-membership based. 2.2. financial management of not-for-profit (ngos) mcmenamin (1999) defines financial management as ‘the ways and means of managing money’. financial management is technically considered as the determination, acquisition, allocation, and utilization of financial resource, with the objective of achieving precise set goals or objectives. financial management is viewed as one of the essential areas in business activities due to the fact that the survival, growth and expansion of the business can only be achieved where sound financial management practices employed are in line with the overall business objectives (attom & mbroh, 2012). benedict arthur & richard appiah-kubi 4 financial management of not-for-profit organizations is not so different from financial management in the commercial in several respects; yet, some key differences shift the attention of a not-for-profit organization’s financial manager. while the profit focus enterprises concentrate on profitability and maximizing organization’s shareholders value, the not-for-profit organizations’ focus is not to increase shareholders value but instead, to provide some humanitarian services. ngos financial management is more than just keeping accurate accounting records. it also involves planning, controlling and monitoring financial resources to achieve organizational objectives. however, not-for-profit organizations mostly lack the financial flexibility of a commercial enterprise because it depends on resource providers that are not engaging in an exchange transaction (blackbaud 2011). the resources provided are directed towards providing goods or services to a client other than the actual resource providers/donors. a not-for-profit must demonstrate its stewardship of donated resources — money and other material resources donated for a specific purpose must be used for that purpose. a purpose which is generally either specified by the donor or implied in the not-for-profit’s specified mission, vision or objectives. the management precepts and reporting activities of a not-for-profit must ensure that these activities strongly geared towards the stewardship for every donated resource. budgeting and cash management are two areas of financial management that are very vital practices for not-forprofit organizations such as ngos. it is expedient that these organization ensure at all year round, whether it has adequate cash reserve to continue to render its services to its beneficiaries. cash flow in not-for-profits such as ngos can be extremely challenging to predict, because such organization depends on revenue from resource providers: donors, that, which cannot guarantee their services (blackbaud, 2011). generally, an increase in demand for a not-for-profit’s services is more likely to lead to a management crisis since forecasting contribution revenue in a reliable manner from year to year is difficult and uncertain. for this reason, the control of expenses is an issue of increased emphasis hence budgeting becomes a critical activity for a not-for-profit such as ngos (blackbaud, 2011). more often than not, ngos financial management is overlooked and this has often led to abrupt liquidation of most of the ngos. as such according to stephenson (2003), ngos currently must design an effective financial management tools that will ensure massive accountability to donors and other stakeholders, gain the respect and confidence of funding agencies and above all help them prepare for long-term financial sustainability. although no one model of financial management fits every organization, a well-organized ngos financial management is a key to the organization’s sustainability (mango, 2006). 2.3. performance measurement and management of non-profit-organizations: (ngos) goodwin (2003) states that performance comprises of the actual output or results of an organization as measured against its intended outputs or objectives. speckbacher 2003 and taylor et al. 2009 ascribe that the non-profit organizations are different from other organizations in the public and private sectors in the sense that there is no profit maximization and no strict measure against which performance can be measured. however, managers of nonprofit organizations have the duty to efficiently manage donors’ resources, act as overseers for these resources and also ensure successful overall performance organizations such as ngos. therefore, it is necessary that the managers of these organizations assess whether the organization is using the donated money effectively and efficiently and also ethically to achieve its mission and vision. senior executives, financial professionals and board members of not-for-profit organizations face the challenge as to what are the relevant indicators of performance, and how should they be measured. however the primary interest of a funder, a donor, a board member, the community, or any other stakeholder should be whether the not-for-profit (ngo) has achieved its mission (marc & adriana, 2009). to be able to measure that achievement requires a clearly defined mission and strategy which the research setting for this study has in place. the leading practices in comprehensive not-for-profit performance measurement have shown that organizations can develop performance measurement systems that include social impact-focused measures, member-focused measures, and other nonfinancial measures, along with the financial ones. not-for-profit organizations need a common framework (model) that not only counts the inputs, outputs, and outcomes of their programs and activities, but also (a) provides information on their success in generating positive social changes and/or member benefits (impacts), and (b) gives insight into the drivers of these changes (marc & adriana, 2009); on this basis the performance of the case setting (ymca) of this study was measured. performance improvement of non-governmental organisations through financial management. a casestudy of young men's christian association of ghana 5 several authors have provided a number of descriptions of performance measurement. lindblad 2006 sees measurement of ngos performance as the application of objectives, indicators and information to assess these organizations interventions and services. it is treated as the mechanism for evaluating employees, teams and the entire organization (ferreira and otley, 2009). miller 2007 also puts ngos performance measurement as an approach of assessment that evaluates a program’s impact in terms of efficiency and effectiveness. carmon (2007) asserts that measuring performance involves a systematic approach of evaluating a programme’s outputs, inputs and impacts. access to resources to ensure survival should not be the sole dimension for measuring ngos performance. also, kareithi and lund (2012) states that the fundamental objective of ngos is targeted at the desired goals by their total beneficiaries reached and the improvement in their various communities. therefore, the assessment of ngos should mainly be measured on how productive they have been in achieving their targeted social objectives. usually, ngos evaluate their performance by setting performance models and then proceed to gather information related to the established indicators. the common performance indicators mostly used by ngos cover effectiveness, fundraising, costs, satisfaction of beneficiaries as well as efficiency (carman, 2007). likewise, teelken (2008) determined four (4) performance dimensions which are: efficacy, economy, efficiency and effectiveness to be used to evaluate the operation of ngos. also, benjamin and misra (2006) added that, in assessing ngos performance, the focus should be on four main indicators which are inputs, outputs, outcomes and impacts. these various above mentioned expert opinions on ngos performance measurement are not different from the program logical model introduced by w.k. kellogg foundation in 1998 (w.k. kellogg foundation, 2004) and the input-impact model by marc & adriana, 2009 on nonprofit performance measurement which states that not just resources (services the program provides, the clients it serves or the cases it treats, its intended results, and the logic behind how the use of resources in the program activities is expected to produce results) but also putting the mission and vision statements of the organization at the core, and also places strategy, organizational structure, systems and also internal environment among the inputs: theories from which the conceptual framework of performance measurement for this study was couched. 2.4. relationship between ngos performance and financial management efficient financial management is the backbone of any entity’s growth drive or attainment of high performance. when well-executed, the financial management function forms the bedrock for growth, development and sustainability (high performance) (aldaba, 2002). according to easterly and rebelo (1993), growth and development discussions would be incomplete without the mention of fiscal management, which, encapsulated on the macro level as the sourcing for and uses of financial resources in line with development agendas, is captured as the financial management function on the micro level. it is more certain that financial management systems continue to be of much significance to business success; either for profit or otherwise. previous research by raymond and magnenat-thalman (1982),holmes and nicholls (1989), nayak and greenfield(1994) and lybaert (1998) have revealed that the quality of management accounting information employed within the small business sector and other resourced managed organizations such as ngos has a positive relationship with an entity’s performance. according to padilla et al (2012) in their study on financial sustainability for non-profit organizations, effective financial management practices is essential in enhancing transparency, efficiency, accuracy, accountability; these which are performance indicators, which enable an organization to achieve its objectives. the success of a business depends on how well it harnesses everyone to work to the common end, and as expected the financial manager must appreciate the conflicting objectives often encountered in financial management (brealey & myers, 2003). clark, (1991) affirms that one of the major drivers of efficiency is the manner of utilization of the capital and the funds that the ngo sector accumulates through various sources for carrying out its work. statistics show that out of more than 1.2 million ngos operating in india, only 3% are being able to carry out constructive grass-root level work (icongo, 2002 survey) hence poor performance. also, ngo establishments typically tend to have high administrative costs of nearly 60% and above. thus, only 10-20% of the funds are utilized for effective developmental work (abraham, 2013). these performance threatening practices could be associated to lack of stringent financial management norms/practices. this, again, shows how devastating an organization will be when its financial management systems, controls or regulations are compromised. benedict arthur & richard appiah-kubi 6 3. research methodology this study employed a case study design. the target population for the study was the ymca ghana organization’s staff drawn from different departments of its headquarters. 48 respondents were sampled from the accounting and finance, internal audit, human resource, procurement, management including field officers and administration using a purposive non-probability sampling technique. the study employed both primary and secondary data using questionnaires and interviews, and organisational records respectively. a blend of quantitative and qualitative techniques of data analyses was used. quantitative analysis was applied on the quantitative data to give meaning to them while qualitative analysis was applied on non-quantitative questions and variables. data was analysed using spss statistics version 21 and microsoft excel for graphs and figures. 4. data presentation, analysis and discussion this section summarizes the data collected and the statistical method of analysis, using the methodology adopted in the prior chapter. the 48 respondents engaged in this study were: one (1) finance director; one (1) directors at the internal audit unit; one (1) director (management); one (1) manager (hr); three (3) staff of the internal audit unit; seven (7) from accounting and finance department; four (4) staff from the human resource department; three (3) from general administration; nine (9) staff from the procurement and logistics department; and eighteen (18) field officers. 4.1. demographical background of the respondents the demographic characteristics of the respondents were examined according to gender, age, educational background and years of service of the respondents. the results from the survey are shown in table 1 below. table 1 demographical characteristics of the sample variables type frequency percent valid percent cumulative percent gender total male female 32 16 48 66.7 33.3 100 66.7 33.3 100 66.7 100 age (years) 20-25 2 4.2 4.2 4.2 25-30 14 29.2 29.2 33.3 35-40 24 50.0 50.0 83.3 40 and over 8 16.7 16.7 100.0 total 48 100.0 100.0 education high school 1 2.1 2.1 2.1 diploma 7 14.6 14.6 16.7 undergraduate 14 29.2 29.2 45.8 professional 13 27.1 27.1 72.9 masters 13 27.1 27.1 100.0 total 48 100.0 100.0 years of service less than 2 years 1 2.1 2.1 2.1 2-5 years 29 60.4 60.4 62.5 6-10 years 17 35.4 35.4 97.9 over 10 years 1 2.1 2.1 100.0 total 48 100.0 100.0 performance improvement of non-governmental organisations through financial management. a casestudy of young men's christian association of ghana 7 table 1 shows that more males 32 (66.7%) than females 16 (33.3%) partook in this study which could also mean more males are engaged in the operations of ymca ghana than females which might be due to tough nature of the job. the table also indicate that majority of the respondents engaged in this study were those in the 35–40 age group representing as much as 24(50.0%) of the total response rate. followed by those in the age bracket of 25–30 years who were also represented by14 (29.2%). respondents who were above the age of 40 years were represented by 8 (16.7%) while those from 20 to 25 years were also represented by 2 (4.2%). the table also shows that that majority 14(29.2%) of the respondents have undergraduate (bachelor’s) degree as their highest educational qualifications. this was followed by those with professional qualification and master’s degree who had the same number of respondents of 13 (27.1%). the respondents who had diploma as their highest educational qualification were represented by 7(14.6%) while only 1 respondent had high school qualification representing 2.1% of the total response rate. based on the analysis of table 4.1.3, it could be inferred that ymca ghana is dominated by bachelor’s degree holders with a substantial majority haven professional and master qualification. with regards to years of service, majority 29(60.4%) of the respondents in this study have worked with ymca ghana for 2-5 years. those who have worked there for 6-10 years were 17 representing 35.4% whiles those who have worked there for more than 10 years and those who have worked there for less than 2 years had the same number of respondents 1(2.1%). this indicates that most of the respondent engaged in this study were experienced about the operations of ymca ghana and therefore could provide valid and reliable data for this study. 4.2. functionality of financial management systems to examine the functionality of financial management systems of ymca ghana, data were gathered on the following indicators: funding agreement (fa); bank account, cash handling and transaction (bct); stock and inventory management (sim); financial management staff/responsibility (fmsr); financial planning and budgeting (fpb). the respondents were asked to indicate the extent to which they agree or disagree to financial management functionality measures using a 5-point likert scale interpreted as: 1strongly agree, 2agree, 3neutral, 4disagree, and 5strongly disagree. funding agreement (fa) table 2 illustrates the frequencies and means of the responses received on the level of agreement and disagreement on the funding agreement variables used in this study. the table gives the mean or average view of respondents on each of the seven variables used to assess the views of respondents on funding agreement at ymca ghana. they are 1.44, 1.40, 1.58, 1.71, 1.60, 1.83 and 1.79 for the statements in fa-1, fa-2, fa-3, fa-4, fa-5, fa-6 and fa-7 respectively. this gives a total average mean of 1.62, approximately 2. this implies that, on the average, majority of respondents “agree” that: agreement outlines funding of project(s); agreement outlines activities to achieve deliverables; agreement clearly mentions management of funds and procurement of goods; agreement clearly mentions reporting procedures: monthly, quarterly, annually; agreement clearly specifies funds allocated for individual activities; agreement clearly mentions all deadlines; agreement clearly mentions funds release schedule. again, the standard deviation of the individual measures of financial agreement in table 4.2.1 shows that among the seven (7) statements used to measure clarity of financial agreement, the most important statement is that: agreement outlines activities to achieve deliverables with mean of 1.40 and standard deviation of 0.610 even though all the statements are important according to the respondents. these findings are in line with theunis & erika, 2011 and fundsforngos effective practices of ngos funding to ensure sustainability. they mentioned that, one of the most important elements of an effective funding agreement is the ability to naturally and precisely mention all deliverables: quantifiable and qualitative, agreed between the donor and the ngo. key to table 2 fa -1: agreement outlines funding of project(s) fa-2: agreement outlines activities to achieve deliverables fa-3: agreement clearly mentions management of funds and procurement of goods fa-4: agreement clearly mentions reporting procedures: monthly, quarterly, annually fa-5: agreement clearly specifies funds allocated for individual activities benedict arthur & richard appiah-kubi 8 fa-6: agreement clearly mentions all deadlines fa-7: agreement clearly mentions funds release schedule table 2 funding agreement (fa) source: field survey, january 2019 bank account, cash handling and transaction (bct) table 3 presents the frequencies and means of variables used to assess bank account, cash handling and transactions at ymca ghana. the table gives the mean or average of opinions of respondents on each of the eleven variables on bank account, cash handling and transactions. they are 1.13, 1.27, 1.40, 2.00, 1.98, 1.73, 1.60, 1.81, 1.65, 1.81 and 1.58 for the statements in bct-1, bct-2, bct-3, bct-4, bct-5, bct-6, bct-7, bct-8, bct9, bct-10 and bct-11 respectively. this gives a total average mean of 1.63, approximately 2. this implies that, on the average, majority of respondents “agree” that the authoritative dimensions of bank account, cash handling and transactions mechanisms/frameworks by theunis & erika (2011), mango (2006) and fundsforngos for ngos and other not-for-profit organizations are properly upheld at ymca ghana hence denoting that the current fm practices/systems of ymca ghana is worthy. key to table 3 bct-1: bank accounts are opened in nationally recognized banks for all project funds bct-2: there is clearly stated authorized signatory(ies) for all banking instruments bct-3: finance management policy clearly states who is/are responsible for managing bank transactions bct-4: cash transactions are resorted in case of small expenses and when/where banking services are not available bct-5: closing balance cash are entered under the daily cash balance section and signed by accountant bct-6: a staff responsible for handling cash dully filled up and sign cash withdrawal form to be used to withdraw cash from bank when there is the need bct-7: payment voucher is used to make cash payments and approved by responsible authority(ies) before payment bct-8: it is mandatory to verify the cash balance at the end of every month and any discrepancy noticed is recorded and reported to person concerned bct-9: for payouts form petty cash, a petty cash request form is completed and recipient sign request form upon receipt of cash funding agreement variables frequency total mean standard deviation strongly agree 1 agree 2 neutral 3 disagree 4 strongly disagree 5 fa-1 fa-2 fa-3 fa-4 fa-5 fa-6 fa-7 28 32 23 22 22 17 21 19 13 22 18 23 22 16 1 3 3 5 3 9 9 3 2 48 48 48 48 48 48 48 1.44 1.40 1.58 1.71 1.60 1.83 1.79 .542 .610 .613 .743 .610 .724 .798 total 11.35 total average mean score (=total/7) 1.62 performance improvement of non-governmental organisations through financial management. a casestudy of young men's christian association of ghana 9 table 3: bank account, cash handling and transaction (bct) bank, cash and transaction variables frequency total mean standard deviation strongly agree 1 agree 2 neutral 3 disagree 4 strongly disagree 5 bct-1 bct-2 bct-3 bct-4 bct-5 bct-6 bct-7 bct-8 bct-9 bct-10 bct-11 42 35 29 12 13 18 22 19 19 15 22 6 13 19 24 22 25 23 19 27 27 24 12 11 5 3 8 2 6 2 2 2 2 48 48 48 48 48 48 48 48 48 48 48 1.13 1.27 1.40 2.00 1.98 1.73 1.60 1.81 1.65 1.81 1.58 .334 .449 .494 .715 .737 .644 .610 .762 .565 .641 .577 total 17.96 total average mean score (=total/11) 1.63 source: field survey, january 2019 stock and inventory management (sim) table 4 in the next page presents the frequencies and means of responses received on stock and inventory management. for each of the statement or variables under stock and inventory management: sim-1, sim-2, sim-4 and sim-5, respondents indicated the extent to which they agree or disagree. the table shows that for each of the statements, majority “agree” that there is efficient stock and inventory management at ymca ghana. the total average mean of 1.70, which is approximately 2 for all the five statements, confirms that on the average, respondents “agree” to the fact that stock and inventory are managed well at ymca ghana. this implies that, the standard ngo and other non-profit dimensions for stock and inventory management mechanisms/frameworks established by theunis & erika (2011), mango (2006) and fundsforngos are properly upheld at ymca ghana hence denoting that the current fm practices/systems of ymca ghana is good enough to improve on the organizations’ performance. key to table 4 sim-1: maintains stock register by recording all goods purchased and stored to prevent excess purchases and wastage sim-2: stock & inventory register is audited and monitored periodically sim-3: quotations are obtained from 3-4 suppliers before finalizing on supplier for purchase based on quote and reliability sim-4: past performance, reputation and availability are emphasized when selecting supplier sim-5: authorize person(s) is/are dully assigned to manage all stock records and its aligned function benedict arthur & richard appiah-kubi 10 table 4 stock and inventory management (sim) stock and inventory management variables frequency total mean standard deviation strongly agree 1 agree 2 neutral 3 disagree 4 strongly disagree 5 sim-1 sim-2 sim-3 sim-4 sim-5 35 23 13 10 23 13 23 20 26 23 2 12 11 `2 3 1 48 48 48 48 48 1.27 1.56 2.04 2.08 1.56 .449 .580 .771 .794 .580 total 8.51 total average mean score (=total/5) 1.70 source: field survey, january 2019 financial management staff and responsibilities (fmsr) table 5 presents the frequencies and means of responses received on financial management staff and their responsibility as an indicator of financial management functionality at ymca ghana. for each of the statement or variables fmsr-1, fmsr-2, fmsr-3, fmsr-4, fmsr-5, fmsr-6, and fmsr-7, respondents indicated the extent to which they agree or disagree. the total average mean of 1.57, approximately 2 for all the seven statements indicates that on the average, respondents “agree” to the fact that financial management staff are of high quality and responsible which could in turn enhance financial management functionality at ymca ghana. this is, again, an implication that the quality and responsibility of financial management staff in ymca ghana is of high standard, efficient and conforms to theunis & erika (2011), mango (2006) and fundsforngos’ elements of ngos and non-profit making organizations’ financial management frameworks for ngos financial management staff and their responsibilities. key to table 5 fmsr-1: there is governing body/executive board which comprises members from different committees of the organization such as finance, public relations and project and plays a lead role in financial department. fmsr-2: there is board of members who are ultimately responsible for the financial aspects of the organization to ensures that everything is undertaken in proper order fmsr-3: a finance manager whose is the head of the finance committee and plays supervisory functions and monitoring responsibilities fmsr-4: the finance manager assists and guides the board by providing relevant financial information during budgeting, accounts to donors and other decision-making activities. fmsr-5: there is financial assistants whose main responsibility is to report to the finance manager and implement work, as and when directed fmsr-6: administrative manager(s) who is/are experienced and take overview and control of the hiring, inventories, stocks, and all other non-specific activities fmsr-7: administrative/cash assistant whose responsibilities spread across various spectrums of duties, finance being one. performance improvement of non-governmental organisations through financial management. a casestudy of young men's christian association of ghana 11 table 5 financial management staff and responsibilities (fmsr) fmsr variables frequency total mean standard deviation strongly agree 1 agree 2 neutral 3 disagree 4 strongly disagree 5 fmsr-1 fmsr-2 fmsr-3 fmsr-4 fmsr-5 fmsr-6 fmsr-7 37 32 26 27 23 21 19 11 15 21 19 24 24 24 1 1 2 1 4 1 3 48 48 48 48 48 48 48 1.23 1.35 2.08 1.48 1.54 1.56 1.73 .425 .526 4.438 .583 .544 .501 .707 total 10.97 total average mean score (=total/7) 1.56 source: field survey, january 2019 financial planning and budgeting (fpb) table 6 displays the frequencies and means expectations of respondents with regards to the nine variables used to assess financial planning and budgeting: fpb-1, fpb-2, fpb-3, fpb-4, fpb-5, fpb-6, fpb-7, fpb-8 and fpb-9. the overall average of responses on financial planning and budgeting is 1.85, approximately 2. that is, the respondents “agree” that there is functional financial planning and budgeting system at work in the organization. this implies that, there are structured policies and mechanisms on financial planning and budgeting which effectively affects the financial management practices at ymca ghana. this well-structured financial planning and budgeting frameworks recorded at ymca ghana are not different from theunis & erika’s (2011) prescribed ngos’ financial planning and budgeting as a component of ngos’ financial management mechanisms. key to table 6 fpb-1: budget is prepared for each activity giving break up of sub-activities and related costs fpb-2: budgets capture all the required costs for specific activities only. fpb-3: budgets are approved before incorporation into financial plans fpb-4: program objectives along with activity plans are completed before budgeting fpb-5: whole project/departmental team are involved in budgeting process fpb-6: all expenses are reviewed against the budget on a monthly basis fpb-7: project management verifies quarterly reports against budget, analyze causes for variance and take appropriate action. fpb-8: project management verifies quarterly reports against budget analyze causes for variance and take appropriate action. fp9-9: budgets for subsequent year(s) take into consideration cost increases due to inflation, exchange rates, etc. benedict arthur & richard appiah-kubi 12 table 6 financial planning and budgeting (fpb) financial planning and budgeting variables frequency total mean standard deviation strongly agree 1 agree 2 neutral 3 disagree 4 strongly disagree 5 fpb-1 fpb-2 fpb-3 fpb-4 fpb-5 fpb-6 fpb-7 fpb-8 fpb-9 31 32 15 17 22 29 23 19 20 15 15 26 20 18 17 18 24 19 2 1 6 8 8 7 5 7 3 2 1 2 48 48 48 48 48 48 48 48 48 1.40 1.35 1.88 1.88 1.71 1.42 1.67 1.71 1.77 .574 .526 .789 .761 .743 .539 .724 .651 .751 total 14.79 total average mean score (=total/9) 1.64 source: field survey, january 2019 figure 1 below summarizes respondents’ mean/averages of the five indicators of functionality of financial management and control systems at ymca ghana namely: funding agreement (fa); bank account, cash handling and transaction (bct); stock and inventory management (sim); financial management staff/responsibility (fmsr); financial planning and budgeting (fpb). the figure shows pictorial view of mean for each dimension and the score thereof. it is glaring from the bar chart that the quality of financial management staff and their responsibility is the most effective financial management indicator at ymca ghana even though all the indicators function well in the organization. the average of the responses for all the five indicators of financial management systems is 1.67 (given by the mean of the average for all the five indicators of financial management). this means that the respondents “agree” that the functional financial management and control system at ymca ghana is effective. figure 1 summaries of financial management indicators (source: field survey, january 2019). performance improvement of non-governmental organisations through financial management. a casestudy of young men's christian association of ghana 13 performance review of ymca ghana to assess the performance at ymca ghana, the respondents were presented with ten (10) key not for profit organizations’: ngos performance indicators to indicate the extent to which they agree or disagree to the performance indicators using a 5-point likert scale interpreted as: 1strongly agree, 2agree, 3neutral, 4disagree, and 5strongly disagree. the responses have been analysed in table 9 below. table 9 presents the frequencies and means of responses received on ten (10) non-profit: ngos’ performance measures when they were employed as performance review of ymca ghana. for each of the statement or variables pr-1, pr-2, pr-3, pr-4, pr-5, pr-6, pr-7, pr-8, pr-9 and pr-10, respondents indicated the extent to which they agree or disagree. the total average mean of 1.53, approximately 2 for all the ten statements indicates that on the average, respondents “agree” to the fact that the current financial management system/controls being practiced at ymca ghana have significantly contributed to the various commendable successes/accomplishments that the organization has been credited with for the past years. samuel manu kofi: a professor at the university of cape coast, ghana expressed a sentiment that “ngos have a reputation for being short-lived when they come to ghana, do something helpful and leave again. while longevity is not always necessary, having a substantial impact is.” although many ngos have come to ghana and they have left, but ymca ghana is still alive and active for more than 30 years of operation and still impacting lives and societies. this achievement, which can be said, among other things, that it’s as a result of the organizations good financial management and controls framework being practiced. this results also conforms to padilla et al (2012) in their study on financial sustainability for non-profit organizations which they mentioned that effective financial management practices is essential in enhancing transparency, efficiency, accuracy, accountability; these which are performance indicators, which enable an organization to achieve its objectives such as growth, development and sustainability to impact on needy lives and impoverished and neglected societies. table 7 performance of ymca ghana performance review variables frequency total mean standard deviation strongly agree 1 agree 2 neutral 3 disagree 4 strongly disagree 5 pr-1 pr-2 pr-3 pr-4 pr-5 pr-6 pr-7 pr-8 pr-9 pr-10 23 27 21 25 20 19 28 30 23 21 22 20 27 20 26 25 19 17 25 20 1 1 3 2 2 1 1 4 2 2 2 1 48 48 48 48 48 48 48 48 48 48 1.50 1.46 1.50 1.54 1.63 1.60 1.44 1.40 1.56 1.65 .546 .544 .505 .617 .570 .574 .542 .536 .580 .729 total 15.28 total average mean score (=total/10) 1.53 source: field survey, january 2019 benedict arthur & richard appiah-kubi 14 key to table 7 pr-1: existing financial management controls are capable of increasing fundraising efficiency and funds growth pr-2: existing financial management controls have the ability to ensure financial transparency to stakeholders pr-3: current financial management controls could have led to increase in quality of services provided pr-4: the financial management regulations have positively influenced the level of satisfaction of beneficiaries and stakeholders of ymca ghana’s projects/programs pr-5: financial management controls have ensured increased in projects/programs finance efficiency (financial resources are best used to achieve required planned outputs) pr-6: financial management regulations have ensured projects/programs nonfinancial efficiency (non-financial resources such as time, staff and expertise are best used to achieve planned outputs) pr-7: there has been increase in networking, relevance and satisfaction among partners (local government, bilateral organizations, etc.) due to the current financial management controls practiced pr-8: the current financial management controls ensure that financial information needed for management decision making and stakeholders’ perusal are quality pr-9: existing financial management controls are capable of ensuring prevention, if not, decrease in fraudulent financial reporting systems. pr-10: financial management controls have contributed to increase in impact performance (the long-term positive effects/consequences of ymca ghana’s programs /activities) figure 2 below summarizes respondents’ mean/averages of the probability that the five indicators of functionality of the current financial management and control systems at ymca ghana has been an influential factor of the organization’s current remarkable performance standard. the figure shows pictorial view of mean for each dimension and the score thereof. it is glaring from the bar chart that the ability of the current financial management control systems to ensure quality information needed for management decision making and stakeholders perusal is the most obvious performance review indicator at ymca ghana followed closely by, also, the ability of the current financial management controls in ymca ghana to have increased its networking, relevance and satisfaction among its partners and the realization of projects/programs non-financial efficiency coming next even though all the indicators are being recorded in the organization. the average of the responses for all the ten dimensions of performance review is 1.53 (given by the mean of the average for all the ten measures of performance). this means that the respondents “agree” that the current financial management and control system being practiced at ymca ghana is effective enough to have improved on and contributed to the organization’s remarkable achievements. figure 2 summaries of performance review indicators (source: field survey, january 2019). performance improvement of non-governmental organisations through financial management. a casestudy of young men's christian association of ghana 15 5. conclusion and recommendations the study sought to investigate into how to improve performance of ngos in ghana by sound financial management systems and practices using the case of ymca ghana. a sample of 48 respondents was used for the study. the following objectives were set for the study; to examine the functionality of financial management control systems in ymca ghana, to identify any possible challenges that hinders the implementation of sound financial management control systems, to review the performance of ymca ghana. to achieve the set objectives, spss tool and microsoft excel were employed on the dataset for the analysis. the study revealed that, the quality of financial management staff and their responsibility is the most effective financial management indicator at ymca ghana even though all the other indicators which are funding agreement, bank, cash handling and transactions, stock inventory and management and financial planning and budgeting function well in the organization. the average of the responses for all the five indicators of financial management systems was 1.67 signifying that the respondents “agreed” that the current financial management and control system at ymca ghana is effective. the study also established that the ability of the current financial management control systems to ensure quality information needed for management decision making and stakeholders perusal which subsequently build trust is the most obvious performance review indicator at ymca ghana followed closely by, the influential role of the current financial management controls in ymca performance improvement via increase in its networking, relevance and satisfaction among its partners and the realization of projects/programs non-financial efficiency. the average of the responses for all the ten dimensions of performance review was 1.53 implying that the respondents “agree” that the functional financial management and control system at ymca ghana is effective enough to have improved on and contributed to the organization’s ability to achieve its objectives of impacting children’s lives and their families. however, it is also evident in this study that ymca ghana faces some shortcomings in its financial management practices: all paper and pen (traditional) ways of accounting, record keeping and reporting; irregular external audit review of financial and accounting statements/records. despite the few outline challenges in ymca financial management framework, ymca’s financial management and control mechanisms is still worthy to be recommended to and emulated by other ngos (local and international) in ghana. ngos play an imperative role in economic development of struggling economies. it is critical to be aware of the impact of ngos in the growth of the economy, which includes creation of jobs, improving of standard of living, easing poverty and attaining of sustainable development goals. however, for ngos to succeed, effective financial management practices should be employed. this includes quality of financial information and the medium of reporting to ensure accountability, periodic external auditing to control the tendency of preparing fraudulent financial information, employing the services of qualified and ethical personnel’s to man operations. ngos should also adopt internal control measure that emphasize on cost effective monitoring, evaluation, accountability and learning(meal) systems that effectively plans and tracks results in a timely manner for further action planning. the researchers are certain of the fact that when the above recommendations are well executed, it will help improve the performance of ngos not only in ghana but across the world. hence, achieve the sustainable development goals for a world without hunger and malnutrition, poverty, lack of education and health facilities, child exploitation and right abuse among others. benedict arthur & richard appiah-kubi 16 references abdul-gafaru, a., quantson, r. 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(2006) practical financial management for ngos, uk, june mckinney, jerome b. (2004). effective financial management in public and nonprofit agencies, 3rd edition. westport, ct: praeger. porter, g. (2003). enhancing ngo management in ghana: an alternative approach. porter, g. (2003). ngos and poverty reduction in a globalizing world: perspectives from ghana. progress in development studies, 3 (2): 131–45, performance improvement of non-governmental organisations through financial management. a casestudy of young men's christian association of ghana 17 theunis k., erika b. (2011). a practical guide to the financial management of ngos.: namibia: namibia institute for democracy. world vision. water, sanitation and hygiene (wash) projects. ghana, (2010) ymca ghana. annual report (2018) https://ymcaghana.org/wp content/uploads/2019/06/annual-report-2018final.pdf zadek, s. (2003). from fear and loathing to social innovation. alliance, vol. 8 no. 4, pp. 21-4, international journal of commerce and finance, vol. 6, issue 2, 2020, 207-217 207 resource dependence reduction strategies for international new ventures merve çeli̇k, istanbul commerce university pinar büyükbalci yildiz technical university received: june 06, 2020 accepted: july 18, 2020 published: oct 02, 2020 abstract this study centers around the following research questions: which partnership strategies do new ventures prefer in their internationalization processes? on which resources do they reduce their dependency through these strategies? with an attempt to answer these questions, face-to-face interviews are conducted with the founding partners of five international new ventures headquartered in istanbul, turkey. it was concluded that new ventures reduce their dependencies on critical resources by means of sales partnership agreements and r&d agreements they make in global markets. through sales partnerships, they reduce their dependencies on human resources, financial resources and network. through r&d partnerships, they reduce their dependencies on technological knowledge, financial resources and network. keywords: international new venture, partnership strategies, resource dependency 1. introduction with the impact of globally integrated trade system, countries, markets and firms become more dependent on each other. not only big firms, but also several new ventures maintain their operations in international markets. international new ventures are defined by oviatt and mcdougall (1994) as “business organizations that, from inception, seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries”. following their infancy period, new ventures start to operate in international markets (autio and george, 2006; mcdougall, shane, and oviatt, 1994; sapienze, zapletalová, 2015). yet, they most lack experience (coviello and cox, 2006; evangelista, 2005; mcdougall, shane, and oviatt, 1994; oviatt and mcdougall, 1994), and their dependency on specific resources in international markets is considerably high due to high uncertainty. consequently, reaching out critical resources is crucially important for new ventures to internationalize successfully. nevertheless, to explain the international activities, international entrepreneurship literature falls short of explaining resource dependency reduction strategies adopted by new ventures throughout their internationalization process. previous studies generally concentrated on marketing strategies of new ventures (e.g. hallback and gabrielsson, 2013; knight, 2000; mcdougall and robinson, 1990; sandberg and hofer, 1987) and there is still lack of information on resources which are critical to new ventures in their internationalization processes (peiris, akoorie and sinha 2012). thus, current study focuses on how new ventures provide access to critical resources in global markets by employing resource dependency reducing strategies. 2. literature review 2.1. international new ventures theory boundaries between countries started to disappear and the world became one giant market thanks to the developments such as rapid development in technology, free circulation of capital and disappearance of trade barriers. moreover, communication methods evolved, and so distances and barriers in communication disappeared. owing to all these, the distances between people and countries disappeared too. because of all these reasons, the number of companies operating internationally and the number of international activities of companies increased. the traditional internationalization models such as the “uppsala model” (johanson and vahlne, 1977), and the “innovation model” (bilkey and tesar, 1977) explain internationalization process of firms by presenting a step-byin te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e merve çeli̇k, & pinar büyükbalci 208 step approach, proceeding through certain stages, claiming that firms must reach a certain maturity in order to start their international activities. however, with the emergence new ventures going international right after their foundation, these models fell short of explaining their internationalization process. filling the gap, “international new ventures theory” (oviatt and mcdougall, 1994), with its focus on the firm’s age, not its size, underlines the removal of barriers between countries thanks to globalization and technological developments. the theory presents a perspective which integrates “international business”, “entrepreneurship” and “strategic management theory” in order to explain internationalization of new ventures. it highlight four aspects about international new ventures:(1) organizational formation through internationalization of some transactions, (2) strong reliance on alternative governance structures to access resources, (3) establishment of foreign location advantages, and (4) control over unique resources.” in figure 1, the process of getting sustainable competitive advantage for international new ventures is shown in these aspects. figure-1 necessary and sufficient element for sustainable invs element 4 unique resources economic transaction organization economic transaction new ventures organization economic transaction international new ventures new ventures organization economic transaction sustainable invs international new ventures new ventures organization economic transaction element 1 internationalization of some transaction element 2 alternative governance structure element 3 foreign location advantage resource dependence reduction strategies for international new ventures 209 adopted from benjamin m. oviatt and patricia phillips mcdougall, toward a theory of international new ventures, journal of international business studies, vol. 25, no. 1 (1st qtr., 1994), p.54. 2.2. resource dependency theory the resource dependency approach was first put forth by james thompson (1967) and evolved with the studies of aldrich, pfeffer and salancik (1978). especially the book of pfeffer and salancik (1978) called “the external control of organizations” contributed to the theory a lot. this book was taken form around three subjects. the first of them is the importance of the environment of organizations or the social context on decisions such as the structure of boards, collaborations, merger & acquisitions. the second one is the ability of organizations’ access to limited resources in spite of environmental limitations. the last one is the importance of power in regard to understand both intra organizational and inter organizational behavior. this theory defends that organizations can’t be self-sufficient, and so have to supply resources from the others in order to survive. because of this, it focusses on reducing resource uncertainties in organizations. it also concentrates on the mutual dependency relationship between organizations and the management of balance of power between them. according to the resource dependency theory, the power of an organization correlates with the resources it has and competitive edge. the more the environment in which an organization exists gets more complex, the harder it becomes to access to resources for that organization. in this type of situations, organizations make some strategical decisions to decrease the level of their dependencies to the environment. in other words, organizations adopt some strategies so as to reduce their dependencies on the environment. one of these strategies which is preferred by organizations to procure the important resources for themselves is merger & acquisition. the resource dependency theory focusses on how organizations exploit the impacts coming from their environments. it also defends that the control of the environment on organizations is related to the power and the dependency. in order to sustain its competitiveness, an organization must utilize the resources it has according to environmental conditions. making the right decisions with this perspective, an organization can secure the continuation of its existence. an organization must always be aware of its capacity and abilities. it must manage its resources strategically effectively and efficiently. according to resource dependency theory (pfeffer and salancik, 1978), organizations depend on each other in terms of resources. barney and arikan (2001) explain these resources as "tangible and intangible assets firms use to conceive of and implement their strategies”. the need of an organization for the resources owned by other organizations which are located in the external environment indicates the degree of its dependency. according to this theory, organizations adopt various strategies so as to reduce their dependencies. according to hillman et al. (2009), the resource dependency theory offers a theoretical perspective to comprehend interorganizational relations such as joint ventures and r&d agreements, research consortiums, co-marketing agreements and buyer-supplier relations (barringer and harrison, 2000; oliver, 1990). according to this perspective, organizations can access critical resources through employing these strategies and governing structures. barney (1991) lists firm resources as consisting of assets, capabilities, processes, routines and knowledge. it is the success of the firm in managing these resources which makes it build a competitive edge. the capability to acquire and manage these resources also play critical role throughout firm internationalization process. thus, it emerges as an interesting topic to study how international new ventures lack critical resources go international and how they build the necessary capabilities to manage critical resources which are essential for their internationalization. according to oviatt and mcdougall (1994), the most critical resource which is owned by international new ventures is knowledge. bloodgood et al. (1996) accepted board members as the critical resource for international new resources. rialp and rialp (2007), on generally, refer the critical resources as intangible resources (e.g. intellectual capital) and defend that these resources play a huge role in internationalization of new ventures. chetty and wilson (2003) also advocate that intangible resources such as knowledge, ability and qualification are the critical resources for small-scaled firms. 3. methodology face-to-face interviews provide detailed information about people’s thoughts, opinions, and experiences of interviewees rather than superficial information related to the research problem (yıldırım and şimsek, 2013). for this reason, face-to-face interview practice was preferred in this study to collect information on partnership strategies of international new ventures in-depth. data were collected via semi-structured interviews. the sample consists of five merve çeli̇k, & pinar büyükbalci 210 international new ventures operating in istanbul, turkey. the firms in the sample is determined by referring to the profile portrayed by mcdougall and oviatt (1994). thus, the companies in the sample all exert effort for international sales and investments and start their international operations just after their foundation, as portrayed by mcdougall and oviatt (1994). the companies chosen for this study all have international operations by either conducting export operations or using other forms of collaborations to be active in international markets. table-1 presents general information on the sample firms. the time span, between the foundation and the start of international activities, is accepted as 6 years and less in this study (mcdougall, oviatt and shrader 2003; zahra, ireland and hitt, 2000). the interview duration lasted between 1 to 2 hours. the primary steps in the interview process include, (1) contacting with the authorities of technoparks to obtain the list of companies which are suitable for the study, (2) contacting with the authorities of companies to request an interview, and (3) conducting the interviews. the data analysis process includes (1) tape-recording during the interviews with the consent of interviewees (2) transcribing the tape recordings , and (3) interpreting the data obtained (gürbüz and şahin, 2018). the findings obtained at the end of the analysis are presented in the next section. table 1 profile of sample firms number of employees foundation year internationalization year sector company-1 9 2008 2008 retail software technologies company-2 14 2012 2016 industrial software technologies company-3 4 2014 2018 energy technologies company-4 7 2008 2008 industrial software technologies company-5 23 2015 2015 computer and communication technologies 4. findings and discussion since small-scaled companies will have difficulties in running their international operations on their own, they can operate in global markets through partnerships. building partnerships, however, doesn’t secure success for smallscale companies. in order to be successful, they need to maintain appropriate partnerships (weaver and dickson, 1998). due to limited resources, international new ventures need to build partnerships which allow them to provide the resources they need in international markets. in this study, to determine the types of partnership established by resource dependence reduction strategies for international new ventures 211 new ventures, the company officials were asked, “which partnership agreements do you make in international markets? and “through these partnerships, which resources do you obtain to reduce your dependence on the environment?” it was observed that company-1 has sales partnership agreements with companies from switzerland, germany, england, netherlands, ireland, greece, czech republic and spain. it is also known that, new ventures get the opportunity to internationalize swiftly with the help of their technologic knowledge (mcdougall, shane, and oviatt, 1994). in this sense, company-1 combines its technological power with the sales power of its partners. accordingly, it is revealed that company-1 introduced its products to several foreign markets in this way. reflecting upon this, the manager of company-1has stated that they benefited from their partners' networks, sales forces, and human resources through the partnership agreement. that they don’t set up a sales team in regions which they have partnerships and this obviously reduces their expenses and provides financial benefits. the founding partner of company-1 expands on this by saying that: "our advisor is dealing with these subjects. he says you’d better make partnerships with these firms. therefore, we have built sales partnerships in eight cities around the world. switzerland, germany, england, netherlands, ireland, greece, czech republic and spain. i take advantage of the entire network of my partner. i benefit from his manpower. i use it for sales." johanson and mattsson (1988) claims that international new ventures might take the opportunity to operate in international markets by means of the relations they build in their networks. in today’s business landscape, international network relations are especially important owing to the interdenpendent relations among companies, countries and markets (madsen and servais, 1997). therefore, not surprisingly, one of the most important features of successful ventures turns out to be their strong international networks (oviatt and mcdougal, 1995). as these ventures have limited resources, expanding their networks is critical to sustain their international operations. the case of company-1 executing the sale of its products in foreign markets through its partner demonstrates that company-1 benefits from the networks of its partners. moreover, not having to found a sales team in foreign markets show that company-1 reduces its dependency on human resources. important physical resources include facility and equipment, geographical location and raw materials which are owned by the firm (barney, 1991). new ventures suffer from lacking these resources (oviatt and mcdougall,1994) and thus, they endeavor to make up their deficiencies in this regard. similar to the first case, it’s observed that company-2 eliminates these imperfections by also benefiting from a “sales partnership agreement” during its internationalization process. the manager of company-2 stated that owing to the sales partnership, there was no need to establish a sales team and technical team. doing so, the company especially overcome its technical equipment deficiency. the product types of company-2 require installment and regular examination. with the agreement they did, product installments and examinations are conducted by the partner. the founding partner of company-2 stated following on this subject: "all these partners have two basic functions for us: the first one is sales. secondly, we do not provide service only on software, and we need local partners for on-site installation of our systems, meaning pre-installation and postinstallation support services. thus, we need a local partner located where the product is, . firstly, we try to find a local partner. we prefer partners with sales capabilities. in this way, it becomes easy for us to enter the market and expand our operations. if they have no sales capabilities, i have to sell. then, the local partner remains just like a technical service. thus, it is important for us that they have the capabilities to run both sales and technical functions. in this way, we do not feel obligation to organize an overseas sales team. in addition, i do not have to create two different technical teams. " company-2 prefers to make partnership agreements with companies capable of conducting technical inspections for its products. in order to fulfill its international operations in spite of inadequate resources, company-2 has signed sales partnership agreements with three global brands. it can be inferred that company-2 build partnerships with well-known companies in the sector as it wants to benefit from these companies during its internationalization process. this obviously helps them to gain recognition in foreign markets and fix its network related deficiencies. the founder of the company also acknowledged that, the customers of their partners become potential customers for their firms. thus, it can be said that company-2 took advantage of the "networks" of its partners as depicted in the below statements of its founders: merve çeli̇k, & pinar büyükbalci 212 "we establish sales partnerships with brands supplying global camera and video track software. when these companies are asked fora product that they do not manufacture, they tell potential customers that they have a trustworthy partner. they urge their customers to access their web sites and make a selection from a list. we are included in that list. we are integrated with huawei, hikvision, chinese brands, pelco, and an american brand, and we are included in their lists. our integration is ongoing with samsung, honeywell, famous brands, and several unknown brands and a software brand, which is a world leader in our market and serving only in monitoring software. it does not manufacture cameras. this provides a global sales force for me because they serve the whole world. all these ranked companies are actually providing services in 150-200 countries. this enables me to address several markets and reach out to the whole world. they will see me on the list at website and contact me. they will be my customers, in other words, the customers of hikvision, huawei and honeywell are my potential customers. this means thousands of companies in more than 100 countries." it was found that company-2 also had an r&d agreement with a company in turkey. r&d agreements generally bring small scaled companies with technical abilities and big scaled companies with production experience together (gibbs and humphries 2009). the r&d partner of company-2 has 53 foreign customers. the co-jointly manufactured product is sold abroad. through this partnership, company-2 has entered into two new countries. additional to benefiting from the "network" of its partner, it was also revealed that the company utilized “technological knowledge (know-how)” of its partner during the process of joint product development. despite they are new in the market, new ventures have high technological knowledge (zahra, ireland and hitt, 2000). however, it is observed that they always are in a struggle for improving themselves in terms of technological knowledge. the founding partner of company-2 expressed the following on this subject: "actually, there is a turkish company with which we make business in saudi arabia and somalia. we also have an r&d partnership with this company. we carry out r&d and they perform production and development. we have transferred them all required hardware for production, the software has been fully developed by us. they make mechanical part and r&d, mechanic is also a sort of r&d. we have manufactured a joint product. this company is a turkish company in ankara. but it makes exports to 53 countries and we sell this product abroad owing to this.” how new ventures access networks in international markets is very important. networks of partners affect the growth trajectory of new ventures (milanov and fernhaber, 2009). in parallel with this, the founding partner of company-3 responded to the question of, “under which conditions does your company make r&d agreements?” as, “it is important that the candidate has customers in international markets”. it is obvious that expanding its network is an important motive for company-3 while making agreements. the founding partner of company-3 urged that an important criterion of this agreement is that its partner's having customers in international markets. the venture can benefit from "networks" of its partners in this manner. it was also determined that it took advantage of "technological knowledge (know-how)" of its partners during the joint product development process. the founding partner of company-3 stated the following on this subject: "it is significant to be a company with customers in international markets. so, we made a new agreement with a company with customers abroad. for example, we requested a phrase on products indicating: “developed by company-3”. we also signed agreements in america. after learning on how to do it, we may also attempt to develop this. but it is unnecessary to rediscover the world. this would mean waste of time." company-4 had an "r&d partnership”, as well. it has important partnerships with global companies. it develops products by combining its technological capabilities with those of global companies. therefore, it provides access to the “technological knowledge (know-how)” of its partners. the company executive said the following about this partnership: "there are certain brands in industrial automation sector with which we carry out studies. for example, siemens, bosch. these are companies well-known brands in this sector but they do not develop their underlying technologies by themselves. they collaborate with companies providing services in a certain field of specialization, which is called the niche sector. we work together in order to develop technologies needed." in addition, these partnerships provide advantages in reaching out new customers, as observed in previous cases. in other words, the venture benefits from the "network" of these companies. the executive expressed this by telling that: "it provides an advantage while getting into the market. instead of searching for customers across the world, you can reach out many regions through your partner company. in terms of logistics and reaching out the customers, it is particularly useful. it provides convenience thanks to distribution from a single center" resource dependence reduction strategies for international new ventures 213 moreover, since products are marketed and logistic activities are performed by the larger company, the financial burden for company-4 decreases. therefore, it was found that another resource type obtained via r&d agreements was “financial resources”: “the other company is competent in marketing most of its products. this provides a significant advantage for us in terms of market budget." company-4 makes agreements with large companies in the sector mainly to benefit from their technological knowhow while developing joint products. the founding partner of company-4 indicated that marketing and logistics operations are conducted by other companies. based on this, it can be stated that the cost of these operations would be too much for the company if company-4 had conducted these operations on its own. however, the company got rid of these costs by benefiting from networks of larger companies. therefore, it can be stated that company-4 reduced its dependencies on the network and financial resources as well as on technological knowledge. it was found out that company-5 also built a “sales partnership agreement”. it benefits from the customer potential of its partner by means of this agreement. therefore, "network" is emphasized as the resource benefited. sales operations are carried out by the partner company following the agreement. accordingly, company-5 doesn’t have to establish a sales team. in this case, company-5 utilizes the human resource of its partner. it also gains advantage in terms of “financial resources” by not being exposed to cost of organizing a team. the founding partner of company-5 expressed the following on this subject: "we have now distributors abroad. we have 110 customers in england. we have two distributors. the team is small and resources are limited. we have performed this nearly with a near-zero resource. we select our partners from companies engaged in restaurant business. those selling hardware technology to restaurants can also sell our software easily. we select those companies which have the capabilities to sell software. for example, we have recently made an agreement in japan. because we sell an online system infrastructure. we sell a ready-to-use package. we serve some of them against a subscription fee. we supply technology. they contact with their customers." the founding partner of company-5 says that their team is small and their resources are insufficient. the small size of their team indicates that the company is inadequate in terms of human resources. therefore, conducting foreign sales with the support of the partner company reduces the dependency on human resources and financial resources. knight and cavusgil (2004) express that building sales partnerships in order to market their products in global markets increases the performances of international new ventures. in our study, it is observed that international new ventures introduce their products into foreign countries thanks to sales partnerships. besides being considered as a foreign market entry mode, it has been analyzed that which resources they needed to access. findings from the study confirm that these resources are network, human resources and financial resources. hessels and trejen (2010) reckon that the cost of direct export by small-scale businesses is more costly than the cost of sales through agents. in this study, the fact that international new ventures reduce their dependence on financial resources corroborates the thought of hessels and trejen. it has been concluded that there is no need for international new ventures to establish sales teams thanks to sales partnership agreements. so, they fulfill their needs for human resources with the help of sales partnership agreements. they also get rid of the extra cost that would be needed to set up a sales team. it is also concluded that in addition to personnel employment costs, they have recovered from the additional costs needed to coordinate and control their sales operations. network comes to the fore as another resource obtained by new ventures. it has been observed that new ventures are in an effort to expand their network connections in international markets by way of partnerships. rezaei and ortt (2018) have concluded in their study that small businesses are making marketing and sales partnerships in order to grow their business and reduce the cost. as a result of this study, the fact that international new ventures reduced their dependence on financial resources by sales partnerships and entering new countries also confirms the conclusion of rezaei and ortt (2018). ji et al. (2018) present that technological knowledge interaction in interorganizational partnerships produces a positive effect on the growth of the new venture. in addition, they also concluded that new ventures rich in technological knowledge tend to build partnerships with local firms in the internationalization process. but, knight and çavuşgil (1996) defend that partnerships with foreign partners ease access to foreign countries. however, in this study, it’s seen that new ventures make r&d agreements with both local and foreign companies. three international new ventures involved in this study have already made r&d agreements. while one of them made an agreement with a local partner, the other two made agreements with both local and foreign partners. new ventures ease their merve çeli̇k, & pinar büyükbalci 214 access to foreign markets with the help of building partnerships with foreign companies. some of them, however, may not have the instruments that allows them to contact foreign firms. in these sorts of cases, it can be said that these new ventures prefer to build partnerships with local firms which operates in foreign markets. it has been observed that new ventures which make an agreement with local companies have entered foreign markets by choosing the companies with foreign customers. haskell et al. (2016) claim that new ventures don’t prefer to make an r&d agreement, but if they do, they will consider financial resources and network as partner selection criteria. this study also confirms the arguments of haskell et al. by portraying the access of new ventures to financial resources and network through r&d agreements. according to the findings of the study, it was established that new ventures also reach technological knowledge as well as financial resources and network through r&d agreements. new ventures have limited network and financial resources. but their technological knowledge is their strength (oviatt and mcdougall, 1994). although they are still strong in this respect, in terms of technological knowledge, they try to improve themselves in regard to technological knowledge. in this sense, it is argued that the resources new ventures try to reach through r&d partnerships are not only the limited resources they possess. for international new ventures, securing sustainable competitive advantage depends on providing access and managing unique resources (oviatt and mcdougall, 1994). according to wernerfelt (1984), the optimal growth of a firm depends on the use of existing resources and the development of new ones. in this sense, the partnership strategies of new ventures in international markets and the resources accessed through these partnership strategies are demonstrated in table-2. table2 strategies and associated resources type of partnership type of resource company-1 sales partnership network human resources financial resources company-2 sales partnership network human resources financial resources r&d partnership technological knowledge network company-3 r&d partnership technological knowledge network resource dependence reduction strategies for international new ventures 215 company-4 r&d partnership technological knowledge network financial resources company-5 sales partnership network human resources financial resources 5. conclusion this study underlines the importance of partnership strategies for international new ventures to obtain critical resources so as to gain competitive advantage. in doing so, the study attempts to explain how these ventures reduce their environmental dependency by reaching out these critical resources. it has been revealed that, three out of five new ventures in the sample made sales partnership agreements in global markets. also, three of them made r&d partnership agreements. it is concluded that, they provided access to network relations, human resources and financial resources through sales partnerships and thus reduced their dependence on external environment, in this regard. it is also observed that, thanks to r&d agreements, they provided access to technological know-how, network relations and financial resources, which reduced their dependence on external environment with regards to these resources again. in brief, it is observed that the scarcity of financial resources, human and tangible resources for the new ventures in the study do not constitute an obstacle for their broad internationalization purposes. the interaction of new ventures with other organizations plays a huge role in their internationalization by enabling them provide access to critical resources. they put a lot of effort into penetrating foreign markets and accessing new resources via partnerships. partnership strategies and the resources they are associated with is an important note for related stream of research. it is also found that international new ventures build r&d partnerships with local partners, as well as with foreign partners. in order to reach a stronger conclusion on this, future studies can focus on partner selection criteria of international new ventures for r&d agreements. it can be assumed that the conditions of countries in which international new ventures locate can affect their strategies. thus, in order to collect the results under a common ground, it is suggested that further studies on international new ventures should be conducted in different regions by increasing sectoral diversity. merve çeli̇k, & pinar büyükbalci 216 references andersson, s. 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(2015). “models of czech companies’ internationalization. journal of international entrepreneurship”, vol.13, no.2, 153-168. international journal of commerce and finance, vol. 6, issue 2, 2020, 40-49 40 unemployment and the macroeconomics of ethiopia endashaw sisay, mizan-tepi university, ethiopia yilkal wassie, jimma university, ethiopia minyahil alemu jimma university, ethiopia received: june 01, 2020 accepted: july 18, 2020 published: oct 02, 2020 abstract unemployment has long been there for (especially) developing economies being the major development challenge. the cost of unemployment transmits in a couple of channels; of which the opportunity costs arising from lost production and the resultant social disorders are of immediate ledges. while appreciating them all, the government of ethiopia (goe) conveyed various schemes towards reducing unemployment to (at least the recommended) minimum rate. despite developments in various efforts to that end, unemployment remained pronounceable policy challenge in ethiopia. it, therefore, calls for enhanced intervention towards supporting the process of controlling unemployment in the country. the present study is principally aimed to identify those macroeconomic policy variables that are important in explaining the dynamics of unemployment in ethiopia. we employed the annual time series data set for the period serially running from 1984 to 2018. the individual variables were all subjected to the augmented dickey fuller unit root tests and the mixed order of integration has been confirmed. as a result, the auto-regressive distributed lag model approach was employed for cointegration issues; and various possible cointegrating roots among the variables entered the unemployment model were suggested too. our regression results reveal that, the population growth rate, economic growth rate, inflation rate, foreign direct investment, and the external debt variables are all important predictors of unemployment both in long and the short run periods. a positive impulse moves from inflation to (cyclical) unemployment in ethiopia, whereby contrasting the phillips hypothesis. economic and social development policies need not be treated in isolation. any successful monetary policy action in targeting the threshold inflation rate is supposed to be a crucial approach. besides, enhancing productive and more labor-oriented investments serve the best long run solution to that end, too. keywords: ardl; ethiopia; macroeconomics; philips curve; unemployment 1. introduction life without a job is the most likely distressing economic incident. as noted by richard and peter (2008), while most people depend on their labor earnings to satisfy minimal requirements of survival, still many others obtain from their work not only income, but also a sense of personal execution (richard and peter, 2008). notably so arguable would be that, no job no income, no more life! hence, job loss could mean either no life or poor life style, even a loss of self-esteem. generally, the issue of job is all about the issue of survival! that mainly suggests for development policies to target unemployment issues in (especially) most developing countries. obviously, unemployment is a key macroeconomic meter to indicate the wellbeing of an overall economy of any type; i.e. irrespective of its development status. controlling, or at least reducing, unemployment is of the basic headaches of all development policies. to that end, policy makers adapt various operational tools that are supposed to suit each of the corresponding situations prevailing under their vicinities. that means some economies are more of industry based, still the other tend to be more of agricultural, and so on. consequently, policy instruments in varying conditions differ depending on their economic structures as well as other self-specific considerations, though all target the same thing. whatever the instrument chosen is, it should be successful in reducing unemployment. a policy instrument supposed to attract more active labor force into the economic system can be taken as effective in framing development policies; which, in turn, is expected normalize the overall system. fisher (1926), for instance in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e unemployment and the macroeconomics of ethiopia 41 has acknowledged that, any mechanism adopted to boost investments are effective while reducing unemployment rates and maintaining the social welfare (ibid). a well-functioning economy is supposed to serve its constituents fairly, and be distributed in accordance to their contribution. one of such fairness can be ensured via its ability in absorbing the fairly sufficient proporti on of active labor force available (see jelilov et al, 2016). with a high rate of unemployment, an economy remains looser from at least two dimensions: one is the sacrificed production, and the other arises from the social costs of unemployment; like war, crimes, political instability and so on (hussein, 2014; snowdon and vane, 2005). besides, fisher (1926) underlines unemployment as being mostly the foregone output since it deprives the necessary resources needed to develop the economy. furthermore, unemployment leads to cruel home side problems, and unfavorably affects the status of a nation in comparison to other nations. despite notable developments towards controlling unemployment internationally, it still remained an issue in many countries. its cost is the worst in especially least developed and underdeveloped economies. according to the 2017 cross country survey of the international labor organization, the world mean unemployment rate is estimated at about 15 percent in the world; of which the shares of sample individual countries has been found to be 24.30% in south africa, 3.97% in china, 4.40% in usa, 39.39% in bosnia and herzegovina, 12.80% in egypt, 4.30% in united kingdom, 17.22% in spain, 11.20% in algeria, 7.50% in argentina and specifically in 2016, stood at 17.06 % in ethiopia (ilo, 2017; wb, 2017). from this we see that, the rate of unemployment is the highest among developing economies with ethiopia being one. in ethiopia, growth in active work force, owing to the young dominant demographic profile of the country, is among the largest in the world. despite to the high growth of labor force the country’s economic growth, though pronounced to be among the highest in the world, is unable to satisfy the growing employment demand. from the office for national employment policy and strategy of ethiopia, there are many more under 15 years old entering the work force each year than the old people living the labor force (nepse, 2016). the under 15 engagements are, however, not in cyclical vacant positions, but family labor. however, the country’s macroeconomic profile recorded the highest unemployment rate, compared to most sub-sahara countries. no doubt, real and sustained growth of economy reduces unemployment. according to the assessment report of the world bank in 2016, ethiopia has been registering the 5th fastest economic growth during the periods 2001–2010 at an average annual rgdp growth rate of 8.4 percent and the third with a forecast of 8.1 percent during the periods 2011-2015. moreover, the country’s economy had exhibited 9.8 percent average annual growth rate during 2010/11-2015/16, registered 8 percent growth in 2015/16 (nbe, 2015/16; wb, 2016). despite such economic improvements, unemployment is high and remained one of the socio-economic problems in the country (wb, 2016; dejene et al, 2016; deribe et al, 2015). though it is of the extensively focused subjects of most economic researches in the country, the issue of unemployment remained bold in the macroeconomic environs of ethiopia. therefore, it still calls for an in-depth investigation into the identification of the deep-rooted sources of unemployment in support of an effort that could stabilize the general economic system in the country. most previous works give a narrow view of the labor market; and still few tend to concentrate on the incidence of unemployment in specific categories. the policy aspect of labor market has been found to be less explored in the literature, at least, in the sense of macroeconomic determinants. majority focused unemployment in a relation to microeconomic factors (though unemployment is mostly a macroeconomic concern); and to socio-economic as well as the demographics. still some were limited to the specific categories of unemployment. for instance, deribe et al (2015), pieter (2004), aynalem and mulugeta (2016),muhdin (2016), dejene (2016), nayak (2014), wubante (2015), gizachew et al (2017), and tsegay and roussar (2012)were limited only to either the youth, or urban aspects of unemployment. despite the unemployment-micro link analyses, still majority of the previous works were area specific too. for example, the work of muhdin (2016) was limited to selected towns by using the household level data; and gizachew et al (2017) was based on the cross sectional observations from halaba. our basic stand is that, unemployment should be viewed broadly, and analyzed in a relation to macroeconomic variables. hence, the current study is aimed to examine the macroeconomic determinants of unemployment in ethiopia with special focus of examining the short and long run predictors of unemployment using the time series annual observations for the period running from 1984 to 2018. we, therefore, test the following relevant hypotheses; endashaw sisay, yilkal wassie, minyahil alemu 42  there is inverse relationship between real national output and cyclical unemployment in the long run.  inflation has significant long run impact on cyclical unemployment in ethiopia  foreign direct investment has positive and significant impact on unemployment in the long run, and the short run as well.  in the short, population growth has no impact on unemployment, but correlates negatively with unemployment in the context of ethiopia the study is entirely based on the annual time series data set for the period ranging from 1984/85 to 2018/19. we employed the augmented dickey fuller (adf) unit root test approach to examine the stationarity property of individual variables the model, and ardl for cointegration test. besides, we used the error correction model for the short dynamics. 2. methods and procedures the data employed are exclusively of secondary types, which are sourced both from domestic and international organizations; like, national bank of ethiopia (nbe), ministry of finance and economic cooperation (mofec), ethiopian economics association (eea), the world bank (wb), and international monetary fund (imf) data bases. our data set contained annual observations on the unemployment rate, population growth rate, foreign direct investment as a percentage of gdp, real gross domestic product (rgdp), and the inflation rate in terms of cpi (consumer price index), current external debt as a percentage of national income, from the study period ranging between 1984 and 2018. 2.1 the model: theory and empirics our theoretical model is the phillips (1958) curve which hypothesizes an inverse relationship between unemployment and inflation as indicated by, unt = f (inft)…………………………….……………………. (1.1) where, unem is unemployment and inf represents inflation rate, and t is the time trend. the functional relationship between unemployment and inflation in equation (1.1) states that, the rate of unemployment at any time t is a negative function of inflation rate. the original phillips(1958) curve proposed that there is inverse and nonlinear association between changes in the levels of unemployment and the wage rate. the reduction in wages is associated with high levels of unemployment while increase in wages is associated with low level of unemployment (romer, 2012). to empirically examine the macroeconomic determinants of unemployment in ethiopia, we adapt the following empirical model suggested by (maqbool, 2013; oniore and bernard, 2015; hussein, 2014; and jelilov et al, 2016) by varying as well as extending the number of regressors; unt = f (cpit)………………………………………………. (1.2) where, untis the rate of unemployment at any point in time, and cpit is a measure of inflation rate at a given time period. however, to account for other potential predictors of unemployment variable, we also control for the effects of relevant macroeconomic variables and rewrite the functional relations as follows; unt = f (cpit, rgdpt, deptt, fdit, popt)……………………. (1.3) where, unt is unemployment rate at a given time period, rgdpt is real gross domestic product, cpit is a proxy to inflation rate, deptt is external debt as a percentage of gross national income and fdit is foreign direct investment as a share of gdpt. we, therefore, take the natural logarithmic forms of each variable and specify the following linear regression model to capture the particular impact of each regressor entered the model; lnunt = α0 + α1lncpit+ α2lnrgdpt + α3lndeptt + α4lnfdit + α5lnpopt + ut…. (1.4) unemployment and the macroeconomics of ethiopia 43 where, α0 is a constant; and αi’s are the parameters of corresponding regressors; and u is the white noise error which explains any disequilibrium in the model. stationarity test: the augmented dickey fuller (adf) unit root test approach was employed to examine the stationarity properties of all individual variables entered the unemployment regression model. we used stata ver. 14 for data analysis or estimating the regression model of all procedures in our analysis. cointegration test: it would be obvious that, the choice of cointegration test approach is reliant on the order of integration among individual series under consideration (maddala, 2013). because our variables are of i(0) and i(1) types, exhibiting the mixed order of integration, we employed the autoregressive distributed lag (ardl) model approach for cointegration, to examine whether the variables jointly exhibit stationarity; that is whether they have a common long term trend. this condition is used to verify whether the series have a long tern stable equilibrium relation. a beauty of ardl is its suitability with various orders. that is, it can be applied when the series are of i(0), i(1), or even, fractionally (mutually cointegrated) integrated (gujarati, 2004). moreover, this approach provides unbiased estimates of the long-run model (alimi, 2015). the wald test or f-statistic in ardl bounds test approach is used to test the existence of long-run relationship. we compare the reported f-statistic with the reported critical (pesaran et al, 1999). if the estimated f-statistic appears to be greater than the upper-bound critical, the null hypothesis of no cointegration will be rejected. in contrast, if the f-statistic falls below the lower bound critical value, then we fail to reject the null. thus, the variables included in the model do not share long-run relationships among themselves. if the f-statistic falls within the lower and upper bound critical values, then it tends to be inconclusive to either accept or reject the null. in that condition, looking for any appropriate mechanism (including variables management) would be mandatory. the general ardl (p, q) follows; ………………………………. (1.5) where, is a vector, are allowed purely ; and are coefficients; is the constant; is the optimal lag order used for the endogenous variable; q is optimal lag orders used for independent variable; is a vector of error termsunobservable zero mean white noise vector process(serially uncorrelated or independent). lnunrt = β + α11lnunrt-1 + α21lnrgdpt-1 + α31lninft-1 + α41lnedt-1 + α51lnfdit-1 + α61lnpopt-1 + lnunrt-i + lnrgdpt-i + lninft-i + lnedt-i + lnfdit-i+ lnpopt-i + u1i………………………………………………………………. (1.6) where, lnunr is log of unemployment rate, lnrgdp is the log of real gross domestic product, lninfr is the log of inflation rate, lnfdi is the log of foreign direct investment, lnexd is the log of external debt, lnpop is log of population growth rate, βj(j = 1,2….., 6) denotes intercept; q is maximum lag length; i is number of lags; jk(j,k = 1,2…., 6) denote the long run coefficients. hypothesis for testing the cointegration among the variables in the model follows; h0: ajk = 0 no cointegration. j, k =1,…,6 h1: ajk 0 no cointegration. j, k =1,…,6 endashaw sisay, yilkal wassie, minyahil alemu 44 if there is an evidence of long-run relationship among the variables, the following long-run ardl (p1, p2, p3, p4, p5) model will be estimated (abdulbaset et al, 2013). all variables are as defined earlier. dlnunrt = β + lnunrt-i + lnrgdpt-i + lninft-i + lnedt-i + lnfdit-i + lnpopt-i + u1i………………………………………. (1.7) error correction model (ecm): after a confirmation of long-run cointegration among the variables unrt, rgdpt, infrt, exdt, popt, fdit, the ecm approach was employed in order to capture the short run behavior of variables involved in the analysis. the general ecm specification is given by; yt = a0 + a1xt t-1 + ut…………………………………………................. (1.8) whereby, a1 is impact multiplier;  is the adjustment parameter 3. results and discussion individual variables were all subjected to the augmented dickey-fuller (adf) unit root tests in order to examine the stationarity properties among them. table 1.1 below reports the adf regression results; table 1.1: stationarity test results (adf) variable level first difference constant constant and trend constant constant and trend lnunt (-2.751582) (-2.734954) (7.697294)* (7.609472)* lnrgdpt (4.201534)* (6.038616)* lnfdit (-1.382028) (-3.566594) (5.883800)* (5.803385)* lncpit (4.168996)* (7.536394)* lnpopt (-0.263257) (-4.212254) (-4.323737)* (-4.332646)* lndebtt (-1.472761) (-2.574467) -4.247948* (4.191843)* * rejection of the null hypotheses at (α= 0.01 and α= 0.05) source: (own computation, 2018/19) evident from table (1.1) is mixed order of integration among the time series. the adf regression results suggest that whereas, the variables lnrgdpt and lncpit are stationary, the lnunt, lnfdit, lnpopt, and lndebtt are not. since the variables are i(0) and i(1) and no more higher order has been confirmed, we employ the auto regressive distributed lag model (ardl) for cointegration issues. dynamic model analyses need to determine the time span for which the impact of changes in a given variable could persist. below is the lag length reported by various measures. table 1.2: lag length determination lag logll lr fpe aic sc hq 0 -194.7781 na 0.182108 12.48613 12.71515 12.56204 1 -136.5185 94.67171 0.023295 10.40741 11.78154* 10.86289 2 -98.80853 49.49440* 0.011909 9.613033 12.13227 10.44809 unemployment and the macroeconomics of ethiopia 45 3 -66.67363 32.13490 0.010789* 9.167102* 12.83144 10.38173* * lag length suggested by corresponding criterion as it can easily be seen above, the most reported lag length is 3. therefore, we use a length of 3 in regression of the var model in this paper. before running ardl regression, we conducted appropriate diagnostic tests and none of them were revealed invalid. unambiguously, the conditions of normality in the distribution of residuals, heteroscedasticity, serial correlation and multicollinearity, model specification, and parameters stability issues were all examined, and the overall model validity has been confirmed with each condition. table 1.3: ardl bounds test result for cointegration source: (own computation, 2018/19) the bounds test is mainly based on the joint f-statistic which its asymptotic distribution is non-standard under the null hypothesis of no cointegration. the first step in the ardl bounds approach is to estimate the six equations (1, 2, 3, 4, 5 and 6). the estimations of the six equations for the existence of long run relationship among the variables by conducting the f-test for the joint significance of the coefficients of the lagged levels of the variables, i.e., 0 1 2 3 4 5 6 : 0 i i i i i i h a a a a a a      against the alternative, 1 1 2 3 4 5 6 : 0 i i i i i i h a a a a a a      1 , 2, 3, 4, 5 6. i and we denote the f-statistic of the test which normalize, lnunt by flnunt(lnunt/lnrgdpt, lnpopt, lnfdit, lndebtt, lncpit). two sets of critical values for a given significance level can be determined (pesaran et al., 2001). the first level is calculated on the assumption that all variables included in the ardl model are integrated of order zero, while the second on the assumption that the variables are integrated of order one. the null hypothesis of no cointegration is rejected when the value of the test statistic exceeds the upper critical bounds value. other ways, the cointegration test is inconclusive. the use of this approach is guided by the short data span. we choose a maximum lag order of 3 for the conditional ardl vector error correction model by using the akaike information criteria (aic). the model f-statistic t-statistic inference flnunt(lnunt/lnrgdpt, lnpopt, lnfdit, lndebtt, lncpit) 7.277* 6.204* yes flnpopt(lnpopt/lnrgdpt, lnunt, lnfdit, lndebtt, lncpit) 8.891* 4.836* yes flndeptt(lndeptt/lnrgdpt, lnpopt, lnfdit, lnunt, lncpit) 8.742* 2.658 yes flnrgdpt(lnrgdpt/lnrunt, lnpopt, lnfdit, lndebtt, lncpit) 13.25* 6.700* yes flnfdit(lnfdit/lnrgdpt, lnpopt, lnunt, lndebtt, lncpit) 4.958* 1.400 yes flncpit(lncpit/lnrgdpt, lnpopt, lnfdit, lndebtt, lnunt) 5.071* 5.187* yes critical value bounds of the f-statistic and t-statistic: restricted intercept and no trend f-statistic t-statistic k=5 sig. level 99% 95% 90% 99% 95% 90% i(0) i(10 i(0) i(1) i(0) i(1) i(0) i(10 i(0) i(1) i(0) i(1) 3.41 4.68 2.62 3.79 2.26 3.35 3.43 4.79 2.86 4.19 2.57 3.86 where, kis the number of regressors; and * denote statistical significance at 1 percent. endashaw sisay, yilkal wassie, minyahil alemu 46 calculated f-statistics are reported in table 1.3 when each variable is considered as a dependent variable (normalized) in the ardl regressions. their values are: for equation (1), flnunt(lnunt/lnrgdpt, lnpopt, lnfdit, lndebtt, lncpit) = 7.276699; for equation (41), flnrgdpt(lnrgdpt/lnrunt, lnpopt, lnfdit, lndebtt, lncpit) = 13.25035; for equation (42), flncpit(lncpit/lnrgdpt, lnpopt, lnfdit, lndebtt, lnunt) = 5.071352; for equation (43), flnfdit(lnfdit/lnrgdpt, lnpopt, lnunt, lndebtt, lncpit) = 4.957683; for equation (44), flndeptt(lndeptt/lnrgdpt, lnpopt, lnfdit, lnunt, lncpit) = 8.742264; and for equation (45), flnpopt(lnpopt/lnrgdpt, lnunt, lnfdit, lndebtt, lncpit) = 8.891138 from these results, it is clear that there is a long run relationship amongst the variables when lnunt, lnpopt, lndebtt, lnrgdpt, lnfdit, and lncpitis the dependent variable because its f-statistic (6.701) is higher than the upperbound critical value (4.15) at the 5% level. thus, the null of no cointegration in equation (16) is rejected. there exists a cointegration among the variables. the results confirm that, there are long-run relationships between unemployment and all regressors entered the model. all models reveal the existence of the long run relationship among variables at 1 percent significance level. this conclusion is based on the computed f-statistics. table 1.4: the long run nexus of unemployment and other macroeconomic variables dependent variable: unemployment rate (unt) regressors coeff. stand errors t-statistics prob. lnpopt 9.64 4.362428 2.210685 0.0456 lnrgdpt -0.44 0.164806 -2.652923 0.0199 lncpit 0.62 0.154519 4.00675 0.0015 lnfdit -0.43 0.132177 -3.220696 0.0067 lndebtt -1.61 0.439135 -3.656843 0.0029 cons -0.25 0.000 source: (own computation, 2018/19) the predicted relationship between unemployment and other explanatory variables considered is therefore given by, lnunt = 9.64lnpopt – 0.44lnrgdpt + 0.62lncpit – 0.43lnfdit –1.61lndebtt– 0.25…. (1.9) from table (1.4) above, it is worth mentioning that the regressors all exhibit meaningful on g term correlation with (cyclical) unemployment. in contrast with the phillips hypothesis, we estimate appositive association between unemployment and inflation to ethiopia. of course, this finding is also similar to most empirical literatures. for instance, folawewo and adeboje (2017) found the positive and significant impact of inflation on unemployment in their empirical analysis for ecowas, which contrasts the phillips curve, and in support of our results too. on the other side, maqbool et al (2013) estimated var model to examine the macroeconomic determinants of unemployment in pakistan, and his findings show that, the phillips curve was alive both in the short and the long run. eita (2016) has estimated negative and significant link among unemployment and inflation variables, towards validating the phillips hypothesis in namibia’s economy, but contrasting our finding. this finding however is not surprising in the context of ethiopia’s economy. the positive impulse from inflation goes towards (cyclical) unemployment via its inadequate impact on costs of investment. a positive inflation shock increases prices of inputs, including the labor (given the market is efficient), which in turn, reduces the profit margin to the firm. thus, low investing demand reduces employment demand as well. a high and persistent inflation in the country deter private investment whereby unfavorably affecting the labor demand (especially) in the private sector. thus, the phillips curve is no longer valid in the ethiopian context. unemployment and the macroeconomics of ethiopia 47 unemployment is negatively associated with the external debt in ethiopia. this favorable effect of external debt might imply that, resources obtained in the form of external borrowing are diverted towards productive sectors, with a potential of absorbing the growing labor force in the country, and should in principle; i.e., never beg food to eat! loan receipts directed towards end consumption bear nothing beyond the multidimensional costs to the general system. this finding is in line with the findings of maqbool et al (2013) in pakistan, and folawewo and adeboje (2017) among ecowas forming countries. improvement in real national output reduces unemployment in the long run, indicating that part of the income obtained is reinvested, which in turn, demands more labor employment in the economy. that is, new capital formations as well as expansion of existing assets (both) from enhanced production invite new inputs, raw materials, labor force for further takeoff. this finding supports development theories, and is line with most empirical findings. for instance, maqbool et al (2013) in pakistan; folawewo and adeboje (2017) among ecowas member states; doğan (2012) in turky; prawoto (2017) and trimurti (2014) in indonesia; aurangzeb and asif (2013) in china, confirmed the significant negative association between rgdp and cyclical unemployment. domestically, this finding is consistent with the findings of (getnet, 2003; imf, 2013; abdulkadir and kaushik, 2015; and deribe et al, 2015). international capital inflow were found to significantly reduce the long run (cyclical) unemployment growth in ethiopia, indicating that the goe is (partly) successful in targeting fdi for creating jobs to home side labor force. the estimated negative coefficient of fdi (table1.4) is obvious, and confirms the overwhelming view that, developing economies rely on foreign direct investments basically to satisfy the persistently growing internal demand for job. our finding supports adeboje (2017); prawoto (2017) and trimurti (2014); maqbool et al (2013); and getnet (2003). population growth deters employment growth in the country, indicating that, the population growth rate is much higher than the country’s (gross investing) employing capacity. the country’s economy appears not responsive to instantaneously growing labor force in a manner that could clear employment gap in the labor market. nepse (2016) noted that, the labor force is growing much more rapidly than the population as a whole because of the young dominated demographic profile. there are many more under-aged (below 15) years old entering the work force each year than there are old people living the labor force. unemployment provides a link between growth and poverty reduction only when it is systematically guided through policies and strategies which influence the determinants of labor market characteristics. the short-run case: table 1.5: the short run dynamics of unemployment: ecm estimates dependent variable(d, lnunt) variable coeff. std. error t-statistic prob. adjustment parameter, ecm (-1) = -0.267 (0.000) -1.266859 0.162937 -7.775125 0.0000 d,lnrgdpt (-1) 0.345 0.080 4.296 0.0009 d,lnrgdpt (-2) 0.096 0.043 2.223 0.0445 d,lncpit 0.253 0.050 5.068 0.0002 d,(lncpit (-1) 0.365 0.072 5.061 0.0002 d,(lncpit (-2) 0.160 0.073 2.208 0.0458 d,(lnfdit) -0.235 0.068 3.464 0.0042 d,(lnfdit (-1) 0.707 0.133 5.316 0.0001 d,(lnfdit (-2) 0.396 0.103 3.844 0.0020 d,(lndebtt) -1.583 0.351 -4.512 0.0006 d,(lndebtt (-1) 0.660 0.293 2.251 0.0423 d,(lndebtt (-2) 1.128 0.323 3.488 0.0040 d,(lnpopt) 12.21 5.783 -2.113 0.0545 endashaw sisay, yilkal wassie, minyahil alemu 48 source: (own computation, 2018/19) evident from table (1.5) is negative and strongly significant coefficient of the error correction, which is estimated at 0.267(0.000).hence, there is strong evidence for the short-term deviations to restore back towards the long term stable equilibrium point. about26.7% of the deviations in the system will be corrected each year. that means it takes a system about 3 years and 9 months to reach the long run (full restoration) equilibrium position. fortunately, all variables entered the unemployment model have all found to be important in the short run. thus, the regressors chosen all contribute significantly to the dynamics of unemployment irrespective of the time span considered in our analysis. the positive impact of inflation persists also in the short run, due to its inadequate effect on private investment undertakings. besides, the impact of initial shock survives up to the second period. it farther reveals that, the extent of inflationary pressure in the dynamics of inflation in the country. the effect of output is positive in short run, perhaps indicating the short run rigidities in the real sector. the short run impacts of fdi and population growth on the country’s (cyclical) unemployment are obvious. 4. conclusion and some recommendations premise with the phillips curve was suggested no longer valid in ethiopia. positive impulse moves from inflation to (cyclical) unemployment, likely due to its inadequate role on private investments. timing is of less relevance whenever the importance of every macroeconomic regressor is considered; only that, the weight for some may differ. that is, the significant impacts of all variables persist both in the long and the short run. in line with theoretical justification, the effects of real national output, fdi, and the external borrowing on (cyclical) unemployment are negative. besides, the impact of population size is also expected. economic and social development policies of the country need not be treated in isolation. monetary policy should be credible in targeting lower inflation rate. moreover, any effective family planning policy could help in the effectiveness of employment policies. more importantly, enhancing productive and more labor-oriented investments serve the long run solution. additionally, the country should make the investment environment attractive towards enhancing inflows of international capital, as they were found to significantly reduce the (cyclical) unemployment growth rate in ethiopia. references aynalem s. and mulugeta d. 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(2015), “women and unemployment in bahir dar city”, full length research, ethiopia international journal of commerce and finance, vol. 4, issue 1, 2018, 40-51 40 perceived service quality, perceived value for money, satisfaction and repurchase intention: an evaluation on private university services dr. leonnard, s.e., m.comm sekolah tinggi manajemen ipmi e-mail address: leonnard.ong@ipmi.ac.id abstract repurchase intention is a very important goal for private universities in the very high competition in the world of education today w ith fellow private universities and state universities. the students' decision to do repurchase intention is influenced by many factors. the success of private universities in identifying and focusing the university's marketing and development strategies based on those factors will greatly determine the sustainability of the universities’ business. therefore, this study investigated the private university customers' perception of quality and value for money and its effect on satisfaction and students’ repurchase intention. a causal design survey was applied out of 150 students of private universities in jakarta, indonesia. the partial least square (pls) was employed to analyze the data. the research outcome signified that there was a direct positive effect of perceived value for money on satisfaction, perceived se rvice quality on perceived value for money, and perceived service quality on satisfaction and repurchase intention. the total effect of perceived service quality on repurchase intention was higher through an indirect effect of satisfaction. on the contrary, a direct effect of perceived value for money on repurchase intention was not confirmed. keywords: private universities, perceived service quality, perceived value for money, student satisfaction, repurchase intention, pls 1. introduction the competition of educational institutions offering educational services is becoming an interesting issue today (oldfield & baron, 2000; hemsley brown & oplatka, 2006). both public and private universities compete each other to offer high educational service to satisfy consumer need (maguad, 2007; abdullah et al., 2014). increasing demand for higher education services leads to increasing the number of universities that creates high competition in the educational industry. there are different views on the quality of public and private universities. in some developed countries mentioned that in the state of equilibrium, private universities have higher quality than public universities (epple & romano, 1998). as quality is linearly related to price, the quality of private universities is highly related to the costs imposed. this principle is in line with customer decision making theory, in which consumers are considered to be behaving rationally will only make a purchase if the amount they sacrifice is proportional to the compensation they earn (rao, 1984; tellis, 1986; dodds et al., 1991). another view mentions otherwise that public universities have higher quality than private universities. in some developed countries of the european union, public universities charge low tuition fees, even zero tuition fees with higher educational quality than private universities (romero & del rey, 2004). in this case, the public universities act in a monopolistic competition in the market so that they are able to get the best student candidates through a rigorous entrance test selection. while private universities get the rest of the demand. this condition is also common in indonesia. private universities have great challenges in order to compete with public universities and other private universities. unlike the european union, however, the costs set by private universities in indonesia are generally higher than at public universities. the high cost incurred should be proportional to the quality obtained by consumers. price-quality interaction generates customer value and satisfaction which is the main objective of service industries, including educational services (zeithaml, 1988; dodds et al., 1991; kashyap & bojanic, 2000; hu et al., 2009; kuo et al. , 2009; fakharyan et al., 2014; gumussoy & koseoglu, 2016; rajaguru, 2016). in fact, the price and quality used as a basis for consumers to evaluate services are not always objective terms. a similar price can be viewed differently from the point of view of the consumer whether higher or lower depending in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e perceived service quality, perceived value for money, satisfaction and repurchase intention: an evaluation on private university services 41 on the type of product and service, the situation and the time of purchase (cooper, 1969a). the price in this case is called perceived value for money. then the perceived value for money becomes a predictor of the level of quality that consumers receive. high value for money must be followed by high quality as well, so that in the same time can increase or decrease the willingness to purchase. this quality level is a perceived quality that precisely determines the consumer buying behavior compared to the actual quality of the product or service (doods et al., 1991). although, there are growing literatures discussing perceived value for money and perceived quality relationships, however, there was little evidence represented in the educational services (kashyap & bojanic, 2000; rajaguru, 2016; gumussoy & koseoglu, 2016; liu & lee, 2016). therefore, this study fills the gap. we examined the interaction of perceived quality and perceived value for money and how they relate to customer satisfaction and repurchase intention in private universities in indonesia. the outcome will enhance prior literatures by adding a new empirical evicence of the means-end theory in the higher educational services. this study is structured as follows; the next section will explain the previous theories and studies that underlie this research. based on this foundation, then we built the hypotheses to be tested using partial least square (pls) method. furthermore, the next section will explain the data collection method and research results. finally, this paper will be finalized with discussion, managerial implications and study limitations. 2. literature 2.1 perceived value for money, perceived service quality, satisfaction perceived value for money is the amount that consumers should sacrifice to consume goods or services (zeithaml, 1998; kashyap & bojanic, 2000). perceived value for money is a perception that consumers use in evaluating products and making purchases compared to the actual price of the product or service. a product or service can be more expensive, moderate, or cheaper depending on how the product or service provides economic and emotional value to consumers (rajaguru, 2016). economic value is the opportunity cost between what is sacrificed by consumers and utility. while the emotional value is the influence of factors outside the value for money that can affect consumer decisions. these factors can take the form of time, the cost of getting a product or service and convenience (kashyap and bojanic, 2000). empirical studies proved that perceived value for money is an indicator that consumers use in deciding to make purchases (zeithaml, 1998; kashyap & bojanic, 2000; alford & biswas, 2002; liu & lee, 2016). there are 3 indicators used to measure perceived value of money, according to brady et al. (2005). those are whether the product provides the best value, whether consumers receive something that is comparable with the value for money they spend, and whether everything that consumers received and the cost of providing more value for consumers. meanwhile, according to howat & assaker (2013) there are 2 indicators used to measure perceived value for money, i.e. whether the facility is proportional to the value for money and whether the program is proportional to the value for money. perceived quality is the result of a comprehensive evaluation of products and services consumed by consumers (zeithaml, 1998). the evaluation of the products or services will influence the consumer's perception of value for money (economic and emotional) (kashyap & bojanic, 2000; petrick, 2004; xia & suri, 2014). there are two indicators used to evaluate perceived service quality following grönroos (1984), namely technical quality and functional quality. rust & oliver (1994) then define technical quality as physical quality of service and functional quality as the delivery quality of service. prior empirical literatures proved that the application of technical quality and functional quality indicators to assess perceived quality is still rare (de keyser & lariviere, 2014; kasiri et al., 2017). most of the empirical evidence suggests that servqual is the most commonly used indicators (zeithaml et al., 1996). the interaction between perceived quality and perceived value for money will result in customer satisfaction (zeithaml, 1988; brady et al., 2005; kuo et al., 2009; howat & assaker 2013; gumussoy & koseoglu, 2016; rajaguru, 2016). based on the explanation above, hypotheses are proposed as follows: h1: perceived service quality positively affects perceived value for money h2: perceived service quality positively affects student satisfaction dr. leonnard, s.e 42 h3: perceived value for money positively affects student satisfaction. 2.2. satisfaction, repurchase intention satisfaction is a comprehensive evaluation after consuming products and services (li & petrick, 2010; gallarza et al., 2011). the level of satisfaction in the education service sector is different from other service sectors. the level of customer satisfaction resulted from a series of teaching and learning processes during the university where the output of the process is intangible (taylor, 1996). satisfied consumers will result in repurchase intention (gumussoy & koseoglu, 2016). there are 3 indicators used to measure customer satisfaction that is expectation, emotion, and involvement. expectation is a consumer's expectation of the products and services they consume. emotion is a consumer psychological response when consuming products and services. finally, involvement is the involvement of consumers of products and services when the products and services consumed meet the consumer's expectation and emotion (vinagre & nehes, 2008). based on the explanation above, hypotheses are proposed as follows: h4: satisfaction positively affects repurchase intention 2.3 perceived value for money, perceived service quality, and repurchase intention previous empirical researches proved that there is a positive significant relationship of perceived value for money, perceived quality and repurchase intention (dodds et al., 1991; zeithaml, 1988; kashyap & bojanic, 2000; yee & san; 2011; wang & tsai, 2014; gumussoy & kaseoglu (2016), rajaguru, 2016). consumers will be willing to repurchase the products or services if the quality (economic and emotional) is proportional to the amount they sacrifice (economic and emotional). based on the explanation above, hypotheses are proposed as follows: h5: perceived service quality positively influences repurchase intention h6: perceived value for money positively influences repurchase intention 3. conceptual model based on the literature review and the result of previous empirical studies, we propose the relationship analysis of perceived value for money, perceived quality, satisfaction and repurchase intention. the conceptual relationship between the analyzed variables is denoted in figure 1 below. repurchase intention satisfaction h4 h1 h2 h5 h6 h3 perceived service quality technical quality functional quality perceived value for money facilities provide value for money services provide value for money staffs provide value for money perceived service quality, perceived value for money, satisfaction and repurchase intention: an evaluation on private university services 43 4. methodology 4.1 measures in the measurement of the development constructs in this study was adapted from the literatures. perceived quality was measured by indicators of technical quality and functional quality (grönroos, 1984; rust & oliver, 1994). technical quality consisted of actual service items received by consumers (outcome quality). functional quality consists of 3 items of attitude, behavior, and expertise (rust & oliver, 1994). perceived value for money was measured by following brady et al. (2005) and howat & assaker (2013) consisting of facilities providing value for money, services providing value for money, and staffs providing value for money. satisfaction was measured by indicators of expectation, emotion, and involvement (vinagre & nehes, 2008). finally the repurchase intention was derived from the following 3 items of questions: consumers will remain loyal to the university, consumers take care of the university's shortcomings, and consumers are determined to finish college at the university as best they can (dick and basu, 1994). 4.2 sample and data collection data were collected from 150 private university students using stratified random sampling with proportional allocation method. the students were from bachelor and master degree from various study programs. the questionnaires included latent variables of perceived value for money, perceived service quality, satisfaction, and repurchase intention. the questionnaires employed the likert scale with 5 alternative answers, i.e. strongly agree (5), agree (4), disagree/sometimes (3), disagree (2), and strongly disagree (1). finally, partial least square (pls) was carried out to analyze the data. 5. outcomes 5.1 exploratory factor analysis the evaluation of the convergent validity model indicated that the model has had reliability items viewed from standardized loading (> 0.5) (table 1). table 1. reliabilty test results latent variables dimensions standardized loadings standardized loadings (bootstrap) critical ratios (cr) communalitie s perceived service quality technical quality 0.955 0.956 121.907 0.912 functional quality 0.960 0.959 85.552 0.922 perceived value for money facilities provide value for money 0.804 0.802 18.562 0.646 services provide value for money 0.745 0.751 10.506 0.556 staffs provide value for money 0.769 0.759 14.325 0.592 satisfaction expectation 0.887 0.884 30.819 0.787 emotion 0.877 0.875 34.219 0.768 involvement 0.842 0.841 29.565 0.709 repurchase intention repurchase intention 1 0.892 0.890 35.444 0.796 repurchase intention 2 0.830 0.825 22.269 0.688 repurchase intention 3 0.739 0.748 14.920 0.547 dr. leonnard, s.e 44 table 1 above indicated that all dimensions of loading factor values were greater than 0.7 so it could be summed up that the dimensions used in the model were valid and significant (cr value 2.0). the amount of variances that could be explained by the latent variables to its dimensions was explained through the value of communalities. as many as 91.2 % technical quality and 92.2 % functional quality could be explained by the latent variable of perceived service quality. perceived value for money explained higher on facilities provide value for money, and satisfaction explained higher on expectation subsequent evaluations of the cronbach's alpha and d.g rho (pca) pointed the values above 0.6 indicating the model was sufficient for composite reliability (nunnally & bernstein, 1994) (table 2). the average variance extracted (ave) values of all latent variables were above 0.5 indicated that all latent variables had good convergent validities. table 2. composite reliability test results latent variables dimensions cronba ch’s alpha d.g rho (pca) mean commu nalities (ave) critical values eigenv alues perceived service quality technical quality 0.910 0.957 0.917 0.453 0.830 functional quality 0.075 perceived value for money facilities provide value for money 0.664 0.817 0.598 0.856 1.537 services provide value for money 0.546 staffs provide value for money 0.485 satisfaction expectation 0.836 0.902 0.755 0.605 1.369 emotion 0.276 involvement 0.169 repurchase intention repurchase intention 1 0.759 0.862 0.677 0.832 1.690 repurchase intention 2 0.534 repurchase intention 3 0.272 further evaluation of discriminant validity which was carried out by comparing the ave value with the quadratic correlation between latent variables indicated the loading factor values for technical quality (0.955) and functional quality (0.960) were higher compared with other latent variables. similarly, the facilities providing value for money dimensions (0.804), services providing value for money (0.745), and staffs providing value for money (0.760) had higher correlations on latent variables perceived value for money. dimensions of expectation (0.887), emotion (0.877), and involvement (0.842) had higher correlations to the latent variable of satisfaction. finally, the dimensions of repurchase intention 1 (0.892), repurchase intention 2 (0.830), and repurchase intention 3 (0.739) had higher correlations to the latent variables of repurchase intention. all of the cross comparison results indicated that the model had fulfilled discriminant validity (table 3). table 3. cross-loading test results perceived service quality perceived value for money satisfaction repurchase intention technical quality 0.955 0.536 0.681 0.611 functional quality 0.960 0.505 0.717 0.655 perceived service quality, perceived value for money, satisfaction and repurchase intention: an evaluation on private university services 45 facilities provide value for money 0.454 0.804 0.414 0.385 services provide value for money 0.345 0.745 0.376 0.290 staffs provide value for money 0.451 0.769 0.442 0.338 expectation 0.598 0.484 0.887 0.650 emotion 0.660 0.475 0.877 0.651 involvement 0.651 0.427 0.842 0.601 repurchase intention 1 0.566 0.413 0.671 0.892 repurchase intention 2 0.525 0.401 0.597 0.830 repurchase intention 3 0.547 0.256 0.524 0.739 5.2 structural model analysis 5.2.1 inner model analysis the results of cross-sectional regressions indicated that the value of r2 for each endogenous variable that could be explained by the model was more than 20 % (r2 of perceived value for money 0.295, r2 of satisfaction 0.559, r2 of repurchase intention 0.397) which means the exogenous latent variables were valid in explaining the endogenous variables. a further evaluation of the effect size f2 indicated the effect size f2 for the model 1 on perceived service quality was 0.418 (moderate effect). in the model 2, the value of f2 for perceived service quality was 0.626 (high leverage), and f2 for perceived value for money was 0.059 (small effect). in the model 3, the value of f2 for perceived service quality was 0.074 (small effect), f2 for perceived value for money was 0.000 (no effect), and f2 for satisfaction was 0.280 (moderate effect). the last evaluation of structural model validation was by looking at the value of goodness of fit (gof). the absolute gof value of the model was 0.584 (high) (table 4). table 4. goodness of fit index result gof gof (bootsr ap) standar d error critical ratio lower bound (95 %) upper bound (95%) absolute 0.584 0.586 0.033 17.599 0.507 0.651 relative 0.987 0.968 0.012 85.328 0.939 0.986 outer model 1.000 0.997 0.001 983.812 0.993 0.998 inner model 0.987 0.971 0.011 87.346 0.945 0.989 5.2.2 path estimates and hypotheses testing an evaluation of the inner model indicated that 5 of the 6 hypotheses were supported. the supported hypotheses were the hypothesis 1,2,3,4, and 5. perceived service quality positively influenced perceived value for money with a coefficient of 0.543 (hypothesis 1). perceived service quality and perceived value for money positively influenced student satisfaction with coefficients of 0.626 and 0.192, respectively (hypothesis 2 and 3). satisfaction and perceived service quality positively influenced repurchase intention with coefficients of 0.524 and 0.272, respectively (hypothesis 4 and 5). dr. leonnard, s.e 46 5.2.3 direct, indirect, and total effects direct, indirect, and total effects in the table 5 and figure 1 pointed that perceived service quality had the greatest influence on satisfaction (0.730) and repurchase intention (0.600). the high effect of perceived service quality on satisfaction was obtained through an indirect effect of perceived value for money. while the influence of perceived service quality on repurchase intention was obtained through an indirect effect of satisfaction. the smallest influence was given by perceived value for money on satisfaction (0.192), followed by the influence of satisfaction on repurchase intention (0.524), and the influence of perceived service quality on perceived value for money (0.543). table 5. direct, indirect, and total effects direct effect indirect effect total effect perceived service quality perceived value for money 0.543 0.543 perceived service quality satisfaction 0.626 0.104 0.730 perceived value for money satisfaction 0.192 0.192 satisfaction repurchase intention 0.524 0.524 perceived service quality repurchase intention 0.272 0.328 0.600 perceived service quality repurchase intention 0.013* 0.100 0.113 note: * = non-significant effects at the 0.05 level figure 1. results of pls model note: * =non-significant effects at the 0.05 level perceived service quality perceived value for money satisfaction repurchase intention technical quality functional quality facilities provide value for money services provide value for money staffs provide value for money expectation emotion involvement repurchase intention 1 repurchase intention 2 repurchase intention 3 w= 0.757 w= 0.789 w= 0.498 w= 0.410 w= 0.485 w= 0.514 w= 0.474 w= 0.487 w= 0.481 w= 0.455 w= 0.387 reg= 0.543 reg= 0.626 reg= 0.192 reg= 0.272 reg= 0.013 reg= 0.524 perceived service quality, perceived value for money, satisfaction and repurchase intention: an evaluation on private university services 47 6. discussions 6.1 theoretical implications results of data processing support theoretical background of the previous empirical studies. from the multidimensional analysis, it was found that each of the significant dimensions influenced latent variables. the dimensions of technical quality and functional quality significantly influenced perceived service quality (coefficients of 0.757 and 0.789, respectively). these results support grönroos (1984) and rust & oliver (1994). similarly, the dimensions of facilities providing value for money, services providing value for money, and staffs providing value for money significantly influenced perceived value for money (coefficients of 0.498, 0.410, and 0.485, respectively). these results support brady et al. (2005) and howat & assaker (2013). dimensions of expectation, emotion, and involvement significantly influenced satisfaction (coefficients of 0.514, 0.474, and 0.487, respectively). these results support vinagre & nehes (2008). the last dimension of repurchase intention 1, repurchase intention 2, and repurchase intention 3 significantly influenced repurchase intention (coefficients of 0.481, 0.455, and 0.387, respectively). these results support dick & basu (1994). furthermore, from hierarchy analysis, it was found that perceived service quality significantly influenced perceived value for money. these results support zeithaml (1998), brady et al. (2005), kuo et al. (2009), howat & assaker (2013), and gumussoy & koseoglu (2016). perceived service quality and perceived value for money influenced satisfaction. these results support brady et al. (2005), kuo et al. (2009), howat & assaker (2013), rajaguru (2016), and gumussoy & koseoglu (2016). furthermore, perceived service quality through indirect effects of perceived value for money influenced satisfaction with a higher total effect. these results support gumussoy & koseoglu (2016) and howat & assaker (2013). satisfaction directly influenced repurchase intention. these results support gumussoy & koseoglu (2016). perceived service quality also directly influenced repurchase intention that supports kashyap & bojanic (2000), yee & san (2011), wang & tsai (2014), and rajaguru (2016). in contrast, the results of the analysis do not support zeithaml (1988), dodds et al. (1991), kashyap & bojanic (2000), yee & san (2011), wang & tsai (2014), rajaguru (2016) where perceived value for money had no direct effect on repurchase intention. indirect effects of both perceived service quality variables and perceived value for money against repurchase intention support gumussoy & kaseoglu (2016) and rajaguru (2016). 6.2 managerial implications the theoretical implication in the previous discussion reveals not only the direct effect of perceived service quality on satisfaction, but also through mediating variable perceived value for money. this means that the higher the service quality that consumers receive, the higher the perception of the consumer on the perception that the price they pay is proportional to the quality they earn which subsequently will give satisfaction (howat & assaker, 2013). implication for managers is that they cannot set prices in such a way without improving service quality. then by looking back at the dimensions that constitute perceived service quality where functional quality has the greatest influence, managers need to consider delivery services quality that includes attitude, behavior, and expertise of staffs and lecturers at the university who interact directly with students. according to howat & assaker (2003), managers need to set standards for recruitment and training of staff and lecturers so that they provide services in a friendly, non-discriminative manner, provide information quickly, accurately, carefully and easily understood, and especially for lecturers to have knowledge and high teaching ability. the subsequent implications of the perceived service quality influence on repurchase intention reveal that high service quality will lead to the desire of students to complete and to continue their studies to the higher level in the same universities. in addition, the indirect influence of perceived service quality through satisfaction implies the manager that in order for students to do repurchase intention, they must provide a high service quality that exceeds student expectations (gumussoy & kaseoglu, 2016; rajaguru, 2016). 7. limitations and future studies dr. leonnard, s.e 48 this study has several limitations. first, the model does not distinguish sociodemographic characteristics of students, education levels and fields of study. therefore, for the advanced research, it is important that these characteristics should be considered because different characteristics can give differences in preference to service quality, value for money, satisfaction, and repurchase intention. second, the concept of perceived service quality used in this study follows grönroos (1984) consisting of two dimensions of technical quality and functional quality. other concepts can be considered for advanced research, such as the three component models by rust & oliver (1994) and the multilevel model by dabholkar, thorpe, and rentz (1996). third, the focus of this research is only on an endogenous 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3(1), p. 47. zeithaml, v.a., 1988. consumer perceptions of price, quality, and value: a means-end model and synthesis of evidence. the journal of marketing, pp. 2-22. appendix a table a.1. variables selected for model analysis dimensions attributes technical quality the staffs appearance are neat library facilities are adequate the lecture rooms are comfortable service standards promise quality administrative services are adequate academic services are qualified functional quality staff knowledge is adequate academic services is precise academic service is provided with care staff treatments are non-discriminatory quick response quick complaint handling staffs are friendly staffs provide information that is easy to understand perceived value for money facilities provide value for money services provide value for money staffs provide value for money expectation facilities are in line with expectations staffs are in line with expectations i am proud to be a part of the university emotion i enjoy studying at the university i am delighted to study at the university the learning atmosphere is fun perceived service quality, perceived value for money, satisfaction and repurchase intention: an evaluation on private university services 51 involvement i actively contribute ideas to the university i actively promote university excellence i care about the university repurchase intention i will remain loyal to the university i am contributing to the shortcomings of the university i am determined to finish my study at the university international journal of commerce and finance, vol. 2, issue 1, 2016, 67-80 an exploratory analysis of online shopping behavior in turkey adnan veysel ertemel, (ph.d.) istanbul commerce university, turkey buğra çelik, (msc.) istanbul bahçesehir university, turkey abstract: alongside the technologic developments, transformation in user behavior and business models has been observed. new areas and models are emerged in a lot of grounds like the communication of people or daily activities. so a new face put for shopping behavior by the ecommerce, which is one of the novelties. this study tries to research online shopping behavior in turkey. with a quantitative research, device usage, the reasons behind to shop or not to shop online, online shopping category and e-commerce site preferences, payment methods, international e-commerce and online marketplace usage is investigated. as implications of the research, “saving time“ is found to be the foremost reason for shopping online in turkey and “travel and bookings” category is found as the most shopped category among the results of the survey. keywords: e-commerce, e-commerce in turkey, online shopping, online consumer behavior 1. introduction: as computers spread all over the world, people started to get benefits of this technology in more areas than business and office purposes. computers were only used by universities and large-scale companies since they were not easily affordable and appropriate for small spaces (grosse, n.d.). after the technologic developments and cheaper prices on personal computers, most of the homes started to get access to computers. today, internet is used many areas like music, television, communication, social media, health, security, education and more. especially mobile device owners need internet like they need electricity. this need may be a little further for some of the people like they can’t move on in the life without their mobile device or internet. anxiety of being unable to use mobile device or internet to get contact is called nomophobia and it is a reproduce wording of “no mobile phone phobia” (king et al., 2014, p. 28). it is not surprising that people developed new kind of fears like nomophobia which are related to addiction to their mobile phones and internet. in the world of today, since the people are addicted to their digital devices and internet, they developed a new user behavior as well. new user behavior affected most of the markets and sectors. as people tend to do their transactions online; shopping, which is one of the biggest economic values, is carried to digital devices. so ecommerce (electronic commerce) was born. this paper first examines e-commerce in definition and history. afterwards, turkey is detailed in terms of economic impact of e-commerce and online shopping behavior, lastly findings are discussed and concluded. 2. literature review 2.1 e-commerce definition in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 68 http://ijcf.ticaret.edu.tr before defining e-commerce, it would be helpful to understand what commerce is. according to oxford dictionaries (n.d.) commerce is defined as follows, “the activity of buying and selling, especially on a large scale.” so commerce is a simple transaction where a seller and a buyer take place. zwass (1996) defines e-commerce as “the sharing of business information, maintaining business relationships, and conducting business transactions by means of telecommunications networks” (p. 3). based on this definition, any commercial transaction made on a telecommunication network other than internet would be a subject of ecommerce. despite the fact that e-commerce may not be on internet only, the term is redefined by the dominance of internet and digital era that we are in. chesher, kaura & linton (2003) stated, “in particular, the news media seized upon the term e-commerce and largely redefined it as the marketing and selling of products/services to consumers over the internet” (p. 40). so e-commerce is an internet term and it can be summarized as, e-commerce is buying and selling products or services on internet. 2.2. evolution of e-commerce technologic developments led e-commerce into an infinite evolution. in this journey, e-commerce was born from more basic technologies, recently it is transformed by new devices and internet, and in the future it is expected that e-commerce may reach to a technologic level beyond the imaginations. 2.2.1. history e-commerce origins root back to late 1970s when there was no easily affordable computers or internet connection at home. information technology engineer michael aldrich and his colleague peter champion led the birth of online shopping in 1979 by their invention allowing to connect a computer to a television (coleman & ganong, 2014, p. 974). according to taylor (2013), m. aldrich is the inventor of online shopping which is called as “teleshopping” at that time (p. 20). after aldrich’s invention, in 1980’s a new technology, which is regarded as one of the most successful onlie services before internet, was born. a private network named minitel was launched by france telecom in 1982, allowing users to look up phone numbers, arrange travel bookings, make financial transactions and shop online (cornelius et al., 2002, p. 204). with these ancestoral models of e-commerce, it has tranformed to a new level in 1990’s with a revolutionary technologic development. 2.2.2. today until world wide web is introduced by tim berners-lee in 1989 and his first web site is launched in 1991, technology was not very fast and practical and e-commerce couldn’t be useful (jones, 2014). e-commerce was skyrocketed with the invention of world wide web and web sites due to their useful structure. there is no doubt ecommerce got a rapid grow by the customers started to search world wide web for products and services (world trade organization, 2013, p. 3). in mid 1990’s, e-commerce pioneers like amazon and ebay are founded. they had important roles at the evolution of e-commerce. with all of the connected devices such as smartphones, tablets and laptops; e-commerce is so powerful today. easy accessibility, better prices and convenience caused a migration of shoppers from physical channels to digital channels. 2.2.3. future of e-commerce 69 http://ijcf.ticaret.edu.tr although e-commerce is on the rise and very powerful in recent years, one of the major weaknesses of online shopping is unavailability to examine products physically. in the near future, technologic developments may create new capabilities for consumers to go beyond this weakness. consumers can examine a product on a computer or experience a simulation with virtual reality (vr) applications, which contain web based and interactive threedimensional models (figueroa & häubl, 2002, p. 744). other aspect of vr is the one which is experienced through special headsets. vr headsets are expected to transform the way of e-commerce. according to kent (2015), physical stores have connection to internet and consumers got used to shop via their mobile devices, so mix of a physical and digital worlds may lead a new shopping experience: virtual reality shopping (p. 20). in 2020, digital technology will be unfolded by the companies including fetching and analyzing of consumer data, high end social media usage and engaging consumers with employees whether in-field, in-store or on a travel (dugal et al., n.d., p. 15) 3. e-commerce in turkey according to the republic of turkey prime ministry investment support and promotion agency of turkey (n.d.), half of the population is observed as under the age of 30.7 among 77.7 million people. although the population of turkey is getting older, when it is compared to the european countries, the youngest population has been recorded in turkey with the ratio of 16.6 percent, even as italy and spain have the lowest young population ratio by 9.9 percent (anadolu agency, 2014). gordon and hodgson (2012) stated, “the e-commerce sector is booming in turkey, as a result of a large youth population familiar with new technology and solid economic growth, with real internet retailing value expanding by 61.1% over 2006-2011.” in turkey, e-commerce market size has been growing so fast and it is seen like turkish e-commerce market will have a more important position not only in the country but globally (piramit e-commerce, n.d.). 3.1. evolution of e-commerce in turkey as cedetaş (n.d.) reported, the first e-commerce application in turkey was the electronic store of remzi bookstore launched in 1997, which was prepared in the second half of 1996 by prizmanet. in the food sector, migros türk founded sanal market in 1997, which is the largest supermarket chain in turkey (dean et al., 2013, p. 26). in 1998, one of the first turkish e-commerce sites hepsiburada.com was founded (eticaret gundem, n.d.). with just a team of 3 personnels, 6 categories and 2.700 advertisings on site, sahibinden.com was launched in 2000 and there has been a great interest on it (patronturk, 2012). gittigidiyor.com was founded as a company with 3 partners and launched on 5th of february, 2001 (gittigidiyor, n.d.). in the beginning, online shopping has been observed in low rates due to low speed dial-up internet connection, but after the launch of asymmetric digital subscriber line (adsl) connection by turkish telecom in 2002 growth rate has been higher (i̇yiler, 2009, p.57). the most outstanding foreign capital inflows have been the acquisition of biletix by ticketmaster in 2006, the partnership of ebay and gittigidiyor in 2007 and the foreign capital partnership of yemeksepeti.com in 2008 (afra, 2010). in the leadership of grupanya, in 2009 a new e-commerce business area has been opened which allows users to purchase the products or services of 3rd party companies with discount (türkiye cumhuriyeti kalkınma bakanlığı [ministry of development of turkish republic], 2013, p. 127). turkish e-commerce market has been a focus of attention and fast growth. afra (2013) stated, “there are four main driving forces behind this growth: credit card penetration, logistic infrastructure, high mobile internet usage and a viral / social young population.”. 3.2. e-commerce statistics from turkey according to turkish statistical institute (2015), computer and internet usage ratios have been 54.8 and 55.9 percent in order among the people who are aged between 16 and 74 in april 2015. household with internet access proportion has been 69.5 percent. 96.8 percent of households have either mobile phone or smartphone. among the 70 http://ijcf.ticaret.edu.tr internet users, proportion of individuals who made a purchase of a good or service online has been 33.1 percent (turkish statistical institute, 2015). in its’ report “türkiye’de e-ticaret 2014 pazar büyüklüğü” [2014 market size of e-commerce in turkey], turkish informatics industry association (2015) illustrates the market size of e-commerce in turkey as 18.9 billion tl with 945 sites. 384 only online sites generate 6.5 billion tl, 326 travel and vacation sites generate 6.8 billion tl, 272 multi channel retail sites generate 3.5 billion and 6 online legal betting sites generate 2.1 billion tl (p. 8). büyükyıldırım (2015) claims, just in 3 years period internet users will be over 53 million, e-commerce customers will be over 16 million and e-commerce volume will increase more than 50 percent. 4. research methodology 4.1. aim of the research the primary aim of this research is to advance the understanding of online shopping behavior in turkey. this research examines device usage, the reasons behind to shop or not to shop online, online shopping category and e commerce site preferences, payment methods, international e-commerce and online marketplace usage. while the principle objective of this research is to find out online shopping behavior in turkey, demographics are also examined. 4.2. research sample the sample is chosen randomly from the potential online shoppers who use at least one of computer, smartphone or tablet. in order to find out general online shopping behavior, an online survey is conducted. the survey is assured to be accessible via computer, smartphone or tablet. the survey is sent via email to the selected individuals; also social media networks twitter and facebook are used to reach a wider audience. in addition to the social media networks and email, the survey is also broadcasted on mobile messaging application whatsapp to the selected contacts. the sample contains 234 individuals. answering the survey takes around 2 or 3 minutes. 4.3. research findings gender percentage of women participants is 60.3 with 141 individuals and percentage of men participants is 39.7 with 93 individuals. gender breakdown is shown on figure 4.1 below. 60,256% 39,744% woman man 71 http://ijcf.ticaret.edu.tr figure 4.1: gender of the participants age age of the participants differentiate between 22 and 41. the average age of the participants is 29.4. the standard deviation is calculated 4.2082 and in 90 percent confidence level z=1.645. the survey is 90 percent confident that the true mean of the population is between 22.53 and 36.37. education 153 individuals which is 65.4 percent of the participants are graduated from a university. 30.8 percent with 72 individuals master degree follows the university graduates. while doctorate graduates are just 2.6 percent with 6 individuals, high school graduates are 1.3 percent with 3 individuals. education breakdown is shown on figure 4.2. figure 4.2: education breakdown of the participants occupation 24 participants which is 10.3 percent of total, stated that they are unemployed. 15 participants which is 6.4 percent of total, stated that they working in a part-time job, and the rest, 195 participants which is 83.3 percent of total stated that they work in a full-time job. occupation breakdown is shown on figure 4.3 below. ,00% 1,282% 65,385% 30,769% 2,564% primary school high school university master doctorate 72 http://ijcf.ticaret.edu.tr figure 4.3: occupation breakdown of the participants device ownership multiple selection was allowed in device ownership question. even if they don’t own a computer or tablet, all of the participants stated that they own a smartphone. 3 participants which is 1,3 percent of total, stated that they have smartphone only. while 51 participants which is 21.8 percent of total stated that they own a computer and a smartphone together, 180 participants which is 76.9 percent of total stated that they own a computer, a smartphone and a tablet all together. average number of device owned by each participant is 2.8. time spent on devices the range of hours spent on computer is between 0 and 15 while it is between 1 and 18 for smartphone, between 0 and 3 for tablet. in average, 7.2 hours is spent on the computers per day even as 5.8 hours is spent on a smartphone and 1.0 hour is spent on a tablet. online shopping situation 228 individuals by 97.4 percent of the participants stated that they have shopped online while only 6 individuals by 2.6 percent stated that they have never made online shopping. the reasons not to shop online multiple selections was allowed in this question. among the participants who never shopped online, need of inspecting products physically is outstanding from the other reasons by 50 percent. security concerns follow it by 33 percent and product availability by 17 percent come after. the reasons not to shop online are shown on figure 4.4 below. 10,256% 6,410% 83,333% doesn't work part-time work full-time work 50% 33% 17% 0% 10% 20% 30% 40% 50% 60% i would like to inspect products physically online shopping is not secure the products i am looking for are not available on internet 73 http://ijcf.ticaret.edu.tr figure 4.4: the reasons not to shop online preferred devices to shop online multiple selection was allowed in this question. online shoppers among the participants prefer computer and smartphone mostly by 32 percent. computer, smartphone and tablet all together are preferred by 29.4 percent while only computer is preferred by 21.5 percent. only tablet by 6.6 percent, only smartphone by 5.3 percent, computer and tablet together by 3.9 percent and lastly smartphone and tablet together by 1.3 percent follow in preference for the device to shop online. the reasons to shop online multiple selection was allowed in this question. “saving time” is outstanding from the other reasons by 72 percent. delivery directly to home or office follows by 71 percent, easier shopping experience by 62 percent, product/price comparison by 61 percent, better prices by 54 percent, getting product information easily by 39 percent, online exclusive products by 26 percent and free delivery by 20 percent come after. the reasons to shop online are shown on figure 4.5 below. figure 4.5: the reasons to shop online most preferred online shopping categories multiple selections was allowed in this question. travel and bookings category, which is like purchasing plane tickets or booking hotel rooms, have been stated as preferred online shopping category by online shopper participants in 100 percent. fashion by 79 percent comes after, financial services and congrats-souvenir categories both by 70 percent follow. grocery shopping has been stated as preferred online shopping category by 43 percent while technology gets the least preferred category by 39 percent. the most preferred online shopping categories are shown on figure 4.6 below. 72% 71% 62% 61% 54% 39% 26% 20% 0% 10% 20% 30% 40% 50% 60% 70% 80% 74 http://ijcf.ticaret.edu.tr figure 4.6: the most preferred online shopping categories most popular local e-commerce sites multiple selections was allowed in this question. hepsiburada.com has been stated as preferred local e-commerce site by 55 percent among the participants who shop online. while markafoni.com has been preferred by 49 percent, trendyol.com by 44 percent, gittigidiyor.com by 38 percent and sahibinden.com by 37 percent follow. n11.com by 26 percent, mobile application getir by 22 percent, teknosa.com by 14 percent, kliksa.com by 8 percent and shopigo.com by 8 percent come after. the most popular local e-commerce sites are shown on figure 4.7 below. figure 4.7: the most popular local e-commerce sites international e-commerce usage 161 individuals, which is 70.6 percent of all participants who shopped online, have stated that they shop on international e-commerce sites while 67 individuals which is 29.4 percent of all participants who shopped online have stated that they do not. reasons to shop on international e-commerce sites multiple selection was allowed in this question. product unavailability in turkey has been stated by 85 percent of the participants who shop on international e-commerce sites. better prices by 47 percent follows, easier user experience 100% 79% 70% 70% 43% 39% 0% 20% 40% 60% 80% 100% travel & bookings (plane tickets, hotel bookings etc.) fashion (dress, shoes etc.) financial services (banking, credit, insurance etc.) congrats, souvenir (flower, cake etc.) grocery (food, personal care etc.) technology (smartphone, tv, camera etc.) 55% 49% 44% 38% 37% 26% 22% 14% 8% 8% 0% 10% 20% 30% 40% 50% 60% 75 http://ijcf.ticaret.edu.tr and free delivery option come after by 7 percent for both. reasons to shop on international e-commerce sites are shown on figure 4.8 below. figure 4.8: reasons to shop on international e-commerce sites most popular international e-commerce sites in turkey multiple selections was allowed in this question. amazon.com has become the most stated site among the participants who shop on international e-commerce sites by 81 percent. ebay.com by 59 percent and asos.com by 36 percent come after. alibaba.com and aliexpress.com have been stated by 25 percent and 24 percent in order. the most popular international e-commerce sites in turkey are shown on figure 4.9 below. figure 4.9: most popular international e-commerce sites in turkey payment methods while shopping online multiple selections was allowed in this question. credit card method has been stated by 97 percent of the participants who shop online. digital payment tools like paypal etc. have been stated by 33 percent, debit card by 16 percent, cash at the door by 9 percent, money transfer by 5 percent and mobile payment by 3 percent follow. payment methods while shopping online are shown on figure 4.10 below. 85% 47% 7% 7% 0% 20% 40% 60% 80% 100% products i look for not available in turkey better prices user experience is easier free delivery 81% 59% 36% 25% 24% 0% 20% 40% 60% 80% 100% 76 http://ijcf.ticaret.edu.tr figure 4.10: payment methods while shopping online selling a product on c2c sites 105 individuals by 46.1 percent of all participants who shopped online have stated that they have sold a product on c2c e-commerce sites while 123 individuals by 53.9 percent have not. purchasing a product on c2c sites 161 individuals by 70.6 percent of all participants who shopped online have stated that they have purchased a product on c2c e-commerce sites while 67 individuals by 29.4 percent have not. 5. conclusion in order to have a better understanding of online shopping behavior in turkey, conducted survey results have been analyzed. from 234 participants, 141 of them are women by 60.3 percent and 93 of them are men by 39.7 percent. while age range of participants is between 22 and 41, average age is 29.4. most of the participants are graduated from a university by 65.4 percent, master degree by 30.8 and doctorate degree by 2.6 are observed as education level. majority of the participants have stated that they work full-time by 83.3 while 10.3 percent have stated that they do not work. all of the participants have at least a device from computer, smartphone or tablet. smartphone is owned by all of the participants. while the largest range is in time spent on smartphone, which is between 1 and 18 hours, the average time spent on devices per day are, 7.2 hours on computer, 5.8 on smartphone and 1.0 hour on tablet. most of the time is spent on computer or smartphone on daily basis. since the smartphones are owned by all of the participants and time spent on smartphones is high, mobile site and mobile application production or development may be considered by the e-commerce companies. 97.4 percent of the participants have stated that they shop online. the participants who do not shop online, state the main reason not to shop online as their need to inspect product physically by 50 percent, security concerns by 33 percent and product unavailability on internet by 17 percent come after. one of every 3 participants have stated that they prefer computer and smartphone to shop online. 29.4 percent of the participants has stated that they use computer, smartphone and tablet for online shopping purposes. the most specific reason to shop online has observed as “saving time” by 72 percent of participants who make online shopping. instead of going to a physical store and make shopping there, people prefer to shop online and save time for other purposes. “delivery directly to home or office” is the second most specific reason to shop online by 71 percent so it can be considered as people do not will to carry packages or bags along them but recieve them at home or office. in the light of these two major results, time saving and delivery concepts can be the focus in e commerce marketing campaigns. while 62 percent thinks e-commerce provides an “easier shopping experience”, 61 percent states “product/price comparison alllowance” is one of the reasons to shop online. as 39 percent states 97% 33% 16% 9% 5% 3% 0% 20% 40% 60% 80% 100% credit card digital payment tools like paypal etc. debit card cash at the door money transfer mobile payment 77 http://ijcf.ticaret.edu.tr “getting product information easily” is one of the reasons to shop online, it can be considered as accessible information and comparisons are drivers of e-commerce. of course “better prices” are stated by more than half of the participants. online exclusive products and free delivery options followed these reasons by below 30 percent. “travel and bookings” category has been observed as the most shopped category among all online category options by 100 percent. secondly, “fashion” category comes by 79 percent. so it can be said that travel and fashion industries enjoy the e-commerce mostly. the third place is shared between “financial services” and “congrats-souvenir” categories by 70 percent. “grocery” category has been observed by 43 percent, so it can be argued there is an opportunity for potential growth. “technology” category has been observed as the last preferred category by 39 percent, so it can be argued that people tend to inspect or try expensive products physically before they make the purchase decision. hepsiburada.com has been stated as the most popular local e-commerce site by 55 percent. secondly markafoni.com by 49 percent and at the third place trendyol.com by 44 percent follow. top 3 local e-commerce sites can be considered as under dominance of mass and fashion markets. c2c platforms gittigidiyor.com and sahibinden.com have been observed in similar percentages, by 38 and 37 percent in order. n11.com by 26 percent followed by getir by 22 percent, teknosa.com by 14 percent, kliksa.com and shopigo.com both by 8 percent. it can be discussed that less popular e-commerce sites may invest in marketing to increase awareness. international e-commerce sites are used by 70.6 percent of the participants who shop online. the main reason behind it has been observed as “products i look for not available in turkey” by 85 percent. it can be argued that if unavailable products are distributed in turkey, distributors can find theirselves a market. “better prices” by 47 percent follows, so it can be considered as prices for some products are higher than international markets or there is a misperception among the consumers. “user experience is easier” and “free delivery” both by 7 percent come after. the e-commerce giant amazon.com takes the leadership as the most popular international e-commerce site by 81 percent. ebay.com has the second place by 59 percent and asos.com has the third place by 36 percent. alibaba.com and aliexpress.com have very similar percentages by 25 and 24 percent in order. it can be argued that people find the products that are not available in turkey on amazon.com easily since it has a wide portfolio of various products. the most preferred payment method has been observed as “credit card” by 97 percent. “digital payment tools like paypal etc.” has the second place by 33 percent. “debit card” method has been stated by 16 percent, so some of the consumers prefer to make the payment directly from their accounts. “cash at the door” by 9 percent, “money transfer” by 5 percent and “mobile payment” by 3 percent come after. if any of e-commerce sites which don’t accept credit cards but other payment methods, it can be claimed that their revenues would decrease dramatically. 46.1 percent of the participants have stated that they have sold a product on c2c platforms, while 70.6 percent have stated that they have purchased a product from c2c platforms. it can be considered that users tend to make a purchase more than selling a product. references afra, s., 2010., ecommerce 2000 – 2010 turkey. http://www.sinaafra.com/ecommerce-2000-2010-turkey-2, accessed 28.11.2015. afra, s., 2013., digital bosphorus: the state of turkish ecommerce 2013. http://www.sinaafra.com/digitalbosphorus-the-state-of-the-turkish-ecommerce-2013/, accessed 28.11.2015. anadolu agency, turkey marks world population day as eu's youngest country, 2014. http://www.aa.com.tr/en/economy/turkey-marks-world-population-day-as-eus-youngest-country/142375, accessed 27.11.2015. büyükyıldırım, ü., 2015, türkiye’de e-ticaretin gelişme potansiyeli [potential of e-commerce development in turkey]. http://www.umityildirim.com/turkiyede-e-ticaretin-gelisme-potansiyeli/, accessed 29.11.2015. cedetaş, b., n.d, e-ticaret dünü bugünü türkiye’den örnek uygulamalar [e-commerce by yesterday, today cases from turkey], http://yunus.hacettepe.edu.tr/~tonta/courses/fall2001/kut680-bileko/e-ticaret.htm, accessed 02.12.2015. 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http://www.piramiteticaret.com/blog/turkiye-de-e-ticaretin-bas-dondurucu-buyume-hizi-66.aspx http://www.tubisad.org.tr/tr/library/reports/t%c3%9cb%c4%b0sad%20e-ticaret%202014%20pazar%20b%c3%bcy%c3%bckl%c3%bc%c4%9f%c3%bc%20raporu.rar http://www.tubisad.org.tr/tr/library/reports/t%c3%9cb%c4%b0sad%20e-ticaret%202014%20pazar%20b%c3%bcy%c3%bckl%c3%bc%c4%9f%c3%bc%20raporu.rar http://www.tuik.gov.tr/prehaberbultenleri.do?id=18660 79 http://ijcf.ticaret.edu.tr commission regulation (ec) no 794/2004 of 21 april 2004 implementing council regulation (ec)no 659/1999 laying down detailed rules for the application of article 113 of the tfeu, oj ue, l 140, 30.04.2004, p.1-134. case c-343/95, judgement of march 18, 1997, calě & figli versus servizi ecologici porto di genova (court reports 1997, pp. i-1547). european commission, communication from the commission to the european parliament and the council the repercussions of the terrorist attacks in the united states on the air transport industry, com 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zawatka-gerlach, berlin und brandenburg fordern einsicht in antragspapiere, der tagesspiegel, 1.06.2015, web edition: http://www.tagesspiegel.de/berlin/eu-pruefverfahren-zum-ber-berlin-und-brandenburg-forderneinsicht-in-antragspapiere/11849842.html, access 20.09.2015. international journal of commerce and finance, vol. 9, issue 1, 2023, 40-67 * * i̇stanbul ticaret university, turkey, ansumanasdkhn@gmail.com ** i̇stanbul ticaret university, turkey, necdetsensoy@ticaret.edu.tr 40 financial reporting for non-profit organizations: the case of peace corps gambia ansumana saidykhan * necdet sensoy ** submitted: 20.12.2022 accepted: 10.03.2023 published: 06.07.2023 abstract concerns about the non-profit sector's alleged lack of accountability and transparency have led to calls for the creation of accounting standards or recommended practices. this should be a framework for covering all aspects of the npo sector, from governance and compliance to information asymmetry and transparency, and effectiveness. the purpose of this article is to review the financial statements of the peace corps gambia, in view of the ifr4npo prepared by cipfa and search for some common points. keywords: non-profit organisation, financial reports, peace corps gambia, cipfa, ifr4npo jel classification: g1, m4 1. introduction non-profit organizations (npos, henceforth) are becoming increasingly influential and powerful across the world. they range in size from small and local to huge, national, and worldwide organizations and encompass a wide range of social activities, such as religion, politics, education, health, the environment, charity, and so on. the most important thing that can give a clear picture of the performance of these organisations and an opportunity to evaluate their activities, is the nature of their financial reporting, which has the effect of increasing the trust of their donors and financiers. it has been observed that the financial statements of many npos operating globally are not perfect in terms of disclosing true and fair information. many international journal of commerce and finance ansumana saidykhan necdet sensoy 41 of them just provide lists of activities with the belief that this will give the public a clear picture of their financial resources and how they were distributed (dhanani & connolly, 2015). these organisations are inattentive to the necessity of the preparation of financial statements and attached notes which are so important to access the required financial reporting according to recommended financial reporting standards for npos. however, the sector's growth and reputation have been tempered by high-profile incidents of financial misappropriation, organizational inefficiencies, and abuse of power (fassin, 2009), and concerns are being raised about whether ngos embrace the same accountability and transparency standards that they demand from others (chunakov et al., 2019). providing "high-quality accounting and reporting information", is a vital component of carrying out the responsibility to major stakeholders (crawford et al., 2018a). the charity finance group (cfg) symposium (2012) noted the need for a "common understanding of npos' financial reporting so that funders, beneficiaries, and international networks may use this information responsibly. financial reporting, together with non-financial and narrative reporting, may be one way for npos to fulfil pluralistic accountability to their numerous stakeholders (ryan et al., 2014). however, there aren't many countries in the world with npospecific requirements. financial reporting doesn't have a sector-specific conceptual framework, and the regulation of the standards that are there is usually substandard (mcdonnell & rutherford, 2019). the creation of the unique financial reporting framework and consideration of npo financial reporting concerns need a clear understanding of what is meant when the word 'npo' is used. with such a wide range of npos, any attempt to categorize them risks mistakenly excluding organizations that may benefit from the guidance being prepared by the chartered institute of public finance and accountancy (cipfa). non-profit institutions servicing homes are not the only organizations that may be classified as npos because they have non-profit features. private businesses, for example, charge market prices for the goods and services they create while reinvesting any surpluses to advance service delivery goals. they (private businesses) are also classified as non-profits since they do not seek financial rewards from investors. while many npos are likely to exhibit all of these broad features to some degree or another, they are meant as indicators of an organization's status as an npo rather than a set of regulations. as a result, an organization needs not to possess all of the qualities to be classified as an npo for financial reporting reasons. it might be strongly aligned with certain features while being completely unaligned with others. some non-profits, for example, are wholly funded by the sale of products and services, with all earnings going international journal of commerce and finance ansumana saidykhan necdet sensoy 42 toward furthering public-benefit goals. npos are likely to gain from the guidance in this case, but other features may be less applicable. this article aimed at highlighting the reality of financial reporting by peace corp gambia as a non-profit organisation and the importance of adopting international standards to improve this reporting process through the focus on the implementation of the international financial reporting for non-profit organisations (ifr4npos) standard. it is supposed that the npos adopting this standard will improve the process of their financial reporting and increase the users’ confidence in their financial information. the importance of studying the financial reporting process of non-profit organisations and improving it, is as important as the financial reporting output of the for-profit organisations, since the two are part of society and provide services regardless of their goals, whether profitable or not. 2. literature review financial reporting, according to(dhanani et al., n.d.) and (crawford et al., 2018b), is a crucial component of a set of social and functional accountability that is significant to a wide range of stakeholders for determining an npo's effectiveness and stability in the pursuit of mission fulfilment. according to (baskerville & grossi, 2019), financial reporting transparency, which affects npo accountability, has to be extended to conceptually sound and unique financial reporting standards. some believe that international standards will be a cost-effective solution to ensure npo accountability given the increasing rise of npos to support community development in developed and less-developed countries (melookaran et al., 2015) and that it would result in savings in terms of audit and regulatory work. despite the need for npo international financial reporting standards, only a small number of countries such as canada, england, wales, scotland, belgium, new zealand, switzerland, and the united states have npo sector-specific standards in place (crawford et al., 2018). in the gambia, there is no standard reporting structure for npos. comparatively, the public and for-profit sectors can benefit from an associated set of international accounting standards and sector-specific that are issued by the international public sector accounting standard board (ipsasb) and the international accounting standard board (iasb) respectively (ipsasb, 2014; iasb, 2010). these frameworks detailed the aspects of information that are likely to be most beneficial to users in certain sectors and describe the respective goals of financial reporting. the academic literature, however, does not support using for-profit or public sector practices to report npo performance because they ignore taking into account the issues unique to npos and negatively affecting npo accountability. these techniques were taken from the business sector, passed international journal of commerce and finance ansumana saidykhan necdet sensoy 43 through the public sector, and applied ad hoc to situations in the voluntary sector (crawford et al., 2018b). another crucial point is that the npo sector's opinions were not extensively solicited during the proper procedures and open discussions that led to the iasb and the ipsasb's declaration of standards. according to some, globally adopted, conceptually sound accounting standards may support disclosures that are complete, relevant, reliable, and comparable across and within jurisdictions. these standards should be subjected to regulation, oversight, and audit, and transparent, helping to explain to stakeholders how an npo's efforts translate into results that help it achieve its mission (yasmin & ghafran, 2021). the chartered institute of public finance and accountancy (cipfa) and humentum1 are currently partnering on a project called "international financial reporting for non-profit organizations (ifr4npo)." the goal of this project is to create the first globally applicable financial reporting guidance for the non-profit sector. the project is a five-year program created to overcome the current financial reporting gaps. cipfa hosted a meeting of standard-setters from countries such as australia, canada, japan, ireland, the netherlands, norway, sierra leone, south africa, turkey, the uk, the usa, and zimbabwe to discuss the potential creation of npo-ifr standards or guidelines for the industry (the chartered institute of public finance & accountancy & humentum, 2021). it focuses on the perspectives of involved parties in npo financial reporting throughout the world to assess the potential and possibility for npo-ifr to support accountability. also the project analyses perspectives regarding worldwide contemporary npo financial reporting practices and beliefs, accountability linkages between npos and their stakeholders, and consequences for the sector's development of globally convergent financial reporting. the practical and political relevance of strong and comprehensive displays of accountability, especially financial accountability, is increasingly acknowledged due to their growing economic and social significance (christine ryan, janet mack, stuart tooley, 2014). from a theoretical perspective, several scholars argue the necessity for npo accountability (ahmed et al., 2019). all organizations may be expected to report truthfully on their present financial status, according to (mulgan, n.d.). the reporting frameworks detail the aspects of information that are likely to be most beneficial to users in certain industries and describe the respective goals of financial reporting. understandability, timeliness, comparability, and verifiability are 1 humentum was founded in july 2017 by the merger of inside ngo, named lingos, and mango. they are a leading global non-profit working with humanitarian and development organizations to improve how they operate and to make the community more equitable, accountable, and resilient. international journal of commerce and finance ansumana saidykhan necdet sensoy 44 the qualitative attributes of pertinent information that accurately depicts the underlying transactions and events of the reporting entity in the context of the sector. these traits facilitate the disclosure of financial and non-financial information for accountability reasons and support public views of financial reporting's openness. according to (dhanani & connolly, 2015) and (hall & o’dwyer, 2017), the npo sector is distinguished by its accountability relationships with a wide range of stakeholders. these stakeholders include beneficiaries, donors, the government, and regulators. the dominant logic of comparability or uniformity to drive a transactional or sector-neutral stance is therefore used when these powerful stakeholders seek globalization (cordery et al., 2019). this is possible in countries where ifrs is endorsed as the ideal option, even though for-profit accounting is different from npo accounting. numerous studies done in the past have shown how frustrating these variations are, especially in light of the possibility that globalization would enable npos to lower compliance costs. the literature also cautions against the lack of the users' "voice" in the process of establishing financial reporting standards (bamber & mcmeeking, 2016). the main determinants of npo reporting at this moment are lawmakers, standard-setters, regulators, and funders also determine what and how reporting is carried out. there is evidence that a "third set of norms," designed expressly for npos, is gaining popularity. this data reveals that international public sector accounting standard (ipsas) and international financial reporting standard (ifrs), two worldwide standards for reporting on the public and for-profit sectors, are now widely seen as being inadequate or unsuitable for non-profit organizations. 3. theoretical framework 3.1 fund accounting fund accounting is a method of financial reporting used when public sectors receive restricted contributions. a fund is described as a distinct pool of financial and other resources created to support certain activities that are managed and reported separately from other accounting entities. funds are created when there are limitations on the uses of specific resources. according to (herzlinger & sherman, 1980), "fund accounting was designed to report truthfully the financial transactions specific to non-profit organizations." this statement reflects the responsibility or stewardship paradigm. the underpinning of fund accounting is the explicit formation of distinct funds (sometimes known as "pots of assets" separated for accounting reasons). additionally, it may be utilized to improve organization monitoring and guarantee total transparency when using certain sources concerning your budget. an organization that is international journal of commerce and finance ansumana saidykhan necdet sensoy 45 not for profit may legally establish several funds to represent the various limitations imposed on it, either internally or externally. fund accounting is a popular and preferred choice among npos since separate financial statements are issued for each fund to address the issue of constrained resources and demonstrate transparency. fund accounting also enhances planning, budgeting, and performance assessment by keeping track of numerous funds and presenting a clear picture of the organization's financial situation. how fund accounting works an essential management duty is keeping track of net assets that are restricted internally and contributions that are restricted externally. utilizing fund accounting is a typical approach to accomplishing this. fund accounting is an option for a non-profit organization. in other words, even if donations are regulated by donors, fund accounting is not required. it is required to keep track of limited donations to make sure they are used under the restrictions. npos are required to account for all monies received, including any particular cash donated for use in a specific project, as well as the general responsibility to properly utilize the organization's resources. by publishing separate financial accounts for each "fund," the problem of the need for separate accounting for restricted resources to show accountability and stewardship is resolved. the major reason for fund accounting's widespread adoption by npos is this. inter-fund transfers and inter-fund appropriations due to the idea of fund accounting, inter-fund transfers and appropriations are specific to npos and increase the complexity of financial statements. while inter-fund appropriations refer to the use of competent authorities to approve the use of resources for certain objectives, interfund transfers refer to the use of "transfers" to allocate resources between funds. transactions and accounts connected to similarly limited activities are grouped in fund accounting. each fund keeps track of its receipts, payments, assets, and liabilities in addition to its net asset balance (when using fund accounting, the latter is called a fund balance). these many diverse funds are sometimes merged into a limited number of comparable funds for reporting purposes especially external reporting. endowments, limited funds, and unrestricted funds are often represented by these funds. there is also a distinction between funds that are restricted internally (board-restricted funds) and those that are restricted externally (i.e. by the donors). for each type of fund, the statement international journal of commerce and finance ansumana saidykhan necdet sensoy 46 of operations and fund balances lists the revenues, expenditures, excess (or deficit) of revenues over expenditures, and change in the fund balance as a whole. the closing fund balance is determined as follows: opening fund balance + excess of revenues over expenditure = closing fund balance. the statement of financial position displays the assets, liabilities, and fund balance for each of the chosen fund categories. in an equation, fund balance = assets liabilities. it is possible to transfer money from internally restricted funds to unrestricted funds; in this case, the net fund balance of the former would be reduced and the net fund balance of the latter would be increased proportionately. any transfers between funds typically need board permission. 4. financial reporting standards for npos 4.1 international financial reporting standards for npos some believe that international standards will be a cost-effective strategy to ensure npo accountability. this will result in savings in terms of audit and regulatory work given the increasing rise of npos to aid community development in developed and less-developed countries (barrientos, e., & reilly, 2016). when donors realize that their money has been used responsibly, they have more trust and confidence in npos. a few countries, including canada, england and wales, scotland, belgium, new zealand, switzerland, and the united states, have npo sector-specific rules, notwithstanding the need for an international standard for non-profit organizations' financial reporting (npo-ifr). there is no overarching reporting structure or framework for npos globally. due in part to the absence of a single acknowledged worldwide accounting framework, donors on their part have devised financial reporting standards to match their unique needs, but this has produced a range of financial reporting requirements. annual reporting by npos is crucial for stakeholders to monitor npo activities (indriani, 2015). it is also "increasingly acknowledged as one of the most extensively utilized methods with which npos may account to their stakeholders." however, modern npo financial reporting practices are often jurisdiction-specific; in fact, it is common for npos to create reports in a variety of formats depending on the intended audience (reheul et al., 2014). additionally, due to a lack of regulation and various organizational structures, financial reporting varies not just depending on the audience for that information but also frequently lacks uniformity within a given country (ball, 2012). consequently, there are differences in financial reporting between jurisdictions as a result of the absence of accepted npo-specific international standards. varied financial reporting international journal of commerce and finance ansumana saidykhan necdet sensoy 47 obligations as imposed by donors can place a significant burden on npos, especially when combined with the many rules and regulations that are applicable in various regions. the international financial reporting for non-profit organizations (ifr4npo) is a project initiated to address these difficulties for enhancing npo governance and financial management. the chartered institute of public finance and accountancy (cipfa) and humentum are working together to implement the project, which is being supported by contributions and grants. making npo financial reports more transparent, reliable, and easy to compare, will help a wide spectrum of npos and their stakeholders. the following three goals determined by the ifr4npo standard will be achieved over years to come by the guidance. objective 1: to raise the standard, trustworthiness, and openness of npo financial disclosures. objective 2: to balance the demands of preparers and users to facilitate the supply of npo financial information that is helpful for decision-making and accountability. objective 3: addressing particular npo challenges will help to make npo financial reporting more comparable. the following are three steps for creating guidelines on international financial reporting for npos. the first of three steps, as shown below, is the consultation paper. consultation  recognizing problems and potential solutions  activating country champions and advisory groups  increasing community and website awareness this consultation paper is released on jan 2021. development  creating the draft guideline  outlining suggested remedies  getting regional input final product: exposure draft is to be released in mid-2023 launch  finishing and releasing the guidance. international journal of commerce and finance ansumana saidykhan necdet sensoy 48  creating instructional materials  aiding with transition and adoption final recommendations are expected to be released in mid-2025 the main objective is to educate stakeholders about the importance of universal financial reporting standards for non-profit organizations that will be used globally. senior npo executives, grantmakers (big donors), regulators, governments (including tax authorities), auditors, npo finance teams, creditors, scholars, and members of the public who support or benefits from the activities of npos are a few examples of npo stakeholders. therefore, the consultation paper examines topics that are thought to be significant to those people or entities within these groups that have an interest in npo financial reporting. the consultation paper's content has been set up so that one can remark on part or all of its elements. this is done to elicit feedback from a wide variety of people or groups who might have various interests in npo financial reporting. the consultation paper provides several recommendations. these include a model that has been put out for creating the guidance. the purpose of making these suggestions is to allow for input to be given from a common platform, which will subsequently help with the analysis of the replies. the input received will be used to inform the creation of the exposure draft (international financial reporting for non-profit organisations, 2021). introducing cipfa cipfa, initially called the corporate treasurers and accountants institute, was established in manchester in 1885 and has contributed to the development of public financial management in the uk and increasingly around the world. public finance professionals are represented by the chartered institute of public finance and accountancy (cipfa). its members and trainees are employed by the whole public sector, as well as national audit organizations, sizable accountancy firms, and other organizations where the effective and efficient management of public funds is required. the credentials of cipfa serve as the basis for a career in public finance because it is the only professional accountancy organization in the world that focuses on public services. additionally, they support good performance in public services, converting the knowledge and expertise of members into clear recommendations and useful services. by advocating for effective public financial management and good governance on a global scale, cipfa is a leader in public finance. to promote public finance and support better public services, they collaborate with international assistance donors and organizations, partner international journal of commerce and finance ansumana saidykhan necdet sensoy 49 governments, accounting authorities, the larger public sector, and private sector partners throughout the world. the project for financial reporting for npos stakeholders in non-profits need financial reporting data that shows whether an npo is achieving its goals in a way that maximizes economy, efficiency, and effectiveness in resource utilization, while also conforming to limitations and rules in the context of its long-term financial health. the project for financial reporting guidance will assist all npos in producing financial reports that meet the standard needs of a wide range of stakeholders for financial information. it is not intended to include specialized reports produced especially to satisfy the information requirements of donors for a particular grant. all npos, from small membership groups to significant global humanitarian organizations, are expected to gain from the guidance. the benefits of the guidance to particular npos will differ, however, due to the diversity of organizations within the sector, the financial reporting contexts they operate in, and the extent to which there are already jurisdictional level npo-specific requirements. like previous international financial reporting standards, each jurisdiction will choose whether to implement the guidance entirely or in part. the guidance won't be needed as a result. a consultation paper is the first step in the process of cipfa developing globally acceptable financial reporting standards for npos. parties interested in or affected by npo financial reporting have their first opportunity to learn more about the planned scope of the guidance and the procedure by which it will be developed through the consultation paper. it is intended to start a dialogue and solicit feedback so that members of the npo community can assist in creating a solution for the sector. the not-for-profit sector consists of a diversified range of institutions with accountability mechanisms with various stakeholder groups for a variety of social activities and goals. although accountability frameworks for the sector have been offered in academic literature, it is still unknown how well these frameworks can explain current financial reporting practices globally and guide modern financial reporting advances(dumay et al., 2017). when compared to the for-profit and governmental sectors, the npo sector stands out because it operates "in an atmosphere of predominantly non-exchange interactions with volunteer funders" (christine ryan, janet mack, stuart tooley, 2014). this makes it difficult for an npo to show its numerous stakeholders that it is accountable for fulfilling its social objective. in contrast to the for-profit industry, there are no owners who may be given priority when it comes to international journal of commerce and finance ansumana saidykhan necdet sensoy 50 accountability for generating financial value. the international accounting standards board's (iasb) conceptual framework's single-minded emphasis on prioritizing reporting to investors and lenders to support economic decision-making is inappropriate for the npo sector. the international public sector accounting standards board (ipsasb) conceptual framework, which differentiates its users (the general public and their political representatives) of public sector financial reporting for accountability reasons and as input for decision-making, is also unhelpful (crawford et al., 2018c). there is no similar organization as the iasb or ipsasb on a global scale for the npo sector, according to current arguments. the goals of the "guidance" project of cipfa will be realized by general-purpose financial reports prepared on an accrual basis and representing the shared needs of many diverse stakeholders. accrual-based financial information provides a comprehensive picture of an entity's financial condition and performance. the information that can be used to hold management responsible and make decisions about funding and other things is enhanced. narrative, non-financial information gives additional information required for understanding an entity's aims for accountability, strategy, risk, performance and decision-making purposes. since the 1970s, organizations in the public and private sectors as well as their stakeholders have greatly benefited from the development and application of international standards. it would be beneficial to have a global accounting standard or guidelines specifically for nonprofit organizations. in a global survey conducted in 2014 that received more than 600 responses from 179 countries, 72% of participants reportedly supported the proposal (zainon et al., 2014). to improve the possibility that it will be accepted by any jurisdiction, it will be prepared using reliable techniques. the guidance should be used more frequently by funding organizations in their compliance and due diligence processes, and they should insist that grantee financial reports be generated in conformity with its requirements. 5. peace corps gambia 5.1 history of peace corps gambia at the government of the gambia's request, the first peace corps volunteers came to the country in september 1967. they established local cooperatives and engaged in specialized crafts like carpentry, engineering, and mechanic labour. another set of volunteers came to help in education two years later. since then, the major objective of peace corps work in the gambia has been education. education volunteers have established resource centres for elementary schools, created curriculum and teaching resources for classes in mathematics, international journal of commerce and finance ansumana saidykhan necdet sensoy 51 science, english, environmental protection, and forestry, and trained teachers in these disciplines(peace corp, 2013). on the other hand, environment peace corps volunteers have participated in managing seven department of forestry divisional nurseries and improved vegetable and fruit tree output in school gardens and orchards. they have also helped control freshwater runoff and seawater intrusion built homemade dams that have increased rice productivity and produced and sold historical tales for the traditional griot society. health volunteers fight against illnesses including malaria, respiratory infections, diarrhoea, and hiv/aids as well as other common diseases. additionally, they support mother and child health by fostering community development and education (peace corps gambia annual review for 2016, 2016). 5.2 financial reporting for non-profit organizations and financial statements of peace corps gambia financial reporting is essential for transparency. the financial statements which are tools of communication between the reporting entity and the stakeholders can shed light on a nonprofit's effectiveness and the proportion of resources it allocates to achieving its primary goals in addition to its financial health. the financial statements which are common to all entities are the balance sheet (financial position statement), the income statement, the cash flow statement, and the statement of changes in shareholders’ equity. however, the peace corps as a non-profit organization prepares another special statement which is called, “statement of net costs” as shown below: table 1: statement of net costs international journal of commerce and finance ansumana saidykhan necdet sensoy 52 the statement of financial position for a non-profit organization, commonly referred to as a balance sheet, is a report that provides a quick overview of the organization’s financial situation. in a single document, it measures the assets, liabilities, and net assets of the organization. with regards to the balance sheet of the peace corps, in an analysis of financial position given in a peace corps (peace corps fiscal year 2021 agency financial report, p.17) shows us that there is a balance sheet item called “total net position” instead of “shareholders’ equity”. as a result, "the statement of changes in shareholders' equity" is now referred to as "changes in net position.” this is important for a non-profit organization as having no capital. the change in net assets for non-profits is a surplus or deficit that is carried forward. a non-profit’s primary goal is to carry out its mission rather than to maximize profits. therefore, a non-profit's surplus or loss may not always provide useful information about its performance. assessing a nonprofit’s resource usage is one way of evaluating its performance. net position is defined as, “net position or its equivalent, net assets, is the arithmetic difference between the total assets and total liabilities recognized in the federal government’s or a component entity’s balance sheet. net position may be positive (assets greater than liabilities) or negative (assets less than liabilities) (fasab-federal accounting standards advisory board, 2007). table 2: analysis of financial position for fiscal year 2020-2021 also available are some special balance sheet items such as, “fund balance with treasury”, “deposit fund”, and “clearing accounts”. international journal of commerce and finance ansumana saidykhan necdet sensoy 53  deposit fund: the deposit fund comprises the volunteer readjustment allowance earned by volunteers for each month of satisfactory service and is payable upon their return to the united states. it is observed that the balance has depleted the form financial year 2020 to 2021 as a result of the temporary suspension of overseas programs, with the complete evacuation of all volunteers and trainees from the field, in response to the covid-19 pandemic.  clearing accounts: these are proceeds of sales funds which represent cash received from the sale of assets, primarily vehicles, and are available once transferred to the peace corps appropriated funds to be reinvested in a like-kind replacement purchase (e.g., proceeds from vehicle sales used to purchase replacement vehicles). the liabilities section of the non-profit statement of financial position sums up what the organization owes. the major part of the total liabilities amount as stated in the peace corps financial statement is made up of;  unfunded federal employees’ compensation act (feca) liability: a liability for the direct dollar costs of compensation and medical benefits paid on the agency’s behalf by the department of labour (dol). since the agency is dependent on annual appropriation, it will include the amount billed for the direct costs in its budget request two years later.  federal employee and veteran benefits payable: this is the liability for the actuarial value of future payments for feca as estimated by dol for the agency.  liability for non-entity assets: non-entity assets comprise a deposit fund and clearing accounts. these funds are not available for the use of the peace corps and are not part of the peace corps resources. the peace corps monitors collections, status, and distribution.  liabilities covered by budgetary resources: these include accounts payable for goods and services received by the agency and for the separation and retirement payments for eligible foreign service personal services contractors (pscs) and foreign service nationals (fsns) and other liabilities. the peace corps’ statement of net cost is made up of;  intragovernmental activity: this represents the costs of goods and services provided to other federal agencies. international journal of commerce and finance ansumana saidykhan necdet sensoy 54  public costs: they are classified as goods and services and any revenue earned from outside federal sources. accountability and transparency to stakeholders are two terms frequently used nowadays when discussing the financial reporting of any firm. donors, members, lenders, grantors, consumers, and other people that give npos resources are stakeholders of npos that use not-for-profit financial statements. while some npos may employ the cash basis of accounting, the general accepted accounting principle (gaap) requires that external financial statements be prepared on an accrual basis. all npos must, according to financial accounting standard board (fasb), provide a statement of financial position, a statement of activities or operations, and a statement of cash flows that summarize the entity's overall financial information. additionally, a declaration of functional expenditures must be provided by non-profit health and welfare groups. it is also recommended but not necessary to use comparative financial statements for financial reporting purposes. fasb authorizes npos to offer extra disaggregated information in addition to reporting financial data for the business as a whole, such as fund information, which may be helpful to internal management, donors, and others. peace corps complies with the federal accounting standards advisory board (fasab). the fasab and its sponsors believe that any description of federal financial reporting objectives should consider the needs of both internal and external report users and the decisions they make. this implies a different role for the fasab than for the financial accounting standards board (fasb) and the governmental accounting standards board (gasb). the fasb sets financial reporting standards for privately owned entities in the united states. the gasb sets financial reporting standards for state and local governments (financial et al., 1993). according to “the preamble to statements of federal financial accounting concepts”, the gaap hierarchy provides that statements of federal financial accounting standards constitute level a (the highest level) guidance. statements of federal financial accounting concepts are not gaap. instead, concept statements constitute "other literature" and may only be relied upon by financial statement preparers and auditors to resolve specific accounting issues in the absence of gaap literature. npos in the gambia are subject to less strict reporting obligations due to minimum regulatory requirements since there is no particular accounting standard devoted primarily to npos in the gambia. the peace corps as a us-based organization abides by “the accountability of tax dollars act of 2002”.according to this act, the peace corps must disclose its audited financial accounts to congress and the director of the office of management and budget. these statements serve the agency's goal to enhance financial management and offer precise, international journal of commerce and finance ansumana saidykhan necdet sensoy 55 trustworthy data for evaluating performance and allocating resources. resources allocated by congress and handled by the department of treasury make up the majority of what an agency has available (peace corps agency financial report fiscal year 2021, 2021). financial statements enlighten a wide spectrum of stakeholders, according to ifr4npo. since they are essential records for keeping an npo accountable and for making financial choices, they contain details regarding the financial performance, financial situation, and cash flows of an npo. it might not be obvious which assets and reserves included in the financial accounts can be utilized by a non-profit organization for continuing operations and which ones can only be used for the objectives for which they were granted. the peace corp's financial operations are therefore divided into entity assets and non-entity assets. assets held by the peace corps but not available for use by the agency are referred to as non-entity assets. entity assets are those that the agency is authorized to use in its operations. although the agency is in charge of managing both entity and non-entity assets, they are reported but separated for presentation. the nature of npos and the methods used to support many npos create some special problems with financial reporting. these affect how financial statements are presented and what they say. the fact that npos get funds with restrictions, prohibitions, or other terms attached might imply that they are not free to spend their resources in any way they deemed fit. the level of comprehension of the financial statements by the stakeholders may be crucial here. some gifts could come in the form of endowments, which need to be put into the economy. the capital itself cannot be utilized by an npo, but the income from the investment can be. again, the financial statements could not make this restriction obvious. due to the variety of activities or service areas provided by npos, stakeholders may have differing opinions regarding the information that belongs in the financial statements. some funders might want information in a certain format. for instance, a donor who has donated funds with a condition may want to see a statement that goes beyond the information offered in typical financial statements and displays the cash received from the contribution and the cash payments made with that donation. financial statements often do not include information on the funds received and paid concerning individual donations. donors may be looking for more data to back up their evaluation of how their gifts were used. this may be a particular problem if the gift is just meant to cover a portion of the project's expenses. donors could want details on costs that have been agreed upon but have not yet been incurred and are thus not yet recorded in the financial accounts. additionally, even if these sums are recorded in the financial accounts, donors who international journal of commerce and finance ansumana saidykhan necdet sensoy 56 approve in-kind services acquired by an npo to be deducted from the overall project cost might not be able to verify these numbers. agency (npos and peace corps to be specific) activities are presented in the principal statements: balance sheets, statements of net cost, statements of changes in net position, and combined statements of budgetary resources. the financial statements were prepared using the peace corps' books and records under the guidelines set out for federal agencies by the federal accounting standards advisory board. agency management is responsible for the accuracy of the financial statements. processing many transactions and other events that occur during a financial reporting period leads to the creation of financial statements. finding a specific transaction in the financial accounts is quite unlikely. it may also be confusing for users of financial statements to provide different viewpoints on the same transactions. in general purpose financial statements that are meant to serve the demands of several stakeholders; will be required to take into account the extent to which the various viewpoints of stakeholders may be taken into account. generally, the reporting entity's perspective is used to generate generalpurpose financial statements. it is necessary to balance the conflicting requirements of many parties. in the relevant literature, net assets are defined as “that part of the report which shows the equity of your organization (its total assets minus your total liabilities)”. net assets=total assets-total liabilities. these net assets are subsequently split and organized in accordance with the restrictions imposed on them. donors, grant-makers, and government entities all reserve the right to restrict the contributions made to nonprofits so that they can only be used for certain activities or programs(nonprofit accounting: a guide to basics and best practices | jitasa group, n.d.). for this reason, it's crucial to carefully manage grants and other restricted contributions in your accounting system. the net assets are split into the following categories of restrictions:  without donor restrictions.  with donor restrictions; purpose or timing.  with donor restrictions; held in perpetuity. however, the above types of classifications were not made in the “net position” of the peace corps. instead, the peace corps resources are classified as obligated and unobligated apportioned resources. as stated in the peace corps combined statements of budgetary international journal of commerce and finance ansumana saidykhan necdet sensoy 57 resources, its planned spending was subjected to discretionary and mandatory budgeted spending. table 3: peace corps comparative statement of financial position2 2 the source of this financial statement is “ https://www.peacecorps.gov/about/open-government/budgetand-performance/ ”. https://www.peacecorps.gov/about/open-government/budget-and-performance/ https://www.peacecorps.gov/about/open-government/budget-and-performance/ international journal of commerce and finance ansumana saidykhan necdet sensoy 58 6 comments on the financial statements of peace corps gambia in view of ifr4npo 6.1 information disclosure the annual report contains both qualitative and quantitative information. financial and nonfinancial information are included in the quantitative data. additionally, a lot of annual reports include graphics, diagrams, and illustrations. therefore, according to (song et al., 2013), disclosure is an abstract term that cannot be assessed directly but may be quantified indirectly. an npo may not be able to tell which assets and reserves listed in the financial accounts can be used for on-going operations and which can only be utilized with the reasons for which they were granted. the nature of npos and the methods used to support many npos create some special problems with financial reporting. from the above findings, it can be pointed out that the peace corps’ financial statements are being effectively utilized as a means of communication for information. the statements provided uniform information as a result of a unique reporting guideline (accountability of tax dollar act of 2002), which resulted in consistency in their accounting practices. this, therefore, eases comparing the performances of pearce corps with respective npos. the fact that npos get funds with conditions (stipulations) attached may imply that they are not free to spend their resources in any way they see fit. this can be important for how stakeholders interpret financial accounts. npos are to keep the requirements in the international standards (ifrs standards, the ifrs for smes standard, and ipsas) intact and offer further guidance, as advised by the ifr4npo standard. when it is pertinent to their stakeholders, this guidance may indicate how extra information will be provided in the financial statements which in this case are supplied below the peace corps' financial statements. disclosures relating to restricted funds may be required. it may not be evident what is included as part of an npo (i.e. which, if any, branches are included) and which entities are managed and formed part of an npo's financial statements without extra disclosures. the complexity is in the requirement for transparency, which includes the decisions taken to improve users' understanding of the reporting entity and their capacity to judge if it is to be compared to other npos. it is relevant to keep in mind the difference between figures presented “at a point in time” and figures presented as “cumulative sums over time”. some financial data are calculated at a specific moment in time, such as a specific reporting date. for instance, the accounts payable figure represents the total dollar amount due by the organization to suppliers as of the indicated international journal of commerce and finance ansumana saidykhan necdet sensoy 59 date. another example is the fund balance with treasury amount reported in the peace corps’ statement of financial position at the specified reporting date. the peace corps does not keep agency funds in business bank accounts. all cash receipts and disbursements are processed by the treasury or the u.s. department of state (dos). other financial data is computed as cumulative sums over time, or the overall financial worth of activity over a predetermined period, such as a full year or a quarter of a year, ending on the reporting date. for instance, the peace corps' statement of changes in net position's cumulative costs of operations figure represents the total cost of operations that the organization incurred during the given period. net assets, assets, and liabilities are all "point in time" financial indicators. the terms "cumulative amounts over time" refer to both revenues and expenses. they represent the accumulation of several transactions that took place throughout the period in question. also, it is advised that npos employ the accrual mechanism under ifr4npo. the peace corp applies an accrual basis of accounting. the accrual approach recognizes revenues when received and costs when an obligation is incurred, regardless of receipt or payment of cash. for simplicity, many ngos retain their records on a cash basis and convert them to an accrual basis at yearend to prepare the annual financial statements. the peace corps financial statements must be prepared in accordance with generally accepted accounting principles (gaap) to ensure that they are presented consistently year after year and are comparable between organizations. we can also measure the current liquidity of the nonprofit. doing so can help us better understand which funds are a leverageable part of your operational budget and can be used to take on additional risks, such as expanding the organization. we can do this by calculating the months for cash and assets that your organization has on hand to pay for items outside of your usual expenses. there are two different equations we can use to calculate this: the months of liquid unrestricted net assets (months of luna) and the months of cash on hand. both are calculated using the information located in the non-profit statement of financial position.  months of liquid unrestricted net assets (luna)---to calculate the months of luna, we need to take the total unrestricted net assets found on our nonprofit balance sheet and subtract the property and equipment assets (found in the first section). this is because those assets are tied up in physical belongings (property, software, etc.) and cannot be liquidated to cover additional liabilities. then, divide this number by the average monthly expenses incurred by the organization. the result is the number of months that we can cover with the liquid assets we have on hand. it’s generally recommended that organizations have the assets on hand to cover at least three months international journal of commerce and finance ansumana saidykhan necdet sensoy 60 of operating expenses(non-profit statement of financial position (or balance sheet), n.d.). here’s what to consider when calculating months of luna. to calculate luna for peace corps; 2021 2020 months of liquid unrestricted net assets [ 334,884−44,299 279,510 ] 1.04 [ 293,022−38,230 249,595 ] 1.02 the peace corps months of luna is within the range of 0 and 3 for the accounting years 2020 and 2021. it is therefore recommended that they start considering how to readdress their financial positioning in terms of distributing their resources. this is the most accurate way of calculating an organization’s liquidity and its potential risk simply because it takes into account the organization’s restricted assets ensuring that they are used for the intended purpose.  months of cash on hand---the second equation you can use to find the liquidity of your organization is the months of cash on hand. this calculation does not account for asset restriction, in contrast to the months of luna . however, it is a simpler equation to calculate. we can find it by dividing the average monthly expenses by your total cash and cash equivalents. to calculate the months of cash on hand for peace corp; 2021 2020 months of cash on hand [ 356,173 279,510 ] 1.27 [ 480,031 249,595 ] 1.92 generally, you’ll want to have between three and six months of cash on hand to determine that your organization is in a financially stable and healthy position which is unattainable by the peace corps (within the range of 1 to two months). international journal of commerce and finance ansumana saidykhan necdet sensoy 61 after reading "the peace corps statements of changes in net position for the years ended september 30, 2021 and 2020," the following reconciliation can be made with other financial statements of the peace corps; (000) (000) (000) $ $ $ 1. unexpended appropriations: beginning balance 199,374 appropriations received 410,500 other adjustments (31,796) appropriations used (346,765) change in unexpended appropriations 31,939 total unexpended appropriations as end of 2021 231,313 cumulative results of operations: beginning balances (144,803) change in cumulative results of operations (144803-132404) 12,399 cumulative results of operations (132,404) net position 98,909 (000) (000) (000) international journal of commerce and finance ansumana saidykhan necdet sensoy 62 $ $ $ 2. breakdown of unexpended appropriations 3231,313 beginning balance (144,803) appropriations used 346,765 donations and forfeitures of cash and cash equivalents 869 transfers in/out without reimbursement 66 donations and forfeitures of property 143 imputed financing (note 12) 11,746 other 8,983 total cost of operations 4(223769) net cost of operations 5356,173 cumulative results of operations (132,404) total net position 6 98,909 appropriation means the amount available for peace corps. there is $199,374 carried forward from the year 2020 as the fund not spent. also, an amount of $410,500 is received during the year 2021 and $346,765 was used during the year 2021 and by small adjustment ($31,796) remains not spent of $231,313 as the end of 2021 and disclosed on the balance sheet. thus reflected as unexpended appropriations as a source on the balance sheet. however, we can criticize that there is no breakdown of appropriations used to have information about how the funds are used. peace corps applies a method of disclosure which gives the changes on some important amounts but not the details as the beginning balance of cumulative results of operations and change in cumulative results of operations. 3 disclosed under net position title of the balance sheet 4 disclosed as bottom line of statement of net cost 5 disclosed under the peace corps statement of net cost 6 disclosed on the balance sheet under title net position international journal of commerce and finance ansumana saidykhan necdet sensoy 63 table 4: statements of changes in net position 7 conclusion the objective of this article is to determine the current condition of npo reporting practices and to review the contents and presentation of the peace corps financial statements. it is observed that npos are not efficiently using financial statements as a means of communicating information. there are no globally accepted accounting and financial reporting standards for non-profit organizations as ifrs for privately owned and profit-oriented business entities. also, the international public sector accounting standards board (ipsasb) works to improve public sector financial reporting worldwide through the development of (ipsas), international international journal of commerce and finance ansumana saidykhan necdet sensoy 64 accrual-based accounting standards, for use by governments and other public sector entities around the world (ifac, n.d.). cipfa has a project for financial reporting for npos which is introduced in this article. contents of the financial statements for non-profit organizations are having differences compared to the profit-oriented business entities depending on their unique characteristics. also, additional financial statements are possibly needed as we observe in peace corp. fund accounting is briefly covered since its relevance to npos. the peace corps financial statements are prepared abiding by the “accountability of tax dollars act 2002” and the federal accounting standards advisory board (fasab) since the peace corps is a usa organization. there are no sufficient regulations in the gambia for npos. different regulatory frameworks for various types of npos may exist both within and between national jurisdictions, as mentioned by the ifr4npo standard. for instance, a uk charity incorporated as a business abides by the companies act 2006 rules, but a social enterprise charity will adhere to the charities statement of recommended practice (sorp). the various frameworks might result in various financial reporting consequences for comparable activity. since accounting tends to be a common language to evaluate financial performance for all firms to enable better comparison and comprehension, there has been a convergence of accounting standards around the world in recent years for profit-oriented business entities. one of the goals of this article is to better understand the accounting problems that are unique to the international network of not-for-profit organizations. it also takes into account whether there is merit in adopting certain common accounting standards for npos globally, given the results of the literature review and empirical evidence. the question focuses on whether the creation of standards will allow npos to properly report to their stakeholders and so meet their demands. the essential financial information presented in the statements for npos will be quite consistent because they are required to use just a single set of fundamental underlying accounting standards and reporting methods, although the reporting formats may vary from organization 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(2014). an empirical study on the determinants of information disclosure of malaysian non-profit organizations. asian review of international journal of commerce and finance ansumana saidykhan necdet sensoy 67 accounting, 22(1), 35-55. international journal of commerce and finance, vol. 2, issue 1, 2016, 37-53 forecasting stock market volitilityevidence from muscat security market using garch models m.tamilselvan (ph.d) faculty of accounting &finance, ibri college of technology – sultanate of oman shaik mastan vali (ph.d) head department of business studies,ibri college of technology – sultanate of oman abstract: engle (1982) introduced the autoregressive conditionally heteroskedastic model for quantifying the conditional volatility and by boollerslev (1986), engle, lilien and robins (1987) and glosten, jaganathan and runkle (1993) extended the class asymmetric model. amongst many others, bollerslev, chou and kroner (1992) or (1994) are considered to be the précis of arch family models. in this direction the paper forecasts the stock market volatility of four actively trading indices from muscat security market by using daily observations of indices over the period of january 2001 to november 2015 using garch(1,1), egarch(1,1) and tgarch (1,1) models. the study reveals the positive relationship between risk and return. the analysis exhibits that the volatility shocks are quite persistent. further the asymmetric garch models find a significance evidence of asymmetry in stock returns. the study discloses that the volatility is highly persistent and there is asymmetrical relationship between return shocks and volatility adjustments and the leverage effect is found across all flour indices. hence the investors are advised to formulate investment strategies by analyzing recent and historical news and forecast the future market movement while selecting portfolio for efficient management of financial risks to reap benefit in the stock market. keywords: garch, egarch, tgarch, stock market volatility 1. introduction the stock and index returns are subject to both internal and external shocks that sharply raise the volatility. stock volatility is simply defined as a conditional variance, or standard deviation of stock returns that is not directly observable. the primary function of the government, companies, day traders, short sellers and institutional investors is to understand the characteristics of the movements between return and volatility. hence, the volatility forecasting become the central part of formulating investment strategies. it is approached with two perspectives, such as the variance is constant over a period of time and the other emphasizes that the variance is getting varied over time. there are few facts indentified in high frequency time series data such as fat tail, clustering volatility, leverage effect, long memory and co movement in volatility. fama (1963, 1965) and mandelbrot (1963) were the pioneer studies found the existence of fat tail in the financial time series data and reported that the kurtosis was greater than standardized fourth movement of normal distribution 3. secondly, the data indicates the shock persistence. the high frequency financial time series data is assumed to possess the clustering volatility which large movements followed by further large movements. it could be detected through the existence of significant correlation at extended lag length in correlogram and corresponding box-ljung statistics. thirdly, the negative correlation between the price movement and the volatility which is called as leverage effect. it is a significant character of the time series data. it was first suggested by black (1976). he argued that the measured effect of stock price changes on volatility was too large to be explained solely by leverage effect. further empirical evidence on leverage effect can be found in nelson (1991), gallant, rossi and tauchen (1992, 1993), campel and kyle (1993) and engle and ng (1993). fourthly, the volatility is highly persistent and there is evidence of near unit root behavior in the conditional variance process. this observation led to two propositions for modeling persistence, the unit root or the long memory process. the autoregressive conditional heteroscedasticity (arch) and stochastic volatility (sv) use the later idea for modeling persistence. fifthly, it is observed a big movement between different variables in financial time series across different markets. it suggests the importance of multivariate models in modelling cross correlations in different markets. these observations about volatility led many researchers to focus on the cause of these stylized facts.according to liu and morley (2009) the standard deviation of the returns over the future period should be forecasted accurately to enhance the asset’s performance. volatility forecasting is an essential part in most finance decisions be it asset in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 38 m. tamilselvan & shaik mastan vali http://ijcf.ticaret.edu.tr allocation, derivative pricing or risk management. hence the financial market volatility has become a central issue to the theory and practice of asset pricing, asset allocation, and risk management. this recognition has initiated an extensive research program into the distributional and dynamic properties of stock market volatility. still, the unique model has not yet been proposed to estimate the time varying variance in the future return but several models are being used by researchers and practitioners. 2. the notification procedure economic competitive mechanism of oman sultanate of oman is one of the prominent economies in the gulf cooperation council (gcc) retaining 40% of world oil reserves with 3.19 million people constituting 23.30% rural and 76.70% urban population. the world's 64th largest economy had achieved $80.57 billion and $81.79 billion gross domestic production during 2013 and 2014 with average of $16.76 billion between 1960-2014. the estimated foreign current reserve is $25 billion and debt gdp ratio is well maintained at 4% level. such a robust economy is facing budget crisis due to sustained low oil price which dropped around 40% from the peak last year, since 31st july, 2014 when the oil price declined less than $100 per barrel, and went further down to less than $50 on 6thjanuary,2015 eventually it touched record low of $38.33 on 24th august,2015. the conservative oman economy is generating 83% revenue from hydrocarbon sector. the nation’s budget massively depends around 79% on oil revenues and 21% on non-oil revenue. the overall estimated revenue for 2015 is 11.6 billion omr (oil revenue 9.16 billion omr and non-oil revenue 2.4 billion omr)which is 2.5 billion omr lesser than the estimated public spending of 14.1 billion omr. the cascade effect of oil price drop has an impact on the performance of industries in the different sectors in oman. in these crucial circumstances, the oman government is in the position to implement certain tough financial and investment decisions to manage the current financial turmoil. firstly, cutting the, nation’s largest cash out flow, current expenditure (9.6 billion omr)to the possible extent. secondly, financing the project and infrastructure investment (3.2 billion omr) through privatization and issuing government bonds, thirdly, enhancing the growth and performance of non-hydrocarbon industries to contribute incremental revenue during the crisis. apart from these oman has strong fundamental strength including the stable macro economy, the efficient infrastructure, the economic and investment legislations, the solid growth of non-oil sectors, the financial stability as represented by the safe public finances, banking system, the monetary policy and the stable local currency make the sultanate capable of confronting these challenges with great confidence. 3. about oman capital market the economic growth and job creation are considered to be the primary objectives of any nation which require a huge long term investments in the capital intensive assets such as revenue generating infrastructure, factories and equipment, new housing and commercial buildings, and research and development to expand the productive capacity. there exists a strong positive correlation between the growth of economy and capital market. capital markets are the significant source of long term and short term capital where the firms mobilize funds from public for the existing and new projects thorough issuance of new securities such as shares, bonds, debentures and other money market instruments. the better allocation of low cost capital enhances the productivity and financial returns of the firms. capital market regulations emphasize the firms to ensure an improved business and management models to achieve the financial performance and corporate governance. oman capital market is an emerging market performing a vital role in pooling capital for the projects and investments. it is one of the well-known markets in the gcc region. at present there are 119 companies listed in muscat security market (msm) shariah index which are grouped under financial sector (36-compnies), service sector (36-companies) and industrial sector (47-companies). the omani companies and government raised 1.285 billion omr in 2013 which is higher than the credits provided by commercial banks in oman. the total value of the investors in muscat security market is 14.1 billion omr which is approximately equal to the total deposits of the commercial banks. thus capital market is highly efficient mechanism to transmit funds from investors, savers, and the government companies needing capital. the capital market is designed for this purpose. forecasting stock market volitilityevidence from muscat security market using garch models 39 http://ijcf.ticaret.edu.tr 4. literature review qamruzzaman(2015) examined a wide variety of popular volatility models for chittagong stock return index from 04 january 2004 to14 september 2014 and found that there has been empirical evidence of volatility clustering. the study confirmed that these five models garch-z, egarch-z, igarch-z, gjr-garch-z and egarch-can capture the main characteristics of chittagong stock exchange (cse). qiang zhang (2015) explored the influence of the global financial crisis on the volatility spillover between the mainland china and hong kong stock markets from january 04, 2002 to december 31, 2013. the results indicated that while there is no volatility spillover in the pre-crisis period, strong bi-directional volatility spillover exists in the crisis period. prashant joshi (2014) used three different models: garch (1,1), egarch(1,1) and gjr-garch(1,1) to forecast daily volatility of sensex of bombay stock exchange of india from january 1, 2010 to july 4, 2014 and confirmed the persistence of volatility, mean reverting behavior and volatility clustering and the presence of leverage effect. neha saini (2014) examined and compared the forecasting ability of autoregressive moving average (arma) and stochastic volatility models applied in the context of indian stock market using daily values of sensex from bombay stock exchange (bse). the results of the study confirmed that the volatility forecasting capabilities of both the models. potharla srikanth (2014) modeled the asymmetric nature of volatility by applying two popularly used asymmetric garch models i.e., gjr-garh model and pgarch model in. bse-sensex between 1st july, 1997 to 30th march, 2013. the results revealed that the presence of leverage effect in indian stock market and it also confirmed the effect of periodic cycles on the conditional volatility in the market amitabh joshi (2014) tried to analyze the volatility of bse small cap index using 3 years data from 1st july 2011 to 1st july 2013 suggested that arch and garch terms are significant. mohandass (2013) attempted to study the best fit volatility model using bombay stock exchange daily sectoral indices for the period of january, 2001 to june, 2012. the findings concluded that the non-linear model is fit to model the volatility of the return series and recommended garch (1,1) model is the best one. naliniprava(2013) forecasted the stock market volatility of six emerging countries by using daily observations of indices over the period of january 1999 to may 2010 by using arch, garch, garch-m, egarch and tgarch models. the study revealed that the positive relationship between stock return and risk only in brazilian stock market. the analysis exhibits that the volatility shocks are quite persistent in all country’s stock market. further the asymmetric garch models find a significant evidence of asymmetry in stock returns in all six country’s stock markets. this study confirmed the presence of leverage effect in the returns series. fereshteh , hossein (2013) applied garch (1-1), and garch (2-2) to investigate the volatility using daily index from 2006 to 2010 for selected pharmaceutical group, vehicle group and oil industry respectively. the result showed volatilities feedback in pharmaceutical and oil industry. positive effect of volatilities reign on output in pharmaceutical group, when this effect was negative in oil group. also it was not confirmed in vehicle group. yung-shi liau 2013 studied the stock index returns from seven asian markets to test asymmetric volatility during asian financial crisis. the empirical results showed that both volatility components have displayed an increasing sensitivity to bad news after the crisis, especially the transitory part. ming jing yang 2012 explored the predictive power of the volatility index (vix) in taiwan market from december 2006 to march 2010. the results shown that the predictive power of the models is improved by 88% in explaining the future volatility of stock markets.. rakesh gupta 2012 aimed to forecast the volatility of stock markets belonging to the five founder members of the association of south-east asian nations, referred to as the asean-5 by using asymmetric-parch (aparch) models with two different distributions (student-t and ged). the result showed that aparch models with t-distribution usually perform better. 40 m. tamilselvan & shaik mastan vali http://ijcf.ticaret.edu.tr praveen (2011) investigated bse sensex, bse 100, bse 200, bse 500, cnx nifty, cnx 100, cnx 200 and cnx 500 by employing arch/garch time series models to examine the volatility in the indian financial market during 2000-14. the study concluded that extreme volatility during the crisis period has affected the volatility in the indian financial market for a long duration. srinivasan1(2010) attempted to forecast the volatility (conditional variance) of the sensex index returns using daily data, covering a period from 1st january 1996 to 29th january 2010. the result showed that the symmetric garch model do perform better in forecasting conditional variance of the sensex index return rather than the asymmetric garch models. jibendu kumar (2010) applied different methods i.e. garch, egarch, gjrgarch, igarch & ann for calculating the volatilities of indian stock markets using fourteen years of data of bse sensex & nse nifty. the result showed that, there is no difference in the volatilities of sensex, & nifty estimated under the garch, egarch, gjr garch, igarch & ann models. amit kumar (2009) investigated to forecast the volatility of nifty and sensex with the help from autoregressive conditional heteroskedastic models (arch). the study found that egarch method emerged as the best forecasting tool available, among others. dima alberg and haim shalit (2008) analyzed the mean return and conditional variance of tel aviv stock exchange (tase) indicesusing various garch models. the results showed that the asymmetric garch model with fat-tailed densities improves overall estimation for measuring conditional variance. the egarch model using a skewed student-t distribution is the most successful for forecasting tase indices. floros, christos (2008) examined the use of garch-type models for modelling volatility and explaining financial market risk using daily data from egypt (cma general index) and israel (tase-100 index). the study found the strong evidence that daily returns can be characterized by the above models and concluded that increased risk will not necessarily lead to a rise in the returns. banerjee, a. and sarkar, s. (2006), predicted the volatility using five-minute intervals daily return to model the volatility of a very popular stock market in india, called the national stock exchange. this result emphasized that the indian stock market experiences volatility clustering and hence garch-type models predict the market volatility better than simple volatility models, like historical average, moving average etc. it is also observed that the asymmetric garch models provide better fit than the symmetric garch model, confirming the presence of leverage effect. kumar.s (2006) attempted to evaluate the ability of ten different statistical and econometric volatility forecasting models to the context of indian stock and forex markets. the findings confirmed that g.-i rch 11. i, and ew.1 l4 methods will lead to netter volatility forecasts in the indian stock market and g.4rch (5, i) will achieve the same in the forex market. glen.r (2005) investigated the role of trading volume and improving volatility forecasts produced by arch and option models and combinations of models. the findings revealed an important switching role for trading volume between a volatility forecast that reflects relatively stale information (the historical arch estimate) and the option-implied forward-looking estimate. hock guan ng (2004) estimated the asymmetric volatility of daily returns in standard and poor’s 500 composite index and the nikkei 225 index in the presence of extreme observations, or significant spikes in the volatility of daily returns. the study concluded that both the garch(1,1) and gjr(1,1) models show superior forecasting performance to the risk metrics model. in choosing between the two models, however, superiority in forecasting performance depends on the data set used. philip (1996) studied the predictive power of garch model and two of its nonlinear modification to forecast weekly stock market volatility for the german stock market, netherland, spain, italy and sweden for 9 years from 1986 to 1994. the study found that the qgarch model is the best when the estimation sample does not contain extreme observations such as the 1987 stock market crash. forecasting stock market volitilityevidence from muscat security market using garch models 41 http://ijcf.ticaret.edu.tr glosten, l. (1993) adopted the modified garch-m model, and proved that monthly conditional volatility may not be as persistent as was thought. positive unanticipated returns appear to result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility. engle, r. and ng, v. k. (1993), attempted to estimate news impact on volatility using daily return from japan stock market. the result suggested that the glosten, jagannathan and runkle (gjr) is the best parametric model. nelson (1991) analyzed the daily returns of crsp value weighted index from 1962 to 1987 to propose a new arch model to overcome the three major drawbacks of garch model. the findings contribute a new class of arch models that does not suffer from the drawbacks of garch model allowing the same degree of simplicity and flexibility in representing conditional variance as arima and related models have allowed in representing conditional mean. akgiray, v. (1989) presented a new evidence about the time series behavior of stock price using 6,030 daily returns from center for research in security prices (crsp) from january 1963 to december 1986. the findings observed the second order dependence of the daily stock returns which could not be modeled with linear white noise process. therefore study concluded that the garch models are superior in forecasting volatility. bollerslev (1986) introduced a new, more general class of processes, garch (generalized autoregressive conditional heteroskedastic allowing flexible lag structure. the extension of the arch process to the garch process bears much resemblance to the extension of the standard time series ar process to the general arma process and, permits a more parsimonious description in many situations. engle, r. f. (1982) introduced a new class of stochastic process called autoregressive conditional heteroscedasticity to generalize the implausible assumptions of the traditional econometric models by estimating the means and variances of inflation in the uk. the study found significant arch effect and substantial volatility increase during seventies. 5. research methodology the study has chosen four actively performing indices from muscat security market such as msm-30 index, financial index, service index and industrial index. the required time series daily closing prices of all four indices have been collected from january 2001 to november 2015 from www.msm.com. the return is calculated as the continuously compound return using the closing price index. )1(100*)/ln( 1  ttt ppr where t r is the return in the period t , t p is the daily closing price at a particular time t ; 1t p is the closing price for the preceding period and ln is the natural logarithm. the graphs 1 and 2 are showing the prices and returns trend of the sample indices for the study period. table: 1: descriptive statistics of daily index return measures msm: 30 index msm financial index msm industrial index msm service index mean 0.000302 0.000276 0.000482 0.000295 median 0.000441 0.000263 0.000156 0.000256 maximum 0.080388 0.078439 0.093876 0.08765 minimum -0.08699 -0.09486 -0.09172 -0.08819 std. dev. 0.010177 0.012228 0.011744 0.009249 skewness -0.90002 -0.65346 -0.59499 -1.17416 http://www.msm.com/ 42 m. tamilselvan & shaik mastan vali http://ijcf.ticaret.edu.tr kurtosis 19.22587 14.32754 15.77624 24.70162 jarque-bera 37323.78 18208.38 23057.63 66726.37 probability 0 0 0 0 source: data analysis descriptive statistics of the selected indices mean returns, standard deviations; skewness, kurtosis, and jarque berra test are reported in the above table 1.the highest mean returns are given by industrial index of 0.05%with the standard deviation of 1.17%. the other three indices msm-30, financial index and service index gained 0.03% return with the standard deviation of 1, 02%,1.22% and .92%. the residuals of the time series data for all indices are found non normality having rejected the null hypothesis in jarque-bera test. the time series data is required to possess certain characteristic to apply the arch family models. therefore, the data is involved for detecting the presence of stationarity and clustering volatility, using unit root adf and pp test and arch test. augmented dickey – fuller test (adf) the time series data is assumed to be non-stationary. to ensure the existence of stationary relationship, the following econometric models like augmneted dickey fuller (adf) and philps –perron (pp) tests are employed in the study. )2( 120     tt k li t t  where, t  denotes the daily price of the individual stock at time “t” and “ 1  ” is the coefficient to be estimated, k is the number of lagged terms, t is the trend term, 2  is the estimated coefficient for the trend, 0  is the constant, and  is white noise. mackinnon’s critical values are used in order to determine the significance of the test statistic. phillips-perron (pp) test phillips and perron (1988) suggest an alternative (nonparametric) method of controlling of serial correlation when testing for a unit root. phillips and perron use nonparametric statistical methods to take care of the serial correlation in the error terms without adding lagged difference terms. since the asymptotic distribution of the pp test is the same as the adf test statistic. the pp method estimates the non-augmented df test equation and modifies the tratio of the coefficient so that serial correlation does not affect the asymptotic distribution of test statistic. the advantage of phillips and perron test is that it is free from parametric errors. pp test allows the disturbances to be weakly dependent and heterogeneously distributed. the pp test is based on the following statistic.1     )3( 2 2/1 0 00 2/1 0 0              f f t f t t where α is the estimate, and  t is the ratio of α and   t is coefficient standard error and ε is the standard error of the test regression. in addition 0 y is a consistent estimate of the error variance. the remaining term 0 f is estimator of the residual spectrum at frequency zero. the present study employs the augmented dickey fuller test and pp test to examine whether the time series properties are stationary or not using level series with trend and intercept. the results show that the test statistics of all four indices is higher than the critical value at 5% level. hence the null hypotheses of adf and pp tests are rejected and concluded that the return series data are stationary at level. 1tripathy, forecasting stock market volatility: evidence from six emerging markets, journal of international business and economy: 69-93 forecasting stock market volitilityevidence from muscat security market using garch models 43 http://ijcf.ticaret.edu.tr table: 2: adf and pp tests for unit root inndices name augmented dickey fuller test philipsperron test test statistics critical value 5% test statistics critical value 5% msm 30 index -44.54387 -3.411143 -44.13303 -3.411143 financial index -45.22041 -3.411143 -44.76095 -3.411143 industrial index -44.00809 -3.411143 -44.11518 -3.411143 service index -47.47459 -3.411143 -47.46145 -3.411143 source: data analysis note: null hypothesis is rejected at the level of 5% significance after ensuring the non-existence of unit root in time series data, it should be further investigated whether the data is found with clustering volatility and arch effect. the clustering volatility means periods of low volatility tend to be followed by periods of low volatility for a prolonged period. again, periods of high volatility is followed by periods of high volatility for a prolonged period. when clustering volatility and arch effect are found in the time series data, then the forecasting can be estimated using arch family models. in this regard, the trend of graph 3, 4, 5 and 6 shown in appendix-ii and the estimates of arch test prove with p-value of 0.0000 for all four indices that the sample time series index return data is suffering from arch and clustering volatility and reject the null hypothesis. the graph 1 and 2 are portraying the trend of price and return series of the sample indices. hence it is determined to use the arch family models such as garch(1,1), egarch and tgarch. table 3: estimates of arch test indices obs*r-squared p-value msm -30 index 883.3364 0.0000 financial index 677.2618 0.0000 industrial index 825.4853 0.0000 service index 1100.498 0.0000 source: data analysis garch model in order to determine the nature of conditional volatility garch model developed by bollerslev (1986) has been used. the model can be specified as follows: )4( 1 aercr ttt     bhnee ttt 4),0(/ 1   )4( 1 1 2 1 cheh jtjj p tiii q t      where, t r in return equation is the stock market return in time period t and t e pure white noise error term. in variance equation t h is the conditional variance and ɷ, pq  ,,,, 121 are parameters to be estimated. q is the number of squared error term lags in the model and p is the number of past volatility lags included in the model. the study has used the garch (1,1) model that assume ɷ > 0, α and β≥ 0. the stationary condition for garch (1,1) is α +β< 1. if this condition is fulfilled, it means the conditional variance is finite. a straightforward interpretation of the estimated coefficient in above equation is that the constant ɷ is long – term average volatility where 1  and 1  represent how the volatility is affected by current news and past information regarding volatility, respectively. 44 m. tamilselvan & shaik mastan vali http://ijcf.ticaret.edu.tr egarch model to ascertain the effect of unexpected shock on the mean return exponential garch or egarch model has been used by the study as it is most popular among the asymmetric garch models. the model is based on the log transformation of conditional variance, the conditional variance always remains positive. the model has been developed by nelson (1991). the study used the following model specifications: )6( 1 aercr ttt     bhnee ttt 6),0(/ 1   )6()ln()( 1111110 chzzezh ttttt    here, 1t z is the standard residual. the term )( 11   tt zez measures the size effect of innovations in returns on volatility, while 1t  measures the sign effect. a negative value of 𝛿 is consistent with leverage effect, which explains that when the total value of a leveraged firm falls due to fall in price, the value of its equity becomes a smaller share of the total value. the total effect of a positive shock in return is equal to one standardized unit is (1+ 𝛿), that of a negative shock of one standardizes unit is (1𝛿). 1  is the coefficient of autoregressive term in variance equation. the value of 1  must be less than 1 for stationarity of the variance. tgarch model to confirm the results produced by the egarch model, tgarch model has also been used in the study. this model is also named as gjr (glosten, jagannathan and runkle ,1993). the specification of the tgarch model used in the study is as follows )7( 1 aercr ttt     bhnee ttt 7),0(/ 1   )7( 1111 2 1 2 10 chdeeh ttttt    where, the dummy variable 1t d represents the bad news, a positive value of 𝛿 signify an asymmetric volatility response. when the innovation in return 1t e is positive, the total effect in the variance is 1 2 te while the return shock is negative the total effect in the variance is 1 2 )(  te . 6. empirical analysis in order to verify the relationship between return and volatility of four important indices in muscat security market garch family models have been applied. the results of the garch (1,1) model exhibits in table:4. it presents the coefficient values of mean and variance equations for all the four indices. in the variance equation the calculated coefficients are i  0.194985, j  0.785738 (msm: 30 – index) i  0.187396, j  0.776473 (msm: financial index) i  0.143314, j  0.850952 (msm: industrial index) and i  0.153056, j  0.834649 (msm: service index) respectively. the sum of calculated coefficients i  and j  is less than 1 for all four indices. so, the garch (1,1) model is considered to be valid. in the model the value explains that i  recent news is linearly related to the present volatility of the sample indices’ return of muscat security market. in contrast the historical volatility is measured by j  coefficient. it is positive and higher than i  for all four indices. it implies that the recent news and past news forecasting stock market volitilityevidence from muscat security market using garch models 45 http://ijcf.ticaret.edu.tr have an impact on the volatility of msm: 30 index, msm: financial index, msm: industrial index and msm: service index in muscat security market in sultanate of oman. since the conventional garch models are unable to capture the asymmetric effect of negative or positive returns on volatility, the study employed the egarch and tgarch models to investigate the presence of asymmetry and leverage effect. egarch and tgarch models help to explain the volatility of spot market when some degree of asymmetric is present in the price series. if the bad news has a greater impact on volatility than good news, a leverage effect exists. table 5 presents the results of tgarch (1,1) models. the coefficient of tgarch (1,1) model  is 0.787629, 0.775223, 0.855391 and 0.835031. these are all greater than zero suggesting the presence of leverage effect, i.e. the volatility to positive innovations is larger than that of negative innovations. it is also observed that in the tgarch(1,1) model, the estimate of βi 0.147525, 0.132158, 0.125029 and 0.103017 are smaller than that of δ0.787629, 0.775223, 0.855391 and 0.835031, inferring that negative shocks do not have greater impact on conditional volatility compared to positive shocks of same magnitude. the egarch (1, 1) estimates are shown in table 6. asymmetry 1  coefficient of msm: 30 index msm financial index msm industrial index and msm service index are 0.953738, 0.943306, 0.969600 and 0.951811. the asymmetric effect is positive and highly significant suggesting that the volatility is depending on its past behavior. so it is evident that the muscat stock market return is not affected with negative shocks. aic and sic criteria used in the above all models indicating low for the regression which is quite reasonable and fit for models. 7. conclusion: this paper inspects the time-varying risk and return of four indices of muscat security market by using arch family models i.e garch (1, 1), egarch (1, 1)and tgarch (1,1). the symmetric garch (1, 1) model estimates the sum of arch and garch coefficients close to 1 specifying that the shock to the conditional variance is highly persistent in all four indices of muscat security market. it is realized that the greater sum of coefficients directs a large positive and negative return and a long run future volatility in the return. it guides that the volatility in muscat security market changes for a long time. hence garch (1,1) process can be used in muscat security market to predict the future behavior of market volatility. the asymmetric tgarch model found the leverage effect between relationship between return shocks and volatility and emphasizing negative shocks do not have greater impact on conditional volatility compared to positive shocks of same magnitude in all four indices of muscat security market. the egarch (1,1) estimation of highly significant positive coefficients proves that the existence of asymmetric effect in muscat security market. the study discloses that the volatility is highly persistent and there is asymmetrical relationship between return shocks and volatility adjustments which may cause low earnings for business and corporate. the oman economy is a conservative economy maintaining robust economic fundamentals such as lower inflation, currency stability, lower fiscal deficit, lower debt gdp ratio, higher percapita income and adequate foreign current reserves. the oman capital and stock market is an infant and emerging market compared to west and few leading asian markets, and considered to be the key competitor in the middle east witnessing the total trade of 2,268,748,228 omr in 2014 comprising 79.43% omanis, 7.34% gcc nationals, 1.82% arabs and 11.41% foreign nationals. around 4/5 of the investors are local nationals hardly 11.41% foreign investors participate in trading. out of 79.43% omanis 51.36% constitutes institutions and the remaining 28.07% is individuals. even though, the domestic fundamentals are good the persistent volatility and asymmetrical relationship are witnessed in the returns of the muscat security market. hence, it is the collective responsibilities of individuals, institutions and the regulators to ensure the return on investment by proper analysis and forecasting of volatility of future returns. references akgiray, v. 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issue 9, march 2014 prashant joshi 2014 forecasting volatility of bombay stock exchange international journal of current research and acdemic review issn: 2347-3215 volume 2 number 7 (july-2014) pp. 222-230 prashant joshi (2014) forecasting volatility of bombay stock exchange, international journal of current research and academic review.issn – 2347-3215 forecasting stock market volitilityevidence from muscat security market using garch models 47 http://ijcf.ticaret.edu.tr qamruzzaman(2015) estimating and forecasting volatility of stock indices using asymmetric garch models and student-t densities: evidence from chittagong stock exchange, international journal of business and finance management research, issn 2053-1842 qiang zhang (2015) global financial crisis effects on volatility spillover between mainland china and hong kong stock markets investment management and financial innovations, volume 12, issue 1, 2015 rakesh gupta (2012) forecasting volatility of the asean-5 stock markets: a nonlinear approach with non-normal errors griffith university issn 1836-8123. s. s. s. kumar (2006)comparative performance of volatility forecasting models in indian markets, decis ion. vol. 33, :vo.2, july d e c embe r , 2006 srinivasan1(2010) forecasting stock market volatility of bse-30 index using garch models, asia-pacific business review vol. vi, no. 3, july september 2010. yung-shi liau& chun-fan you 2013the transitory and permanent components of return volatility in asian stock markets. investment management and financial innovations, volume 10, issue 4, 2013 forecasting volatility in the financial market – john night muscat securities market companies guide muscat securities market annual reports central bank of oman annual reports 48 m. tamilselvan & shaik mastan vali http://ijcf.ticaret.edu.tr appendix: i table :4 estimated co-efficients of garch (1, 1) model msm-30 index financial index industrialindex serviceindex m e a n e q u a t i o n 0  co-efficient 0.000455 co-efficient 0.000542 co-efficient 0.000247 co-efficient 0.000487 z-statistic 3.254435 z-statistic 2.821259 z-statistic 1.449429 z-statistic 4.007875 p-value 0.0011 p-value 0.0048 p-value 0.1472 p-value 0.0001 1  co-efficient 0.324428 co-efficient 0.295504 co-efficient 0.300001 co-efficient 0.276522 z-statistic 19.62471 z-statistic 17.69379 z-statistic 16.84456 z-statistic 15.73803 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 v a r i a n c e e q u a t i o n 0  co-efficient 2.49e-06 co-efficient 5.34e06 co-efficient 1.73e-06 co-efficient 1.98e-06 z-statistic 24.19645 z-statistic 19.74968 z-statistic 12.29881 z-statistic 21.98224 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 i  co-efficient 0.194985 co-efficient 0.187396 co-efficient 0.143314 co-efficient 0.153056 z-statistic 24.22416 z-statistic 20.03826 z-statistic 19.67062 z-statistic 22.96157 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 j  co-efficient 0.785738 co-efficient 0.776473 co-efficient 0.850952 co-efficient 0.834649 z-statistic 145.9176 z-statistic 109.5410 z-statistic 141.9717 z-statistic 164.9439 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 ll 11982.86 11040.05 11450.07 12030.61 aic -7.127555 -6.566526 -6.810513 -7.155969 sic -7.124299 -6.557421 -6.801409 -7.146865 source: data analysis forecasting stock market volitilityevidence from muscat security market using garch models 49 http://ijcf.ticaret.edu.tr table: 5 estimated co-efficients of tgarch (1, 1) model msm-30 index financial index industrial index service index m e a n e q u a t i o n  co-efficient 0.000322 coefficient 0.000350 co-efficient 0,000211 co-efficient 0.000353 z-statistic 2.193508 z-statistic 1.750461 z-statistic 0,201316 z-statistic 2.638436 p-value 0.0283 p-value 0.0800 p-value 0.2296 p-value 0.0083  co-efficient 0.326508 coefficient 0.298219 co-efficient 0.302074 co-efficient 0.286913 z-statistic 19.92916 z-statistic 18.15557 z-statistic 16.91014 z-statistic 16.70014 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 v a r i a n c e e q u a t i o n 0  co-efficient 2.50e-06 coefficient 5.53e-06 co-efficient 1.66e-06 co-efficient 2.00e-06 z-statistic 23.14987 z-statistic 19.10349 z-statistic 11.90734 z-statistic 20.96880 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 i  co-efficient 0.147525 coefficient 0.132158 co-efficient 0.125029 co-efficient 0.103017 z-statistic 13.96073 z-statistic 11.64246 z-statistic 14.01882 z-statistic 13.99687 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 j  co-efficient 0.089226 coefficient 0.108083 co-efficient 0.029423 co-efficient 0.99729 z-statistic 5.924898 z-statistic 6.426743 z-statistic 2.671807 z-statistic 8.498102 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000  co-efficient 0.787629 coefficient 0.775223 co-efficient 0.855391 co-efficient 0.835031 z-statistic 135.9695 z-statistic 101.9776 z-statistic 142.5644 z-statistic 161.5494 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 ll 11991.06 11051.00 11451.50 12043.47 aic -7.131842 -6.572449 -6.810770 -7.163031 sic -7.120917 -6.568541 -6.799845 -7.152105 source: data analysis 50 m. tamilselvan & shaik mastan vali http://ijcf.ticaret.edu.tr table: 6 estimated co-efficients of egarch (1, 1) model msm-30 index financial index industrial index service index m e a n e q u a t i o n 0  co-efficient 0.000234 co-efficient 0.000358 co-efficient 0.000273 co-efficient 0.000548 z-statistic 1.776846 z-statistic 2.192557 z-statistic 1.780028 z-statistic 5.060714 p-value 0.0756 p-value 0.0283 p-value 0.0751 p-value 0.0000 1  co-efficient 0.315975 co-efficient 0.288956 co-efficient 0.301520 co-efficient 0.268750 z-statistic 20.87265 z-statistic 19.76700 z-statistic 18.77488 z-statistic 16.65413 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 v a r i a n c e e q u a t i o n 0  co-efficient -0.681824 co-efficient -0.754580 co-efficient -0.476774 co-efficient -0.647243 z-statistic -29.22041 z-statistic -23.24402 z-statistic -19.62751 z-statistic -20.36057 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 1  co-efficient 0.318085 co-efficient 0.311928 co-efficient 0.267787 co-efficient 0.247902 z-statistic 30.37198 z-statistic 25.93284 z-statistic 29.70122 z-statistic 25.64916 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 1  co-efficient -0.048740 co-efficient -0.053805 co-efficient -0.027568 co-efficient -0.064615 z-statistic -6.530271 z-statistic -6.505015 z-statistic -4.384225 z-statistic -10.91542 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 1  co-efficient 0.953738 co-efficient 0.943306 co-efficient 0.969600 co-efficient 0.951811 z-statistic 476.5742 z-statistic 309.0908 z-statistic 436.6578 z-statistic 352.4175 p-value 0.0000 p-value 0.0000 p-value 0.0000 p-value 0.0000 ll 11984.95 11042.22 11444.49 12043.47 aic -7.128204 -6.567223 -6.806602 -7.163028 sic -7.117279 -6.556297 -6.795677 -7.152103 source: data analysis forecasting stock market volitilityevidence from muscat security market using garch models 51 http://ijcf.ticaret.edu.tr appendix-ii graph-1: daily closing prices for msm-30 index, msm-financial index, msm-service index and msm-industrial index from 1st of january 2001 to 30th of november 2015 notation: the stock’s closing price is in msm (muscat security market). graph-2 continuously compounded rate of return for msm-30 index, msm-financial index, msm-service index and msm-industrial index from 2ndof january 2001 to 30th of november 2015 52 m. tamilselvan & shaik mastan vali http://ijcf.ticaret.edu.tr graph: 3 msm:30 index return – clustering volatility -.10 -.05 .00 .05 .10 -.10 -.05 .00 .05 .10 02 04 06 08 10 12 14 residual actual fitted graph: 4 msm:financialindex return – clustering volatility -.12 -.08 -.04 .00 .04 .08 -.12 -.08 -.04 .00 .04 .08 02 04 06 08 10 12 14 residual actual fitted forecasting stock market volitilityevidence from muscat security market using garch models 53 http://ijcf.ticaret.edu.tr graph:5 msm industrial index return – clustering volatility -.10 -.05 .00 .05 .10 -.10 -.05 .00 .05 .10 02 04 06 08 10 12 14 residual actual fitted graph:6 msm service index return – clustering volatility -.10 -.05 .00 .05 .10 -.10 -.05 .00 .05 .10 02 04 06 08 10 12 14 residual actual fitted international journal of commerce and finance, vol. 6, issue 1, 2020, 204-226 204 impact of mall attractiveness on mall patronage intention: the mediating effect of mall personality özgür çengel, istanbul commerce university ilgın çakiroğlu recep tayyip erdoğan university abstract there are many shopping malls operating in recent years. in order to achieve success in a competitive environment, these shopping malls should attract consumers and show their mall personality to differentiate from competition. this can be possible by revealing the attractive features of the mall from the consumer perspective and understanding the consumer behavior. the purpose of this study is to examine the relationships between mall attractiveness, mall personality and mall patronage intention, as well as revealing the mall attractiveness and mall personality factors. in this context, data was collected with face-to-face survey method, from 414 people that visited the trabzon forum mall. exploratory factor analysis (efa), confirmatory factor analysis (cfa) and structural equation modeling (sem) were used to analyze the survey responses from 414 shopping mall patrons. the findings indicate that shopping mall attractiveness has significant positive impact on mall patronage intention and mall personality has a full mediating effect between shopping mall attractiveness and mall patronage intention. keywords: shopping mall attractiveness, mall personality, mall patronage intention, structural equation modeling 1. introduction the consumers living in the metropolitan cities experience shortage of time due to their hectic lifestyles even though they belong to the higher income group. meeting the diverse needs of members of the family gets even more difficult in a limited period of time. time factor compels the residents of a city to look for a central solution for varying degrees of family requirements (one of which is shopping among these needs) (wong and nair, 2018). in addition to the demands of conscious customers, intense competition has paved the way for diverse retail formats such as hypermarkets, supermarkets, discount stores and specialty stores. modern shopping malls have emerged as striking retail formats for customers as they enabled them to spend their free time and benefit from the entertainment and shopping opportunities simultaneously. hence, the change in the customer behaviour has given rise to a central shopping experience, which is a holistic experience entailing some qualities such as the pragmatic consumption of retailers as well as the simultaneous convenience, productivity, a wide range of product, and the atmosphere (tandon et al., 2016). as of the end of 2019, the turnover of the shopping malls in turkey is expected to be 160 billion turkish liras and the total anticipated number of visitors is 2.4 billion (ayd, 2019). according to the results of “the analysis of shopping mall potential in turkey between 2017-2019" conducted by evagyd and akademetre, it is suggested that the shopping malls are in search of innovativeness to be able to meet diverse needs and thus need to vary their architecture, offer diversity in terms of recreational activities and highlight the value attached to children. it is also emphasized that the shopping mall personality will lead to success (evagyd and akademetre, 2017). in that regard, the attractiveness of shopping malls can be improved through having an ideal combination of such qualities (tandon et al., 2016). there are various shopping malls in metropolitan cities and many of these shopping malls may usually be clustered in a single location. this can lead to a decreased number of customers visiting another shopping mall. the fact that the shopping malls located in the same area have similar parameters in terms of range of brands and products, pricing strategies and the tenant mix causes a crisis for the identity of shopping malls. it also leads to a decision making process entailing factors beyond the shopping action for customers when choosing to be the customers of a certain in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e impact of mall attractiveness on mall patronage intention: the mediating effect of mall personality 205 shopping mall (singh and sahay, 2012). in this regard, taking advantage of recreational opportunities has become a marketing strategy for shopping malls to attract customers in addition to the shopping experience. entertainment options could also be used as tools in diversifying the image (sit et. al, 2003). thus, identifying the expectations of customers visiting the shopping malls and the features that attract customers and offering a good shopping experience to customers are some key aspects of having a good portfolio of customers and gaining a competitive advantage for shopping malls the main purpose of this research is to reveal the effect of mall personality and mall attractiveness on mall patronage intention as well as identifying the factors attracting customers to shopping malls. this study is aimed at filling the gap in the literature arising from the limited studies conducted in turkey with respect to mall attractiveness through making a connection between mall attractiveness, mall personality and mall patronage intention. 2. literature review and hypothesis development 2.1. mall attractiveness a setting can be attractive to the extent that it has the potential of arousing positive emotions and a positive cognitive appraisal and it encourages people to approach and enter inside. attractiveness, which is a perception, is achieved through the needs, demands and preferences of an individual (debek, 2015). it is probable that the consumers move towards an environment that offers a wide range of goods and experiences with a good atmosphere, a high-level of social interaction and with no security concerns. the main suggestion here is that large and indoor shopping malls create primary living spaces for consumers. consumers have been drawn to the shopping malls through a large shopping area and a wide range of products in a single location. the shopping malls have expanded further over the years offering service stores and entertainment opportunities. nowadays, even the small shopping malls contain food courts, restaurants, hairdressers and cinema halls. moreover, the indoor shopping malls are places that offer comfort for consumers away from the traffic and noise in the other shopping areas (bloch, 1994). previously, the distance (brunner and mason, 1968) and the size of shopping malls (bucklin, 1967) were taken into consideration when choosing the shopping malls; however, nowadays, using a multidimensional approach for identifying the attractiveness of a shopping mall, namely the integration of image has become a significant point (finn and louviere, 1996; frasquet et. al, 2001). bloch (1994) claims that the consumers visiting the shopping malls exhibit diverse attitudes, and that the factors affecting their visits differ (while some consumers visit the shopping malls for leisure, others go to the malls for buying the products there). according to debek (2015), mall attractiveness is a two-dimensional structure that reflects emotional-cognitive appraisal and the frequency of visits. debek (2015) also suggests that mall attractiveness entails factors such as the atmosphere of the shopping mall, social positioning, entertainment potential, commerce, social density, noise, order, security and human resources. it is claimed that mall attractiveness is driven by mostly the atmosphere of the shopping mall and social positioning. in addition, a crowded and noisy setting is considered to improve the attractiveness of a shopping mall, which is a surprising fact (debek, 2015). in order for the retailers to achieve success, they need to be attractive for their customers at all stages of buying; in other words, they need to be preferable and convenient. in this regard, the retail managers are supposed to convince their customers to back to their facilities, to spend more time and money (teller, 2008). according to teller (2008), while the atmosphere is a factor influencing the situational attractiveness of the tendency to stay / be in a shopping mall for customers, tenant mix and merchandise value are the factors that directly influence the general attractiveness. thus, it is suggested that the retailers are supposed to offer a wide range of stores and product mix that facilitate and improve shopping effort of consumers (teller, 2008). in a study conducted by anselmsson (2006), the most important factor determining shopping malls customers’ satisfaction is selection (the match between the demands of the customers and the products in the mall). while the atmosphere is the second important factor, it was found that the frequency of visits did not have an impact. the atmosphere factor is specified as a motivating one for staying longer in a shopping mall and buying more. the third important determinant of satisfaction is the convenience factor entailing the working hours, parking, ease of movement and the skill of locating places in a shopping mall. the fourth important determinant of satisfaction is the performance of the sales staff and the fifth one is refreshments. although location is a less effective factor of shopping malls customers’ satisfaction, it may be a özgür çengel & ilgın çakiroğlu significant one in terms of visiting the shopping mall. in addition to these factors, promotional activities and merchandise policy are the least effective ones on satisfaction (anselmsson, 2006). gonzalez-hernandez and orozco-gomez (2012) suggested in their studies that for mexican shoppers, mall essence, popularity and promotional programs, personal service, recreational options, internal atmosphere, and external atmosphere are the factors of mall attractiveness. mas-ruiz (1999) identifies mall attractiveness through three factors in terms of the dimensions of image. these factors include variety and professionalism, parking and shopping environment (masruiz, 1999). while el-adly (2007) refers to comfort, entertainment, diversity, mall essence, convenience and luxury as factors of attractiveness from the perspective of a shopper, sit et. al (2003) claims that six factors including microaccessibility, personal service, amenities, ambulance, atmospherics and security constitute the factors of mall attractiveness. arslan and bakır (2009) suggest that the most important factors for customers in a shopping mall are moving stairways that facilitate a comfortable tour, being able to visit their favourite stores and mall hygiene, respectively (arslan and bakır, 2009). in their studies, cengiz and özden (2002) claim that marketing benefits (having different brands in one place, parking facilities, the quality of the shopping environment, the convenience of working hours, etc.), the qualities of the shopping malls (cleanliness, ease of access, options for cinemas, cafes and restaurants, etc.) and promotional activities in the shopping malls are effective in terms of forming attitudes towards shopping malls by consumers visiting the shopping malls (cengiz and özden, 2002). mittal and jhamb (2016) identify the factors of mall attractiveness, which results in shoppers’ patronage, as merchandising, variety and selection, milieu and facilities and convenience for shoppers in india (mittal and jhamb, 2016). in a study conducted in malaysia by wong and nair (2018), it was suggested that mall attractiveness consists of six dimensions (child friendliness and safety, parking facilities, mall security/convenience, mall marketing activities, service offerings, convenience offered to ladies and elderly people) and child friendliness and safety as well as parking stand out as the most attractive factors that draw customers to the shopping malls. therefore, mall patronage and the image of shopping malls are improved through differentiation of shopping malls and offering better services to the shoppers (wong and nair, 2018). in this regard, it is expected that mall attractiveness is going to have a positive effect on mall patronage. moreover, it is probable that as the shopping environments possess ambiance, design and social factors, these factors may have an effect on the mall personality assumptions made by the consumers (d’astous and levesque, 2003). hence, it is expected that mall attractiveness may have a positive effect on mall personality. this leads to h1-h1a-h2 hypotheses: h1. mall attractiveness will have a positive influence on mall patronage intention h1a. mall attractiveness will have a positive influence on mall patronage intention through mall personality. h2. mall attractiveness will have a direct positive influence on mall personality. 2.2. mall personality martineau (1968) claims that there is a power that determines the customer group besides the functional qualities such as the location of the stores, price range and product range and that this power is defined as store personality or image. martineau (1968) defines store personality as the image of stores in consumers’ minds partly by through functional qualities and partly by an aura of psychological attributes. the researcher also defines store personality rather by means of the image concept and refers to layout-architecture, symbols-colors, advertising and salesperson as the factors constituting the store image. however, d’astous and levesque (2003) put forward that store personality and store image differ from one another rather than explaining store personality through store image. that is to say, while store image is a mental definition entailing all relevant dimensions of a store, store personality is, on the other hand, is limited to the mental dimensions that are compatible with a person’s qualities. although product range is a vital aspect of store image, it is a not a personality trait as it cannot be attributed to a person (d’astous and levesque, 2003). das et.al (2012) defines the personality of department stores, which are general goods stores belonging to store-based retailers, as the attribution of personal qualities of a consumer to a department store (das et. al., 2012a). in another study conducted by das et. al (2012), it is suggested that personality of department stores is comprised of five dimensions, which are sophistication, empathy, dependability, vibrancy and authenticity. the dimensions of store personality plays a key role in establishing retail brand equity (das et.al, 2012b). the studies suggest that store personality differs according to the types of retail (das, 2012b; das et. al, 2013; d’astous and levesque, 2003). besides, shopping malls are also retailers and they have similar shopping motives and impact of mall attractiveness on mall patronage intention: the mediating effect of mall personality 207 activities (acquiring products, recreation, social experiences, personal satisfaction, etc.) as other retail stores (rahman et. al, 2016). rahman et. al (2016) state that positive attitudes towards mall personality improves the shopping value, not just the shopping experience of fashion consumers. hence, they claim that a high shopping value has a powerful impact on mall patronage intention (rahman et. al, 2016). in this regard, mall personality is expected to have a positive effect on mall patronage intention. this leads to h3 hypothesis: h3. mall personality will have a direct positive influence on mall patronage intention 3. research methodology and data collection 3.1. the purpose and scope of the research the purpose of this study is to reveal the impact of mall attractiveness and personality on mall patronage intention as well as identifying the personality of shopping malls as a retail format and attractiveness factors. the limited number of studies that present the impact of mall personality and attractiveness on revisit intention reveals the significance of this study. in this regard, trabzon forum shopping mall (trabzon forum alışveriş merkezi), located in trabzon which is the most developed district of tr90 region, has been examined as part of this research based on its retail sales, significant contribution to employment in the region and its visitor figures. 3.2. limitations of the research this current study has some limitations as all other research. the universe in this research consists of individuals who shop from the mall and convenience sampling was employed due to the limitations with respect to time and cost. because of this, the results of the study cannot be generalized to the universe. a questionnaire was used as a data collection method and the questionnaire including questions about many dimensions such as mall personality and mall attractiveness is a long one. in order to eliminate the disadvantage caused by the length of the questionnaire, face-to-face questionnaires were conducted. 3.3.research sampling the universe of the research consists of individuals who shop from trabzon forum shopping mall and convenience sampling, which is one of the types of non-probability sampling, was employed due to the limitations with respect to time and cost. when the size of sample was determined, it was aimed at reaching an adequate number with at least fivefold of the number of variables (hair et. al, 2010). initially, a pretest was conducted with 45 individuals in order to ensure intelligibility to respondents and the questions that were not intelligible were rearranged. 414 completed questionnaires were included in the analysis. 3.4.data collection method and tool research data was collected by means of a face-to-face questionnaire data collection method with shoppers in trabzon forum shopping mall between december 5, 2019 and january 4, 2020. 3.5.research variables this research was conducted through a questionnaire. this questionnaire was formed based on the literature related to mall attractiveness, mall personality and mall patronage intention in line with the purpose of the study. closeended questions were used in the questionnaire to be able to get fast responses from the participants. the questionnaire is composed of five general sections. the first section includes 6 items that are aimed at revealing some behavioural attributes of the participants about trabzon forum shopping mall. these items are related to the frequency of visits of the participants, when they visit the mall, what their purpose of visit is, how much time they spend in the mall and how they access to the mall. in the second section, mall personality items (34 items) that range from “strongly agree” to “strongly disagree” and assessed on a five-point likert scale are included. the third section consists of items related to mall attractiveness (49 items) on a five-point likert scale ranging from “very good” to “very bad”. the fourth section includes 4 items on a five-point likert scale about mall patronage intention that range özgür çengel & ilgın çakiroğlu from “strongly agree” to “strongly disagree”. the final section of the questionnaire consists of items about the demographic characteristics of the participants (such as gender, age, marital status, residency, educational background, monthly personal income and employment status). the store personality scale developed by d’astous and levesque (2003) was used to measure mall personality. that scale consists of 34 items in five dimensions. these dimensions are enthusiasm, sophistication, unpleasantness, genuineness and solidity. the reason why the store personality scale of d’astous and levesque (2003) was used in the present study to measure mall personality is that there are similarities between retail stores and shopping malls in terms of shopping motives and activities (tangible and intangible product acquisition, recreation, satisfaction and social experiences) (rahman et. al, 2016, p.156). when the literature is reviewed (wakefield and baker, 1998; frasquet et.al, 2001; wong et. al, 2001; sit et.al, 2003; el-adly, 2007; teller and elms, 2010; khare, 2011; gonzalez-hernandez and orozco-gomez, 2012; mittal and jhamb, 2016; tandon et. al, 2016), in order to measure mall attractiveness, it is observed that the dimensions in the scales developed by gonzalez-hernandez and orozco-gomez (2012) and el-adly (2007) align with each other and they are more comprehensive. thus, these two scales were mainly employed in the study. besides, the items that were included in the same dimensions in the literature but that were not integrated in the dimensions were also incorporated into the scale. as a result, mall attractiveness was measured using the 49 items integrated into 6 dimensions in the literature. these dimensions are mall essence, popularity and promotional programs, personal service, atmosphere, recreational options, comfort and convenience. in order to measure mall patronage intention, 4 items were employed from the study of rahman et. al (2016). 4. analysis and discussion 4.1. descriptive statistics – demographics the data collected from 414 participants reveal that women make up the majority of customers (%60.9) in the shopping mall. the individuals aged 18-24 years (%47.8) and aged 25-31 (%25.4) years are the two most significant age groups. majority of the participants (%70.5) are single. while the students rank highest in terms of employment status (%39.4) in the sample, private sector employees follow them (%29.5). %33.8 of the participants have a monthly personal income less than 1000 tl, %21.7 of them have between 2001-3000 tl and %17.6 of them have between 1000-2000 tl. while %48.8 of the participants are high school graduates, %27.3 of them are university graduates. the majority of the customers of the mall reside in the district of trabzon (%74.6); and there are also customers who reside in rize (%25.1) and ordu (%.0.2) districts and shop from the mall analyzed in the study. detailed information about the demographic characteristics of the participants is presented in table 1 below: table.1: demographic characteristics of sample (n=414) variable number of participants % of participants sex female 252 60.9% male 162 39.1% age 18-24 198 47.8% 25-31 105 25.4% 32-38 52 12.6% 39-45 41 9.9% 46 or older 18 4.3% marital status single 292 70.5% married 122 29.5% education illiterate 0 0.0% literate 0 0.0% primary education 24 5.8% high school 202 48.8% impact of mall attractiveness on mall patronage intention: the mediating effect of mall personality 209 college 14 3.4% associate degree 36 8.7% undergraduate 113 27.3% graduate 25 6.0% monthly personal income lower than 1000 tl 140 33.8% 1000 tl to 2000 tl 73 17.6% 2001 tl to 3000 tl 90 21.7% 3001 tl to 4000 tl 50 12.1% 4001 tl to 5000 tl 31 7.5% 5000 tl and over 30 7.2% employment status student 163 39.4% private sector employee 122 29.5% public employee 41 9.9% housewife / stay at home 33 8.0% retired 8 1.9% self-employed 23 5.6% unemployed 14 3.4% others 10 2.4% 4.2. descriptive statistics – mall activities majority of the participants (%69.3) visit the shopping mall at the weekends and %30.7 of them visit on weekdays. the participants access to the shopping mall by public transportation (%51.9), by their own vehicles (%40.3) or by another means of transportation or on foot (%7.7). %58.5 of the participants visit the shopping mall once or twice a month; % 25.4 of them visit three or four times a month; %10.4 of them visit 5 to 8 times a month and % 5.8 of them visit more than 8 times a month. %44.2 of them spend around 3 to 4 hours; %38.4 of them spend about 1 to 2 hours; %11.6 of them spend 5 hours or more and %5.8 of them spend less than 1 hour in the shopping mall. figure.1: activities of the participants in the mall özgür çengel & ilgın çakiroğlu the participants were asked which activities they have when they visit the shopping mall and shopping was the most frequent activity in the responses. in this regard, %56 of the participants prefer the shopping mall for shopping primarily. %11.4 of them prefer strolling around, %10.6 of them prefer entertainment, %7 of them prefer to meet their families or friends and %6.3 of them prefer to eat in the mall as their primary purposes. 4.3. reliability analysis and exploratory factor analysis in this research, the reliability analyses of mall attractiveness, mall personality and patronage intention scales were done. cronbach’s alpha was used to analyze reliability. a frequently cited acceptable range of cronbach's alpha is a value of 0.70 or above (nunnally and bernstein, 1994). this value is 0.955 for the mall attractiveness scale; 0.885 for the mall personality scale and 0.785 for patronage intention scale. hence, each scale can be considered to have quite high reliability. in this study, exploratory factor analysis was conducted initially to identify the dimensions forming mall attractiveness and mall personality. the analysis was performed with a sample size of 414 participants by means of varimax method on 87 items. as a result of the analysis, kaiser-meyer-olkin (kmo) sampling adequacy statistic was 0.918 and the value of the chi-square (χ2) of the bartlett test result was found to be significant (χ2 = 21740.629; p = 0.000). in this regard, conducting a factor analysis was significant. as a result of the factor analysis, the items with values lower than 0.30 factor loading were removed from the analysis and the analysis was repeated each time (hair et al., 2010). in terms of statistical significance, the factor loading should be 0.30 and for factor loading values greater than that the sample size should be 350 or over (albayrak, 2006, p.151). in this study, 10 variables/items that had a factor loading lower than 0.30 were deleted as the sample size was 414 participants. as a result of the analysis, a sum of 77 variables were clustered under 14 dimensions that had an eigenvalue greater than 1 and that could be interpreted in accordance with the relevant literature. the statistical power of the model with the 14 dimensions was %63.225. in social sciences, measure of %60 or better are considered acceptable (hair et al., 2010). standard deviations and averages with respect to the variables of the research as well as the factor loadings of the variables are presented in appendix 1. the number of variables related to the factors extracted, variance explained by every factor and the reliability coefficient of each factor as a result of the exploratory factor analysis are given in table 2. table.2: factor names, number of variables, variance explained by every factor, reliability coefficient factor name number of variables variance explained cronbach’s α factor 1: genuineness (gen) 9 27.115 0.894 factor 2: personal service (ps) 7 5.936 0.896 factor 3: mall essence (me) 7 4.337 0.896 factor 4: enthusiasm (ent) 7 3.449 0.868 factor 5: recreational options (ro) 7 3.319 0.868 factor 6: solidity (soli) 5 3.001 0.822 factor 7: internal atmosphere (ia) 5 2.570 0.834 factor 8: convenience and comfort (cc) 5 2.380 0.822 factor 9: atmosphere (atm) 5 2.170 0.806 factor 10: popularity and promotional programs (pp) 4 2.078 0.848 factor 11: external atmosphere (ea) 4 1.957 0.737 factor 12: unpleasantness (unp) 3 1.822 0.813 factor 13: patronage intention (pi) 4 1.604 0.785 factor 14: sophistication (sop) 5 1.484 0.715 impact of mall attractiveness on mall patronage intention: the mediating effect of mall personality 211 *rotation method: varimax the explanations with respect to the factors in table 2 are presented below. the first factor has 9 variables. the variables with the highest factor loadings are sincere (factor loading=0.740), reliable (factor loading=0.735), and true (factor loading= 0.724). these variables are clustered under the genuineness factor as it is presented in the store personality scale of d’astous and levesque (2003). in this regard, considering the high factor loadings and the relevance to the literature, the first factor is named as “genuineness”. factor 1 explains % 27.115 of the total variance. the second factor has 7 variables. the variables with the highest factor loading are prompt service of staff (factor loading=0.806), staff kindness (factor loading=0.799), staff helpfulness (factor loading=0.7829). these variables are clustered under a factor which is in line with the literature. in this regard, high factor loadings are taken into consideration and this factor is named as “personal service” in accordance with the literature. factor 2 explains the % 5.936 of the total variance. the third factor has 7 variables. the variables with the highest factor loadings are variety of stores (factor loading=0.803), variety of brands (factor loading=0.796) and fashionable brands offered (factor loading=0.753). these variables are clustered under a factor which is in accordance with the literature. in this regard, considering the high factor loadings and the relevance to the literature, this factor is named as “mall essence”. factor 3 explains % 4.337 of the total variance. the fourth factor has 7 variables. the variables with the highest factor loadings are lively (factor loading =0.803), dynamic (factor loading=0.726), and enthusiastic (factor loading=0.706). these variables are clustered under the enthusiasm factor as it is presented in the store personality scale of d’astous and levesque (2003). in this regard, considering the high factor loadings and the relevance to the literature, this factor is named as “enthusiasm”. factor 4 explains % 3.449 of the total variance. the fifth factor has 7 variables. the variables with the highest factor loadings are presence of entertainment programs (factor loading=0.681), existence of fun spaces for kids (factor loading=0.681), services offered in mall (factor loading=0.668), and socialization opportunities (factor loading=0.632). these variables are clustered under a factor which is in accordance with the literature. in this regard, considering the high factor loadings and the relevance to the literature, this factor is named as “recreational options”. factor 5 explains % 3.319 of the total variance. the sixth factor has 5 variables. the variables with the highest factor loadings are well-organized (factor loading=0.641), leader (factor loading=0.639), and thriving (factor loading=0.639). these variables are clustered under the solidity factor as it is presented in the store personality scale of d’astous and levesque (2003). in this regard, considering the high factor loadings and the relevance to the literature, the sixth factor is named as “solidity”. factor 6 explains % 3.001 of the total variance. the seventh factor has 5 variables. the variables with the highest factor loadings are general layout (factor loading=0.728), ease of circulation inside mall (factor loading=0.668), and general decoration (factor loading =0.663). these variables are clustered under a factor which is in accordance with the literature. in this regard, considering the high factor loadings and the relevance to the literature, this factor is named as “internal atmosphere”. factor 7 explains % 2.570 of the total variance. the eighth factor has 5 variables. the variables with the highest factor loadings are adequate lifts (factor loading=0.750), adequate escalators (factor loading=0.734), and adequate directory sign boards (factor loading =0.640). these variables are clustered under a factor which is in accordance with the literature. in this regard, considering the high factor loadings and the relevance to the literature, this factor is named as “convenience and comfort”. factor 8 explains % 2.380 of the total variance. the ninth factor has 5 variables. the variables with the highest factor loadings are clean restrooms (factor loading=0.704), cleanness of the mall (factor loading=0.582), and scent of mall (factor loading=0.569). these variables are clustered under a factor which is in accordance with the literature. in this regard, considering the high factor loadings and the relevance to the literature, this factor is named as “atmosphere”. factor 9 explains % 2.170 of the total variance. özgür çengel & ilgın çakiroğlu the tenth factor has 4 variables. the variables with the highest factor loadings are organization of special events (factor loading=0.718), advertising campaigns (factor loading=0.709), and promotional campaigns/sales (factor loading=0.696). these variables are clustered under a factor which is in accordance with the literature. in this regard, considering the high factor loadings and the relevance to the literature, this factor is named as “popularity and promotional programs”. factor 10 explains % 2.078 of the total variance. the eleventh factor has 4 variables. the variables with the highest factor loadings are ease of reaching to the mall (factor loading=0.743) and availability of parking (factor loading=0.675). these variables are clustered under a factor which is in accordance with the literature. in this regard, considering the high factor loadings and the relevance to the literature, this factor is named as “external atmosphere”. factor 11 explains % 1.957 of the total variance. the twelfth factor has 3 variables. the variables with the highest factor loadings are outmoded (factor loading=0.831), and conservative (factor loading=0.804). these variables are clustered under the unpleasantness factor as it is presented in the store personality scale of d’astous and levesque (2003). in this regard, considering the high factor loadings and the relevance to the literature, the twelfth factor is named as “unpleasantness”. factor 12 explains % 1.822 of the total variance. the thirteenth factor has 4 variables. the variables with the highest factor loadings are i am a loyal cust omer of this mall (factor loading=0.735), and when i go shopping, this mall is my first choice (factor loading=0.725). these variables are clustered under the mall patronage intention factor in the study conducted by rahman et al. (2016). in this regard, considering the high factor loadings and the relevance to the literature, this factor is named as “patronage intention”. factor 13 explains % % 1.604 of the total variance. the fourteenth factor has 5 variables. the variables with the highest factor loadings are upscale (factor loading=0.650), stylish (factor loading=0.640), and snobbish (factor loading=0.615). these variables are clustered under the sophistication factor as it is presented in the store personality scale of d’astous and levesqu e (2003). in this regard, considering the high factor loadings and the relevance to the literature, this factor is named as. in this regard, considering the high factor loadings and the relevance to the literature, this factor is named as “sophistication”. factor 14 explains % 1.484 of the total variance. 4.4. confirmatory factor analysis in this study, after the values were identified with the explanatory factor analysis, confirmatory factor analysis was performed to measure the consistency of the scales. confirmatory factor analysis is used to test whether sample data are consistent with the research design (byrne, 2009). for making decisions with respect to reliable constructs, unidimensionality, convergent validity, reliability, and discriminant validity should be tested. unidimensionality means that a set of variables have only one basic dimension. there are some stages in assessing unidimensionality (janssens et al., 2008): 1. all variables are required to have a high loading on latent variables (> 0.50) and to be significant (critical ratio= c.r. = t-value > 1.96). the snobbish variable in the mall personality scale is low; yet it is not a lower value than 1.96 (0.298). when standardized regression weights are reviewed, that variable was lower than a value of 0.50 (0.190) and therefore, this variable was then deleted from the model 2. the overall fit of the model should be reviewed. some fit indices were used to test how well the model fit. these indices are chi-squareχ2, degrees of freedom-df, the root mean square error of approximation (rmsea) and comparative fit index (cfi) (hair et al., 2010). cfi is one of the most reliable indices and rmsea and srmr (standardized root mean square residual) are generally used to evaluate the overall fit of structural equation modeling – sem (janssens et al., 2008). the chi-square / degrees of freedom ratio was used to evaluate the goodness of fit. in this research, the value of χ2/ df is 2.095 and is indicative of acceptable model fit. the χ2/ df value should be within these ranges. hu and bentler (1999) stated that a good rmsea value is maximum 0.06; browne and cudeck (1993) stated this value should approximate or be less than 0.05 to demonstrate a good fit and it represents a reasonable fit up to 0.08. in this research, rmsea value is 0.052 and is indicative of a good model fit. the srmr value is expected to be less than 0.08 (hu and bentler, 1999). this value here is 0.0544, which is indicative of a good fit. comparative fit index – cfi values should range from 0 to 1 and values approximating 1.0 are indicative of good fit (hooper et al., 2008). in this research, cfi value was 0.824. in table 3, the relevant indices are presented. impact of mall attractiveness on mall patronage intention: the mediating effect of mall personality 213 table.3: goodness of fit indices measurement index threshold interpretation χ2/df 2.098 between 2 and 5 excellent rmsea 0.052 < 0.06 excellent cfi 0.824 > 0.90 unreasonable srmr 0.0544 < 0.08 excellent source: hu and bentler, 1999; hooper et al., 2008; janssens et al., 2008 while the χ2/df, rmsea, srmr values indicate satisfactory fit, cfi value does not meet the minimum criteria. when the standardized regression weights are reviewed initially, the snobbish variable was deleted from the model as its value was less than 0.50 and the analysis was repeated. as a result of the analysis, the fit indices were χ2/df=2.101, rmsea=0.052, srmr=0.0545, and cfi=0.828. when the fit indices are analyzed, it is seen that χ2/df, rmsea, srmr values indicate a good fit and the cfi value was less than the acceptable level (cfi>0.90). in order to have a more appropriate relationship between the variables, proposed modifications were taken into consideration and covariances were used between these variables while the analysis was rerun continuously. the results achieved as a result of the proposed modifications are presented in table 4 below. table.4: goodness of fit indices measurement index threshold interpretation χ2/df 1.990 between 2 and 5 excellent rmsea 0.049 < 0.06 excellent cfi 0.845 > 0.90 close to reasonable srmr 0.0520 < 0.08 excellent source: hu and bentler, 1999; hooper et al., 2008; janssens et al., 2008 though the values of the fit indices did not show a significant difference as a result of the proposed modifications, they improved to some extent. when the values of the fit index are reviewed, the χ2/df, rmsea, srmr values indicate perfect fit and the cfi value increased to 0.845; yet this value (cfi=0.845) is less than the acceptable level. the cfi value can be considered approximating to the acceptable level as it is more difficult to obtain the acceptable values in the indices when there are multiple variables. the confirmatory factor analysis – cfa of the mall personality, mall attractiveness and patronage intention scales is shown in figure 2. convergent validity convergent validity of a measurement model are explained by means of average variance extracted (ave) and composite reliability (cr) (fornell and larcker, 1981). when cr and ave values are reviewed for convergent validity), cr values should be higher than 0.70, and ave values should be higher than 0.50. when table 5 is analyzed, while the ave values of some factors (popularity and promotional programs, mall essence, internal atmosphere, personal service, unpleasantness) are higher than 0.50, the ave values of some other factors (patronage intention, genuineness, enthusiasm, atmosphere, external atmosphere, convenience and comfort, recreational options, solidity, sophistication) are less than 0.50; yet they approximate to values of 0.50. this might have happened due to the varieties in translation as the relevant scales were translated from foreign sources. besides, as the scales used in this study have not been so extensively employed in the studies conducted in turkey, these values can be considered acceptable. with regard to composite reliability, this value is higher than 0.70 for all latent variables and it ranges from 0.83 to 0.93. therefore, the results indicate that the scales have convergent validity. özgür çengel & ilgın çakiroğlu figure.2: confirmatory factor analysis of scales table.5: convergent and discriminant validity measures factors cr ave msv asv impact of mall attractiveness on mall patronage intention: the mediating effect of mall personality 215 patronage intention 0.839 0.457 0.455 0.173 popularity and promotional programs 0.908 0.586 0.401 0.250 mall essence 0.934 0.545 0.405 0.245 genuineness 0.931 0.476 0.540 0.258 enthusiasm 0.919 0.496 0.488 0.223 atmosphere 0.871 0.453 0.576 0.342 internal atmosphere 0.899 0.516 0.401 0.287 external atmosphere 0.820 0.411 0.488 0.252 convenience and comfort 0.887 0.485 0.358 0.205 personal service 0.938 0.559 0.253 0.155 recreational options 0.918 0.488 0.271 0.219 solidity 0.886 0.482 0.459 0.280 unpleasantness 0.888 0.607 0.197 0.197 sophistication 0.842 0.445 0.488 0.284 discriminant validity when the correlation between the constructs does not approximate to 1 or the chi-square test indicates that two constructs are not related to each other, discriminant validity is established (janssens et al., 2008). discriminant validity can be assessed through comparing average variance extracted (ave) and maximum shared variance (msv) with each other (fornell and larcker, 1981). msv values are expected to be lower than ave values (hair et al., 2010). when table 5 is reviewed, majority of msv values with respect to the factors are lower than ave values. average shared variance (asv) values are also lower than msv values. hence, discriminant validity has been demonstrated. 4.5. evaluating the model fit through structural equation modeling -sem in this study, amos 20 was used to test and confirm the research design and hypotheses. as a result of confirming the structural model used in this research, fit indices are presented in table 6. this table shows goodness of fit index of the model without mediator variable. table.6: goodness of fit index for model without mediator variable measurement index threshold interpretation χ2/df 4.138 between 2 and 5 reasonable rmsea 0.087 < 0.08 reasonable cfi 0.917 > 0.90 reasonable srmr 0.0538 < 0.08 excellent source: hu and bentler, 1999; hooper et al., 2008; janssens et al., 2008 when the structural model is reviewed, goodness of fit index values are within the acceptable range and the model shows good fit. table.7: regression weights model without mediator variable direction estimate se t-value p hypothesis mall attractiveness --> patronage intention 0.452 0.069 6.568 *** accepted ***p<0.05 özgür çengel & ilgın çakiroğlu when table 7 is reviewed, mall attractiveness has a significant effect on patronage intention (c.r. or t-value is 6.568, p<0.05). in other words, the null hypothesis is rejected, and h1 (the mall attractiveness will have a positive influence on mall patronage intention) is accepted. mall attractiveness has a positive influence on patronage intention (correlation=0.427). the table presenting the standardized regression weights is given in appendix 3. for a variable to be called a mediator variable, some requirements must be met. one of the requirements is that the mediator variable explained by the independent variable must be significant. another requirement is that the independent variable explained by the mediator variable must be significant. the final requirement is that when the first two requirements are met, the relationship between the dependent and the independent variables becomes nonsignificant (baron and kenny, 1986). in this regard, the goodness of fit values of the model with a mediator variable are presented in table 8 below. table.8: regression weights model with mediator variable measurement index threshold interpretation χ2/df 3.457 between 2 and 5 reasonable rmsea 0.077 < 0.08 reasonable cfi 0.907 > 0.90 reasonable srmr 0.0534 < 0.08 excellent source: hu and bentler, 1999; hooper et al., 2008; janssens et al., 2008 when the model with the mediator variable is reviewed, goodness of fit index values are within the acceptable range and the model shows good fit. table.9: regression weights model with mediator variable direction estimate se t-value p hypotheses mall attractiveness --> patronage intention -0.174 0.099 -1.761 0.078 rejected mall attractiveness --> mall personality 0.866 0.083 10.461 *** accepted mall personality --> patronage intention 0.750 0.103 7.297 *** accepted ***p<0.05 the results of the structural equation analysis are presented in table 9 and figure 3. when table 9 is reviewed, mall attractiveness has an influence on the mediator variable (mall personality) (p<0.05). in this regard, h2 (mall attractiveness will have a direct positive influence on mall personality) is accepted. in other words, mall attractiveness has a positive influence on mall personality (correlation= 0.746). when table 9 is reviewed, it is seen that mall personality has an influence on mall patronage intention (p<0.05) and h3 (mall personality will have a direct positive influence on mall patronage intention) is accepted. in other words, mall personality has a positive influence on mall patronage intention (correlation= 0.792). the change in the mediator variable, namely the change in mall personality must lead to a change in the dependent variable, that is patronage intention. when the mediator variable, which is mall personality, is added to the model, mall attractiveness has no effect on patronage intention. in this regard, it seems that mall personality has a mediator variable effect. in other words, h1a (mall attractiveness will have a positive influence on mall patronage intention through mall personality) is accepted. as mall attractiveness no longer has a significant effect on patronage intention after it is added to the model, it can be stated that mall personality fully mediates. in other words, when mall attractiveness and the mediator variable, which is mall personality, are added to the analysis, the independent variable has no significant effect on the dependent variable (patronage intention) (p>0.05). the table including the standardized regression weights is presented in appendix 4. impact of mall attractiveness on mall patronage intention: the mediating effect of mall personality 217 figure.3: full structure equation modeling 5. conclusion and implications shopping malls have become preferred choices of retail areas for consumers due to the fact that they can satisfy many of their needs from one area and that they can spend their leisure time in an enjoyable way and socialize. in addition to the factors in the literature that influence the preference for the shopping malls such as tenant management, facility management, popularity, convenience, security, service offerings, atmosphere, ease of access, productivity, retailer presentation and entertainment options (frasquet et. al, 2001; wong et. al, 2001; sit et. al, 2003; kiriri, 2009; teller and elms, 2010; debek, 2015; tandon et. al, 2016; wong and nair, 2018), it can be stated that shopping malls have the personality traits that a retail store has and that can draw the consumers. this research aimed at revealing the reasons why consumers prefer to be the customers of these planned shopping malls that have large-scale circulations in retail. in this regard, the purpose of this research was to find out the mall attractiveness and personality factors of the malls which are a retail format as well as the influence of mall attractiveness and personality on mall patronage intention. when the literature is reviewed, the body of work usually is focused on the relationship between mall attractiveness, customers’ preferences for shopping malls and mall patronage intention. however, this study, unlike the previous ones, focuses on the mediation effect of mall personality between mall attractiveness and mall patronage intention. thus, it was aimed at reaching findings that could contribute both to the literature and shopping mall managers/marketers. in this research, initially an exploratory factor analysis was conducted to reveal the basic dimensions of mall patronage intention, mall attractiveness and mall personality and a confirmatory factor analysis was performed to confirm these dimensions. in this regard, a total of 87 items were incorporated into the exploratory factor analysis (49 items in the mall attractiveness scale, 34 items in mall personality scale and 4 items in patronage intention scale) and 77 items were obtained as a result of exploratory factor analysis. 6 items that were deleted from the analysis were from the mall attractiveness scale and 4 of them were from the mall personality scale. a total of 14 dimensions were retained that could be interpreted as a result of exploratory factor analysis. these dimensions were named genuineness, personal service, mall essence, enthusiasm, recreational options, solidity, internal atmosphere, özgür çengel & ilgın çakiroğlu convenience and comfort, atmosphere, popularity and promotional programs, external atmosphere, unpleasantness, patronage intention and sophistication in accordance with the literature. mall attractiveness scale is composed of 8 factors (personal service, mall essence, recreational options, internal atmosphere, convenience and comfort, atmosphere, popularity and promotional programs, external atmosphere), mall personality scale has 5 factors (genuineness, enthusiasm, solidity, unpleasantness, sophistication) and patronage intention has one factor. confirmatory factor analysis was conducted to confirm the factors of each scale obtained as a result of exploratory factor analysis. as a result of the confirmatory factor analysis, the ‘snobbish’ item under the sophistication factor was deleted from the analysis. 8 factors comprising the mall attractiveness scale and 5 factors comprising the mall personality scale and patronage intention factor were confirmed. all dimensions of the scales included in the analysis were shown to be reliable and convergent and discriminant validity were achieved. two scales, on which this study was based, were used for finding out the significance of mall attractiveness with respect to the preference of shopping malls. one of these is the scale used in a research about the segmentation of mexican consumers with regard to mall attractiveness. according to gonzalez-hernandez and orozco-gomez (2012), mall attractiveness is composed of dimensions such as mall essence, popularity and promotional programs, personal service, internal atmosphere, recreational options, and external atmosphere. the second scale is the one in the research of el-adly (2007). according to el adly (2007), mall attractiveness is composed of dimensions such as comfort, entertainment, diversity, mall essence, convenience, and luxury. even though the dimensions are named differently in these two scales, similar items/variables are included. in this research, a total of 8 dimensions which are reliable and valid as a result of the confirmatory factor analysis were used and they are similar to the relevant literature and they are named in a similar way. for the mall attractiveness scale, the store personality scale of d’astous and levesque (2003) was employed. as a result of the confirmatory factor analysis that was performed, mall personality was confirmed to be measured with the same dimensions (5 dimensions), which was similar to the original scale. in order to measure the mall patronage scale, the study of rahman et al. (2016) was used and that scale was confirmed. a model was proposed which was based on a theory relating three structures, which was another purpose of the study, and structural equation modeling was then used to test the model that was proposed. in the research model, the independent variable is mall attractiveness; the mediator variable is mall personality and the dependent variable is patronage intention. according to the results of the research, it was inferred that mall attractiveness has an influence on patronage intention. in this regard, the entertainment opportunities (characteristics such as recreational areas, playgrounds for children, services offered insides the shopping mall), inner atmosphere factors (characteristics such as general layout, ease of circulation inside the mall, decoration, lighting), attaching importance to the general atmosphere of the shopping mall (characteristics such as the cleanness of the shopping mall and temperature control) may encourage customers to have a tendency to visit the shopping mall more. attaching importance to entertainment opportunities with respect to mall attractiveness for the shopping mall customers is a factor that mall management should take into consideration to ensure that customers spend more time in the shopping mall and visit more frequently. in other words, increasing the number of such entertainment areas and opportunities (a variety of restaurant, cinema and theater halls, playgrounds, etc.) may be helpful in terms of drawing more customers to the shopping malls. these findings suggest that there is a similarity between them and the six mall attractiveness factors in the study of gonzalez-hernandez and orozco-gomez (2012), which are mall essence, popularity and promotional programs, personal service, recreational options, internal atmosphere, and external atmosphere. besides, gonzalezhernandez and orozco-gomez (2012) stated in their studies that the factors of internal atmosphere and external atmosphere are the most useful ones in terms of positioning the shopping malls. in this regard, managers of shopping malls may identify and improve their marketing strategies by focusing on the factors that attract the customers. el-adly (2007) identified six factors of mall attractiveness in terms of customer perspective, which are comfort, entertainment, diversity, mall essence, convenience, and luxury. these dimensions also show similarity to the dimensions identified in the findings of this research. when the consumers were asked why they preferred shopping malls, they stated that they attached most importance to shopping and then to strolling around and entertainment. another result of the research is that mall personality mediates between mall attractiveness and mall patronage intention. when mall personality is added to the model, the relationship between mall attractiveness and mall patronage becomes nonsignificant. in this regard, it can be said that mall personality fully mediates. in other words, the perceptions of the individuals who participated in the research impact of mall attractiveness on mall patronage intention: the mediating effect of mall personality 219 are shaped through the factors of mall attractiveness. in this regard, the influence of mall attractiveness on mall patronage intention is demonstrated through revealing mall personality. the participants of this research perceive the shopping mall as solidity (thriving, imposing and so on) and genuineness (true, trustworthy and so on). in this regard, managers of shopping malls must take the personality traits perceived by their customers into consideration when they shape the identity of the malls and offer services. if the identity that the shopping mall wants to present overlaps with the traits that customers perceive, the shopping mall may sustain long-term relationships with the customers. this current study has some limitations as all other research. first of all, it is not possible 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19(2), pp.281-294. appendix.1: mean, standard deviation and factor loading related to research variables research variables mean std. deviation factors / factor loading mall personality items welcoming 3.18 1,119 f4/0.629 enthusiastic 3.18 1,005 f4/0.706 lively 3.20 1,090 f4/0.803 dynamic 3.33 1,093 f4/0.726 friendly 3.05 1,037 f4/0.687 congenial 3.14 1,057 f4/0.544 daring 3.01 1.111 f4/0.427 chic 3.46 1.007 f14/0.356 high class* 3.56 1.027 elegant * 3.22 1.059 stylish 3.08 1.104 f14/0.640 snobbish 2.72 1.181 f14/0.615 upscale 3.09 1.120 f14/0.650 selective 3.16 1.043 f14/0.560 honest 3.28 1.064 f1/0.699 reliable 3.51 1.041 f1/0.735 sincere 3.37 1.025 f1/0.740 özgür çengel & ilgın çakiroğlu true 3.49 1.029 f1/0.724 genuine 3.33 1.059 f1/0.577 trustworthy 3.26 1.087 f1/0.719 conscientious 3.44 1.062 f1/0.516 hardy 3.39 1.056 f1/0.454 solid 3.31 1.037 f1/0.519 reputable 3.43 1.032 f6/0.565 thriving 3.52 0.996 f6/0.639 leader 3.30 1.071 f6/0.639 imposing 3.33 1.072 f6/0.598 well-organized 3.36 1.098 f6/0.641 annoying* 3.49 1.149 irritating* 3.43 1.183 loud* 2.78 1.238 superficial 3.07 1.208 f12/0.763 outmoded 3.39 1.140 f12/0.831 conservative 3.34 1.208 f12/0.804 patronage intention items i intend to revisit this mall 4.03 0.829 f13/0.570 i would certainly recommend this mall to my friends 3.71 1.041 f13/0.608 i am a loyal customer of this mall 3.31 1.136 f13/0.735 when i go shopping, this mall is my first choice 3.41 1.205 f13/0.725 mall attractiveness items variety of brands 3.51 1.178 f3/0.796 variety of stores 3.57 1.128 f3/0.803 fashionable brands offered 3.61 1.060 f3/0.753 availability of after sale services 3.33 1.062 f3/0.568 prestigious brands offered 3.64 1.015 f3/0.735 mall has all that i need 3.33 1.117 f3/0.643 level of prices is appropriate to my income* 2.96 1.079 quality of options in mall 3.49 0.951 f3/0.581 organization of special events 3.09 1.046 f10/0.718 advertising campaigns 3.13 1.013 f10/0.709 promotional campaigns/sales 3.10 1.065 f10/0.696 loyalty programs 2.96 1.022 f10/0.526 popularity of mall* 3.82 0.941 staff training 3.33 0.933 f2/0.632 staff helpfulness 3.46 0.950 f2/0.782 prompt service of staff 3.51 0.943 f2/0.806 neat uniform of staff 3.72 0.832 f2/0.665 staff kindness 3.50 0.986 f2/0.799 staff friendliness 3.42 0.980 f2/0.755 helpfulness of mall management 3.30 1.001 f2/0.607 attitude of mall management* 3.34 0.990 general lighting 3.73 0.981 f7/0.502 ease of circulation inside mall 3.54 1.086 f7/0.668 general decoration 3.52 1.010 f7/0.663 general layout 3.48 1.031 f7/0.728 impact of mall attractiveness on mall patronage intention: the mediating effect of mall personality 223 cleanness of the mall 3.69 1.034 f9/0.582 external appearance of the mall 3.59 1.074 f7/0.501 scent of mall 3.41 1.016 f9/0.569 temperature control 3.79 0.889 f9/0.550 clean restrooms 3.52 1.068 f9/0.704 the color of the mall interior 3.45 0.977 f9/0.558 backround music* 3.25 1.112 general atmosphere of mall 3.46 0.973 f5/0.406 food offered in food courts 3.55 1.028 f5/0.599 variety of restaurants 3.40 1.084 f5/0.601 existence of fun spaces for kids 3.37 1.103 f5/0.681 presence of entertainment programs 3.72 1.006 f5/0.681 services offered in mall 3.42 0.922 f5/0.668 socialization opportunities 3.38 0.976 f5/0.632 working hours in the mall* 3.42 1.044 availability of parking 3.65 1.039 f11/0.675 comfortable seats during shopping 3.36 1.186 f11/0.521 ease of reaching to the mall (access to mall) 3.72 0.994 f11/0.743 size of mall 3.61 0.960 f11/0.547 security in the mall 3.53 1.022 f8/0.442 one-stop shopping 3.55 1.000 f8/0.500 adequate escalators 3.28 1.152 f8/0.734 adequate lifts 2.93 1.244 f8/0.750 adequate directory sign boards 3.20 1.170 f8/0.640 *items removed from research appendix.2: standardized regression weightsconfirmatory factor analysis (cfa) direction estimate pi --> pi3 0.618 pi --> pi4 0.489 pi --> pi2 0.850 pi --> pi1 0.698 pp --> ma12 0.723 pp --> ma11 0.754 pp --> ma10 0.821 pp --> ma9 0.762 me --> ma4 0.648 me --> ma8 0.646 me --> ma6 0.661 me --> ma5 0.791 me --> ma3 0.831 me --> ma1 0.790 me --> ma2 0.779 gen --> mp17 0.728 gen --> mp16 0.619 gen --> mp18 0.764 özgür çengel & ilgın çakiroğlu gen --> mp20 0.756 gen --> mp15 0.563 gen --> mp19 0.710 gen --> mp23 0.657 gen --> mp21 0.755 gen --> mp22 0.633 ent --> mp3 0.755 ent --> mp4 0.779 ent --> mp2 0.685 ent --> mp5 0.812 ent --> mp1 0.614 ent --> mp6 0.693 ent --> mp7 0.561 atm --> ma29 0.544 atm --> ma31 0.733 atm --> ma28 0.716 atm --> ma26 0.702 atm --> ma30 0.656 ia --> ma27 0.648 ia --> ma22 0.623 ia --> ma24 0.833 ia --> ma23 0.686 ia --> ma25 0.782 ea --> ma42 0.682 ea --> ma44 0.656 ea --> ma41 0.626 ea --> ma43 0.599 cc --> ma45 0.666 cc --> ma46 0.615 cc --> ma49 0.747 cc --> ma47 0.722 cc --> ma48 0.725 ps --> ma20 0.689 ps --> ma14 0.662 ps --> ma17 0.676 ps --> ma19 0.783 ps --> ma15 0.764 ps --> ma18 0.813 ps --> ma16 0.829 ro --> ma33 0.634 ro --> ma34 0.697 ro --> ma35 0.720 ro --> ma39 0.686 ro --> ma38 0.719 ro --> ma36 0.748 ro --> ma37 0.685 soli --> mp28 0.618 soli --> mp26 0.668 impact of mall attractiveness on mall patronage intention: the mediating effect of mall personality 225 soli --> mp25 0.747 soli --> mp27 0.722 soli --> mp24 0.711 unp --> mp33 0.887 unp --> mp34 0.758 unp --> mp32 0.678 sop --> mp13 0.627 sop --> mp11 0.677 sop --> mp14 0.642 sop --> mp8 0.721 appendix.3: standardized regression weightsmodel without mediator variable direction estimate mall attractiveness --> patronage intention 0.427 mall attractiveness --> ea 0.659 mall attractiveness --> pp 0.676 mall attractiveness --> atm 0.735 mall attractiveness --> cc 0.699 mall attractiveness --> ia 0.754 mall attractiveness --> ro 0.780 mall attractiveness --> me 0.633 mall attractiveness --> ps 0.624 patronage intention --> pi1 0.660 patronage intention --> pi2 0.783 patronage intention --> pi3 0.726 patronage intention --> pi4 0.613 appendix.4: standardized regression weightsmodel with mediator variable direction estimate mall attractiveness --> mall personality 0.746 mall attractiveness --> patronage intention -0.158 mall personality --> patronage intention 0.792 patronage intention --> pi1 0.676 patronage intention --> pi2 0.813 patronage intention --> pi3 0.692 patronage intention --> pi4 0.586 mall personality --> sop 0.721 mall personality --> unp 0.382 mall personality --> soli 0.766 mall personality --> ent 0.712 mall personality --> gen 0.751 mall attractiveness --> ea 0.651 mall attractiveness --> pp 0.681 özgür çengel & ilgın çakiroğlu mall attractiveness --> atm 0.735 mall attractiveness --> cc 0.696 mall attractiveness --> ia 0.750 mall attractiveness --> ro 0.775 mall attractiveness --> me 0.647 mall attractiveness --> ps 0.629 international journal of commerce and finance, vol. 7, issue 1, 2020, 62-71 62 the effect of the employee motivation on the employee performance in banks in somalia abdiaziiz aqil somalia ahu tuğba karabulut istanbul commerce university, turkey hümeyra nur hati̇poğlu istanbul commerce university, turkey received: dec 12, 2020 accepted: february 23, 2021 published: may 01, 2021 abstract the purpose of this study is to examine the effect of employee motivation on the employee performance in banks in somalia. th e article uses a quantitative survey method to empirically analyze the data collected by the questionnaire. the data was collected from 365 employees and managers who work in several somalian banks in different cities in somalia. the employee motivation scale developed by gagné et al. (2010, pp. 641-642) has 12 items and was taken from zengin (2019, pp. 22-23) and the job performance scale developed by goodman and svyantek (1999, p. 261) has 25 items were used in the study. frequency distribution analysis, reliability analysis, factor analyses, correlation analysis, and regression analysis were applied to the data. according to the results of the analysis, the employee motivation affects the employee performance in banks in somalia. keywords: employee motivation, employee performance, somalian banks 1. introduction the importance of the effect of the employee motivation on the employee performance attracted the attention of researchers in the last decades. nowadays employees are more skilled and qualified. it is more difficult for companies to gain and retain these employees. thus, they have to improve the motivation of their employees via several methods including leadership practices, monetary and non-monetary rewards. if companies attract qualified employees, motivate them appropriately, they can improve performances of their employees. an improved employee motivation will improve a company performance as well. motivation was coined from the word ‘motive’ meaning drives, desires, or needs of people. it is a process for leading people to actions to accomplish objectives (chaudhary & sharma, 2012, p. 29). only if people are motivated, they can like working hard. each employee is motivated by different methods. employee motivation can be defined as a reflection of a creativity, an energy level, and a commitment which employees bring to their jobs (shahzadi et al., 2014, p. 159). an employee performance reflects what an employee does or what he doesn’t do. it involves a work attendance with a helpful and an accommodative behavior, and quantity, quality and timeliness of output (yang, 2008) (shahzadi et al., 2014, p. 161). researchers perceive a motivation as a building block to develop influential management theories whereas managers perceive it as a main part of a performance equation for all organizational levels (steers, mowday, & shapiro, 2004, p. 379). the purpose of this study is to examine the effect of the employee motivation on the employee performance in banks in somalia. the article has the following four sections: (1) the concept of an employee motivation; (2) the concept of an employee performance; (3) research methodology and the findings; and (4) conclusion. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the effect of the employee motivation on the employee performance in banks in somalia abdiaziiz aqil 63 2. the concept of an employee motivation an employee motivation affects an employee performance and triggers a company success in the marketplace. nowadays, companies are in dynamic environments and face challenges. an improved employee motivation and performance can be considered as strengths of companies to overcome threats and get the advantage of more opportunities to have strong, leading market positions. dimensions of an employee motivation were explained in this section. being motivated means being moved to do something. people who don’t feel an inspiration or an impetus for an action can be defined as unmotivated whereas people who are activated or energized toward ends can be defined as motivated (ryan & deci, 2000a, p. 54). different motivation types based on different goals or reasons which rise an action are distinguished in selfdetermination theory (sdt) (deci & ryan, 1985). an intrinsic motivation is doing something due to being enjoyable or interesting whereas an extrinsic motivation is doing something due to leading to a separable outcome (ryan & deci, 2000a, p. 55). an intrinsic motivation triggers and maintains activities through the satisfaction of an influential volitional action (ryan, kuhl, & deci, 1997) (deci, koestner, & ryan, 1999, p. 658). an intrinsic motivation is doing something for its own sake due to being enjoyable and interesting (ryan, 1995) (gagné, et. al., 2010, p. 629). an identified regulation is doing an activity because a person identifies it with its meaning or value, and accepts it as his own which shows it is autonomously regulated. identified people have behaviors or commit into activities for their perceived relations or meanings to their personal goals (koestner & losier, 2002) (gagné, et al., 2010, p. 629). an identification causes a bigger autonomy if a behavior of a person reflects his identity or values (ryan, 1995, p. 406). an introjected regulation is interesting because although the regulation is a controlled form of an internalized extrinsic motivation, it is within a person (e.g., an employee works because it makes him feel like a worthy person) (gagné & deci, 2005, p. 334). an introjection consists of taking in a regulation but not accepting it as his own. it is a controlled form of regulation in which behaviors are performed to avoid anxiety or guilt to have ego enhancements. an introjection highlights a regulation by a contingent self-esteem (deci & ryan, 1995) (ryan & deci, 2000b, p. 72). externally regulated people act with the intention of avoiding undesired consequences or having desired ones. they are energized to do actions if the action is instrumental to these ends (i.e. an employee works while his boss is watching) (gagné & deci, 2005, p. 334). an external regulation is the least autonomous form of an extrinsic motivation. the behavior is triggered by external contingencies such as deadlines, punishments or rewards. these contingencies to perform the behavior are not internalized. an externally regulated action is determined by external forces. external locus of causality represents it (decharms, 1968) (vansteenkiste, lens, & deci, 2006, p. 21). 3. the concept of an employee performance an improved employee performance accelerates improvement of a company performance. nowadays, a company performance has different dimensions. human resources are the most important resource of companies to gain and maintain competitive advantages. thus, managers should try to improve performances of their employees to improve the overall company performance. dimensions of an employee performance were explained in this section. according to several researchers (mathis & jackson, 2006, p. 378; soepardjo & nugrohoseno, 2014), the performance is defined as what employees do or not do. an employee performance shows how much each employee makes contribution to the company in terms of work attendance, quantity and quality of an output, period to produce an output, and a cooperative attitude (ariawaty, 2020, p. 319). locke and latham (1990) state that loyal and highly committed employees are extremely important to achieve goals of companies. highly committed employees are more productive and qualified, have higher responsibilities, work loyalties, and job satisfactions (karim & rehman, 2012). sahoo, behera, and tripathy (2010) showed that a abdiaziiz aqil, ahu tuğba karabulut & hümeyra nur hati̇poğlu 64 committed employee to his career and job has less intention to quit or take leave, feels a job satisfaction, and has a higher intrinsic motivation (hanaysha, 2016, pp. 298-299). an altruism is an attitude arising from an initiative and a voluntary behavior whose interactions are perceived by an employee to another one (argote et al., 2003) (emilisa, 2019, p. 99). an altruism is an attitude willing to help colleagues, leading to actions for assisting colleagues to address problems and complete tasks. this behavior will support a cooperation which is necessary for a teamwork (organ, 2006) (emilisa and lunarindiah, 2018, p. 55). a conscientiousness is an attitude leading to employee behaviors to obey organizational rules. for instance keeping attendance level above the minimum limit, being at work and completing the work on time. this behavior will drive an employee effectiveness and efficiency (organ, 2006) (emilisa and lunarindiah, 2018, p. 55). a conscientiousness trait is related to an employee task and contextual performances directly (jiang et al. (2009)) an employee with conscientiousness trait will have a higher performance (hassan, akhtar, & küçük yılmaz, 2016, p. 5). a task performance can be defined as the degree to which an employee meets or exceeds focal role expectations (harrison, newman, & roth, 2006, p. 307). a task performance can be defined as providing services or producing outputs such as expertise in job related tasks. it consists of activities supporting organizational services or techniques such as planning and coordinating (borman & motowidlo, 1993) (daryoush et al, 2013, p. 101). 4. research methodology and findings 4.1. the purpose of the study the purpose of this research is to determine the effect of the employee motivation on the employee performance. 4.2. the sample of the study this study was conducted in banks in somalia. the questionnaire was sent to 400 employees and managers who work in several somalian banks in different cities. 365 responses were analyzed. 4.3. the model of the study independent variable dependent variable employee motivation employee performance figure 1. the model of the study 4.4. hypothesis of the study the hypotheses of the research are as follows; h1: motivation has a positive effect on performance h1a: intrinsic motivation has a positive effect on performance h1b: identified regulation has a positive effect on performance h1c: introjected regulation has a positive effect on performance h1d: external regulation has a positive effect on performance 4.5. methodology of the study the effect of the employee motivation on the employee performance in banks in somalia abdiaziiz aqil 65 this research is a quantitative research. frequency distribution analysis, reliability analysis, factor analyses, correlation analysis, and multiple regression analysis were applied to the data. the questionnaire was sent by e-mail. employees answered questions for the work motivation. managers answered questions for the employee performance. 4.6. limitation of the study covid-19 created a limitation to collect data. there were time and financial restrictions for the research. 4.7. scales of the study work motivation scale used in this research was developed by gagné et al. (2010) and was taken from zengin (2019, pp. 22-23). employee performance scale used in this research was developed by goodman and syvantek (1999, p. 261). 4.8. research findings 4.8.1. frequency distribution analyses table 1 shows demographic data of the research. table 1. frequency distribution of demographic variables demographic variables f % gender male 215 58,90 female 150 41,10 total 365 100 age 20-29 136 37,26 30-39 124 33,97 40-49 84 23,01 50-59 16 4,38 50 or more 5 1,37 total 365 100 education high school 118 32,33 undergraduate 192 52,60 master 44 12,05 phd 11 3,02 total 365 100 total work experience 0-9 year 182 49,86 10-19 year 170 46,58 20-29 year 13 3,58 total 365 100 total work experience in this company 0-5 year 198 54,25 6-10 year 138 37,81 11-15 year 29 7,95 total 365 100 your position in this company lower level manager 130 35,62 middle level manager 45 12,33 abdiaziiz aqil, ahu tuğba karabulut & hümeyra nur hati̇poğlu 66 top level manager 10 2,74 other 180 49,32 total 365 100 most of the employees are males, between 20-29 age, and non-manager employees. they have undergraduate degrees, 0-9 years total work experience, and 0-5 years total work experience in their current banks. 4.8.2. reliability analysis the following table shows the reliability values of the variables and their dimensions. table 2. reliability analysis results variables and dimensions cronbach's alpha n of items motivation 0,838 12 intrinsic motivation 0,866 3 identified regulation 0,748 3 introjected regulation 0,709 3 external regulation 0,815 3 performance 0,876 25 altruism 0,844 7 conscientiousness 0,888 9 task performance 0,829 9 reliability values are high, acceptable or good as it is observed in table 3. 4.8.3. factor analysis the following tables include factor analyses of the dependent and independent variables. table 3. factor analysis for work motivation scale dimensions and items components value total variance explained intrinsic motivation 2. because i have fun doing my job 0,855 14,222 1. because i enjoy this work very much 0,812 3. for the moments of pleasure that this job brings me 0,788 identified regulation 4. i chose this job because it allows me to reach my life goals 0,885 11,154 5. because this job fulfils my career plans 0,795 6. because this job fits my personal values 0,733 introjected regulation 9. because my reputation depends on it 0,857 11,055 8. because my work is my life and i don’t want to fail 0,788 7. because i have to be the best in my job, i have to be a “winner” 0,788 external regulation 10. because this job affords me a certain standard of living 0,811 9,423 11. because it allows me to make a lot of money 0,794 total variance explained: 45,854 extraction method: principal component analysis rotation method: varimax with kaiser normalization kaiser-meyer-olkin measure of sampling adequacy 0,913 bartlett's test of sphericity approx. chi-square 6423,457 df 766 sig. 0 the effect of the employee motivation on the employee performance in banks in somalia abdiaziiz aqil 67 factor analysis shows that there are four factors in this scale namely intrinsic motivation, identified regulation, introjected regulation, and external regulation as it is in the original scale. 12th item was removed from the analysis due to a low load. intrinsic motivation explains the scale by 14.222% alone, identified regulation explains the scale by 11.154% alone, introjected regulation explains the scale by 11.055% alone, and external regulation explains the scale by 9.423% alone. these four dimensions explain the scale by 45.854% altogether. table 4. factor analysis for performance scale dimensions and items components value total variance explained altruism 1. helps other employees with their work when they have been absent. 0,934 13,077 12. assists me with my duties. 0,847 13. makes innovative suggestions to improve the overall quality of the department. 0,833 7. helps others when their work load increases (assists others until they get over the hurdles). 0,804 3. volunteers to do things not formally required by the job. 0,643 15. willingly attends functions not required by the organisation, but helps in its overall image. 0,622 conscientiousness 2. exhibits punctuality arriving at work on time in the morning and after lunch breaks. 0,816 11,497 11. does not take unnecessary time off work. 0,747 6. exhibits attendance at work beyond the norm, for example, takes fewer days off than most individuals or fewer than allowed. 0,733 8. coasts toward the end of the day. 0,704 10. spends a great deal of time in personal telephone conversations. 0,643 4. takes undeserved work breaks. 0,622 16. does not spend a great deal of time in idle conversation. 0,601 task performance 17. achieves the objectives of the job. 0,802 6,362 21. could manage more responsibility than typically assigned. 0,715 22. appears suitable for a higher-level role. 0,633 23. is competent in all areas of the job, handles tasks with proficiency. 0,601 18. meets criteria for performance. 0,581 25. plans and organizes to achieve objectives of the job and meet deadlines. 0,576 total variance explained: 30,936 extraction method: principal component analysis. rotation method: varimax with kaiser normalization. kaiser-meyer-olkin measure of sampling adequacy. 0,819 bartlett's test of sphericity approx. chi-square 8736,278 df 769 sig. 0 abdiaziiz aqil, ahu tuğba karabulut & hümeyra nur hati̇poğlu 68 factor analysis shows that there are three factors in this scale namely altruism, conscientiousnes, and task performance as it is in the original scale. 5, 9, 14, 19, 20 and 24th. items were removed from the analysis due to low loads. altruism explains the scale by 13.077%, alone, conscientiousnes explains the scale by 11.497% alone task performance explains the scale by 6.362% alone. these three dimensions explain the scale by 30.936% altogether. 4.8.4. correlation analysis correlation values between variables and their dimensions are presented as follows: table 5. correlation analysis results v a ri a b le s o rt . s tn d . d . m o ti v a ti o n t o ta l in tr in si c m o ti v a ti o n id e n ti fi e d r e g u la ti o n in tr o je c te d r e g u la ti o n e x te rn a l r e g u la ti o n p e rf o rm a n c e t o ta l a lt ru is m c o n sc ie n ti o u sn e ss t a sk p e rf o rm a n c e motivation total 3,285 0,774 1 intrinsic motivation 4,724 0,667 -0,013 1 identified regulation 4,086 0,176 -0,017 0,023* 1 introjected regulation 4,424 0,317 -0,024 0,031 0,012 1 external regulation 4,479 0,674 -0,88 0,002* 0,015 0,444 1 performan ce total 4,286 0,454 0,412** 0,224** 0,056** 0,078** 0,088** 1 altruism 4,724 0,267 0,208* 0,076* 0,054 -0,044 0,134 0,076 1 conscienti ousness 4,086 0,176 0,102* 0,224 0,204* -0,017 -0,034 0,114* -0,22 1 task performan ce 4,424 0,345 0,079** 0,033 0,034 0,039 -0,017 0,033 -0,055 -0,057 1 *correlation is significant at the 0.05 level (2-tailed) **correlation is significant at the 0.01 level (2-tailed) table 6 presents that the correlation values among motivation, performance and their dimensions. they are positive and statistically significant. correlation values are significant at the level of 0.01 and 0,05. the correlation between total performance and total motivation is 0,412. correlations between dimensions of the motivation and the total performance are as follows respectively 0,224, 0,056, 0,078, and 0,088. they are statistically significant at 0.01 confidence level. 4.8.5. multiple regression analysis the results of multiple regression analysis is as follows: table 6. model summary model r r square adjusted r square std. error of the estimate f sig. 1 0,402 0,161 0,162 0,83455 6,044 0,000 the effect of the employee motivation on the employee performance in banks in somalia abdiaziiz aqil 69 independent variables can explain 16,2% of the model. the high f value shows that parameters of the model are statistically significant. table 7. regression model independent variables (motivation scale dimensions) b standard deviation beta t sig. intrinsic motivation 0,322 0,121 0,345 4,508 0,000 identified regulation 0,106 0,122 0,108 3,329 0,000 introjected regulation 0,065 0,056 0,066 3,278 0,001 external regulation 0,182 0,101 0,189 2,582 0,001 f: 12,342 df: 5 r2: 0,284 p<0,05 dependent variable: performance beta values represent the coefficients of the independent variables which affect performance and they are positive in the table. thus, the dimensions of the motivation affect the performance positively. the coefficient of intrinsic motivation was 0.345, the coefficient of identified regulation was 0.108, the coefficient of introjected regulation was 0.066, and the coefficient of external regulation was 0.189. significance values for these coefficients are less than 0.05 and statistically significant. so, each motivation variable affects performance positively. thus, all hypotheses are accepted. table 8. the results of hypotheses hypothesis result h1: motivation has a positive effect on performance. accepted h1a: intrinsic motivation has a positive effect on performance accepted h1b: identified regulation has a positive effect on performance accepted h1c: introjected regulation has a positive effect on performance accepted h1d: external regulation has a positive effect on performance accepted 5. conclusion the purpose of this study is to examine the effect of the employee motivation on the employee performance in banks in somalia. the questionnaire which has demographic questions and two scales namely work motivation scale with 12 items and employee performance scale with 25 items were sent to 400 employees and managers who work in several banks in different cities in somalia via e-mail. 365 of responses were analyzed via spss 19 program. the cronbach‘s alpha value of the work motivation scale was 0.838 and whereas the cronbach‘s alpha value of job performance scale was 0.876. these values are accepted as reliable values. intrinsic motivation, identified regulation, introjected regulation, and external regulation were found as dimensions of work motivation scale as it is mentioned in the original scale. they can explain 45.854% of the scale altogether. on the other hand, conscientiousness, altruism, and task performance were found as dimensions of performance scale as it is mentioned in the original scale. these dimensions explain 30.936% of the scale altogether. a correlation analysis was conducted to find the relations between variables and their dimensions. a regression analysis was conducted to determine the effect of the work motivation on the employee performance. then, hypotheses were tested. since, all coefficients of dimensions of motivation are statistically significant, all hypotheses are accepted. if companies focus on improving employee motivations, they can improve employee performances. thus, performances of companies can improve. high employee motivation and performance will be strengths 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(2014), “impact of employee motivation on employee performance”, european journal of business and management, 6(23), 159-167. steers, r. m., mowday r. t., & shapiro d. l. (2004), “introduction to special topic forum: the future of work motivation theory”, academy of management review, 29(3), 379-387. vansteenkiste, m., lens w., & deci e. l. (2006), “intrinsic versus extrinsic goal contents in self-determination theory: another look at the quality of academic motivation”, educational psychologist, 41 (1), 19-31. the effect of the employee motivation on the employee performance in banks in somalia abdiaziiz aqil 71 zengin, f. n. (2019), the importance of cultural intelligence in international organizations and its impact on employee motivation., unpublished phd thesis. ankara yıldırım beyazıt üniversitesi, sosyal bilimler enstitüsü, ankara, türkiye. international journal of commerce and finance, vol. 6, issue 2, 2020, 226-240 226 sustainable finance portfolio analysis in islamic bank (segment perspective) lucky nugroho* universitas mercu buana, jakarta indonesia erik nugraha universitas sangga buana ypkp, bandung indonesia ahmad badawi universitas mercu buana, jakarta indonesia *correspondence author: lucky.nugroho@mercubuana.ac.id received: sept 18, 2020 accepted: oct 01, 2020 published: oct 02, 2020 abstract the purpose of this study is to analyze the distribution of financing at bank syariah mandiri (bsm) based on the segments inc luded in the sustainable finance category in 2019. the method used is quantitative, which is to analyze based on secondary data published in 2019 with research questions: (i) how much is the distribution of retail segment financing to bsm, and how much is included in the sustainable finance category in 2019?; (ii) how big is the distribution of corporate segment financing in bsm, and how much is included in the sustainable finance category in 2019?; (iii) what is the ratio of the distribution of financing included in the category of sustainable financing in the retail segment to the corporate segment in 2019?. the findings of this study are (i) the distribution of financing to the wholesale segment contributed 63% to the sustainable finance; (ii) the distribution of the funding to the retail segment contributed 37% to the sustainable finance; (iii) the portion of bsm financing distribution included in the sustainable finance category in 2019 was 47%. keywords: sustainable finance, islamic bank, wholesale segment, retail segment jel code: g20, g21, g23, g32 1. introduction global warming has become a problem and concern with the worldwide community. the impacts of global warming are climate change, which includes changes in rainfall intensity, temperature increases, extreme weather events, climate anomalies, floods, drought, storms, and other disasters that threaten human life (arafah, nugroho, takaya, & soekapdjo, 2018; masten & obradovic, 2008; nugroho, utami, akbar, & arafah, 2017). climate change has caused huge losses and has even threatened the sustainability of life on earth (beniston et al., 2007; trenberth, 2008). global warming caused by human activities to meet the needs of human life is called economic activity. this economic activity stimulated rapid industrial growth (nugroho, 2014; stiglitz, 1996). furthermore, industrial and transportation operations use fossil materials containing hydrocarbons such as coal, petroleum, and natural gas. hydrocarbons are a source of electrical energy and heat generated from combustion. however, the results of incomplete combustion will cause damage and environmental pollution because carbon monoxide gas is poisonous, which makes air pollution (john & feyisayo, 2013). the industrialization process in various fields that uses fossil fuels and the overexploitation of natural resources on earth due to the pursuit of economic growth impacts the increase of carbon gas for decades. this phenomenon of carbon gas has increased and caused climate change (marland et al., 2003). nevertheless, based on the macroeconomic perspective that climate change is a market failure to control greenhouse gas emissions that are produced as a residue in the production process of goods and services (andrew, 2008). one indicator of the impact of climate change on the economy is the decline in gross domestic product (gdp). gdp is the value of goods and services in a country, produced by the production factors belonging to the citizens of that in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e sustainable finance portfolio analysis in islamic bank (segment perspective) 227 country and foreign citizens (dincer, 1997). climate change due to global warming will cause global gdp per capita to be 23% lower than global warming. a report by citigroup found that global gdp losses could be reduced by $ 50 trillion if global temperatures could be lowered to 2.7° f (1.5° c) in the next few decades. other research suggests that productivity peaks when the temperature in a region averages 55° f (13° c), meaning that a rise in temperature could increase productivity in cold northern countries while lowering productivity in tropical countries. this shows that steady temperature increases will not affect the world equally (worland, 2015). moreover, on a micro-level perspective, climate change causes a decrease in productivity and increased company operating costs. the survey conducted by the carbon disclosure project shows indications of the impact of climate change on productivity and operating costs. a total of 2,000 companies surveyed found that 44% of them experienced production disruptions due to rain and drought. meanwhile, 31% experienced additional production costs. if this happens in the long term, a decrease in productivity will likely occur globally and detrimental (liverman & glasmeier, 2014). indonesia is expected to experience a climate departure, which is a condition in which the lowest average temperature has become higher than the previous highest average temperature in 2029 for most regions such as java and sumatra, even papua can already experience it in 2020. on average, countries in the world will experience a climate departure in 2047. the economic sector in indonesia most affected by climate departure is the food sector. every one degree celsius increase in the lowest average temperature in indonesia will cause rice yields to decrease by up to 10%. drought and hot temperatures are alleged to be one of the leading causes of reduced harvests, as happened in the aceh region in 2015. drought will result in reduced crop production by up to 1.5 tonnes per hectare. fish catches in the indonesian exclusive economic zone are also estimated to decline by up to 40% (wahyudewi, 2016). the above conditions are a real warning that cannot be ignored due to the dangers of global warming and climate change, considering that agriculture and fisheries are the two largest commodities that contribute to indonesia's gdp. if this continues, it is estimated that the prices of various agricultural and fishery commodities will soar that it will reduce people's purchasing power. indonesia can experience a phenomenon called dutch disease, which is the slow growth of economic development in a country with abundant natural resources (andrew, 2008; gerelmaa & kotani, 2016). indonesia, as one of the g20 countries, has shown its commitment to reduce greenhouse gas emissions by 2020. at the pittsburgh summit in 2009, indonesia committed to reducing 26% of greenhouse gas emissions by itself and 41% with international assistance. these contributions have been translated into the national action plan for the greenhouse movement. the indonesian government is currently facing challenges in managing natural resources as the basis for development and anticipating the impacts of climate change, which is better known as pro-growth policies; pro-poor; pro-job; and pro-environment (masruro pimada, 2018). this response is manifested in the master plan for the acceleration and expansion of indonesia's economic development 2011-2025, issued by the coordinating ministry for economic affairs. the masterplan contains a long-term policy strategy to promote high, inclusive, and sustainable economic growth (bappenas, 2011). the master plan policy for preparing the 2015-2019 medium term development plan (rpjm) is an effort to realize sustainable finance. the environmental aspect is one of the pillars of sustainable development, which is new in the 2015-2019 rpjm, which is not found in the 20102014 rpjm. sustainable development will be realized if harmony and balance are created between social, economic, and environmental aspects, and are implemented in business activities oriented towards profit, people, and the planet (nugroho, utami, doktorlina, & husnadi, 2017). these three aspects must be supported by elements of good institutional governance or good. sustainable development does not only focus on economic aspects alone but also pays attention to environmental and social factors (hermes & hudon, 2018; hidayah, badawi, nugroho, & moetopo, 2020). ecological damage and social disparities will occur if action is only to pursue economic growth (stiglitz, 2000). the financial services industry is one of the supporters of sustainable development because realizing the master plan for the acceleration and expansion of indonesia's economic development 2011-2025 requires a massive investment mobilization. estimates of the annual investment required are around the us $ 300-530 billion. most of this investment is needed to build critical infrastructure and environmentally sensitive areas such as agriculture, forestry, energy, mining, and waste. also, financing for micro, small, and medium enterprises (msmes) and the industry is essential to create jobs and increase productivity (nugroho, 2020a; nugroho, lubis, et al., 2020; nugroho & nugraha, 2020). through its business activities, the financial services industry can play a role by providing support lucky nugroho & erik nugraha & ahmad badawi 228 for programs such as financing and sustainable investment in biogas projects, micro-hydro, hydropower, organic agriculture, and so on. the implementation of sustainable finance is crucial in the banking industry because the banking industry contributes 79.8% of total national financial assets. at the same time, most banks have not considered environmental, social, and governance factors in the lending or investment process as the primary consideration so that it will become a threat to indonesia's long-term economic development (volz, 2015). according to nugroho, badawi, & hidayah (2019), researched the implementation of sustainable finance in the financial industry with a case study on bank syariah mandiri (bsm), with the research title “discourses of sustainable finance implementation in islamic bank (cases studies in bank mandiri syariah 2018).” the research was conducted when implementing sustainable finance (sf) at bsm was not required to apply the regulations from the financial services authority no.51/ pojk.3/2017. the results of research with secondary data on the period of implementing sustainable finance for financial products from bsm in the 2017-2018 period have reached a portion of 29.56%, especially the financing portfolio in december 2018. thus, the implementation of sustainable finance at bsm is quite good. regarding the description above, this research is a continuation of previous research conducted by lucky nugroho, ahmad badawi & nurul hidayah. furthermore, this research focuses on the financing or credit segment portfolio in bsm. therefore, the formulation of research questions in this study are as follows: (i) how much is the distribution of retail segment financing to bsm, and how much is included in the sustainable finance category in 2019? (ii) how big is the distribution of corporate segment financing in bsm, and how much is included in the sustainable finance category in 2019? (iii) what is the ratio of the distribution of financing included in the category of sustainable financing in the retail segment to the corporate segment in 2019? based on the problem formulation above, the objectives of this study are: (i) to investigate the size of the corporate segment financing portfolio in bsm in 2019; (ii) to investigate the size of the retail segment financing portfolio at bsm in 2019; (iii) to analyze the comparison of sustainable finance implementation in bsm based on the corporate and retail financing segments in 2019. 2. literature review the primary function of the bank is to collect and channel public funds. the bank collects funds from people who have more money. then these funds are channeled back to people who are short of funds, banks channel fund to solving financial problems experienced by individuals and business entities. more specifically, the functions of the bank are as follows according to nugroho & harnovinsah (2020), the existence of a sharia bank is, of course, inseparable from a purpose. the purpose is also often referred to as maqhasid. this is following al-syatibi using different words related to al-maqasid. the terms are maqasid al-syariah, al-maqasid al-syar’iyyah, and maqasid min syar’i al-hukum. however, some of the meanings of the word sharia have the same understanding that is the purpose of the law revealed by allah swt. islamic shariah was revealed by allah swt to create human well-being as a whole. furthermore, the purpose of shariah or maqhasid shariah makes benefits for the ummah (arafah & nugroho, 2016b; nugroho, 2020b; syafii, sanrego, & taufiq, 2012). furthermore, according to febriadi (2017) and nugroho, meiwanto doktoralina, indriawati, safira, & yahaya (2020), the primary purpose of sharia is to encourage human welfare, which lies in the protection of faith (dîn), soul (nafs), reason ('aql), offspring (nasl), and property (mâl). the guarantee of these five cases means that it will fulfill the public interest and the welfare of all society, which is the ultimate goal of development. the reflection and responsibility of islamic banking towards the public and community interests have an impact on the vital role of islamic banking in the development and national economy. sustainable development aims to improve people's welfare and equitable development between the present and future generations (holden, linnerud, & banister, 2017). the reasons for economic growth must be sustainable, namely first regarding moral reasons in preserving and protecting natural resources, secondly maintaining ecological and environmental values, thirdly maintaining the economic welfare of the community (balmford et al., 2002). in principle, sustainable development is broken down into three aspects, namely, first, economic sustainability in producing goods and services, second, environmental sustainability in maintaining natural resources that include economic resources, and third, social sustainability as a system capable of achieving equality, justice and welfare, and even accountability (blackman & rivera, 2011; kulig, kolfoort, & hoekstra, 2010; moldan, janoušková, & hák, 2012). sustainable development is the development process that aims to balance the economy and the environment, has a close relationship with maqashid sharia values in protecting the future generations (julia & kassim, 2019; nugroho, 2015). sustainable finance portfolio analysis in islamic bank (segment perspective) 229 also, according to (choudhury, 2010; nugroho, meiwanto doktoralina, et al., 2020; pratiwi, 2016; wajdi dusuki, 2008), islamic banks based on the qur'an and hadith by tawhid string relation (tsr) has the same characteristics as the purpose of sustainable finance. islamic banks that have the foundation of islamic law are the foundation of the muslim community to implement the teachings of their religion in fulfilling daily life in totality (kaffah) (aziz, 2012; nugraha, nugroho, lindra, & sukiati, 2020). the needs in human life in the islamic perspective are divided into daruriyat, hajiyat, and tahsiniyat. furthermore, in fulfilling the needs of human life, the goal is to benefit society. human existence is to become a caliph, a blessing for the entire ummah (maslahah) (arafah & nugroho, 2016a; dwi sari, alwi, & doktoralina, 2019; nugroho, 2017). therefore, to realize this condition, every human being must have faith implemented to carry out allah's commands and stay away from his prohibitions. furthermore, the purpose of the life of every muslim is to get the blessing of allah swt, which is to seek happiness in the world and the hereafter (falah) (asutay, 2008; nugroho, badawi, & hidayah, 2019b; nugroho, hidayah, badawi, & mastur, 2020). the combination of the maqasid principles of sharia, maslahah, and falah is an implementation of the concept of sustainable finance, which includes profit, people, planet, and prophet (4p) under the teachings of islam. thus, the principles of sharia implemented in fair islamic banks which prohibit transactions that contain maghrib: maysir (gambling), gharar (uncertainty), and riba (risk-transfer) embody bank prudentiality (customer satisfaction, business strategy, risk management, bank operation, human capital & community development). based on maghrib principles, bank prudentiality and 4p is the concept of "sustainable finance in islamic banking principle." therefore, the illustration of islamic bank operations that are in line with sustainable finance is as follows (figure 1): figure 1. islamic banking principles and sustainable finance relation source: (nugroho et al., 2019a) in managing their products and services, islamic banks make products and services based on specific segments. segments are a strategy for marketing and selling products to groups of people who have similarities such as income, age, etc. the concepts of product differentiation and market segmentation have long been discussed in the literature. one of the pioneers is shaw (1912), which states that the product differentiation strategy is a way to find out human wants more accurately than not to win the competition (dickson & ginter, 1987). besides, product differentiation aims to differentiate goods or services from those sold based on the buyer's preferences. buyer preferences can be analyzed from differences in product, packaging, distribution, or the prestige of trademarks and trade names (for example, coca-cola, calvin klein, etc.). segmentation, according to jonker, piersma, & van den poel (2004), is one way of marketing to sell goods or services that are right on a predetermined target or target. however, according to floh, zauner, koller, & rusch (2014), segmentation is a way of dividing the population of customers and society or a heterogeneous market based on clusters with the same characteristics and characteristics (homogeneous). meanwhile, the purpose of implementing segmentation in companies or banks is to optimize the benefits that can be lucky nugroho & erik nugraha & ahmad badawi 230 achieved (baesens et al., 2004; buckinx, verstraeten, & van den poel, 2007; nugroho, 2020c; van den poel & larivière, 2004). the application of the segmentation strategy by markowitz portfolio theory helps find a balance between the results obtained and the possible risks (finisterra do paço, barata raposo, & filho, 2009). thus, selecting the right segmentation in a bank can improve bank performance. furthermore, the segmentation in islamic banks is divided into two segments, namely the wholesale segment and the retail segment (bsm, 2016). the bank has carried out a segmentation process aimed at increasing the volume of the bank's business by classifying existing market potentials that have the same characteristics (desire, power, and purchasing power). this will facilitate the bank in making marketing and promotion strategies and making appropriate products so that segmentation will strengthen the bank's positioning in the industry (zineldin, 1996). the grouping in this segment aims to improve the bank's performance to focus on customer characteristics and eliminate risks (aldás-manzano, lassala-navarré, ruiz-mafé, & sanz-blas, 2009). furthermore, if described, the application of segmentation in bsm is as follows: figure 2. segmentation in islamic banking source: (nugroho, 2020c)  consumer banking, consumer banking is a work unit that manages and distributes financing to individual customers for consumptive/multipurpose purposes without any financing ceiling limits.  business banking, business banking is a work unit that manages and distributes financing to customers: a) financing to individuals or private business entities for productive purposes with a financing ceiling of more than 200 million to idr 5 billion; b) financing to private individuals or business entities for productive purposes (not members of the financing borrower group and excluding specific criteria for customers in the commercial segment): 1) cooperative financing (including for members with productive & consumptive purposes) with a financing ceiling of more than 200 million to idr 5 billion; 2) financing to sharia microfinance institutions (linkage) with a financing ceiling of more than 200 million to idr 5 billion; 3) a sharia rural bank (bprs) with a financing ceiling of more than 200 million to idr 5 billion; 4) program financing (non-micro) with a financing ceiling of more than 200 million to idr 5 billion.  micro banking, micro banking is a work unit that manages and distributes financing to customers: a) individual financing for productive purposes with a financing ceiling of up to idr 200 million; b) financing to individuals for multipurpose purposes with a financing limit of up to idr 200 million; c) micro program financing with a financing ceiling of up to idr 200 million. furthermore, for the wholesale segment, strategies for channeling financing include:  commercial banking, commercial banking is a work unit that manages and distributes financing to customers: a) financing for private business entities with a financing ceiling of more than idr 5 billion to idr 50 billion; b) financing for private business entities for productive purposes (not members of the financing borrower group and not including particular criteria for customers in the corporate segment) without any financing ceiling limits addressed to: 1) regional owned enterprises (bumd) and its subsidiaries; sustainable finance portfolio analysis in islamic bank (segment perspective) 231 2) local government; 3) multifinance 4) financing to subcontractors through a supply chain financing pattern.  corporate banking, corporate banking is a work unit that manages and distributes financing to customers: a) financing for private enterprises with a financing ceiling of more than idr 50 billion; b) financing for private business entities for productive purposes without a financing ceiling limit aimed at: 1) state-owned enterprises (bumn) and its subsidiaries; 2) multinational company; 3) go public company; 4) ministries, state institutions, and work units under the ministries/state institutions. 3. methodology this research is follow-up research that has previously been conducted by nugroho et al. (2019a). the object of research in this conceptual paper is bank syariah mandiri (bsm) in the implementation of sustainable finance based on the perspective of financing segmentation. the method used is quantitative by analyzing the retail and wholesale segment financing portfolios in the sustainable finance category. the financing portfolio, which is the object of observation, is the financing portfolio in 2019. 4. results and discussion 4.1. sustainable finance in wholesale segment during the 2017-2019 period, bsm has distributed financing to the wholesale segment of idr 30.756 trillion with the following details: table 1. wholesale segmen portfolio financing in million rupiah wholesale segment financing 2019 growth (%) 2018 growth (%) 2017 corporate banking 22,353,676 6% 21,122,561 5% 20,178,333 commercial banking 8,223,959 23% 6,670,770 14% 5,870,885 total 30,577,635 10% 27,793,331 7% 26,049,218 source: (bsm, 2019a) based on the trend from 2017 to 2019, the distribution of financing in the wholesale segment experienced a significant increase, namely 10%, which was dominated by the commercial banking unit with a growth of 23%. commercial banking is a work unit that distributes loans with a nominal value of rp. 5 billion to rp. 50 billion. however, the portfolio in the wholesale segment is the distribution of financing to the corporate banking unit. corporate banking is a distribution of funding with a ceiling of more than idr 50 billion. the allocation of the funding included in the category of sustainable finance in the wholesale segment is as follows: table 2. wholesale segmen portfolio in sustainable finance in million rupiah sustainable financing sector total sustainable financing corporate banking commercial banking a portion of corporate banking a portion of commercial banking infrastructure 1,974,000 888,300 1,085,700 4% 5% education 3,241,000 1,944,600 1,296,400 9% 6% health 9,297,000 5,857,110 3,439,890 26% 15% lucky nugroho & erik nugraha & ahmad badawi 232 sukuk-based project 7,926,000 5,627,460 2,298,540 25% 10% total 22,438,000 14,317,470 8,120,530 64% 36% source: (bsm, 2019b) furthermore, based on table 2 above, it is known that the distribution of financing to the wholesale segment, which is included in the sustainable finance category is amounting to rp22.438 trillion. the main contributor to funding based on the sustainable finance category was the corporate banking unit amounting to 14.317 trillion, with the primary sector being the health sector. if further analyzed, the portion of financing distribution that is included in sustainable finance in the corporate segment is as follows: table 3. wholesale segmen portfolio in sustainable finance vs non-sustainable finance in million rupiah wholesale segment portion portfolio non sustainable finance 27% 8,139,635 sustainable finance 73% 22,438,000 total 100% 30,577,635 figure 3. wholesale segmen portfolio in sustainable finance vs non-sustainable finance source: (bsm, 2019b) furthermore, based on table 3 and figure 3 above, the distribution of the wholesale segment, which is included in the sustainable finance category, has reached above 50% or 73%. the total distribution amounted to idr 30.577 trillion in absolute terms. the health sector is a mainstay in the wholesale segment because bsm focuses on disbursing financing to the health sector. after all, the risk in this sector is low and in line with government programs. based on these conditions, the achievement of distribution of wholesale segment financing to bsm, which is included in the sustainable finance category, is already on track. 4.2. sustainable finance in retail segment the distribution of financing to the retail segment in bsm should be a priority. this is because the third mission of bsm is to prioritize raising cheap funds and channeling funding to the retail segment (bsm, 2020). this is shown during the 2017 to 2018 period, and the distribution trend has increased significantly, namely 13%, according to table 4 below: sustainable finance portfolio analysis in islamic bank (segment perspective) 233 table 4. retail segmen portfolio financing in million rupiah retail segment financing 2019 growth (%) 2018 growth (%) 2017 business banking 7,979,607 -7% 8,595,213 -4% 8,950,378 micro banking 3,796,198 -13% 4,344,973 2% 4,266,141 consumer banking 30,204,558 24% 24,310,583 29% 18,833,848 pawning 2,985,861 10% 2,708,697 15% 2,358,308 total 44,966,224 13% 39,959,466 16% 34,408,675 source: (bsm, 2019a) furthermore, referring to table 4 above, it can be analyzed that the increase in the distribution of financing to the retail segment was contributed by the consumer banking unit that distributes loans to the public for consumptive purposes. however, the work units channeling loans to micro, small and medium enterprises (business banking & micro banking) tend to decline. thus, the decline in the distribution of financing to micro and small entrepreneurs indicates that this sector is not a priority for bsm. meanwhile, according to nugroho, chandra husnadi, utami, & hidayah (2017), islamic banks are pro to micro and small business actors so that services and products to micro and small entrepreneurs are a priority. the retail segment distribution portfolio, which is included in the sustainable finance category, is as follows: table 5. retail segmen portfolio in sustainable finance sustainable financing sector total sustainable financing business banking micro banking consumer banking a portion of business banking (%) a portion of micro banking (%) a portion of consumer banking (%) home for low income 3,969,000 3,969,000 30% green small enterpreneur 3,307,500 3,307,500 25% green micro enterpreneur 5,953,500 5,953,500 45% total 13,230,000 3,307,500 5,953,500 25% 45% 30% source: (bsm, 2019b) the distribution of financing to the retail segment with the most considerable contribution to sustainable finance is the micro sector, represented by a portion of 45% (table 5). even though micro-entrepreneurs have the smallest amount in the distribution of retail segment financing (table 4), they have an enormous contribution to sustainable finance. therefore, bsm must be concerned about micro funding so that the portion of sustainable finance can be even better. the total distribution of the financing for the retail segment was rp.44.966 trillion. however, the allocation of the funding for the new retail segment was rp.13.230 trillion, so that the achievement was only 29%. in detail can be seen in table 6 and figure 4 below: lucky nugroho & erik nugraha & ahmad badawi 234 table 6. retail segmen portfolio in sustainable finance vs non-sustainable finance in million rupiah retail segment portion portfolio non sustainable finance 71% 31,736,224 sustainable finance 29% 13,230,000 total 100% 44,966,224 source: (bsm, 2019b) 71% 29% non sustainable finance sustainable finance figure 4. retail segmen portfolio in sustainable finance vs non-sustainable finance source: (bsm, 2019b) therefore, based on figure 4 and table 5 above, the distribution of financing to the retail segment, which is included in the sustainable finance category, has only reached 29% or idr 13.230 trillion. the main contributor is the distribution of financing to the micro sector or green micro-entrepreneurs. thus, it is necessary to increase the distribution of sustainable finance in the retail segment so that its achievement can be more than 50% of the total allocation of financing in the retail segment. 4.3. comparison sustainable finance in wholesale segment and retail segment distribution of financing to bsm in 2019 amounted to idr 75.543 trillion with total disbursements in the sustainable finance category of idr 35.668 trillion or 47%. the detailed data are in table 7 and figure 5 below: table 7. total sustainable finance vs non-sustainable finance in bsm bsm financing portion portfolio non sustainable finance 53% 39,875,859 sustainable finance 47% 35,668,000 total 100% 75,543,859 source: (bsm, 2019b) sustainable finance portfolio analysis in islamic bank (segment perspective) 235 figure 5. total sustainable finance vs non-sustainable finance in bsm source: (bsm, 2019b) therefore, based on table 7 and figure 5 above, the distribution of bsm financing in the sustainable finance category in 2019 by 47% has increased compared to 2018, which was 29.56% (nugroho, badawi, & hidayah, 2019). the figure for the increase in the implementation of sustainable finance in bsm can be seen in figure 6 below: figure 6. sustainable finance implementation in bsm 2018-2019 source: (bsm, 2019b) also, based on the financing segment in bsm, the implementation of sustainable finance is as follows: table 8. total sustainable finance in financing segment in bsm sustainable finance portion portfolio wholesale segment 63% 22,438,000 retail segment 37% 13,230,000 total 100% 35,668,000 source: (bsm, 2019b) lucky nugroho & erik nugraha & ahmad badawi 236 figure 7. total sustainable finance in financing segment in bsm source: (bsm, 2019b) therefore, referring to table 8 and figure 7, it is the wholesale segment that has a significant contribution to the implementation of sustainable finance when compared to the distribution of financing in the retail segment. furthermore, in the wholesale segment, which makes a vital contribution is a distribution to the health sector. allocation to the health sector and its derivatives such as medical devices and pharmaceuticals will be the focus of bsm in 2019, which is in line with government programs in improving the quality of health of indonesian people. the implementation of sustainable finance in the retail segment is contributed by channeling financing to green micro-entrepreneurs. this is in line with the policy of the government on the prohibition of using plastic bags in both supermarkets and traditional markets so that micro-entrepreneurs no longer use plastic bags to wrap merchandise sold to consumers. besides, currently, micro-entrepreneurs have also provided garbage basket at their shops. thus, the distribution of financing in the sustainable finance category is not only a concern of the management of islamic banks (bsm) but will be more effective if it is supported by regulations from the government, which are in line. therefore, there is a need for better synergy between practitioners and regulators to realize the sustainable finance movement applied properly to financial institutions, including islamic banks.. 5. conclusion the implementation of sustainable finance in islamic banks is necessary because sharia principles are in line with sustainable finance. bsm, as the largest bank in indonesia and as a leader in market share in the islamic banking industry, has implemented sustainable finance since 2018. the results are as follows:  the distribution of financing to the wholesale segment contributed 63% or rp. 22,438 trillion, the majority of which was contributed 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(1996). bank strategic positioning and some determinants of bank selection. the international journal of bank marketing, 14(6), 12–22. 143 international journal of commerce and finance, vol. 7, issue 1, 2020, 41-50 41 assessing internal audit practice: a case of selectedbureaus in snnprs alemayehu taddese kenno hawassa university, ethiopia received: nov 10, 2021 accepted: dec 25, 2020 published: may 01, 2021 abstract internal audit plays a significant role in safeguarding and effective utilization of public resources. this study was conducted to assess the practice of internal audit: a case study of selected bureaus in snnprs. the researcher employed descriptive research design. both simple random and purposive sampling techniques were employed by researcher in order to select 195 professionals in the bureaus. the data collected via structured questionnaire has been analyzed by statistical software, spss version 21.0. accordingly, the result of descriptive statistics showed that, independence and objectivity and quality of internal audit has positive contribution to internal audit practice. the study also found that the major challenges of internal audit in regional sector bureaus are lack of training, sufficient audit facilities, management support, competent audit staff, adequate man power and presence of interference by the higher officials. based on th e findings of the study, the researcher forwarded possible recommendations for bureaus to work on identified results due to fact that they can be taken in to considerations have positive influence in improving internal audit practice of bureaus. keywords: internal audit practice, public sector bureaus, snnprs 1. introduction the term audit comes from the latin word auditare, which has the significance “to listen”. audit in general, is a systematic process of objectively obtaining and evaluating the information or statements to assess their degree of compliance with predetermined criteria, and communication of results to interested users. the role of audit is to provide users with information on the principles and accounting practices and presentation of financial statements accurate picture, clear and complete financial position and financial performance of the company (wanda, 1994). internal auditing refers to an independent appraisal of the activity within the organization for the review of accounting, financial and other operations and activities by stuff of auditors function as part of the management and reporting to it and not to the shareholders. because of changes in organizational desires, technology and complexity of organizations' actions and systems, the nature of the services sought from the internal auditors has been changing over the years from an emphasis on traditional/compliance audit where independence has been the core paradigm, to a value-adding role where partnering with management is accorded greater significance (desalegn and gctachew, 2008). the absence of proper internal auditing in the organization primarily, failure of continues internal auditing in a business organization and result in poor evaluation output and assurance which lead to declining the wellbeing of the enterprise and healthy flow of activities (wanda, 1994). the issuance of ministry of finance directives in 1942, which focused on public sector fund utilization, marked the development of modem auditing in ethiopia (kinfu, 1990). the creation of the office of the auditor general in 1961 (government of ethiopia, 1961) succeeding improvements of duties and responsibilities in 1979 and 1987 was another important progress in public sector auditing in the country. it helps the public sector bureaus to accomplish their objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, detecting error and frauds, control over mistakes and improve public governance. this is why internal auditor is receiving more care especially when considering its contributions to the management of either public or private sectors in the aspect of safeguarding organizational resources. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e alemayehu taddese kenno 42 the government allocates the resources to different bureaus in order to provide the quality service for the society. to achieve those government objectives applying internal audit function were the major mechanism for controlling and using of all scarce resources available in the corporate organization. according to (wubishet and dereje 2014) the internal audit practice is influenced by objectivity and independency of internal audit unit, competency, and internal audit work quality and information technology. having this fact in mind the paper tried to focus on the assessment of internal audit practice of all public sector bureaus in snnprs, ethiopia. 2. literature review 2.1.1. definition internal auditing according to (iia, 2017) internal auditing as “an independent objective assurance and consulting activity designed to add value and improve an organization’s operations, it helps an organization accomplish its objectives by taking a systematic, disciplined approach to evaluate and advance the effectiveness of risk management, control, and governance processes.” internal auditors have backgrounds in numerous academic disciplines, and no particular discipline is required. 2.1.2. types of audits conducted by internal auditors according to (iia, 2012) variety of audits are performed in the review of sector programs and resources. these audits include. operations audits: these audits examine the use of resources to determine if resources are being used in the most effective and efficient manner to fulfill the organization’s mission and objectives financial audits: review accounting and financial transactions to determine if obligations, authorizations, and receipt and payment of moneys are properly and correctly recorded and reported. this type of audit also determines if there are enough controls over cash and other assets and that adequate process controls exist over the acquisition and use of existing resource. compliance audits: these audits define if entities are fulfilling applicable laws, regulations, policies and procedures. examples include federal and state laws, and trustee policies and regulations information systems audits: these audits review the internal control environment of automated information processing systems and how people use these systems. the audits usually evaluate system input, processing controls, backup and recovery plans, and system security and computer facilities. internal control reviews. these audits focus on the components of the key sectors or business activates, such as payroll and benefits, cash management, inventory and equipment, physical safe keeping, grants and contracts and financial reporting. 2.1.3. determinants of internal audit practice confidence in financial reporting and corporate government contains independence of internal audit competence of internal audit staff, internal audit quality, internal control and internal audit standard (belay, 2007).  independence of internal audit according to (mofed, 2010) ethiopian government auditing standards states that organizational independence allows the audit function to conduct work without interference by the entity under audit placed emphasis that in all matters related to their audit work, audit offices and individual must have independence from the legislature, executive and the management of the audited entities just as independence is a major issue for external auditors, independence is also an important issue for internal auditors.  competence of internal audit team competence of internal audit team is also considered as important factors for effective internal audit for improving organizational performances. in line with isppia considered proficiency and due professional care (competence), as a significant element of internal auditing. belay (2007) examining the factors that affect effectiveness of internal audit teams, argue that communication between the members of the audit team has a positive impact on the outcome of the audit. assessing internal audit practice: a case of selectedbureaus in snnprs 43  quality of internal audit in my opinion internal audit quality can be defined as successfully conducting audit work by internal auditors. besides, (okaro et al, 2015) defined internal audit quality as an assert that audit quality is market-assessed joint probability that an auditor will both discover a breach in the client accounting system and also report the breach, this means that the auditor has both the technical competence to detect any material errors during the audit process, and the independence to ensure that material errors and omissions are corrected or disclosed in the auditor’s report.  scope of internal audit internal auditing has undergone dramatic changes that have expanded its scope in a way that allows it to make greater contributions to the organization it serves. it is also perfumed in varied legal and cultural environments; within organizations that differ in purpose, size, and structure; and also by persons inside or outside the organization (mihret et al, 2011).  staff expertise according to (aikins, 2011) states that the audit staff who have line responsibility for ensuring the quality of audit should supervise and review audit actives and the audit report by using the auditing standards. in line with this notion, the audit function needs a professional staff that collectively has the necessary qualifications and to conduct the full range of audits require by its mandate.  field work and quality review fieldwork involves performing the tasks identified in the audit programs to collect evidence for assessment of the audits current operations considering identified audit criteria. the fieldwork should be recorded in audit working papers in a consistent and standardized manner. the government of ethiopia performance standard no. 710 requires proper documentation of audit work (ministry of finance and economic development, 2010).  audit communications internal auditors must have high communication skills to become a successful professional. the development of these skills is not only improves the auditor’s potential, but will also improve the quality of audits made. both the quantity of audit effort and the quality of professional care implemented will determine the overall quality of the internal audit work (cohen &sayag, 2010). 2.2. empirical literature review of related studies 2.2.1. review of related studies outside ethiopia the internal auditing practice in public sector bureaus provides the means to help a government organization to achieve goals and objectives. a study by (kontogeorgis, 2018) found that internal auditing is an important part of the success of public good governance that achieved through effective and efficient use of public resources. furthermore, it found that internal audit function is a vital tool for the management and for the success of a company and one of the pillars of corporate governance or public good governance. the good operation of internal auditing function can be a tool for the improvement of quality of the public good governance and management efficiency. to review internal audit practice in border sense, very few researchers have conducted study on the same topic outside ethiopia. for instance, (gustavson, 2015) using data from a unique worldwide expert survey, covering 122 countries and (gift, 2018) in nigeria found out that auditing has positive and statistically significant effect of the public good governance. in other aspect, few studies have conducted regarding the effectiveness of auditing in public sectors of the other countries. for instance, (enofe, et.al, 2013); (vani, 2010), (dawuda, 2010) in gahana, (shamsuddin, 2014) in malaysian , (cheonget al, 2015) and (alabede, 2012) in nigeria, (ziaee., 2014) and (kirima, 2016) in kenya and (iia, 2012) survey on 107 countries had concluded that competency, management support, professional audit standards, competent leadership, formal mandate, objective and independent of auditors are key determinants that contributes to the internal audit effectiveness in public sector organizations. 2.2.2. summaries of literature review and knowledge gaps for successfully conducting this thesis, the researcher has different literature that related to the topic in countries outside and inside ethiopia. alemayehu taddese kenno 44 (addisu gemeda, 2014), conducted a research on “assessment of internal audit practices: the case of selected public enterprises in east arsi zone” and the findings of his research was that involvement of iaf in managerial matters are very much limited, the scope of internal audit in all of the surveyed enterprises were very much narrow and do not yet free from the traditional thoughts of what an iaf should be. (abreham gebregiworgis, 2011), conducted another research on “internal audit function and corporate governance in commercial bank” and his findings was that ifa and rate of implementation were low. furthermore, use o*f internal audit working papers by external auditors in conducting their duties was low. hence iaf has no positive impact on corporate governance effectiveness for these reasons iaf does not possess quality. this study is different from other conducted researches geographically focusing in spnnprs, due to fact that internal audit practice is different from country to country and internal audit practice in public sector of one region to another do not similar in implementing government policies. previous studies also focused on assessing the role of internal audit in public sectoral bureaus from internal audit unit point of view wheareas the current study try to address the internal auditing practice of public sector from one internal audit team coordinater, finance head, internal auditors, and accountants point of view in order to obtanin relevant inforamtion required for asssessing internal audit practice. 3. research design the study used descriptive method to show accurately the characteristics of a particular situation. moreover, it helps the researcher to gather several kinds of data related to the subject under study. 3.1. data type and sources the researcher used both primary and secondary data. primary data was collected directly from the respondents by distributing questionnaires. whereas, secondary data was gathered from report, bulletins, journals, text books and documents of the study organization. 3.2. methods of data collections to collect primary data structured questionnaire and direct personal interview were used. secondary data will be collected through review of different published and unpublished materials that are related to the topic. the questionnaires were structured based on those used by (taiwo o. et al, 2016) and (tesema, 2018) with major modificatoion. 3.3. target population, sample size and selection techniques the target populations of the study were 43 higher bureaus in south region. in order to select sample from 43 bureaus, the researchers employed simple random sampling method and determined sample size by using formula of (yamane, 1967) indicated below. n = n__ 1+n (e) ² where: n = sample size n = population size e = precision level or sampling error =0.05 n = 43 = 39 1+ 43(0.05)2 hence, the representative sample size for this study is 39 bureaus out of 43 bureaus in snnprs. then, the researcher purposively selected one internal audit team coordinator, one finance head, two internal auditors, and one assessing internal audit practice: a case of selectedbureaus in snnprs 45 accountant which constitute 5 professional from each bureau (39*5= 195) in order to obtain sufficient and relevant evidence required to prepare the report of this study. 4. results and discussion 4.1. data analysis in relation to specific objectives in this section, the researcher addressed the analysis related to specific objectives like independence and objectivity, internal audit quality, professional audit standards and major challenges of internal audit in public sector bureaus of snnprs. 4.1.1. respondents’ opinion on independence and objectivity respondents were asked to rate issues related with independence and objectivity of internal audit in a scale of 5 point likert scale question that ranges strongly agree =5 to strongly disagree=1. the questions are intended to address the status of independence and objectivity of independence status of internal audit in sector bureaus of snnprs. table 4.1: respondents’ opinion on independence and objectivity independence and objectivity of internal audit n mean std. deviation internal auditors in my organization conclude their findings based on objective evidence. 181 2.9503 1.00707 the internal audit unit is free to choose any transaction or area of interest for audit 181 4.2155 .58021 auditors feel free to include any audit findings in their audit reports. 181 4.2818 .55091 the purpose and authority of auditing is clearly defined 181 4.3204 .52395 the internal audit function has adequate level of internal auditors. 181 4.4254 .53874 internal audit provides reports directly to the concerned bodies without any restriction. 181 4.4475 .49862 the audit activity in my organization is carried out without any interference. 181 4.6243 .87703 total item mean and sd 4.1807 0.57894 source: survey data and spss output result, 2020 as shown in the tables 4.1 above the overall average mean score for internal audit independence and objectivity is 4.180 with the standard deviation 0.578 which fall on agree degree level. therefore, it can be conclude that independence of internal audit function in sector bureaus of snnprs has positive contribution to internal audit practice for the reason mean range of the all items is considered as agree = 4 (high mean) with a mean range of 3.404.19. this finding is consistent with the findings of other studies results drogalas et al., (2015), kirima (2016) and tesema (2018). alemayehu taddese kenno 46 4.1.2. respondents’ opinion on internal audit quality the audit quality can be defined as successfully conducting audit work by auditors. the audit quality is a means of using techniques to recognize misstatements in government organizations’ accounting system and report the misstatement to respective authority that has positive effect on promoting public governance. table 4.2: respondents’ opinion on internal audit quality internal audit quality n mean std. deviation internal auditors in my organization have adequate level of knowledge to conduct internal audit. 181 4.5635 .55035 internal auditors in my organization have adequate level of skill to carry out internal audit. 181 4.3204 .52395 internal auditors in my organization are committed to their profession. 181 4.6243 .87703 audit quality is enhanced using techniques to recognize misstatements in accounting system and report the misstatement to respective authority 181 4.5801 .88220 audit quality has maintained to enhance the accountability and responsibility in public governance. 181 4.3094 .90883 auditors perform engagements in such a manner that they believe in their work product and that no quality compromises are made. 181 4.4530 .91546 total item mean and sd 4.47515 0.77630 source: survey data and spss output result, 2020 as shown in the tables 4.2, the overall average mean score for internal audit quality is 4.47515with the standard deviation 0.77630 which fall on strongly agree degree level. therefore, it can be conclude that internal audit quality has positive contribution to internal audit practice for the reason mean range of the all items is considered as strongly agree = 5 strongly agree = 5 (very high mean) with mean range of 4.20-5.00. this finding is consistent with the findings of other studies such as drogalas et al., (2015), sayar et al, (2015) and okaro et al, (2015) . table 4.3: respondents’ opinion on professional audit standards professional audit standards n mean std. deviation internal audit engagement in my organization is conducted by team having appropriate composition to maintain quality. 181 4.3204 .52395 internal audit engagement in my origination is properly revised and supervised to the level required to maintain quality. 181 4.4807 .71174 internal audit report is produced based on actual findings of the audit engagement and communication concerned bodies in my organization. 181 4.7238 .57825 assessing internal audit practice: a case of selectedbureaus in snnprs 47 i believe that audit activities are conducted in accordance with recognized standards 181 2.9603 1.00707 i believe that generally accepted auditing standards are helpful in conducting auditing activity 181 4.4475 .49862 i believe that international professional practice frame work of iia helps in conducting audit work 181 4.7072 .58443 i believe that internal audit work of our bureaus follows public sector internal audit standards (psias) 181 2.9503 1.00707 internal audit reports are produced in consultation with generally accepted standards of reporting. 181 4.4807 .71174 total item mean and sd 3.5938 0.4567 source: survey data and spss output result, 2020 as shown in the tables 4.3 showed that the overall average mean score for internal audit quality is 3.593 with the standard deviation 0.456 which fall on not sure degree level with a mean range of 3.40 4.19, not sure = 3. this implies that the level of internal audit practice in line with international internal audit standards in question mark since the overall responses on implementation of internal audit is not sure by the professional respondents selected from each bureaus of snnprs. this indicates that existence of internal audit standard has low contribution in contribution to performance of internal audit tasks due lack compliance with international audit standards. result is not similar with study finding of empirical researches such as (shewamene, 2014) and (tesema, 2018) who found that existence of internal audit standard has positive influence on effectiveness of internal audit in one hand and practice of internal audit on the other hand. 4.1.4. respondents’ opinion on prevention and detection of fraud by internal sudit unit according to (olaoye and dada, 2017) what is very odd to the definitions is that the concept has been associated with embezzlement, financial misstatement and misappropriation, extortion, illegal amassing of wealth through dubious means, act of deception, bribery, false representation, theft, concealment of material fact but in my point of view, fraud is the deliberate misstatement of financial statements. table 4.4: respondents’ opinion on prevention and detection of fraud by internal audit unit the prevention and detection of fraud n mean std. deviation internal audit in my organization is enhancing good governance through detection and prevention of frauds. 181 3.5635 1.40341 internal procedure being applied in my organization is in position to detect material misstatement. 181 3.3204 1.21887 the intension of the management and employees in my organization to be involved in fraudulent act is less due to the presence of internal audit 181 3.3536 1.41298 alemayehu taddese kenno 48 function. internal audit function of my organization is adequately assessing and reporting the risk of fraud. 181 3.5249 1.40463 i believe that the internal audit of our bureau detects and prevents fraud and irregularities 181 4.4420 .92087 total item mean and sd 181 2.9768 0.9912 source: survey data and spss output result, 2020 as it can be easily seen from the above table 4.4, the overall mean and standard deviation is 2.9768 and 0.9912 for all items is fall with mean range of 2.60-3.39 =disagree. this implies that internal audit unit has low contribution in detecting and preventing fraud and irregularities. this finding is consistent with study by (lajos et al., 2016) and daniela alexandra (2014) who suggested that internal audit plays a role in fraud prevention and detection fraudulent activities, such as fraudulent financial reporting and asset misappropriation, are a broad problem encountered by companies across the globe. 4.1.5. respondents’ opinion on major challenges facing internal auditors in conducting their audit the environment of internal audit across the country face major challenges, the respondent’s opinions are summarized below: table 4.5: respondents’ opinion on major challenges facing internal auditors in conducting audit tasks major challenges facing internal auditors in conducting audit activities n mean std. deviation lack of training 181 4.2928 .54508 lack of sufficient audit facilities 181 4.5801 .92523 lack of management support 181 4.5304 .94010 lack of competent audit staff 181 4.2541 .96698 lack of adequate man power 181 4.4641 .91596 presence of interference by the higher officials 181 4.6243 .87703 total mean and standard. deviation 4.4666 0.8617 source: survey data and spss output result, 2020 as it can be seen from the above table the overall mean of the items is 4.466 which fall with in strongly agree = 5 (very high mean) with mean range of 4.20-5.00 and standard deviation 0.861. this implies that the major challenges of internal audit unit in each sector bureaus of snnprs are lack of training, lack of sufficient audit facilities, lack of management support, lack of competent audit staff, lack of adequate man power and presence of interference by the higher officials due to fact that respondents strongly agree on the existence of the challenges. assessing internal audit practice: a case of selectedbureaus in snnprs 49 5. conclusion and recommendation independence and objectivity of internal auditors improve the internal audit activity in conducting internal audit has positive contribution on improving internal audit work which means an increase on the value of independence and objectivity of internal audit unit leads to an increase in internal audit practice of bureaus in snnprs measured by five point likert scale. audit quality has positive contribution to internal audit practice: which means an increase on the value of internal audit quality of the public sector bureaus enables to an increase in effective utilization of public resources of the sectors bureaus in the region. the major challenges of internal audit unit in each sector bureaus of snnprs are lack of training, lack of sufficient audit facilities, lack of management support, lack of competent audit staff, lack of adequate man power and presence of interference by the higher officials due to fact that respondents strongly agree on the existence of the challenges. 6. recommendations the researcher has been forwarded the following recommendations to the public sector bureaus in snnprs.  an increase on the value of independence and objectivity of internal audit unit improve internal audit practice in snnprs sector bureaus measured by five point likert scale. hence, the bureaus should work on internal audit independence and objectivity as far as these allow the audit activity to be conducted in effective and efficient manner.  an increase on the value of internal audit quality of the public sector bureaus enables to increase in effective utilization of public resources of the sectors bureaus in the region. hence, the bureaus should effort on internal audit quality more than current status due to fact that it has positive influence on internal audit practice in one hand and effectiveness of internal functions in snnprs sector bureaus.  the existence of professional audit standard has low contribution to performance of internal audit task in public sector bureaus since the overall responses on implementation of internal audit is not sure by the professional respondents selected from each bureaus. hence, the bureaus should give attention on effective implementation of professional internal audit standards, such as the international professional practices framework (ippf) promulgated by the iia and public sector internal audit standards (psias) support that internal audit of the organization is systematic, objective, and based on evidence. audit activities should conduct their work in accordance with recognized standards.  internal audit status in terms of fraud detection and prevention of irregularities in the public sector bureaus of snnprs is very low because the average value of the response of all positive items is fall in disagree. hence, the researcher motivated to forward recommendation for public sector bureaus in snnprs to seriously work on internal audit function with regards fraud detection and prevention in a manner that enables to enhance its role in preventing and detecting frauds, errors and irregularities in the sector bureaus.  in order to mitigate challenges that influence internal audit , let the professionals get necessary training in order to improve individual work performance, the management of the sector bureaus are advised to provide the necessary support to internal auditors and create smooth communication between directors, mangers and auditors in order to enhance accountability and transparency in public sector.  the bureaus have to access the qualified and sufficient man power that match the audit tasks in the bureaus while improving the benefit of auditors. it is better to fulfill the necessary physical infrastructures auditors like car, computers, offices, audit manuals, and new information technology product like online auditing system.  finally, the management of the bureaus is recommended to reduce interference in to work of auditors and work for public interest with auditors in order to bring the public good governance by effective and efficient use of public resources. alemayehu taddese kenno 50 references 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whose findings affirmed that liquidity management enhance firms operational performance and worth of a firm. literature demonstrates that results vary when small and large firms were studied as stated by ibhagui and olokoyo (2018) that leverage has significant negative effect on performance when small firms are considered and this negative impact diminishes as the firms grow. hubbard and bromiley (1994) survey’s findings shows that sales is the utmost communal objective mentioned by managers. according to r. kaplan and norton (1993); r. s. kaplan and norton (1996) firm should have diverse goals which should include sales growth to meet their financial obligations. as sales growth and firm size is of significance importance while evaluating firms profitability its effect will also be studied. in a nut shell, this paper aims to examine the impact of liquidity ratios on firms performance and profitability by considering a comprehensive sample of textile firms of pakistan for a duration of nine years. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e impact of liquidity on profitability and performance. a case of textile sector of pakistan 123 2. literature review literature reviews by rudin, nurdin, and fattah (2016) and samo and murad (2019) illustrates that despite the important connection between financial liquidity and profitability, there are limited studies that indicate the significant association between them.lumpkin and dess (1996) argued that performance is multidimensional in nature so multiple measures of performance should be taken into account. the association between the different measures of performance can be complex in nature as growing firms will certainly not perform better when financial performance is considered.on the other hand, profitability is a significant measure of firm’s performance as it is impossible that a firm growth can be sustained without revenues being available for reinvestment (fitzsimmons, steffens, & douglas, 2005).profitability indicates firm’s ability to withstand any financial crisis so that a firm can smoothly carry on its operations; also it maximizes shareholders value.impact of liquidity and solvency on profitability was studied by khidmat and rehman (2014) by examining chemical sector of pakistan. their findings confirmed that liquidity, solvency and profitability are closely related. another study conducted by šarlija and harc (2012) showed that firms try to sustain liquidity in their operations to timely meet their obligations. excess both liquidity and leverage may have negative influence on the firm (shaheen & malik, 2012). leverage and liquidity proportions have to be appropriate as per the requirements of the firm, since both deficiency or excess of them would lead to have negative impact on the firm(karaduman, akbas, ozsozgun, & durer, 2010).hence, management of liquidity is very important for any firm to pay existing obligations i.e. financial and operating expenses on the business (saleem & rehman, 2011). the results of zaitoun and alqudah ratified that liquidity has significant and positive affect on the profitability while examining impact of liquidity and financial leverage on profitability of jordanian industrial firms. ardishvili, cardozo, harmon, and vadakath (1998) and f delmar (1997) reported that employment, market share, physical output, assets, profits and sales are possible indicators of performance while frédéric delmar, davidsson, and gartner (2003) explored several performance measures and declared that if only one indicator has to be chosen to measure firms growth than sales should be chosen as a growth measure. in consistant with the previous research, this study will observe impact of sales growth on firm performance as well to get more evident results. chandler and baucus (1996) observed that researchers often assume that rapid growth is desirable when sales growth is used to measure performance but the perception that rapid growth specifies firms better performance may not be universally true. firms having prompt growth have excessive strains on assets which can lead to instability in firms’ performance. fitzsimmons et al. (2005) results imply that small firms which pursue the growth pathway are expected to attain above average performance while large firms which tends to pursue the profitability pathway are expected to attain high growth and profitability. based on past research, it is evident that the firm size is an important variable while scrutinizing firm’s performace and profitability. stanwick and stanwick (1998) determined the relation between size of the firm, financial performance and corporate social performance by examining the data of us firms from 1987 to 1992. the results showed that corporate performance is influenced by firm size and profitability.mule, mukras, and nzioka (2015) demonstrated the effect of corporate size on profitability by evaluating kenyan firms. their findings shows that there exists a positive relation between firm size and profitability. manufacturing companies listed in indonesian stock exchange were studied by kartikasari and merianti (2016) from 2009-2014. firm size was measured by considering both total assets and total sales. results of regression analysis showed that firm size (in terms of assets) have significant negative impact on profitability while firm size (in terms of sales) has insignificant effect on the profitability of firms.similar study conducted by olawale, ilo, and lawal (2017) showed that firm size has negative impact on performance when considered in terms of assets while it has positive impact on firm performance when considered in terms of sales.budhathoki, rai, lamichhane, bhattarai, and rai (2020) examined the impact of liquidity, leverage, and total assets size of the bank on profitability. results revealed that the bank size have positive effects on profitability. liquidity, firm performance and profitability have been a topic of concern among financial analysts for many years and conflicting results have been observed in literatrure which amplify the importance of the study. based on past research analysis, this paper aims to study the effect of liquidity ratios on profitability and performance of the firms. saira sundas & minaam butt 124 3. objective of the study the objective of the paper is to study the effect of liquidity ratios on profitability and performance in presence of control vaiables like firm size and sales growth by considering textile sector of pakistan. a sample of 152 textile firms has been analyzed from 2005-2014 to study this effect. 4. hypotheses development listed hypotheses have been developed to attain the objectives of the study. h1: there is a positive and significant relation between firms’ liquidity and profitability. h2: there is a positive and significant relation between firms’ liquidity and performance. h3: there is a positive and significant relation between firms’ liquidity and sales growth. h4: there is a positive and insignificant relation between firms’ liquidity and firm size. 5. data and sampling financial statement analysis of non financial firms have been evaluated to get the empirical results.data has been collected from the publications of state bank of pakistan. panel study has been conducted which is a type of longitutinal research which observes same group or organizations across multiple time line (neuman, 2014). the final sample of the study includes an unbalanced panel data of 152 textile firms listed on karachi stock exchange from 2005-2014. 6. variables and measures liquidity ratios (acid ratio and current ratio) are used as independent variable to determine liquidity of the firms.current ratio is calculated based on measures used by odit and chittoo (2008), saleem and rehman (2011) and sajid, mahmood, and sabir (2016). it is a gross measure of liquidity which links liquid assets with current liabilities. sr.no. variables measurements 1 acid ratio current assets-inventories/current liabilities 2 current ratio current assests/current liabilities 3 return on assets(roa) net profit before tax/total assets 4 return on equity (roe) net profit before tax/shareholder’s equity 5 profitability (net profit after tax/total fixed assests) 100 6 firm size log of sales 7 sales growth net sales/net fixed assets quick ratio\acid ratio is calculated based on saleem and rehman (2011); it indicates whether firm can disburse their current debt without selling any inventory or not. profitability is used as a dependent variable which is calculated based on sajid, tahir, and sabir (2015) and saleem and rehman (2011) paper. it shows operating efficiency of the finances over firm’s investment. roa and roe are used as performance indicators.return on asset reflects the effectiveness of all the assets, it is an obvious measure of performance.the same vaiable is used by kartikasari and merianti (2016) to estimate performance of indonesian firms. the other variable used to evaluate performance is return on equity which is used based on olawale et al. (2017) paper. return on equity measures the firms’ profitability with which the owner’s money is managed.sales growth is measured by dividing net sales by net fixed assets (odit & chittoo, 2008; sajid et al., 2016) while firm size is considered in terms of sales as estimated by ebel ezeoha (2008) and kartikasari and merianti (2016). 7. theoritical model impact of liquidity on profitability and performance. a case of textile sector of pakistan 125 liquidity ratios (acid ratio, current ratio) sales growth firm size control variable independent variable dependent variable profitability performance (roa, roe) 8. regression model this study will investigate the relation between liquidity and profitability by using following regression equations roa= … (i) roe= … (ii) profitability= … (iii) where roa=return on assets, roe = return on equity, α =constant , β= the regression coefficient , ε= error term. 9. empirical results table 1 summarizes the descriptive statistics. the mean and standard deviations of liquidity ratios and other variables are estimated by using stata.the average return on asset is 2.4 while return on equity is 1.7.the mean current ratio is 1.1 and acid ratio is 0.3.standard deviation shows the deviation of values from its mean. table: 1 summaries of basic descriptive statistics variable obs mean std. dev. min max roa 743 2.442503 17.69018 -164.31 321.6 roe 743 1.74825 94.67652 -1277.82 791.9 profitability 743 4.054547 109.5365 -1784.221 1121.298 current ratio 743 1.167537 1.079883 .01 11.81 acid ratio 743 .3805384 .6485108 0 10.2 sales growth 743 2.676916 3.797728 .0087105 92.13251 firm size 743 14.52721 1.562278 7.990915 17.81269 table 2 shows correlation results. sample data has been tested for mulicolinearity to verify collinearity error among the variables. estimation results do not show any concern over multicollinearity as there is no value above 1 and less than -1. saira sundas & minaam butt 126 table: 2 correlation results of estimation variables variables roa roe profitability current ratio acid ratio sales growth firm size roa 1.0000 roe 0.1150 1.0000 profitability 0.5531 0.0197 1.0000 current ratio 0.1328 0.0286 0.3278 1.0000 acid ratio 0.0589 -0.0207 0.3330 0.7139 1.0000 sales growth 0.1206 0.0587 -0.3253 0.1234 0.0486 1.0000 firm size 0.2145 0.0769 0.1181 0.0280 -0.0445 0.1099 1.0000 hausman’s test is employed to select amongst the two basic approaches for panel estimation i.e. random effect model and fixed effect model which is adequate for our estimation model. hausman’s test results support fixed effect model as the p-value is less than 0.05.therefore, fixed effect panel regression is adopted for evaluating the impact of liquidity ratios on performance and profitability.the same regression model has been opted by kartikasari and merianti (2016) and saleem and rehman (2011). table: 3 fixed effect regression results variables roa roe profitability current ratio 2.468223 (1.228)** 7.433529 (6.517) 8.924049 (6.709) acid ratio\ quick ratio -1.023877 (1.664) -5.052025 (8.829) 35.33195 (9.089)*** sales growth 1.282459 (0.512)*** 1.369427 (2.719) 7.534609 (2.799)*** firm size 3.348356 (1.312)*** 3.42022 (6.962) 6.07067 (7.166) .0624 .0092 .0034 no. of observations 743 743 743 no. of groups 134 134 134 table 3 reports regression results ***significant at 1%, **significant at 5%, *significant at 10% table 3 shows the results of fixed effect model.the results of first regression model shows that current ratio has significant positive effect on return on assets; similar findings were reported by wang (2002). acid ratio have negative association with firms performance while possitive relation has been observed between firm size and performance, similar results were testified by olawale et al. (2017) as well. the second regression model impact of liquidity on profitability and performance. a case of textile sector of pakistan 127 demonstrates that current ratio, acid ratio, sales growth and firm size have insignificant impact on roe which means roe is not affected by liquidity ratios.our findings are in consistant with the findings of saleem, q., & rehman, r. u. (2011).considering the third equation, regression result proves that liquidity ratios have possitive impact on profitability in case of textile sector of pakistan. zaitoun and alqudah and samo and murad (2019) also projected same results in their study. while firm size and profitability report positive association. these findings are similar to the verdicts of mule et al. (2015) and budhathoki et al. (2020) and contradicts the findings of kartikasari and merianti (2016). this verdict can be drawn from the study that liquidity ratios illustrates firms capacity to pay off existing debt obligations without raising external capital. since, the value of liquidity ratio is more than one it proves that the textile sector of pakistan is in a stable condition. if the current ratio would have been less than one than firms should be concerned about their financial condition as they might not be able to pay off their short term debts.possitive relation with profitability denotes that textile sector is generating enough profits to meet their short term financial obligations. 10. conclusion this paper empirically address the relationship between liquidity ratios, performance, sales growth, firm size and profitability from 2005-2014 by analyzing textile sector of pakistan. the results show that liquidity ratios have positive association with profitability while both show insignificant relation with return on equity. the control variables sales growth and firm size are also positively related to firms’ performance and profitability. in a nut shell, liquidity ratio is very helpful in determining the profitability of a firm as these ratios elucidates firm’s current assets and current liabilities. this study concludes that if liquidity ratio is high than the firm is in a stable position as the firm would be cash enrich and can easily handle the cash issues. the implication of the study is that it determines relation between firms’ liquidity and profitability that will help investors to analyze firms’ financial condition to meet day to day operating expenses. further, the current study is limited to textile sector of pakistan considering a period of nine years due to availability of data constraint; in future large sample data can used by evaluating other variables and sectors. references ardishvili, a., cardozo, s., harmon, s., & vadakath, s. 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(2002). liquidity management, operating performance, and corporate value: evidence from japan and taiwan. journal of multinational financial management, 12(2), 159-169. zaitoun, m., & alqudah, h. the impact of liquidity and financial leverage on profitability: the case of listed jordanian industrial firm’s. international journal of commerce and finance, vol. 6, issue 2, 2020, 125-138 125 assessment of tax payment and collection problems in jimma zone, ethiopia mengistu deyassa dadi, jimma university, ethiopia sintayehu tulu wondimu, jimma university, ethiopia mathewos woldemariam birru jimma university, ethiopia received: aug 31, 2020 accepted: sept 23, 2020 published: oct 02, 2020 abstract the study was attempted to assess problems associated with taxpayers and the revenue authority of ethiopia case of jimma zone, oromiya regional state. to address research objectives, the researchers were used survey data collected through questionnaires, and the collected data were analyzed with the aid of statistical software, ordered logistic regression model. the study used tax collection as dependent variable, and those taxpayers delay declaration, tax fairness and equity, corruption and political instability, organizational strength of the tax authority, tax payer’s awareness, mode of tax collection, and starting a business without a license as i ndependent variables. the findings of the study revealed that independent variables corruption, political instability, organizational strength of the tax authority, tax fairness, and modes of tax collection has a significant relationship with tax collection. it indicates that th ese variables have an impact on the collection of taxes. on the other hand, other variables, taxpayers' delay on the declaration, taxpayers' awareness, and starting a business without license shows no significant relationship. researchers recommended that to improve tax collection the tax authority should develop strategies to aware tax payers in the community. keywords: taxpayers, tax authority, taxation, tax collection jel classification: h7, h25, h26&h27 1. introduction governments, all over the world have started several public projects, such as social security, protection and other services of public utilities like electricity, water supply, railways, heavy electricity, atomic energy, and so on. to provide social amenities in the form of education, health and sanitation facilities and public utilities, the government requires adequate revenue. tax is one of the most important sources of revenue for every government. taxes are compulsory contributions imposed by the government on its citizens to meet its general expenses incurred for the common good, without any corresponding benefits to the taxpayer. (elke s. , 2010) as cited by (tamunonimim n and a.masa, 2012) tax is a compulsory payment made on different basis and rates by citizens (corporate bodies and individuals) to government, non negotiable but obligatorily. this payment is not based on direct exchange for the payment for goods and services. it is non negotiable because none of the citizens has any direct contribution to the composition of the basis and rates of payment. government only classifies the items on which the tax is to be paid, and the category of citizens that should be subjected to the payment (ariwodola, 2005). the decision is however, based on the cost of the projects or programs government intends to execute, which is the principal determinant of the budget size. government also judges the basis, rates, category of citizens, and the time period to pay the tax, on the direction of the economy desired and government’s perception of the standard of living of the citizens. this is why tax is defined as a tool for government revenue and fiscal policy tool for directing the economy. taxes are not paid directly based on exchange contract like any other in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e mengıstu deyassa dadi & sintayehu tulu wondimu & mathewos woldemariam birru 126 payments except subsidies paid by government. any citizen pays it whether or not the citizen benefits from the government projects and programs financed by the taxes (rosen, 2004). taxation is a universal concept to forms the central pillars around the civilization has been built; plays a critical role in society and has the capacity to affect the lives of everyone. tax is a payment required by a government that is unrelated to any specific benefit or service received from the government. the general purpose of a tax is to fund the operations of the government it means to raise revenues for the government expenditures. taxes differ from fines and penalties in those taxes are not intended to punish or prevent illegal behavior. most of the authors’ in their definition as a key components of taxes they incorporates a payment is required involuntary, imposed with a government agency likes federal, state, or local governments and taxpayer not tied to receive of any benefits due to paying taxes. so, primarily the meaning of “taxation” is raising money for the purposes of government by means of contributions from the individual persons (brian c. s. , 2018) taxation is the backbone for the developed and developing countries to generate revenue for government even though the revenue mobilization made in developed and developing countries in some extent may have the difference and their differences is probably feasible. overall, the revenue obtained probably taken as a sources for financing public projects or goods. (timothy b & torsten p, 2013) taxes are necessary to overcome the free riding inherent in the financing of public goods, to control market imperfections, and to achieve social justice through redistribution. economic growth (efficiency) is promoted by the first set of goals, whereas social justice (equity) is promoted by redistribution and the provision of public and merit goods. goals of promoting economic growth and social justice are shared by developed and developing countries even though a number of differences between developed and developing countries; one of the difference may be on tax designs. these differences include variations in industry and size of administrative and compliance costs, in the levels of corruption, in the levels of monetization in the economy, in political constraints, and in the relative size of the informal economy (avi-yonah, & reuven s., 2007) according to (elke s. , 2010) tax systems in many developing countries are characterized by tax structures being not in line with international standards, by lack of tax policy management, low compliance levels and inappropriate capacities in tax administration that make the government to collect tax below the planned. when we compared the developed and developing countries taxation, most of the developed countries are characterized with a broad base for the direct and indirect taxes with tax liability covering the vast majority of citizens and firms; where as in developing countries were confronted with social, political and administrative difficulties in establishing a sound public finance system. as a result, developing countries are vulnerable to tax evasion and avoidance activities of individual taxpayers and corporations. this may be considered as a reasons for large differences in the ability to mobilize own resources between developed and developing countries (giz, 2010) as to (pius v. c. okoye and raymond e, 2014) developing countries receive a very low amount of revenue from taxation because these countries face a number of institutional problems in the process of revenue generation like tax evasion and corruption of public officials in tax administration that can significantly reduce tax revenue and seriously hurts economic growth and economic development and unstable and shifting behaviors of government, which hinders the process of long-term reforms in the system. 1.1 problem statement the government expenditure on the gross domestic product (gdp) is higher in developed than developing countries. comparatively the developing countries typically collect taxes of between 10 to 20 percent of gdp, while the developed countries are more like 40 percent. even though; the costs of corruption, administration, and compliance are much greater in developing countries (timothy & torsten, 2014).in recent years, domestic revenue mobilization in developing countries has gained increasing prominence in the policy debate. currently in international, level the priority issue given for taxation. as a policy, there is debate to taxation after decades of living in a shadow economy at least for five reasons. these are state building, long term independence from foreign assistance and the shifting aid paradigm, the fiscal effects of trade liberalization, the increased prominence of fiscal issues in the “west” due to the financial and debt crisis, and the continuing acute financial needs of developing countries (giulia & mick, 2014). taxation is the earliest and most prevalent form of government interference with the economic life of individuals and business enterprises. it is a process whereby charges are imposed on individuals or property by the legislative branch of the federal government and by many state governments to raise funds for public purposes. the government has the right to impose tax on the operating business and collect the tax return from the business. the assessment of tax payment and collection problems in jimma zone, ethiopia 127 tax collected from operating business has importance in the raising of revenue for federal government and providing incentives type of economic areas (yohannes m & sisay b, 2009). the right of the chief authority to collect taxes, and the general policy which determines who is to be taxed, how much the tax shall be, and for what purposes it shall be levied has always been a controversial issue. since it is a burden no one wants to take it, government in a given country should design appropriate tax system to allocate tax burden between different sections of the society. a good tax system should not affect the ability and willingness of the people to work, save and invest. if not, it would affect the development of trade and industry and the economy as a whole (ramaswami p, 2005). according to the current amended federal income tax proclamation no.-979/2016 taxpayers are categorized into three categories, namely category “a”, “b”, and “c” based on their volume of sales and form of business. category “a” includes any company incorporated under the tax law of ethiopia or foreign country and any other person having an annual gross income of birr 1,000,000 or more. category “a” taxpayers are required to submit to tax authority at the end of fiscal year a financial position statement and a profit and loss statement. category ‘b’ taxpayer being a person, other than a company, having an annual gross income of birr 500,000 or more but less than 1,000,000. these categories of taxpayers must submit profit and loss statement at the end of the year. the law requires all entries in the records and accounts to be supported by appropriate vouchers (council of ministers regulation no. 78/2002: article 18, sub article 2).category ‘c’ unless already classified in categories ‘a’ and ‘b’ include those taxpayers being a person other than a company, having an annual gross income of less than birr 500,000. unlike the case for category “a” and “b” tax payers, the income tax liability of category ‘c’ taxpayers is determined using standard assessment. this type of assessment is a fixed amount of tax determined in accordance with the council of ministers regulation established schedules. in this regard, this category of taxpayers is the most problematic category of taxpayers and it is considered as hard to tax. this is because these taxpayers pay taxes at fixed rate on the income estimated by the income tax authority rather than declaring their income by themselves. assessment committee estimates their daily income and the taxpayers have little room to address their view so that frequent friction is observed in this area (lemessa, 2007). taken in to considerations the above issues this research intends to assess problems related to taxpayers and tax authority regarding payment and appropriate collection. 1.2. objectives of the study the main objective of the study was to asses problems related to taxpayers and tax authority. specifically, aims to investigate the relationship of taxpayers’ delay of declaration, corruption and political instability, organizational strength of the tax authority, taxpayers’ awareness, starting business without license, tax fairness and modes of tax collection and tax collection. 1.3. research hypotheses the following research hypothesis were driven by the researchers for the study on assessment of problems associated with taxpayers and revenue authority h1. there is significant relationship between tax payers’ delay of declaration and tax collection. h2. there is significant relationship between corruption and political instability and tax collection. h3. there is significant relationship between organizational strength of the tax authority and tax collection. h4. there is significant relationship between taxpayers’ awareness and tax collection. h5. there is significant relationship between starting business without license and tax collection h6. there is significant relationship between tax fairness and tax collection. h7. there is significant relationship between modes of tax collection and collection of tax 2. data and methods 2.1. research design research design provides the glue that holds the research project together. a design would be used to structure the research, to show how all of the major parts of the research project the samples or groups, measures, treatments or programs, and methods of assignment work together to try to address the central research questions (wouldiam, 2006). this study focus on assessing the problems associated with taxpayers and revenue authority. to this effect, mengıstu deyassa dadi & sintayehu tulu wondimu & mathewos woldemariam birru 128 descriptive survey method was employed with the assumption that it can help to describe the tax system practice in ethiopia. 2.2 sources of data and methods of data collection the study was used primary data. the primary data sources were collected by using self-administered questionnaires. the questionnaires were comprised of both closed and open-ended questions. open-ended questions were used to allow the respondents to write their opinions without restrictions and to include ideas that might not been indicated in the questionnaires. in addition to open-ended questions, the researchers would also use closed-ended questions, which are designed as scale measurement base using five-point likert-type scaling. the scaling was (1) represent strongly disagree, (2) disagree, (3) neutral, (4) agree, and (5) strongly agree. thus, the variables can be scaled to measure the degree of their agreement or the disagreement of the respondents, which the variables can be elicited. close-ended questions are included in the questionnaire in order to obtain a high response rate. further, close-ended questions are quicker and easier both for respondents and for researcher. indeed, in the engagement of the researches’ mainly primary data, collection methods would be used and this is because the study needs the respondents’ opinion or response regarding the issue to be investigated. 2.3. target population, sample size and sampling technique the target population of these studies would be different groups of taxpayers of the jimma zone, currently in jimma zone 22 district are available includes the jimma city administration. according to the information of the zone revenue office in total 30,783 taxpayers presently avilable i.e., group a taxpayers’ are equal to1, 606 ,group b taxpayers’ are equal to 1,424 and group c taxpayers’ are equal to 27,753. in determination of sample size the researchers could taken into an account of the three criteria, usually would be need to be specified to determine the appropriate sample size: level of precision, level of confidence or risk, and degree of variability in the attributes being measured (miaoulis and michener, 1976) and also for populations that are large, cochran (1963:75) developed the equation to yield a representative sample for proportions. where: sample size z2 abscissa of normal an area α at the tails (1_α equals the desired confidence level 95%), e is desired level of precision, p estimated proportion of an attribute i.e., presented in target population, and q is 1-p. the above sample size equation provides somehow large sample size to our studies even though to minimize the sample size and to access proportionately more information from small sample we have adjust the sample size with as followed equation. where: n sample size, n target population in sample section from selected district we have, used multi-stage sampling technique would be used to select sample size of each study. then, a proportional random sampling method was employed to select the sample taxpayers from each stratum. sample size determination for the study would be as followed; assessment of tax payment and collection problems in jimma zone, ethiopia 129 then sample size of the would be adjusted as follows from 22 districts’ of jimma zone the researchers would select 10 districts’ whom pays large tax in relative to other unselected district from each category a, b and c purposively. according to the data of taxpayers of each district, the researcher takes in to account for those who have 1000 and above taxpayers. the sample size selection of each category would be made proportionally with the determined sample size. table 1 sample size of the study s. no. selected district target population sample size a b c total target pop a b c 1. gommaa 38 34 1684 1756 1 1 29 2. b/m/aggaaroo 196 161 1493 1850 3 3 25 3. limmuu kosaa 158 51 1925 2134 3 3 33 4. limmuu seqaa 36 20 1300 1356 1 1 22 5. maannaa 56 25 1057 1138 1 1 18 6. omoo naddaa 19 54 1291 1364 1 1 22 7. s/coqorsaa 31 31 1160 1222 1 1 20 8. sh/somboo 42 23 1021 1225 1 1 17 9. sokkorruu 30 61 1432 1523 1 1 24 10. jimma city 861 772 6915 8548 14 13 119 total 380 source: jimma zone revenue office 2.4. methods of data analysis researchers were used descriptive statistics to analyze the collected data with the aid of statistical software. accordingly, frequencies, percentages, mean and standard deviation was used to analyze the quantitative data. in addition to the descriptive statistics, the econometric analysis tool that is ordered logistic models would be employed. 2.5. model specification: ordered logistic regression model (ologit) when the outcome variable is ordinal and the relative ordering of response values is known and have the exact distance between them then the most popular method is the ordered logistic regression model, which is also known as the proportional odds model(williams, 2016). unfortunately, experience suggests that the assumptions of the ordered logistic model are frequently violated indicated the situations most of experts studies as (long &freese, 2014), cited in (williams, 2016). the ordered logistic model is a regression model for ordinal response variables. the model is based on the cumulative probabilities of the response variable: in particular, the logistic of each cumulative probability is assumed mengıstu deyassa dadi & sintayehu tulu wondimu & mathewos woldemariam birru 130 to be a linear function of the covariates with regression coefficients constant across response categories(michaels, 1989).it is tempting to analyze ordinal outcomes with the linear regression model, assuming equal distances between categories. however, this approach has several drawbacks which are well known in literature as (mckelvey and zavoina, 1975; winship and mare, 1984; lu, 1999), cited in (michaels, 1989). when the response variable of interest is ordinal, it is advisable to use a specific model known as the ordered logit model. questions relating to the assessment of problems related to taxpayers and tax authority are usually ordinal in nature. under this study, the ordered logistic model would be uses to estimate the relationships between ordinal responses on the assessment of problems related to taxpayers and tax authority and selected exogenous variables of the study. the collected responses are categorical as well as ordered them sequential from the small magnitude to the large magnitude with setting an equal distance between each other’s’, the responses expressed as strongly disagree [1], disagree [2], agree [3] and strongly agree [4]. let be an ordinal response variable with categories for the subject, alongside with a vector of covariates . a regression model establishes a relationship between the covariates and the set of probabilities of the categories , usually, regression models for ordinal responses are not expressed in terms of probabilities of the categories, but they refer to convenient one-to-one transformations, such as the cumulative probabilities of . note that the last cumulative probability is necessarily equal to 1, so the model specifies only cumulative probabilities. an ordered logistic model for an ordinal response with categories is defined by a set of equations where the cumulative probabilities are related to a linear predictor through the logit function: . (1) the parameters , called thresholds or cut-points, are in increasing order ( it is not possible to simultaneously estimate the overall intercept and all the thresholds: in fact, adding an arbitrary constant to the overall intercept can be counteracted by adding the same constant to each threshold . this identification problem is usually solved by either omitting the overall constant from the linear predictor (i.e. ) or fixing the first threshold to zero (i.e. ). the vector of the slopes is not indexed by the category index thus, the effects of the covariates are constant across response categories. this feature is called the parallel regression assumption: indeed, plotting against a covariate yields parallel lines or parallel curves in case of a non-linear specification. in model (1) the minus before implies that increasing a covariate with a positive slope is associated with a shift towards the right-end of the response scale, namely a rise of the probabilities of the higher categories. some authors write the model with a plus before : in that case, the interpretation of the effects of the covariates is reversed. from equation (1), the cumulative probability for category is the ordered logistic model is also known as the proportional odds model because the parallel regression assumption implies the proportionality of the odds of not exceeding the category : in fact, the ratio of these odds for two units, say and , is ], which does not depend on and thus it is constant across response categories. 3. results and discussion this part of the paper presents results and discussions. it structured as follows: first, analysis of the descriptive statistics of the variables. second, tests of the model, third, interpretation of the model and finally tests of hypothesis. assessment of tax payment and collection problems in jimma zone, ethiopia 131 3.1. description of categories of taxpayers table 2 category of respondents category of taxpayers freq. percent cum. category a 28 7.37 7.37 category b 26 6.84 14.21 category c 326 85.79 100 total 380 100 source: survey collected data in 2019 as shown on the above table, the total numbers of the respondents are 380 from ten woredas in jimma zone. namely, gomma, agaro, limu kosa,manna,omo nada,seka chekorsa,shabe sombo,sokoru and jimma town. category “a” taxpayers are those taxpayers whose annual turnover is greater than birr 1,000,000 (one miiiion birr) the number of the respondents selected from the above mentioned woredas for this category was 28 which means 7.37 percent, category “b” taxpayers are those taxpayers whose annual turnover is in between birr 500,000 (five hundred thousands) up to birr 1,000,000(one million) the number of respondents from this category is 26 which means 6.84 percent. and category “c” taxpayers are those whose annual turnover is below birr 500,000 (five hundred thousands) the number of respondents from this category was 326 which means 85.79 percent. this number is large when compared with category a and b, because most of the taxpayers in the zone are from this category. 3.2. descriptive statistics analysis of dependent and independent variables of the study the dependent and independent variables would be described their statistical natures expressed with the support of statistical software as follows. to undertake the analysis the researchers concentrated on the frequency distributions, percentage, mean and its standard deviations. table 3 summary of dependent variable responses tax collection frequency percent cum. 1 24 6.32 6.32 2 59 15.53 21.84 3 101 26.58 48.42 4 196 51.58 100 total 380 100 source: survey collected data in 2019 mengıstu deyassa dadi & sintayehu tulu wondimu & mathewos woldemariam birru 132 table 3 indicates that the dependent variable responses from the sampled respondents of the study. according to the above stated table, respondents that respond strongly disagree which is represented by number 1 would be equal to 24(i.e., 6.32%), those who respond disagree which is represented by number 2 were 59(i.e., 15.53%), agree which is represented by number 3 were 101(i.e., 26.58%) and also strongly agree which is represented by number 4 were 196(i.e., 51.58%). this statistic results implied that most of the respondents would be responded agrees and strongly agree on tax collection. table 4 summary of variables of the study (dependent and independent) variables obs. mean std.dev min max tax collection 380 3.234211 0.9333392 1 4 taxpayers delay 380 3.322556 0.3388831 2.4248571 3.857143 corruption 380 3.256842 0.4889605 2.2 4.2 organizational strength 380 3.076316 0.4763693 2 3.875 awareness of taxpayers 380 3.128947 0.5082533 1.833333 4.333333 tax fairness 380 3.334211 0.5050674 2 4.75 start business without license 380 3.101974 0.7128874 2 4.5 modes of tax collection 380 3.275439 0.7216826 1.666667 5 source: survey collected data in 2019 table 4, shows that the dependent and independent variables of the study. the dependent variable that is, tax collection would be categorical in nature. the independent variables would be expected an influence on tax collection. the survey data collected from the sample of 380 respondents were ranged with the likerted scales, which means from strongly disagrees to strongly agree categories. in this basis, the maximum and minimum values stated for each of the dependent and independent variables were expressed. in addition to these the above table also indicates that the mean and standard deviations of each dependent and independent variables of the study. the expected value of the dependent variable, known as tax collection is closed to 3.234 and its standard deviation closed to 0.933. this figure implies that the sample respondents were gave the responses in between agree and strongly agree categorical scales. even though some of the respondents out of the sample respondents would be give, the responses below agree categories probably strongly disagree and disagree due to that we have observed the deviation of 0.933 from the expected values. the expected values of the independent variables namely, taxpayers delay on declaration, corruption and political instability, organizational strength of the authority, taxpayer’s awareness, starting business without license, tax fairness and modes of tax collection would be stated in the above table for all of them. the expected value of taxpayers would be equal to 3.322 from the given responses of the sample respondents and the standard deviation equal to 0.338. the expected value of the corruption and political instability would be equal to 3.25 from the given responses of the sample respondents whereas the standard deviation equal to 0.488. the expected value of organizational strength of the authority would be equal to 3.07 and the standard deviation would be equal to 0.476. the expected values of taxpayers’ awareness, tax fairness, starting business without having license and modes of tax collection would be 3.12, 3.334, 3.101 and 3.275 respectively. in addition, their standard deviations would be 0.508, 0.505, 0.7128 and 0.721. the selected independent variables such as taxpayers delay on declaration, corruption and political instability, organizational strength of the authority, tax payer’s awareness, starting business without license, tax fairness and modes of tax collection would be ready to undertaken the data analysis with the support of the econometrics model. according to the measures of the central tendency, especially the mean values and standard deviations indicate that the distributions of the data would be concentrated to the center and their standard deviation indicates that the data distributions closed to the center. assessment of tax payment and collection problems in jimma zone, ethiopia 133 3.3. the econometrics model tests (ologit) chi-square tests help to know the associations between the dependent variable and independent variables. 1. the chi-square tests show that between tax collection and taxpayers delay is resulted in the pearson chisquare would be 276.5757 and its probability would be equal to 0.000. this result indicates that there is an association between the outcome and independent variables. 2. the chi-square tests show that between the tax collection and corruption and political instability is resulted in the pearson chi-square would be equal to 535.9315 and its probability would be equal to 0.000. according to this test, there is an association between the outcome and independent variables. 3. the chi-square tests show that between tax collection and organizational strength of the authority the pearson chi-square would be equal to 555.9802 and its probability would be equal to 0.000. this result shows the association between the variables. 4. the chi-square tests show that between tax collection and awareness of taxpayers is resulted as the pearson chi-square would be equal to 425.0605 and its probability 0.000. this result indicates that there is an association between the outcome and independent variables. 5. the chi-square tests show that between tax collection and tax fairness is resulted as the pearson chi-square would be equal to 168.4779 and its probability would be equal to 0.000. this result indicates that there is an association between the outcome and independent variables. 6. the chi-square tests show that between tax collection and starting business without license is resulted as the pearson chi-square would be equal to 258.2292 and its probability would be equal to 0.000. this result indicates that there is an association between the outcome and independent variables. 7. the chi-square tests show that between tax collection and modes of tax collection is resulted as the pearson chi-square would be equal to 250.1718 and its probability would be equal to 0.000. this result indicates that there is an association between the outcome and independent variables. according to the chi-squares tests of each independent variables with the dependent variable we have observed the presence of an associations between the studied variables, that is, the outcome variable and independent variables. the p-values from each dependent and independent variables chi-square tests would be less than 0.05 or the value of alpha. these situations would be suggested that an accepting of the research hypothesis and in another direction it required to rejects the null hypothesis. iteration 0: log likelihood = -439.77943 iteration 1: log likelihood = -296.90378 iteration 2: log likelihood = -272.20569 iteration 3: log likelihood = -271.41132 iteration 4: log likelihood = -271.40802 iteration 5: log likelihood = -271.40802 ordered logistic regression number of obs = 380 lr chi2(7) = 336.74 prob> chi2 = 0.0000 log likelihood = -271.73718 pseudo r2 = 0.3829 table 5 ordered logit model out put tax collection coef. std.err. z p>|z| [95% conf. interval] taxpayers delay 0.5673717 0.4378049 1.30 0.195 -0.2907101 1.425454 corruption 4.108721 0.4454913 9.22 0.000 3.235575 4.981868 organizational strength of the authority 1.930508 0.5322645 3.63 0.000 0.8872885 2.973727 awareness of taxpayers 0.1095662 0.3158881 0.35 0.729 -0.5095631 0.7286956 tax fairness -3.01705 0.5591336 -5.40 0.000 -4.112932 -1.921168 mengıstu deyassa dadi & sintayehu tulu wondimu & mathewos woldemariam birru 134 start business without license -0.2540865 0.4030733 -0.63 0.528 -1.044096 0.5359227 modes of tax collection 3.493214 0.3671363 9.51 0.000 2.77364 4.212788 cut1 16.76613 2.459107 11.94637 21.58589 cut2 19.53605 2.519167 14.59857 24.47352 cut3 22.13057 2.612337 17.01049 27.25066 source; stata output, 2019 3.4. interpretations of econometrics model output ordered logistic model interpretations with the coefficients iteration log: this is a listing of the log likelihoods at each iteration. remember that ordered logistic regression, like binary and multinomial logistic regression, uses maximum likelihood estimation, which is an iterative procedure. the first iteration (called iteration 0) is the log likelihood of the “null” or “empty” model; that is, a model with no predictors. at the next iteration, the predictor(s) are included in the model. at each iteration, the log likelihood increases because the goal is to maximize the log likelihood. when the difference between successive iterations is very small, the model is said to have “converged”, the iterating stops, and the results are displayed, that is converged to -271.40802. table 6 model summary ordered logistic regression log likelihood = -271.73718 number of obs = 380 lr chi2(7) = 336.74 prob> chi2 = 0.0000 pseudo r2 = 0.3829 source; stata output, 2019 number of obs: as shown on table 4.5, the number of observations was used in the ordered logistic regression. the number of observation was 380. it may be less than the number of cases in the data set if there are missing values for some variables in the equation. by default, stata does a list wise deletion of incomplete cases. lr chi2(7): this is the likelihood ratio(lr) chi-square test that at least one of the predictors’ regression coefficient is not equal to zero in the model. the number in the parenthesis indicates the degree of freedom of the chi-square distribution used to test the lr chi-square statistics and defined by the number of predictors in the model. the lr chi-square statistics can be calculated by -2(l (null model) l (fitted model)) = -2[(-439.77943)-(271.40802)] =336.74. where l (null model) is from the log likelihood with just the response variable in the model (iteration 0) and l (fitted model) is the log likelihood from the final iteration (assuming the model converged) with all the parameters. in general speaking the lr chi2 (7) shows that models fits the data well as compared to the null hypothesis pro > chi2: this is the probability of getting a lr test statistics as extreme as, or more so, than the observed under the null hypothesis is that all of the regression coefficients in the model are equal to zero. in other words, this is the probability of obtaining this chi-square statistics (336.74) if there is in fact no effect of the predictor variables. this p-value is compared to a specified alpha level, thus to accept type i error, which is typically set at 0.05 or 0.01. the small p-value from the lr test, <0.0001, would lead us to conclude that a least one of the regression coefficients in the model is not equal to zero. the parameter of the chi-square distribution used to test the null hypothesis is defined by the degree of freedom in the prior line, chi2 (7). the p-value indicates there is a highly significant, and tells us that taxpayers delay of declaration, corruption and political instability, strength of the tax authority, awareness of the taxpayers, tax fairness, start business without trade license and modes of tax collection would have a significant effect on tax collection. assessment of tax payment and collection problems in jimma zone, ethiopia 135 pseudo r2: this is mcfadden’s pseudo r-squared logistic regression does not have an equivalent to the r-square that is found in ols regression. then the value of mcfadden r2 (aka pseudo r2) would be computed as follows; mcfadden r2 (aka pseudo r2) is (remember, =-2* = -2*-439.77943 = according to the above expressions the pseudo r2 of the model output as well as the computed values of pseudo r2 with an equations we would obtain the identical values. table 7 summary of parameter estimates tax collection coef. std.err. z p>|z| [95% conf. interval] taxpayers delay 0.5673717 0.4378049 1.30 0.195 -0.2907101 1.425454 corruption 4.108721 0.4454913 9.22 0.000 3.235575 4.981868 organizational strength of the authority 1.930508 0.5322645 3.63 0.000 0.8872885 2.973727 awareness of taxpayers 0.1095662 0.3158881 0.35 0.729 -0.5095631 0.7286956 tax fairness -3.01705 0.5591336 -5.40 0.000 -4.112932 -1.921168 start business without license -0.2540865 0.4030733 -0.63 0.528 -1.044096 0.5359227 modes of tax collection 3.493214 0.3671363 9.51 0.000 2.77364 4.212788 cut1 16.76613 2.459107 11.94637 21.58589 cut2 19.53605 2.519167 14.59857 24.47352 cut3 22.13057 2.612337 17.01049 27.25066 coefficients’ of the variables: in the above table 4.6, the ordered log-odds (logistic) regression coefficients of the exogenous variables of the study were shown. to conduct the interpretation of the coefficients of the variables we would be taken into account of the standard interpretation of the ordered logistic coefficient as “for a one unit increase in the predictor, the response variable level is expected to change by its respective regression coefficient in the ordered log-odds scale while the other variables in the model are held constant.” interpretation of the ordered logistic estimates is not dependent on the ancillary parameters; the ancillary parameters are used to differentiate the adjacent levels of the response variable. however, since the ordered logistic model estimates one equation over all levels of the dependent variable, a concern is whether our one-equation model is valid or a more flexible model is required. according to the ordered logistic model most of the exogenous variables of the study would be statistically significant except taxpayers delay in declaration, awareness of taxpayers and start business without license, that is, insignificant (p-value=0.195,0.729 and 0.528) respectively. the obtained results of the ordered logistic model would be interprets their coefficients of the exogenous variables as per the standards of the ordered logistic model interpretations as follows. the positive coefficient of the exogenous variables would be taxpayers’ delay on mengıstu deyassa dadi & sintayehu tulu wondimu & mathewos woldemariam birru 136 declaration, corruption and political instability, organizational strength of the authority, awareness of taxpayers and mode of tax collection. this implies that the likelihood of tax collection would be supported. std. err.: these are the standard errors of the individual regression coefficients. they are used in both the calculation of the z test statistic, superscript j, and the confidence interval of the regression coefficient, superscript k. z and p>|z|: these are the test statistics and p-value, respectively, for the null hypothesis that an individual predictor’s regression coefficient is zero given that the rest of the predictors are in the model. the test statistic z is the ratio of the coefficient to the standard error of the respective predictor. the z value follows a standard normal distribution, which is used to test against a two-sided alternative hypothesis that the coefficient is not equal to zero. the probability that a particular z test statistic is as extreme as, or more so, than what has been observed under the null hypothesis is defined by p>|z|. [95% conf. interval]: this is the confidence interval (ci) for an individual regression coefficient given the other predictors is in the model. for a given predictor with a level of 95% confidence, we would say that we are 95% confident that the “true” population regression coefficient lies in between the lower and upper limit of the interval. it is calculated as the coef. ± (zα/2)*(std.err.), where zα/2 is a critical value on the standard normal distribution. the ci is equivalent to the z test statistic: if the ci includes zero, we would fail to reject the null hypothesis that a particular regression coefficient is zero given the other predictors are in the model. an advantage of a ci is that it is illustrative; it provides a range where the “true” parameter may lie. 3.5. hypotheses testing based on the above regression result the researchers tested the hypotheses as follows. h1. there is significant relationship between taxpayers’ delay on tax declaration and tax collection. the coefficient of taxpayer’s delay of tax declaration is .5674 at p-value of 0.195 it indicates that there is no significant relationship between taxpayers delays on tax declaration and tax collection at 1% significant level. therefore, the null hypothesis is accepted. h2. there is significant relationship between corruption and political instability and tax collection the coefficient of corruption and political instability is 4.1088 at p-value of 0 indicates that there is significant relationship between corruption and political instability and tax collection at 1% significant level. therefore, the null hypothesis is rejected. this means corruption and political instability has its own impact on tax collection. h3. there is significant relationship between organizational strength of the tax authority and tax collection the coefficient of organizational strength is 1.930 at p-value of 0 indicates that there is significant relationship between organizational strength and tax collection at 1% significant level. therefore, the null hypothesis is rejected. this means organizational strength of the tax authority has its own impact on tax collection. h4. there is significant relationship between taxpayers’ awareness and tax collection the coefficient of awareness of taxpayers is .10956 at p-value of 0.729 indicates that there is no significant relationship between taxpayer’s awareness and tax collection at 1% significant level. therefore, the null hypothesis is accepted. h5. there is no significant relationship between tax fairness and tax collection the coefficient of tax fairness is -3.017 at p-value of 0 indicate that there is significant relationship between tax fairness and tax collection at 1% significant level. therefore, the null hypothesis is rejected. this means tax fairness has its own impact on tax collection. h6. there is no significant relationship between starting business without license and tax collection the coefficient of starting business without having license is -2540 at p-value of 0.528 indicates that there is no significant relationship between starting business without license and tax collection at 1% significant level. therefore, the null hypothesis is accepted h7. there is significant relationship between modes of tax collection and collection of tax the coefficient of modes of tax collection is 3.493 at p-value of 0 indicates that there is significant relationship between modes of tax collection and tax collection at 1% significant level. therefore, the null hypothesis is rejected. this means modes of tax collection have its own impact on tax collection. assessment of tax payment and collection problems in jimma zone, ethiopia 137 4. conclusion and recommendation from the result of the regression the following results were reviewed, the independent variable , corruption and political instability, organizational strength of the tax authority, tax fairness and modes of tax collection have significant relationship with tax collection this indicates that those variables have their own impact on collection of taxes. on the other hand others variables, taxpayers delay on declaration, taxpayers awareness and starting business without license shows no significant relationship. as we have seen from the respondents response most of category “a” and “b” taxpayers are conceived to the fairness of tax assessment in jimma zone, however, some of the above group taxpayers and almost all category “c” taxpayers do not agree with the fairness tax assessment in jimma zone. this might be because of some of category a and b taxpayers lack to prepare acceptable and accurate financial statements and necessary supportive documents for their transactions; as a result, the tax authority assessed their tax liability by estimation. regarding category c taxpayers, since they are not obliged by tax law to prepare financial statements for their transactions, such problem might be occurred due to lack of impartiality or independence by the tax authority employee or due to lack of taxpayers experience in payment of tax to the government. based on the results from discussion, the researchers provided the following possible recommendations: as it can be clearly seen from the analysis, corruption and political instability has significant effect on collection of taxes hence it is advisable to the concerned body, specially government is expected to teach citizens to struggle on corruption through different techniques, such as using mass medias, including in curriculum of education, promote cultures which increase the norms of the society etc, for political instability expected to give attentions on good governance by identifying the causes of the problems to reduces conflicts and maximizing love and respect. the tax authority is expected to focus on modes of tax collection by developing different payment mechanisms or systems. most of the transaction evolved still is only through cash or hand in hand, collection thus it is advisable to the authority to employ different modes of cash collections such as mobile banking, promoting technologies that facilitate the payment and collection simple. the authority must involve the taxpayers or their representatives while estimating the daily sales or revenue of taxpayers to address the question of fairness and equity and the authority has to try its level best in ensuring tax fairness and equity so that voluntary compliance behavior can be developed. tax fairness and equity is mainly a big problem especially for category c taxpayers because their sales volume is estimated in committee which is highly exposed for biasness. in addition, it is advisable to the tax authority to focus on strengthen its organizations because it has significant effect on tax collection thus the authority is expected to develop strategies which helps to bring changes on the mind of human beings. especially that promotes knowledge, skills and attitude. these three issues are a pillar for everything. references ariwodola, j. t. 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(2013). taxation and development. ournal of modern african studies. timothy, b., & torsten, p. (2014). why do developing countries tax so little? journal of economic perspectives, volume 28, 99–120. un, (2007), benchmarking e-government: a global perspective, retrieved from http://www.unpal.un.org/intradoc/groups/public/documents/april 2013 world bank group (2016), tax compliance cost burden and tax perceptions survey in ethiopia williams, r. (2016) ‘understanding and interpreting generalized ordered logit models’, journal of mathematical sociology, 40(1), pp. 7–20. doi: 10.1080/0022250x.2015.1112384. yohanesmesfin and sisaybogale,2009. tax law.prepared under the sponsorship of the justice and legal system research institute. yohannes mengesha &zerihun ashebir (2013). assessing the gaps and problems that exist between the business community and tax authorities of dire dawa administration. international journal of commerce and finance, vol. 1, issue 1, 2015, 25-38 pairs trading to the commodities futures market using cointegration method cüneyt ungever, (phd candidate) istanbul commerce university, turkey abstract: this paper investigates pairs trading strategy by using the cointegration method among the 10 most popular agricultural future markets. it is found that only in 2 pairs shows trading signal. the pairs trading strategy is performed in two stages that are the formation period and the trading period with daily futures data from 2004 to 2015. after the formation period was constructed, it is assumed that the cointegration error continues to hold the trading period same as it does for the formation period. the pairs trading strategy is created by the long position cotton and the short position coffee and also long position cotton and short position the livecattle. it is found that the profitability of this strategy worked well in both formation period and trading period. keywords: pairs trading, cointegration approach, futures market, commodities, statistical arbitrage 1. introduction: the pairs trade, also known as a statistical arbitrage strategy or a convergence trading strategy, is a market neutral trading strategy. the conception of pairs trading is the simultaneous buying and selling two historically correlated securities. this investment strategy requires buying the under-valued security (long position) while short selling (short position) the over-valued security, thus keeping the market neutrality (vidyamurthy, 2004). jesse livermore, the most famous trader of all time, was the first pairs trader in the late 1800s. livermore’s strategy was to monitor “sister stocks”, or two similar stocks in the same industry (ehrman, 2006). in 1980s, nunzio tartaglia, a quantitative analyst, gathered a team of physicists, mathematicians and computer scientists to reveal arbitrage opportunities in the equity markets. tartaglia’s team developed high tech trading programs by using complex statistical methods. the first objective of tartaglia’s trading programs was to select pairs of securities whose prices tended to move together (gatev, goetzmann, and rouwenhorst, 1998). tartaglia’s team had been very successful in trading these pairs in 1987, but in 1989, after two years of bad performance, morgan stanley halted its operation. despite of a couple of bad years of performance, the pairs trading became a very popular market-neutral strategy among individuals and institutional traders as much as hedge funds. in this paper, the profitability of pairs trading strategy is studied by using johansen cointegration method in the commodities future market over the period of 2004-2015. in the academic literature, in order to apply pairs trading strategy, interestingly, neither cointegration method nor commodities future markets have received little attention. this study, first, seeks to identify pairs of commodities by using johansen’s test for cointegration and then in this study the pair of commodities is modeled by using the vector error correction modeled (vecm). the vecm model obtained from residual series plays a primary role to implementing a pairs trading strategy. this paper proceeds as follows. the next section reviews the literature. section 3 describes the data and methodology, section 4 reveals empirical results and trading strategies. section 5 summarizes and concludes the paper. 2. literature review there are four main methods to implement the pairs trading in the academic literature: 1-distance trading method, 2-stochastic spread method, 3-combine forecast method 4-cointegration method in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 26 cüneyt ungever http://ijcf.ticaret.edu.tr 2.1-the distance method the distance method, the most common method gatev et al. (1998, 2006), is one of the most referenced papers in the pairs trading. the study by gatev et al. (1998) has been used in distance-trading approach to test the pairs trade in the u.s. stocks with daily data from the period 1962 to december 1997. gatev et al. (2006) extended and updated the analysis of 2002. their first research showed that the average annualized excess return is 12% of top pairs, and concluded that the pairs payoff is not strictly linked to a classical mean reversion effect. their second research also showed that the average annualized excess returns is 11% for self-financing portfolio of pairs. abnormal returns are compensation to arbitrageurs for enforcing the “law of one price”. do and faff (2009) replicated the gatev (1998) methodology with the recent data. they found that the strategy is still profitable but it is declining. perlin (2009) found that the pairs trading strategy worked well in the brazilian financial market and also an implementation of pairs trading strategy leads a positive excess return. broussard and vaihekoski (2012) used the finnish stock market data from 1987 to 2008 under different weighting structures and trade initiation conditions. they found that the excess return is 12.5%. 
papadakis and wysocki (2008) examined the impact of accounting information events on the profitability of the pairs trading strategy by using the u.s stock pairs from 1981 to 2006. they found that the drift in stock prices, following earnings announcement and analyst’s earning forecast, has a significant effect on the pairs trading. engelberg, gao and jagannathan (2009) analyzed the source of profits from the pairs trading. they found that the profitability of pairs trading is positively related to the way of information spreads across the stocks in the pair and in the frictions that suppress this information flow. jacobs and weber (2011) analyzed returns in different information settings by using the data of the u.s. stocks and eight major stock markets from 1960 to 2008. they found that pairs opening on high distraction days generate higher returns than pairs opening on low distraction days. mori and ziobrowski (2011) compared the performance of the pairs trading in the u.s. reit market with the u.s general stock market over the period of 1987 to 2008. they found that the reit market provided superior profit opportunities between 1993 and 2000 because of special characteristics of reit and these profits disappeared after 2000. nath (2003) tested the u.s. treasury securities. he concluded that the pairs trading strategy produces abnormal returns compared to various benchmarks between 1994 and 2000. muslumov (2009) did a research about the istanbul stock exchange and found that the average excess return of 5.4% for the top 20 best pairs trading portfolios. huck (2013) used s&p 500 stocks and demonstrated the high sensitivity of the return to changes in the length of the formation period and that data-snooping bias cannot explain the positive excess return obtained in some cases. 2.2stochastic spread method a stochastic approach has been used in the pairs trading by elliott, van der hoek and malcolm (2005) and do et al, (2006), rampertshammer (2007), mudchanatongsuk, primbs and wong (2008), herlemont (2008), bogomolov (2010), kanamura, rachev and fabozzi (2010). elliot (2005) proposed a mean reverting that is gaussian markov chain model for the spread. the appropriate investment decision is based on the predictions of the spread and is calibrated from market observations. do et al. (2006) investigated the stochastic approach and agreed with the work of elliot et al. (2005). this model has three major advantages from the point of the empirical perspective. do et al (2006) suggested that the long term mean of the level differences in two stocks should not be constant and they proposed the stochastic residual spread method to pairs trading. mudchanatongsuk et al. (2008) offered a stochastic control approach to the problem of pairs trading, obtained the optimal solution to the problem in closed form through hamilton-jacobi-bellman equation and provided closed form maximum likelihood estimation values for the parameters in this model. kanamura et al. (2010) applied the pairs trading strategy to energy futures market f rom 2000 to 2008 by using a mean reverting process of the futures price spread. they found that the stable profit can be made with the pairs trading but the profit of cross commodities may not be improved. bogomolov (2010) investigated all three methods of the pairs trading used by elliot et al. (2005) -distance trading, stochastic spread and co-integration approach to australian stock exchange. he found that all three methods showed a good performance before calculating transaction costs but later he saw that transaction costs severely diminished returns of all methods especially the return of the stochastic spread method. pairs trading to the commodities futures market using cointegration method 27 http://ijcf.ticaret.edu.tr 2.3-combine forecast method the method of combine forecast is described by huck (2009, 2010). he used multi-criteria decision making methods (mcdm) and neural networks methods to test pairs trading strategy by using s&p 100 stocks. these two methods are based on three stages: 1-forecasting, 2-ranking and 3-trading. the combine forecast method is developed without the reference to any equilibrium model. huck (2009, 2010) proposed that the method offers much more trading possibilities and could detect the “birth” of the divergence that other methods cannot achieve. 2.4-cointegration method the cointegration approach described by banerjee (1993), gilespi and ulph (2001), hong and susmel (2003), vidyamurthy (2004), lin, mcrae and gulati (2006), galenko, popova and popova (2007), schmidt (2008), puspaningrum (2009), chiu and wong (2012). vidyamurthy (2004) uses the engle-granger 2 steps method for co integration and develops trading strategies based on the assumed dynamics of portfolio. he presented both of a parametric and a non-parametric empirical approaches to conduct his analysis. lin at al. (2006) developed a procedure that implants a minimum profit condition in the pairs trading strategy. they found that the five-step strategy is feasible for commonly used parameter values. schmidt (2008) used the johansen test for cointegration to identify pairs of stock and then mean-reverting residual spread modeled as a vector-error-correction-model (vecm). he used 17 financial stocks listed on the australian stock market dated from 2002 to 2007. schmidt research did not address to the profitability of the pairs trading strategy. puspaningrum (2009) tried to find the optimal pre-set boundaries for pairs trading strategy by using the cointegration method. the objective was to develop a quantitative method to assess the average trade duration, the average inter-trade interval and the average number of trades and then at the end of these assessments, the objective is to use them to find the optimal pre-set boundaries. in the term of maximizing the minimum total profit for co-integration error following an ar (1) process, the optimality is improved by assembling the cointegration technique, the cointegration coefficient weighted rule, and the mean first-passage time using an integral equation approach. chiu at al (2012) investigated the optimal dynamic of the pairs trading strategy of cointegrated assets by using the mean-variance portfolio selection criterion. they suggested that arbitrageurs do not make an investment when cointegration disappears in the market. thus, the timeconsistent optimal trading strategy does not necessarily resemble to either relative value or long-short strategies. 3. data and methodology the data used in the study consists of the daily logarithmic closing prices of soybean zs (cbot), corn zc (cbot), wheat zw (cbot), rough rice zr (cbot), oats zo (cbot), live cattle le (cme), lean hog he (cme), cocoa cj (ice), coffee “c” kt (ice), and cotton tt (ice) futures traded on the cbot, cme and ice (figure 2) analyzed. there is a link between real interest rates and real commodity prices. when the fed cut interest rates between 2001 2004 and 2008-2011, real commodity prices started to increase. in 2008 and in 2011 commodity prices spiked (figure 1). after 2014, commodity prices started to decline as an expectation of interest rate rise in 2015 (figure 2 and 6). this paper addresses to profits of pairs trading strategy when the period of commodity prices peaked in 2008 and 2011, and the strategy is re-tested when commodity prices started to decline. the daily rolling three-month future closing price data is obtained from the bloomberg database. for each futures security, the nearby futures contract was employed and rollovers into next contract occurred on the last day of the month before contract expiration. public holidays in different indexes were filled by the last date closing price. the average transaction cost per contract is set to 1 cent (0.5bp) but the transaction costs are ignored. it is assumed that the cointegration vector continues to hold the trading period. the value of the long/short positions for each day was set to $100,000. the pairs trading strategy is implemented in two stages, which are similar to gatev et al. (ggr): the formation 28 cüneyt ungever http://ijcf.ticaret.edu.tr period and the trading period. there is no standard rule for deciding the lengths of the formation period and trading period. the formation period needs to be long enough to determine cointegration relationship actually existing, but not so long that there is not enough information left for the analyze for the trading period. the trading period needs to be long enough to have opportunities to open and close trades and test the strategy but it cannot be too long because it is possible that the cointegration relationship between two tested commodities may change. the time period for the formation period and the trading period is covered from december 1st, 2004 to may 1st, 2015. in order to find the maximum number of cointegrated pairs, the whole formation period is divided into 5 sub-periods. the formation period contains 7 years of logarithmic daily data of 1765 observations (1.12.2004-1.12.2011), of 1500 observations, of 1250 observations, of 1000 observations, and of 750 observations. the trading period contains 3.5 years period of 859 observations (2.12.2011-1.05.2015). figure 1 (source: jeffrey frankel, hks) figure 2 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2004 2005 2006 2007 2008 2009 2010 cocoa coffee corn cotton livecattle leanhog oats roughrice soybean w heat pairs trading to the commodities futures market using cointegration method 29 http://ijcf.ticaret.edu.tr 4. trading strategies and empirical results 4.1. pairs selection the important step of the strategy consists of identifying potential pairs. first, to test for a unit root in the individual price series, the augmented dickey-fuller and phillips-perron tests are applied. the adf and pp unit root test results of the variables in their levels and first difference values are shown in table 1. all the unit root tests are performed with time trend and intercept (*) and intercept (**), for all variables in their levels; and the tests are performed with their first difference values. the specification of the test regression is automatically selected using the akaike-criterion. adf and pp tests for the level data, the null hypothesis is not rejected at the 1% significance, indicating that all variables are not stationary. using the adf and pp test, the null hypothesis is rejected for all first difference equations at the 1% level of significance. so according to this test, all variables are i (1) that reach the significant level of %1 in the one lag of data. second, to test for cointegrated pairs with intercept term, the johansen test is run for all possible combination of pairs. there are 45 possible pairs. the numbers of cointegrated pairs with 5 sub-periods are represented in table 2. in a first row, there are 7 cointegrated pairs that are soybean-wheat, cornoats, cotton-coffee, cotton-lean hog, cotton-live cattle, wheat-rough rice, and lean hog-live cattle are significantly cointegrated in the period between 2004 and 2011 (table 2 and 3). in the second row with 1500 observations for the data of 2005 to 2011 show that there are 6 cointegrated pairs (cotton-coffee, cotton-livecattle, livecattle leanhog, roughrice-soybean, roughrice-wheat soybean-wheat). in the third row, using 1250 observations, there are 4 cointegrated pairs (cotton-coffee, roughrice-soybean, roughrice-wheat, and soybean-wheat). in the forth row, using 4 years data of 2007 through 2011 with 100 observations, there are only 2 cointegrated pairs (roughricewheat, soybean-wheat). in the fifth row, using 3 years data of 2008 through 2011 with 750 observations, there are 2 cointegrated pairs (cotton-coffee, soybean-wheat). these 5 sub-periods indicate that the maximum number of cointegrated pairs is found in the period of between 2004 and 2011. the integration equations with 1765 observations (2004-2011): log coffee(-1) 0.6666*log cotton(-1) -0.443 log corn(-1) -1.0513*log oats(-1) +0.308 log cotton(-1) -2.5023*log live cattle(-1) +0.003 log cotton(-1) -3.9873*log lean hog (-1) +0.002 log wheat (-1) -1.4943*log soybean(-1) + 0.344 log wheat (-1) -1.2731*log roughrice(-1) +0.001 log leanhog(-1) -1.2871*log livecattle(-1) -0.626 in the figure 3, two diagrams are illustrated by residuals for coffee/cotton and cotton/livecattle that both are stationary moving around zero. even though some periods, for coffee/cotton pair (a), after 2007 and 2011 and for cotton/livecattle pair (b), a period of 2004, 2005 and 2011, it takes quite a long time to return zero. finally, after 30 cüneyt ungever http://ijcf.ticaret.edu.tr analyzing 7 pairs whether an ar (1) model is fitted or not, only 2 pairs are cointegrated and their cointegration errors are an ar (1) model. the standard deviation of coffee/cotton pair is 0.0493 and the standard deviation of cotton/livecattle is 0.1086. figure 3: plot of coffee/cotton and cotton/live cattle residual series against time a) plot of c/tt residual series -.15 -.10 -.05 .00 .05 .10 .15 .20 2004 2005 2006 2007 2008 2009 2010 cointegrating relation coffee-cotton b) plot of le/tt residual series -.4 -.3 -.2 -.1 .0 .1 .2 .3 .4 2004 2005 2006 2007 2008 2009 2010 cointegrating relation cotton-livecattle 4.2. implementing pairs trading strategy in order to apply the pairs trading strategy, two trading rules should be followed. the first rule is to set up an upper bound and a lower bound for +-1.5 standard deviation. second rule, when the cointegration error is higher than or equal to the upper bound (+1.5std deviation) at the time t0, a trade is opened by selling number of cotton shares at the time t0 and by buying number of coffee shares at the time t0 and when the cointegration error gets back to its mean at the time t1, the positions are closed out while short position coffee and long position cotton. in the same strategy applied to the lower bound, when the cointegration error is lower than or equal to the lower bound (-1.5std deviation) at the time t0, a trade is opened by selling coffee and by buying cotton at the time t0 and when the cointegration error gets back to its mean at the time t1, the positions are closed out while buying coffee and selling cotton. pairs trading to the commodities futures market using cointegration method 31 http://ijcf.ticaret.edu.tr profit per trade before transaction costs #: quantity of commodity, π: price of commodity profit upper bound=#shares (π cotton t1-πcotton t0) +#shares (π coffee t0-πcoffee t1) profit lower bound=#shares (π cotton t0-πcotton t1) +#shares (π coffee t1-πcoffee t0) the figure 4 shows that during the formation period, pairs of residuals show sufficient levels of mean reversion so that the portfolio could be traded regularly enough to make a profit. long cotton and short coffee: log coffee (-1) 0.6666*log cotton (-1)-0.443 and long cotton and short livecattle: log cotton (-1) -2.5023*log livecattle (-1) +0.003 figure 4: residual series with pre-determined upper and lower bound a) plot of c/tt residual series .26 .28 .30 .32 .34 .36 .38 .40 .42 2004 2005 2006 2007 2008 2009 2010 spread upper low er coffee-cotton b) plot of le/tt residual series -2.16 -2.12 -2.08 -2.04 -2.00 -1.96 -1.92 -1.88 -1.84 -1.80 2004 2005 2006 2007 2008 2009 2010 spread upper low er cotton-livecattle 32 cüneyt ungever http://ijcf.ticaret.edu.tr during the formation period for coffee-cotton pair, 4 out of 5 trades are completed. while the average trade duration is 72.8 days, the total profit is $69,123. when the average return per trade is 6.14%, the average annualized return is 21.25%pa. for the pair of cotton-livecattle, 5 trades are completed. while the average trade duration is 106 days, the total profit is $633,655. when the average return per trade is 199.1%, the average annualized return per trade is 477.33%. figure 5: cointegration error for the trading period a) plot of c/tt residual series -.3 -.2 -.1 .0 .1 .2 .3 .4 iv i ii iii iv i ii iii iv i ii iii iv i 2012 2013 2014 2015 cointegrating relation coffee-cotton b) plot of le/tt residual series -.16 -.12 -.08 -.04 .00 .04 .08 .12 .16 iv i ii iii iv i ii iii iv i ii iii iv i 2012 2013 2014 2015 cointegrating relation cotton-livecattle pairs trading to the commodities futures market using cointegration method 33 http://ijcf.ticaret.edu.tr figure 6: log prices for the trading period the figure 5 shows the cointegration error for the trading period but it is assumed that the cointegration relationship in the formation period still continues to hold in trading period. the figure 6 presents the logarithmic prices of the 2 pairs. since may 2011, almost all agricultural commodity prices have been in a long-term crash due to an increasing supply, a competition and a reduced demand. during 2012 and 2013, coffee and cotton prices were declined dramatically. after the first quarter of 2014, nearly all commodity prices increased except cotton prices peaked in may 2014 but after that cotton prices suffered a rapid decline. meanwhile live cattle futures prices have increased gradually. the upward trend started in 2009, with largest price increase occurring in 2014. the standard deviation of coffee/cotton pair is 0.098 and the mean of coffee/cotton is 0.492. during the trading period for the coffee/cotton pair, 2 trades are completed and the average trade duration is 159 days. also, for the coffee/cotton pair, the total profit is $48,909, the average return per trade is 11%, and the average annualized is 17.4% pa. in the case of cotton/livecattle pair, the standard deviation is 0.2311 and the mean is -3.599. for cotton/livecattle, 3 trades are completed and the average trade duration is 142 days. the total profit is $372,343, the average return per trade is 202% and the average annualized return is 358.5% pa. 34 cüneyt ungever http://ijcf.ticaret.edu.tr 5. conclusion a pairs trading strategy is widely popular in the finance world. in this paper, the concept of cointegration in pairs trading is applied to the agricultural future market. first unit root is tested and then johansen test is applied to identify the cointegrated commodity pairs and to find the cointegration error. only 7 out of 45 agricultural future market pairs conclude that they are cointegrated with the johansen approach. as a result of the pair trading strategy, coffee-cotton and cotton-livecattle, two cointegrated pair of agricultural future contracts is obtained. pairs trading strategy is applied to both the formation period and the trading period. annualized profit for coffee-cotton and cotton-live cattle pairs; from formation period are 21.25% pa and 199.1% pa, from trading period are 17.4% pa and 358.5% pa, respectively. tests of these periods show that the pairs trading strategy is outperformed. this study finds that pairs trading in commodity futures markets earn statistically a significant return. this paper does not address the source of the profitability of pairs trading strategy from the characteristic of agricultural futures prices: extrinsic events such as climatic, political and governmental forces, strong mean reversion, high volatility, large price spikes and interest rates. the relationship between real interest rates and real commodity prices plays an important role in the prices of commodities. the result of easy monetary policy is associated with low real interest rates since 2008, which boosts the prices of agricultural commodities. the findings of this study reveal that the strategy of pairs trading is also outperformed during this period. overall, the relative value arbitrage strategy relies on the trader’s ability not only to identify to find but also to capture the divergence and mean-reversion movement. the strong mean reversion and the high volatility may cause high excess returns from the pairs trading strategy, especially in the pair of cotton-live cattle trades. in a stable economic and a financial environment, certain opportunities may be lost due to the low volatility in the relationship between the two related commodities to make a trade profitable. in the future research, changing the length of formation/trading period, copula approach, kalman filtering techniques, risk adjustment, and some trading rules would be useful for estimating profit patterns of the pairs trading strategy. table 1:unit root test adf adf (-1) pp pp(-1) soybean *-1.8791 **-1.8803 *-40.7345 **-40.7332 *-1.9368 **-1.9389 *-40.7219 **-40.7214 corn *-2.0573 **-2.05792 *-40.7188 **-40.7274 *-2.0530 **-2.0541 *-40.7032 **-40.7120 wheat *-1.8925 **-1.8935 *-42.9061 **-42.8990 *-1.8466 **-1.8494 *-42.9111 **-42.9031 live cattle *-2.2553 **-2.2573 *-16.6035 **-16.5798 *-2.2666 **-2.2741 *-42.4429 **-42.4303 lean hog *-3.1620 **-3.1627 *-40.4566 **-40.4548 *-3.1447 **-3.1465 *-40.4667 **-40.4660 pairs trading to the commodities futures market using cointegration method 35 http://ijcf.ticaret.edu.tr table 1. continue rough rice *-1.8277 **-1.8286 *-38.1270 **-38.1337 *-2.1982 **-1.8330 *-38.3315 **-38.1218 oats *-2.3025 **-2.3032 *-38.3153 **-38.3253 *-2.2209 **-2.1988 *-38.5551 **-38.3417 cocoa *-2.0711 **-1.1041 *-28.6208 **-28.5957 *-2.2467 **-1.2316 *-42.0056 **-41.9792 cotton *-1.9730 **-1.9737 *-38.5660 **-38.5769 *-2.0215 **-2.0221 *-38.6303 **-38.6410 coffee *-2.3168 **-2.3176 *42.0085 **-42.0167 *-2.3258 **-2.3274 *-42.0114 **-42.0196 the critical t-statistic values for the adf test are – 3.1281 at the 10% confidence level, 3.4124 at the 5% confidence level and – 3.9633 at the 1%confidence level *trend + intercept models applied **intercept no trend table 2:cointegration analysis period time span cointegrated pairs 1/12/2004-1/12/2011 1765 observations tt-kt, zc-zo, tt-le, tt-he, zw-zs, zw-zr, he-le 20/12/2005-1/12/2011 1500 observations tt-kt, tt-le, le-he, zr-zs, zr-zw, zs-zw 18/12/2006-1/12/2011 1250 observations tt-kt, zr-zs, zr-zw, zs-zw 14/12/2007-1/12/2011 1000 observations zr-zw, zs-zw 11/12/2008-1/12/2011 750 observations tt-kt ,zs-zw 36 cüneyt ungever http://ijcf.ticaret.edu.tr table 3: number of pairs co-integrated soybean corn wheat live cattle lean hog rough rice oats cocoa cotton coffee soybean no yes no no yes no no no no corn no no no no no yes no no no wheat yes no no no yes no no no no live cattle no no no yes no no no yes no lean hog no no no yes no no no no yes rough rice yes no yes no no no no no no oats no yes no no no no no no no cocoa no no no no no no no no no cotton no no no yes yes no no no yes coffee no no no no yes no no no yes references bianchi, j.r., drew, e.m., zhu, r. 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(2012), selection of a portfolio of pairs based on cointegration: the brazilian case, federal university of rio grande do sul, federal university of santa catarina, brazil chen, j.h., chen, j.s., li, f. (2012), empirical investigation of equity pairs trading strategy, http://ssrn.com/abstract=1361293 chiu, c.m., wong, y.h. (2012), dynamic cointegrated pairs trading: time-consistent mean-variance strategies do, b., faff, r. (2010), does simple pairs trading still work? financial analyst journal, 66(4), 8395. do, b., faff, r. (2010), are pairs trading profits robust to trading costs? the journal of financial research, 35(2), 261287. do, b., faff, r., hamza, k., (2006), a new approach to modeling and estimation for pairs trading, unpublished paper, monash university ehrman, s.d., (2006), the handbook of pairs trading-strategies using equities, options & futures, john wiley & sons, inc., new jersey elliott, r.j., van der hoek, j., malcolm, w.p. 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(2006), loss protection in pairs trading through minimum profit bounds: a cointegration approach. journal of applied mathematics and decision sciences 2006, 4, 1-14. miao, j.g. (2014), high frequency and dynamic pairs trading based on statistical arbitrage using a two-stage correlation and cointegration approach, international journal of economics and finance, 6,3,canadian center of science and education mori, m., ziobrowski, a.j. (2011), performance of pairs trading strategy in the u.s. reit market. real estate economics, 39(3), 409–428. mudchanatongsuk, s., primbs, a.j., wong, w. (2008), optimal pairs trading: a stochastic control approach, 2008 american control conference, washington 38 cüneyt ungever http://ijcf.ticaret.edu.tr muslumov, a.a.y. (2009), the profitability of pairs trading in an emerging market setting: evidence from istanbul stock exchange. the empirical economics letters, 8(5): 495-500. nath, p. 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(2011), pairs trading on divergent analyst recommendations. journal of investment management 9, 4, 75-95. international journal of commerce and finance, vol. 2, issue 1, 2016, 147-156 causality relationship between import, export and growth rate in developing countries serhat yüksel, (ph.d.) konya food and agriculture university, turkey sinemis zengin, (ph.d.) turkiye ekonomi bankası, turkey abstract: in this paper, we tried to determine the relationship between imports, exports and growth rate in developing countries. within this scope, 6 developing countries (argentina, brazil, china, malaysia, mexico and turkey) were analyzed in this study. in order to achieve this purpose, annual data for the periods between 1961 and 2014 was tested by using engle granger co-integration analysis, vector error correction model and toda yamamoto causality analysis. according to the result of the analysis, it was determined that there is not any relationship among three variables in brazil and mexico. on the other hand, we defined that increase in export causes higher growth rate in argentina. moreover, it was concluded that there is a causal relationship from import to export in china and turkey. furthermore, it was determined that export causes higher import in malaysia. therefore, it can be concluded that the relationship between import, export and growth rate is not same for all developing countries.. keywords: economic growth, import, export, engle-granger causality analysis, vector error correction model, toda yamamoto causality test 1. introduction the relationship between export and growth rate is always discussed in the literature. some people think that increase in export amount leads to increase in growth rate. if countries can increase export amount, this will lead to increase in gdp amount because export is one of the component of gdp (hossain, 2014. in addition to them, there are also some studies in which a relationship was defined from gdp growth to export rate (shihab, et. al., 2014). in other words, it is thought that increasing in growth rate provides export growth. the main reason behind this situation is that by increasing gdp growth rate, a country can increase its efficiency. owing to this situation, it can increase its competitive advantage in international market which causes exports to go up. however, some people also argue that there is not such a relationship between export and growth rate. they assert that this relationship depends on the type of the country and period (bahmani-oskooee, 2009), (jung and marshall, 1985). furthermore, import plays an important role in the relationship between export and growth rate (kim, lim and park, 2009). some of the researchers have the view that import causes higher exports by providing higher quality intermediate goods (bas, 2009). therefore, according to this view, import can also lead to higher economic growth. similar to export and growth rate relationship, there are also some views that come up with the idea that there is not a relationship between import and export or economic growth (ajmi, et. al., 2015). moreover, economic growth is also one of the objectives of developing countries (khan and reinhart, 1990). they made many programs in order to achieve economic growth. increasing export and import amount is one of these programs (balassa, 1985). therefore, the studies related to explain the relationship between economic growth, export and import are significant. because of this situation, in this study, we tried to analyze the relationship between growth rate, export and import in developing countries. as a result of this analysis, it may be possible to suggest an economic policy to developing countries. this paper is organized as follows. after the introduction part, we will give information about the similar studies in the literature and empirical results of them. the third section of this paper reviews the empirical results of our study. the final section gives information about the conclusion of the study. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 148 serhat yüksel and sinemis zengin http://ijcf.ticaret.edu.tr 2. literature review there are many studies in which the relationship between export and growth rate is analyzed in the literature. on the other hand, only few studies look for the effect of import on growth rate and export. some of these studies are emphasized on the table below. table 1: studies related to the relationship between growth rate, export and import authors method scope direction of causality gibba and molnar (2016) vec gambia export → growth rate alkhateeb et. al. (2016) vec saudi arabia export → growth rate growth rate → export ajmi, et. al. (2015) var south africa there is no relationship. araujo, et. al. (2015) granger causality brazil export → growth rate growth rate → export hossain (2014) granger causality bangladesh, india, pakistan and sri-lanka export → growth rate shihab, et. al. (2014) granger causality jordan growth rate → export achchuthan (2013) regression sri lanka export → growth rate import → growth rate fan and nie (2013) var china import → export rahman and shahbaz (2013) vecm pakistan import → export pistoresi and rinaldi (2012) cointegration analysis italy import → growth rate shahbaz and rahman (2012) vecm pakistan import → growth rate bas (2009) regression argentina and chile import → export gerni, emsen and değer (2008) regression turkey import → export awokuse (2005) granger causality korea export → growth rate growth rate → export mah (2005) cointegration analysis china export → growth rate growth rate → export causality relationship between import, export and growth rate in developing countries 149 http://ijcf.ticaret.edu.tr tuncer (2002) toda yamamoto turkey import → growth rate growth rate → import mallick (2002) cointegration analysis india export → growth rate growth rate → export thornton (1996) granger causality mexico export → growth rate doraisami (1996) cointegration analysis malaysia export → growth rate growth rate → export oxley (1993) granger causality portugal export → growth rate ghartey (1993) wald test taiwan, usa and japan export → growth rate growth rate → export dodaro (1993) regression 87 different countries export → growth rate marin (1992) granger causality 4 oecd countries export → growth rate segerstrom, et . al. (1990) dynamic general equilibrium model usa growth rate → export kunst and marin (1989) var austria export → growth rate growth rate → export ram (1985) regression 73 different countries export → growth rate findlay (1984) descriptive statistics usa growth rate → export sources: authors gibba and molnar made a study so as to understand the relationship between export and growth rate in gambia. they tested the data for the period between 1980 and 2010 by using vector error correction method. as a result of the analysis, a causality relationship was defined from export to the growth rate (gibba and molnar, 2016). there are also many studies that reached the similar conclusion (hossain, 2014), (thornton, 1996), (oxley, 1993), (dodaro, 1993), (marin, 1992), (ram, 1985). in addition to them, there are also some studies in which the causality from growth rate to the export was identified (shihab, et. al., 2014), (segerstrom, et . al., 1990), (findlay, 1984). furthermore, alkhateeb and others also analyzed the relationship between exports and economic growth in saudi arabia. within this context, they used the data for the years between 1980 and 2013. additionally, vector error correction model was also used in order to achieve this objective. finally, they concluded that there is a causal relationship both from export to growth rate and from growth rate to export (alkhateeb et. al., 2016). araujo and others (2015), awokuse (2005), mah (2005), mallick (2002), doraisami (1996), ghartey (1993) and kunst and marin (1989) reached the same conclusion by using different method. moreover, some studies also concluded that increase in import causes the growth rate to increase (achchuthan, 2013) (pistoresi and rinaldi, 2012), (shahbaz and rahman, 2012), (tuncer, 2002). furthermore, fan and nie (2013), rahman and shahbaz (2013), bas (2009) and gerni, emsen and değer (2008) concluded that rise in import leads to increase in export by providing better quality intermediate goods. however, ajmi and others did not find any causality relationship between export, import and growth rate for south africa (ajmi, et. al., 2015). 150 serhat yüksel and sinemis zengin http://ijcf.ticaret.edu.tr 3. research and application 3.1. data and methodology in order to analyze the relationship between export, import and growth rate in developing countries, annual data of 6 developing countries (argentina, brazil, china, malaysia, mexico and turkey) for the periods between 1961 and 2014 was used in this study. this data was obtained from world bank. in addition to this situation, we also used engle granger co-integration analysis, vector error correction and toda yamamoto causality approaches so as to achieve this objective. within this context, eviews 8.0 program was used. 3.2. methods used in this study 3.2.1. engle-granger co-integration analysis engle granger co-integration analysis was used in order to see whether there is a long run relationship between the variables. the first requirement of this analysis is that both of the variables should be stationary with the same degree. after that, error term series are provided as a result of the regression analysis made between these variables. if the series are stationary, then it means that there is a long term relationship between these two variables. the result of this analysis is so important that the type of the causality test will change according to the result of co-integration analysis (engle and granger, 1987). 3.2.2. vector error correction model vector error correction model (vecm) is mainly used in order to determine whether there is a causal relationship between the variables. if there is a co-integration among the variables, standard granger causality test cannot be used in this situation (granger, 1969). vecm is very helpful for the conditions in which variables are not stationary at their level values and become stationary with their first differences (engle and granger, 1987). the equation of vecm is shown below. ∆x_t=a+ ∑_(i=1)^m▒b_i ∆x_(t-i) + ∑_(i=1)^n▒c_i ∆y_(t-i) + ∑_(i=1)^o▒d_i ∆z_(t-i) + µec_(t-i) + ε_i in this equation, µ demonstrates the error correction parameter that helps the variables to achieve long run relationship. because of this situation, this parameter should be statistically significant and negative in order to reach this objective. 3.2.3. toda yamamoto causality test toda yamamoto causality test also analyses causal relationship between the variables. however the main difference of this analysis from granger causality test is that there is no requirement that the variables should be stationary. in addition to this situation, co-integration does not have to exist among the variables. the sum of maximum integration number and lag interval in var model is used as a lag interval in toda yamamoto analysis (toda and yamamoto, 1995). 3.3. results of the model in order to define the relationship between export, import and growth rate in argentina, brazil, china, malaysia, mexico and turkey, first of all, we made stationary analysis. after that, we made engle-granger co-integration analysis for these variables according to the results of the unit root tests. just then, depending on these results, we made vecm causality tests. in addition to them, we also tested the variables by using toda yamamoto causality tests in order to reach better results. 3.3.1. unit root tests in order to understand whether the variables are stationary or not, we made zivot-andrews unit root test. the details of this analysis were given on the table below. tablo 2: zivot andrews unit root test causality relationship between import, export and growth rate in developing countries 151 http://ijcf.ticaret.edu.tr variable zivot andrews unit root test level p value first difference p value export argentina 0.0000 export brazil 0.0493 export china 0.0000 export mexico 0.0222 export malaysia 0.0002 export turkey 0.0003 import argentina 0.0000 import brazil 0.0764 0.0009 import china 0.0003 import mexico 0.0210 import malaysia 0.0081 import turkey 0.0551 0.0165 growth rate argentina 0.0103 growth rate brazil 0.0230 growth rate china 0.0479 growth rate mexico 0.0007 growth rate malaysia 0.0102 growth rate turkey 0.1471 0.0037 sources: authors tests as a result of this analysis, it can be understood that the variables of import of brazil, import and growth rate of turkey are not stationary on their level values. owing to this situation, co-integration test will be performed in order to identify the relationship between import and growth rate of turkey. 3.3.2. engle-granger co-integration analysis results because the variables of import and growth rate of turkey are stationary with their first differences, co-integration between these variables will be examined. in this process, firstly, we made regression analysis between these two variables. as a result, we provided error term series of this analysis. the results of unit root test of these error term series are given below. . tablo 3: unit root test results of error terms 152 serhat yüksel and sinemis zengin http://ijcf.ticaret.edu.tr error term series adf test phillps perron test zivot andrews test level p value level p value level p value import – growth rate (turkey) 0.0000 0.0001 0.0415 sources: authors as it can be seen from the table above, all error term series are stationary. this situation shows us that there is a long term relationship between import and growth rate of turkey. therefore, vecm causality relationship should be used for these variables. 3.3.3. vector error correction model (vecm) analysis results so as to make vecm causality analysis, first of all, lag intervals for the variables should be defined. with respect to the variables of import and growth rate of turkey, optimal lag interval is calculated as “2”. these lag intervals were calculated according to akaike information criteria and shwartz criteria. the details of this analysis were given below. tablo 4: lag interval analysis lag lr fpe aic hq 0 18.82436 201.0599 10.97935 11.00864 1 18.82465 157.2649 10.73338 10.82127 2 12.18792* 140.5155* 10.61965* 10.76613* 3 6.622071 141.6593 10.62524 10.83032 4 5.037689 147.7092 10.66257 10.92623 sources: authors after that, vecm analysis was performed so as to define whether there is a causal relationship between these variables. the results of this analysis were emphasized below. tablo 5: vector error correction model between import and growth rate in turkey country causality direction lag interval p value result turkey import → growth rate 2 0.3399 there is not causality relationship growth rate → import 2 0.5649 there is not causality relationship sources: authors the p values on the table above give information about causality relationship. if this value is less than 0.05, this means that a relationship is analyzed. according to the results, it was determined that there is not a causal relationship between import and growth rate in turkey. causality relationship between import, export and growth rate in developing countries 153 http://ijcf.ticaret.edu.tr 3.3.4. toda yamamoto causality analysis results as we emphasized before, there is need to calculate maximum integration degree and lag interval in var model. as a result of unit root test results, maximum integration degree was calculated as “1”. furthermore, lag interval in var model was calculated as “1” for argentina, brazil and china whereas it is “2” for malaysia, “3” for mexico and “4” for turkey. because the sum of these two numbers are used in toda yamamoto analysis, lag interval was accepted as “2” for argentina, brazil and china, “3” for malaysia, “4” for mexico and “5” for turkey. the results of this analysis were emphasized below. tablo 6: toda yamamoto results country causality direction lag interval p value result argentina import → export 2 0.2040 there is not causality relationship. growth rate → export 2 0.5117 there is not causality relationship. export → import 2 0.2611 there is not causality relationship. growth rate → import 2 0.7717 there is not causality relationship. export → growth rate 2 0.0218 there is a causality relationship from export to growth rate. import → growth rate 2 0.0888 there is not causality relationship. brazil import → export 2 0.0628 there is not causality relationship. growth rate → export 2 0.0702 there is not causality relationship. export → import 2 0.1788 there is not causality relationship. growth rate → import 2 0.5640 there is not causality relationship. export → growth rate 2 0.2168 there is not causality relationship. import → growth rate 2 0.2145 there is not causality relationship. china import → export 2 0.0020 there is a causality relationship from import to export. growth rate → export 2 0.6287 there is not causality relationship. export → import 2 0.1950 there is not causality relationship. growth rate → import 2 0.3155 there is not causality relationship. export → growth rate 2 0.9426 there is not causality relationship. import → growth rate 2 0.7283 there is not causality relationship. malaysia import → export 3 0.1486 there is not causality relationship. growth rate → export 3 0.7675 there is not causality relationship. export → import 3 0.0214 there is a causality relationship from export to import. 154 serhat yüksel and sinemis zengin http://ijcf.ticaret.edu.tr growth rate → import 3 0.1934 there is not causality relationship. export → growth rate 3 0.5362 there is not causality relationship. import → growth rate 3 0.2451 there is not causality relationship. mexico import → export 4 0.6737 there is not causality relationship. growth rate → export 4 0.9526 there is not causality relationship. export → import 4 0.3232 there is not causality relationship. growth rate → import 4 0.5000 there is not causality relationship. export → growth rate 4 0.2521 there is not causality relationship. import → growth rate 4 0.0639 there is not causality relationship. turkey import → export 5 0.0255 there is a causality relationship from import to export. growth rate → export 5 0.4673 there is not causality relationship. export → import 5 0.9757 there is not causality relationship. growth rate → import 5 0.0571 there is not causality relationship. export → growth rate 5 0.1433 there is not causality relationship. import → growth rate 5 0.3056 there is not causality relationship. sources: authors according to the result of toda yamamoto analysis, it was determined that there is not any relationship among three variables in brazil and mexico. on the other hand, we defined that increase in export causes higher growth rate in argentina. moreover, it was concluded that there is a causal relationship from import to export in china and turkey. furthermore, it was determined that export causes higher import in malaysia. 4. discussion and conclusion in this study, we tried to define the causal relationship between growth rate, export and import in developing countries. within this scope, annual data of argentina, brazil, china, malaysia, mexico and turkey for the period between 1961 and 2014 was analyzed. in addition to them, engle-granger co-integration analysis, vecm and toda yamamoto analysis were used in this study so as to achieve this objective. first of all, we made unit root test to the variables of growth rate, export and import. in this process, we used zivot andrews unit root test. as a result of this analysis, it can be understood that the variables of import of brazil, import and growth rate of turkey are not stationary on their level values. owing to this situation, engle-granger co-integration test will be performed in order to identify the relationship between import and growth rate of turkey. as a result of co-integration analysis, it was identified that there is a long term relationship between import and growth rate of turkey. therefore, vecm causality analysis was implemented to these variables. in addition to them, we also used toda yamamoto analysis so as to achieve better results. according to the result of this analysis, it was determined that there is not any relationship among three variables in brazil and mexico. on the other hand, we defined that increase in export causes higher growth rate in argentina. moreover, it was concluded that there is a causal relationship from import to export in china and turkey. furthermore, it was determined that export causes higher import in malaysia. in conclusion, it can be said that the relationship between growth rate, import and export is not similar for all developing countries. due to this situation, it is impossible to make suggestion to developing countries with respect to the policy related to growth rate, export causality relationship between import, export and growth rate in developing countries 155 http://ijcf.ticaret.edu.tr and import. this situation is similar to many studies in the literature (bahmani-oskooee, 2009), (jung and marshall, 1985). references 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(2002), “türkiye’de i̇hracat i̇thalat ve büyüme: toda yamamoto yöntemiyle granger nedensellik analizleri 1980 2000”, çukurova üniversitesi sosyal bilimler enstitüsü dergisi, 9(9), 89-107. international journal of commerce and finance, vol. 7, issue 1, 2021, 1-17 1 the impact of public education expenditures on graduate unemployment: cointegration analysis to ethiopia amsalu dachito jimma university, ethiopia minyahil alemu jimma university, ethiopia berhanu alemu ambo university, ethiopia received: sept 22, 2020 accepted: nov 30, 2020 published: may 01, 2021 abstract unemployment is amongst most pressing economic challenges the ethiopian economy has long been experiencing. though the country succeeded in targeting overall unemployment most recently, graduate unemployment continued trending at higher rates over the years. we examined the impact of government education spending on the rate of graduate unemployment in ethiopia, using yearly series of data over the periods spanning from 1991to 2019. the results of augmented dickey fuller test revealed difference stationarity for all series of interest; while the suggested order of integration was one. the results of johnson’s cointegration test indicated the existence of long-run equilibrium relationships among the variables entered the test model. in determining the impacts of inflation rate (cpi), economic growth (rgdp) and public education spending on graduate unemployment, we employed vector error correction model as it enables us cap ture the short-run and long-run outputs instantaneously. according to vecm regression results, inflation rate and expenditure on education were found to have significant impact on the long-run growth rate of graduate unemployment. while the inflation rate contributed positively, government expenditure has negative influence on the rate of graduate unemployment towards validating the keynesian theory of employment. besides, the impacts of both variables were found to persist in the short-run. both are estimated significant and consistent in sign in the short-run. however, economic growth was found to have a trivial role in explaining the rate of graduate unemployment in both the short-run and the long-run periods. moreover, the results of vec causality analysis revealed a significant unidirectional causality running from economic growth towards public funds available for financing education; but no causality was suggested in reverse. we recommend a drastic measure to advance the education sector through suitable investments in a manner that will help in skills development, productivity enhancement and entrepreneurship growth. keywords: cointegration, graduate unemployment 1. introduction 1.1. background of the study theoretically, the intensity of education defines the development of human capital and economic productivity. education is accredited to intensify worker’s efficiency through enhancing skills and competencies across individuals. as a result, it contributes to the growth and development of the general economy; which could absorb idle capacity into the productive system, whereby reducing unemployment rate. barro and lee (2010) have identified three channels through which education influences productivity and economic growth. the first channel identified is efficiency of existing resources. through its positive implication to labor productivity and efficiency of existing resources, education is argued to boost economic growth. secondly, higher education facilitates adoption of technologies created elsewhere, facilitating domestic productivity and growth processes. third, advanced education enables own innovation and enhances creativity, and the resulting productivity fosters economic growth. in principle; growing productivity has potentials of absorbing idle capacity in the economy, thus reducing in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e amsalu dachito & minyahil alemu & berhanu alemu 2 unemployment. thenegative impulse of education to unemployment is suggested through its impact on economic productivity and growth as well (hua, 2016; attahir, 2016; onodugo et al., 2017). grant (2017) identified two basic channels through which education contributes to employment. the first is through enhanced capacity from rising productivity. improving technical as well as managerial efficiencies could be meant to foster productivity and economic growth, whereby leaving space for raising employment demands in the economy. the other way is associated with the role of education to enhancing creativity and entrepreneurships. the later provides multiplier effect to education from extra bases of entrepreneurial activities, besides direct implication to enhanced self-employment. in other words, entrepreneurships serve dual purpose in the short term (selfemployment and newly introduced economic base); and even beyond from medium to the longer term, from external labor employment and direct contributions to outputs. however, the hypothetical gains from education will be achieved only if the right education is provided. education expansions should accompany with raising productivity, skills and creativity in a manner that could foster productivity. the implication here is that, a favor should be more to schooling quality than quantity. towards validating a premise, hanushekand kimko (2000)discovered momentous association between quality of education and economic growth, but insignificant impact from quantity dimension. pirim et al. (2014) revealed that, though access to education across developing countries profoundly improved, an economic gain from widespread education is yet puny. their explanation was that, access to education does not necessarily imply quality of education; and concluded that, it is quality that matters more. their explanation extends to reveal profound losses from unproductive education. that is, education expenditures without achieving the intended gains in the longer-term could only produce adverse costs to the country, whereby contracting economic growth and giving rising to unemployment growth. in ethiopia, higher education has remarkably been expanding for the past two decades. both the number of higher institutions as well as higher schooling has improved dramatically. there has also been concurrent growth of funds allocated to the sector during these two decades. as a result, the number of graduates from these institutions h as increased enormously over the years; and at the same time graduate unemployment has continued trending at higher rates. we examine the long-run relations between expenditures on education and graduate unemployment in ethiopia covering temporal period spanning from 1991 to 2019. 1.2. statement of the problem despite the profound developments in ethiopian higher education, the growth of graduate unemployment continued trending at higher rates. though the country has succeeded in reducing overall unemployment since 2003/04, the number of unemployed people from tertiary education has been increasing over the years (nigusse and mulugeta, 2018; undp, 2014; imf, 2019). impressive records in ethiopia’s economic growth with particular insight since 2003/04, has not been nourishing the growing job demands in the country. the observed positive trend between expanding higher education and graduate unemployment in ethiopia, contradicts the keynesian hypothesis claiming inverse links between education and unemployment rate. the case can be justified to poor quality of education (rated on international standards), or others restraining economic and employment growth. the present study is primarily initiated to test the validity of keynesian employment theory; i.e., as to whether investing in education in the context of ethiopian economy is effective in targeting unemployment. why has graduate unemployment to ethiopia been behaving in contrast to universal hypothesis? we were motivated to answering this research question. evidences on the dynamic relationships between investments in higher education and graduate unemployment remained mixed. while (elvis, 2019; matsumae and hasumi; 2016; umut, 2015; joseph, 2016; austin and ogbole, 2014) found a negative and significant association between public spending and unemployment rate; still some others such as those of (agboola et al., 2018; attahir, 2016; nwosa, 2014) found a positivesignificant impact of education spendingon the rate of unemployment. on top of erraticresults, laokulrach (2013) has confirmed insignificant relationships between education and unemployment. this empirical controversy was another motivation to the present study. thus, we aim to establish the long-run relationships between investments in education sector and the growth rate of graduate unemployment to ethiopia. while highereducation has extensively been investigated both in academia and policy directives with particular focus to quality, graduate unemployment remained overlooked. thus, it’s indispensable to examine the dynamic the impact of public education expenditures on graduate unemployment: cointegration analysis to ethiopia 3 implication of expanding education expenditures to graduate unemployment. several studies such as (amanuel, 2016; broussar and tsegay, 2012; muhdin, 2016; amenu and fufa, 2019; dejene, 2019)examined predictors of youth unemployment, but with education variable overlooked. it is important to note that, the term ‘youth’ constitutes both graduate and non-graduates. we need to disaggregate ‘youth’ as graduates and non-graduates, due to (nigusse and mulugeta, 2018)since youth need not necessarily fall under the definition of labor force. while aggregating both aspects, previous studies ended up with unreliable results, as the group may constitute those not in the labor force. hence, the present study would be robust improvement over existing literatures in the topic. we therefore aim to contribute to the existing literature by redressing the methodological as well as conceptual weaknesses with previous studies. the most important consideration with the present analysis rests on the definition of graduate unemployment. 1.3. hypothesis of the study we test the bellow hypotheses in line with keynesian hypothesis linking government spending, unemployment rate and economic growth. theoretically, employment serves a channel through which the positive impulse of government spending transmits to economic growth. a premise follows that, increased government spending enhances employment of more resources and then contribute positively to productivity and growth. improving economy, in turn, creates more space to idle resources, whereby reducing unemployment. we therefore develop the following null hypotheses for this study:  expenditures on education has no significant impact on graduate unemployment rate in ethiopia;  public spending on education does not granger cause economic growth of ethiopia;  economic growth does not granger cause government expenditure on education in ethiopia. 1.4. objectives of the study the ultimate goal with the present study is to establish the long-run relations of investments in higher education and graduate unemployment in ethiopia, using temporal data serially ranging from 1991-2019. specifically, the following issues were addressed;  assessing trends of graduate unemployment and expenditures on education in ethiopia;  estimating impact of education expenditure on graduate unemployment rate in ethiopia;  analyzing causal relations between economic growth and gov’t expenditure on education. 2. research design and methodology 2.1. research design as long as the present study is concerned basically with the cause-effect analysis, we employ econometric methods employing suitable regression models at various stages. therefore, the research design adopted here is more of experimental type. moreover, the data were collected exclusively in quantitative values. thus, the study employs the quantitative research approach, which is common in experimental research design. 2.2. data source and type the choice of the sample period is based on the availability of yearly time series data, spanning from 1991/92 to 2018/19. the world bank and international monetary fund data home pages are our data sources for all variables involved in the present study. all series were taken as annual growth rates. thus, response variable is annual growth rate of graduate unemployment at time t. the regressors include; gdp proxied economic growth rate, inflation rate measured by the consumer price index (cpi), and the government expenditure on education. the choice of economic growth as an independent variable is due to the keynesian hypothesis that government spending via its negative impact on unemployment rate fosters economic growth. besides, inflation variable was also considered due to the phillips curve, demonstrating inverse relations between unemployment and inflation. amsalu dachito & minyahil alemu & berhanu alemu 4 2.3. the theoretical model the keynesian theory of employment serves a guideline to this study. keynesians maintain that public expenditures are effective to influencing employment and economic growth in the short-run (casey, 2010; anthanasios, 201; and kasau et al., 2015; mankiw, 2010).the path through which economic growth could be influenced by public spending is through full-employment. the positive impulse moves to economy only after enhancing the proper utilization of idle resources (including labor input) whereby absorbing idle capacity into the production sector. therefore, the initial impact of public spending immediately gives rise to employment rate, and then to the general economy. the assumption is based on the belief that, rising public spending will induce productive investments requiring large labor, whereby reducing the rate of unemployment in the economy. besides, the additional labor employment produces more and contributes positively towards the economic growth. therefore, the keynesians postulate inverse relationships between public spending and unemployment rate (sangkuhl, 2015; elvis, 2019; casey, 2010; mankiw, 2010).according to this theory; at any given point in time unemployment is a linear negative function of government expenditures. we thus aim at examination of this hypothesis to ethiopia. 2.4. empirical model: vecm specification due to (casey, 2010; sangkuhl, 2015; anthanasios, 2013; elvis, 2019; onodugo et al., 2017; kasau et al., 2015; and samira and khalil, 2015),we exploit the time series dimension of our data employing the error correction mechanism. a beauty with ecm rests on its instantaneous report of the short and long-run results. thus, the function relating unemployment to spending variable specifies the dependent and independent variables is given by; guemtt = f (gexpt)…………………………………… (3.1) where guemt is graduate unemployment; gexp is the government expenditure variable; and t represents time trend in a series of observation. according to the keynesian hypothesis, the relationship in specification (3.1) above is all negative. the autoregressive specification in ecm component is given by; yt = 1+ α1ut-1+ yt-i + ixt-i+ izt-i xt = 2 + α2ut-1 + yt-i+ ixt-i+ izt-i …………………… (3.2) ; αi measures the speed of adjustment towards the equilibrium; coefficients of lagged terms indicate the short run effects of corresponding regressors on the associated response variable. if the αi coefficients are negative and significant at predetermined acceptable level, it signifies the existence of systemic convergence towards the equilibrium. that is, α portion of short term deviations will restore back within a year (since we have annual observation in this study). as long as modeling unemployment is our target, we specify ecm using our variables included in the present study as follows; lnguempt = β0+ αεt-i + t-i + t-i + t-i+ t-i + ut……………………………………………………….. (3.3) erator; ln gives the natural logarithm; ε is the error correction term and its coefficient α measures the speed of adjustment; guemp is graduate unempl elasticity of various lagged terms of unemployment; gexpedu is government expenditure on education; rgdp is real gross domestic product; cpi is consumer price index measuring the dynamic impact of inflation on unemployment. ut is the white noise error in ecm regression. the impact of public education expenditures on graduate unemployment: cointegration analysis to ethiopia 5 however, before we proceed to the estimation of ecm, we need to confirm the necessary conditions in advance. stationarity and cointegration tests are of the basic necessities in time series analysis. accordingly, we have addressed the two in advanced as discussed hereunder; 2.5. stationarity and cointegration tests 2.5.1. stationarity test a priori with time series study is the examination of unit root properties of each series under consideration. the requirement with predictive model is that, all series should be stationary; i.e., must not contain a unit root problem. an important condition with forecasting models is that, all variables used in the analysis should have time invariant mean and variance (gujarati, 2004; wooldridge, 2013). a serious emphasis also requires stability of covariance of each variable. stationarity conditions were examined viathe augmented dickey-fuller (adf) test (dickey and fuller, 1979). adf is based on regression of the first difference of y (δyt) on a constant, time trend (yt-1) and various lags of y, specified as follows; yt = α0 + t + yt-1 + yt-i + t…………………………… (3.4) unit root problem in y. adf is based on the t-ratio of yt-1. if it exceeds adf critical at any one of the three benchmarks (reported at 1%, 5% or 10%), the null hypothesis will be rejected. nevertheless, if yt is tested non-stationary, the first difference δyt should then be tested for stationarity using the same procedure; and the procedure will continue until it is stationary. but, in most of the cases economic and financial data are stationary at first differences. the length of time lag in regressions of ecm and adf models is often determined empirically; to take sufficient size so that the error term is indeed serially uncorrelated. the suitable lag (k) is set; for instance, based on minimizing akaike information criterion (see gujarati, 2004; wooldridge, 2013; maddala, 1992). in this paper kwas determined based on aic due to (kasau et al., 2015; samira and khalil, 2015; minyahil et al., 2016). 2.5.2. cointegration test a cointegration analysis aims to determine whether there is a long-run relationship between variables of interest. as long as the present study is intended with impact analysis, we need to examine if long term equilibrium path exists for variables entered the long-run model. if no cointegration is confirmed, then no need to proceed further; and the analysis should be limited to the short-run behaviors of the series. johnson’s cointegration test was employed to examine whether the variables share stable long-term equilibrium path. johnson’s maximum likelihood method constructs cointegrated variables directly on ml regression, rather than to rely on conventional least squares. johnson’s method for cointegration depends on rank of the matrix formed from vectors of cointegration equations, and, the associated characteristic roots. the test computes statistics of trace and maximum eigen value. while trace test examine the null hypothesis that, r (= 0,1,2,….k-1) cointegration vectors exist against its alternative of k (number of variables) cointegration vectors; the eigen value tests the null of r vectors against the alternative hypothesis that r+1 vectors exist. the premise is that, in a model of k endogenous variables, possibly the cointegration rank ranges between zero to k-1 (harry, 2012; nurmadihah et al., 2011). both statistics are directly reported in stata command vecrank for cointegration. building on nurmadihah et al. (2011), both test statistics are developed as follows; 1. trace ( ) = -tlog (1) 2. max ( ) = -t (1) …………………………………………. (3.5) while the first specification in equation (3.5) gives the trace test statistic, the second expression provides the same for the maximum eigen approach.every notation in equation (3.5) is as defined earlier. amsalu dachito & minyahil alemu & berhanu alemu 6 2.6. diagnostic check vector error correction model involves basically three common post estimation tests. these are lm test for serial autocorrelation, normality and parameter stability tests. langeragean multiplier test for residuals autocorrelation test the hypothesis of no autocorrelation. if the probability values of the computed chi-square statistics are greater than 0.05 at various lag order, then we accept the null hypothesis. on the other hand, the residual normality conditions were examined through the statistics of jarque-bera test, skewness and kurtosis tests.in each case if the probability value exceeds the 0.05 level,then the null will be accepted (gujarati, 2014; wooldridge, 2013; maddala, 1992). we have presented regression outputs on these and other necessary results under the appendix section. 2.7. variables definition and expectation of their sign unemployment growth rate is a response variable in the specification of ecm. according to international labor organization (ilo, 2014), unemployment is a condition by which people remain without a job. the definition of unemployed includes those who are economically active, but without a job and seeking for a job. the recent extension in the definition includes those individuals who have lost their jobs, and even those groups voluntarily left jobs (world bank, 2013).unemployment rate is, therefore, the proportion of those in labor force but who are currently without jobs. inflation variable was measured by using the consumer price index. consumer price index (cpi)a change in the average price of consumable goods and services. it measures the positive net change in the average price of consumer goods and services. the phillips curve postulates a negative relationship between unemployment and inflation rates, based on the assumption that higher input prices lead to costly production and lower investment undertakings. falling investments could give rise to unemployment upsurge. following the phillips curve hypothesis, we therefore expect negative impact of inflation on unemployment rate. the consideration of economic growth variable in the present study is justified due to keynesian employment hypothesis, claiming that public spending can influence economic growth only after its initial positive impact on employment. economic growth is measured as a percentage point change in consecutive real gross domestic products of the country. the positive impact of economic growth is expected in advance. education expenditure includes the general government expenditure on education (current, capital, and transfers). again, following the keynesian claim we expect negative relationship between expenditures on education and graduate unemployment rate. 2.8. ethical consideration the most important thing with research work rests on the trustworthiness of evidences provided. it then requires the reliability of data sources, method of analysis as well as transparency of researchers. to assure the reliability issues, we have provided our stata outputs in the section for appendix. next, the data were sourced from the wb and imf data bases for which the copy can be submitted where and when needed. moreover, all the materials used in this work are duly acknowledged by providing their details under the section for references. 3. results and discussion 3.1. descriptive information 3.1.1. trends of expenditures on education and graduate unemployment rate (1991-2019) figure (1) plots the natural logarithmic annual absolute terms of expenditure on education sector and the number of graduate unemployment for the sample period in ethiopia. throughout the sample period of this study, while government spending on education exhibited relatively stable trend, graduate unemployment has been highly volatile (figure 1). during 1991-1994, the rate of graduate unemployment has been trending slow mainly due to the relatively small number of graduates from tertiary education. yet, public spending on education kept on rising at increasing rates. between 1996 and 1998, graduate unemployment has exhibited continuous growth rate following gradual increase in the number of graduates and inadequate economic growth to host the galloping employment demands. however, the rate of graduate unemployment has dropped to its minimum in 2000 following by high rates till the the impact of public education expenditures on graduate unemployment: cointegration analysis to ethiopia 7 last year of our ample period, except some improvements during 2009 to 2013. from 2014 onwards, graduate unemployment has been trending at increasing rates. figure (1): trends of education expenditure and graduate unemployment source: authors´ compilation based on wb (2020) & imf (2020) however, the growth of public spending on education has revealed quite rising rate. despite to differences in their growth rates, both variables show some evidence of long-term relationship whereby revealing convergence during the final years of the observation period. thus, we hope to confirm significant long-run relations between public education expenditure and graduate unemployment under inferential analysis. in other words, the figure (1) evidences the likelihood of permanent association between expenditures on education and graduate unemployment in ethiopia. 3.1.2. overview of expenditures on education and economic growth (1991-2019) here we aim at over viewing the joint trend of government expenditure on education sector and real gdp growth over the sample period of this study. this sort of analysis has been initiated to grasp evidence on the long-run relations of both variables inspired by the keynesian theory. keynesian economists postulate that, government expenditure through its negative impact on the rate of unemployment could foster economic growth rate(mercan and sezer, 2014; elvis, 2019; zoran, 2015; mulugeta et al., 2012; agboola, 2018; and bazezew and alemu, 2014). intensified economic capability, in turn, creates farther employment opportunities whereby reducing the rate of unemployment. besides, positive bidirectional causality is suggested among government spending and economic growth. trend analysis helps understand the overview of long-term trends for both variables; at least in the directions of movements as well as the nature of cycles. figure (2): an overview of gov’t education expenditure and economic growth in ethiopia source: authors’ compilation using stata 14 based wb and imf data (2020) amsalu dachito & minyahil alemu & berhanu alemu 8 evident from the figure above is both variables positively trending overtime, providing evidence of long-term relations between them. the question of whether or not that observed relationship is significant could be addressed later under the section for inferential analysis. this stage we can say only that, both used to trend jointly over the sample period. moreover, the real gross domestic product has been trending higher compared to public spending on education. it means that, throughout the observation periodethiopian economynurtured faster than government spending on education, though both have trended with rising rates. a little improvement in the rate of economic growth might have been contributing to the higher rate of public expenditure on education; otherwise the reverse would have explained the observed trend in line with keynesian hypothesis. to supplement our descriptive analysis, we have computed various summary statistics of both indicators as presented hereunder: table (1): descriptive statistics of expenditure on education and graduate unemployment rate variable obs. mean std. dev. min. max. spending on education 28 1.939 32.70 -22.41 55.83 economic growth 28 6.987 5.95 -8.67 13.57 source: authors’ compilation based on (wb, 2020 & imf, 2020) as it can be observed from table (1), there is large difference in mean growth rates of both variables. for the sample period, ethiopian economy has been growing on average by 7 per cent; while the average growth rate for government education expenditure was reported to be 2 per cent. moreover, the spending variable was found to have a more volatile trend compared to rgdp. this can be understood by a large standard deviation of 32.70 for education expenditure and only 5.95 for economic growth rate, suggesting relative stability of economic growth. while economic growth exhibited relative stability, the education spending variable has been oscillating up and down, manifesting insignificant long-term relation. the same conclusion can be reached from the minimum and maximum growth rates, -22.41 and 55.83, respectively for public spending. real gdp has been trending with a minimum of -8% and maximum of 13.57% rates over the sample period. in conclusion, irrespective of relative stability in the economic growth education expenditure was highly volatile. hence, there might not be significant causality in either side. 3.2. inferential analysis 3.2.1. unit root test results examining the unit root properties of individual variables is a prior with any analysis involving time series data. stationarity test may not be necessary if one intends not to generalize the findings out of the sample period. but, time series studies are usually aimed to predict future values, so that testing for stationarity become compulsory. in this test, we need to determine whether or not a series exhibits time invariant mean, variance and covariance over time. as we mostly are concerned with weak stationarity, the first two indicators would be sufficient. the augmented dickey fuller (adf, 1979) test was used to determine unit root properties of all variables under consideration. table (2) reports the result: table (2): adf stationarity test results at level first difference variable intercept intercept + trend intercept intercept + trend order eduexpt -1.963 -1.747 -4.057** -4.120** i(1) guemptt 0.006 -1.308 -6.572** -6.457** i(1) rgdpt -1.374 -1.934 -6.239** -7.079** i(1) inft -1.344 -2.336 -3.884** -3.940** i(1) source: authors’ compilation using stata 14 based on wb and imf data (2020) ** signifies rejection of the null hypothesis at 1 per cent. as presented in table (2) above, all variables were subjected to adf unit root test each four times. that is we have considered the intercept in the first stage and included the trend term in subsequent procedures. however, none was the impact of public education expenditures on graduate unemployment: cointegration analysis to ethiopia 9 revealed stationary at level values; while all the four variables become stationary at their first differenced terms. the test procedure rejected the null hypothesis at 1 per cent for all variables under consideration. under the adf unit root test, we reject the null hypothesis of non-stationarity of a series when the computed tau statistic is greater than the adf tau critical value. moreover, the inclusion trend terms in adf regression didn’t improve the significance level except to minor differences in the reported coefficient for intercept alone and intercept and the trend terms. therefore, ecm regression considers only the intercept term while estimating the parameters. since the series are all non-stationary (integrated of order one), regression of the basic model uses the first differenced values of all variables under consideration. 3.2.2. leg size determination in time series analysis, choice of the lag size has a detrimental influence on the efficiency of regression outputs. it should not be too large, or too law; rather it is important to decide a priori on the appropriate lag size to be included in model estimation (gujarati, 2004; wooldridge, 2013). there are different approaches for determining the appropriate lags length in econometric analysis, which include; final prediction error (fpe), akaike information criteria (aic),schwarz information criteria (sic), log likelihood (ll), sequential modified likelihood ratio test (lr) and hannan-quinn information criteria (hic).a popular approach with empirical analysis has been to take that sizesuggested by majority of the different criteria(attahir, 2016; onodugo et al., 2017; jaradat, 2013; omitogun andlonge, 2017; minyahil et al., 2016; mercan and sezer, 2014; elvis, 2019; zoran, 2015). table below presents the results for appropriate lag size determination table (3): results for appropriate lag length selection lag order ll lr p-value fpe aic hqic sbic 0 104.427 nr 6.9e-09 -7.43906 -7.38198 -7.24709 1 226.791 244.73 2.7e-12* -15.3178* -15.0324* -14.358* 2 241.49 29.398* 3.2e-12 -15.2215 -14.7077 -13.4937 * reflects the appropriate lag length suggested by the criterion; where, ll: the log likelihood; fpe: final prediction error; aic: akaike information criteria; lr: sequential modified likelihood ratio test (lr); hqic: hannanquinn information criteria; and sbic: schwarz information criteria source: authors compilation using stata 14 based on wb and imfdata (2020) itcan be seen from table (3) above that, the appropriate lag length suggested by majority of the selection criterion is one. therefore, all subsequent analyses are carried out using the optimal lag length of one. 3.2.3. cointegration test results the most important condition in long-run analysis is cointegration test; i.e., determining whether or not variables entered the long-run model exhibit long-term relation. johnson’s cointegration methodology requires all variables to be integrated of the same order {(i(1)}, which is already confirmed earlier. thus, johnson’s approach for cointegration has been adopted in the present study. as we have provided details under methodology section, johnson’s cointegration test uses two test statistics; the trace statistics and maximum eigen value. as evidenced with table (4) below, both the trace (λtrace) and maximum eigenvalue values(λmax)rejects the null hypothesis of no-cointegration, while demonstrating the presence of long-run relationships between variables of interest. the summary statistics of both tests have been reflected in the table below; amsalu dachito & minyahil alemu & berhanu alemu 10 table (4): johnson’s unrestricted cointegration rank test maximum rank λmax critical @ 5% λtrace critical @ 5% none 33.78 27.07 92.29 47.21 at most 1 27.49 20.97 58.50 29.68 at most 2 18.69 14.07 31.01 15.41 at most 3 3.76* 12.32 3.76* 12.32 * indicates rejection of the null hypothesis at 5 per cent significance level source: authors’ compilation using stata 14 based on wb and imf data (2020) evident in the above table is both the trace and maximum eigen value tests rejecting the null hypothesis predicting the maximum rank of cointegration to be four. thus, both methods suggest the maximum number of cointegrating rank to be three. there are three ways by which the variables together move longer. both tests reject the hypothesis of no cointegration at four. thus, there is strong evidence that variables under consideration exhibit the long-run relationships. evidence of cointegration in the model allows estimation of long-run model to capture the long-run dynamics of individual variable in the model. 3.2.4. results of the long-run model this time we estimate the long-run elasticity with each regressor in reference to the response variable, which in our case is public spending on education. to obtain the long-run coefficients we have estimated the error correction model as it provides us with both the short and long-run results. parallel to regression of the spending variable on all regressors involved, the long-run parameters were exactly identified and johnson normalization restrictions were imposed. table below reports the long-run coefficients: table (5): the long-run elasticity estimation results independent variables coef. std. err. z-value lneduexpt -0.2345* 0.1009 -2.32 lnrgdpt -0.6010 0.5130 -1.17 lncpit 0.9912** 0.2772 3.58 con_ -7.35 cointegrating term ( _ce1) -1.15 0.2477-4.64 global significance:r2 = 0.71f(4, 24) = 437.61[0.0000] dw(4, 29) = 2. 29 validity test: heteroskedasticity: chi^2(1) = 0.21[0.6486]; reset: (2, 27)= 2.19[0.0847] arch= 3.209[0.0733] diagnostic test jarque-bera test: chi^2(8) = 45.052[0.86427] langerange multiplier test skewness test: chi^2(4) = 18.090[0.74290] chi^2(l1)= 23.057[0.1122] kurtosis: chi^2(4) = 26.962[0.66784] chi^2(l2)= 17.91[0.3287] ** & *, respectively, rejects the null hypothesis at 1% and 5 per cent. source: authors’ compilation using stata 14 based wb and imf data (2020) the impact of public education expenditures on graduate unemployment: cointegration analysis to ethiopia 11 as indicated in as foot notes along with the long-run results, all of validity and vecm diagnostic conditions were tested robust. regarding overall significance of our specification, the reported coefficient of determination (r2= 0.71) is fair enough in such a large observation time series analysis, where about 71 per cent of variations in the graduate unemployment has been explained jointly by inflation rate, economic growth and government expenditure on education. thus, our model predicts better about graduate unemployment growth rate in ethiopia. moreover, the significant f-statistic also guarantees the global significance of our regression model. besides, none of the validity and diagnostic conditions has failed the test as indicated in table (5). corresponding regression results are presented under the section for appendix. the coefficient of error correction term (ect) terms has a profound implication in times series analysis via vecm methodology. as presented in table (5) above, a negative and significant coefficient of ect is suitable as required for vigorous stability in the system. an implication with the estimated coefficient of error correction term is that, there is stable equilibrium relationship between unemployment, public spending and rgdp and inflation variables in ethiopia; and the reported coefficient reveals the speed of adjustment towards the long-term equilibrium point. graduate unemployment rate adjusts about 115 percent of previous year systemic distortions this year. thus, complete adjustment takes less than a year to restore the long-run equilibrium. evident from table (5) is a negative and strongly significant impact of public spending on graduate unemployment rate in the long-run, demonstrating the validity of the keynesian theory to the context of ethiopian economy. the long-run estimate clearly elaborates the effectiveness schemes for government expenditures in significantly reducing the proportion of graduate unemployment over longer period. the long-run elasticity of public spending on education was estimated at (0.23) and significant at 5 per cent level. graduate unemployment bounces inversely to fiscal actions in reference to education sector, and that the reaction was found to be strong. in other words, a percentage point improvement in government spending on education significantly reduces the rate of graduate unemployment by about 23% of the previous year’s level; and vice versa. this finding gives empirical support to keynesian hypothesis, positing that government spending plays profound role in lowering unemployment (keynes, 1936; zoran, 2015; mohseni and jouzaryan, 2015; casey, 2010; anthanasios, 2013; and kasau et al., 2015); hence by rising productivity it fosters economic growth. besides, this particular finding is empirically consistent with most of the previous works; such as those of (elvis, 2019; matsumae and hasumi; 2016; umut, 2015; joseph, 2016; austin and ogbole, 2014). it however contradicts to (agboola et al., 2018; attahir, 2016; nwosa, 2014; and laokulrach, 2013). there is strong evidence that inflation upsurges the growth rate of job seekers. inflation has been important in amplifying the long-run rate of graduate unemployment in ethiopia. we estimated a positive and strongly significant coefficient for inflation variable (table 5), whereby challenging the phillips curve premise in this piece of effort. phillips curve tells us that, these two key macroeconomic indicators tend to vary inversely overtime (mankiw, 2010; snowdon and vane, 2005; alisa, 2015); but we found the result contradicting this claim to ethiopia. from our results we see that, an increase in the rate of inflation gives rise to permanent graduate unemployment. table (5) shows a 1% increase in inflation rate raises the rate of graduate unemployment by 99 per cent. the case may be explained in two ways; firstly, through its destructive implication to agents’ purchasing power, consistent inflationary pressures might have been disrupting the growth of private investments and then, adversely affect private employment (labonte, 2016; kevin, 2008). secondly, large inflation may lead to high job searching costs which majorities in ldcsare unable to afford (mohseni and jouzaryan, 2015; berentsen et al., 2017; hongo et al., 2019). both cases could positively contribute to the long-run rate of graduate unemployment. our finding, of course, is consistent among others to (ayesha, 2013; umair and ullah, 2013; karaçor et al., 2013; tenzin, 2019; vermeulen, 2017; berentsen et al., 2017). economic growth has no role in determination of long-run graduate unemployment rate. the long-run elasticity of rgdp was estimated at (-0.60), but insignificant at even 10 per cent level. the impact of rgdp though irrelevant has a right sign in line with the keynesian hypothesis. keynesian economists hold that, increase in public expenditures through enhancing effective use of idle capacity and intensifying productivity could foster economic growth (banda, 2016; labonte, 2016; tenzin, 2019). the growing economy, in turn, gives opportunity for farther employment growth and the system functions in the same passion creating externalities to those in need. the ineffectiveness of economic growth in reducing unemployment has been explained in relation to mismatches in the amsalu dachito & minyahil alemu & berhanu alemu 12 growth rates with both indicators. economic advancements might have not been able to satisfy excessive growth in employment demand overtime. yet, this finding is consistent to the findings of (schubert and turnovsky, 2017;adarkwa et al., 2018; khrais i., and al-wadim., 2016). 3.2.5. vecm short-run estimates we have estimated the short-run elasticity of graduate unemployment with respect to changes in public spending on education, economic growth and inflation rate employing vec methodology. the short-run results are presented in the table below: table (6): vecm short-run regression results **&*, respectively indicate significance levels at 5% and 10% level source: authors’ compilation using stata 14 based wb and imf data (2020) the negative impact of public education has also persisted in the short-run, demonstrating its relevance in targeting graduating unemployment permanently. the short-run elasticity of graduate unemployment to changes in public spending was negative (-0.1303) and significant at 10 per cent (table 6). this farther gives empirical support to the employment theory of keynesian economists, conjecturing the effectiveness of government expenditures in reducing employment rate. in line with this hypothesis, we found negative and significant associations between public spending on education sector and the growth rate of graduate unemployment (keynes, 1936; casey, 2010; anthanasios, 2013; and kasau et al., 2015). moreover, this result makes empirical consistency to ((mohseni and jouzaryan, 2015; berentsen et al., 2017; adarkwa et al., 2018; khrais i., and al-wadi m., 2016). table (6) evidences the persistent impact of inflation rate in the short run, signifying its dominant role in determination of graduate unemployment both in short too. a 1 per cent increase in inflation upheld the rate of graduate unemployment by 66.87%, which is the dominant effect in the short-run. the explanations for the positive impact would be as discussed under section (4.4) and conceptually sound across economies of least developed countries like ethiopia. the persistent impact of inflation variable has also been confirmed by (umut, 2015; joseph, 2016; austin and ogbole, 2014; agboola et al., 2018; attahir, 2016; nwosa, 2014). economicgrowth was found to have a trivial role in reducing graduate unemployment in the short-run. it may be that, while economic improvements influence only a few at early stages, soon have the economy been experiencing more graduates at various levels. over longer time horizon, the initial economic benefits could be offset by highly trending rate of unemployment. the insignificant impact of economic growth both in the short and the long-run periods has been explained in two possibilities. firstly, domestic production sector is not able to invite the growing employment demand significantly, and that domestic education may be supported more by external aids(agboola et al., 2018; attahir, 2016; nwosa, 2014; attahir, 2016; nwosa, 2014). besides, the government may not have given significant attention to reduce the continuously mounting graduate unemployment rates, just by allocating significant gdp share to education sector. the latter is less likely to ethiopian context, where the government has been committed to reduce unemployment by placing exceptional focus to education sector. the short-run elasticity in relation rgdp growth rate was consistently reported by (mohseni and jouzaryan, 2015; berentsen et al., 2017; ayesha, 2013; umair and ullah, 2013; karaçor et al., 2013; tenzin, 2019; adarkwa et al., 2018; khrais i., and al-wadi m., 2016). independent variable coef. std. err. z-value l1.lnguemptt l1.lneduexpt -0.0907 -0.1303 0.1728 0.0883* -0.53 -1.48 l1.lnrgdpt 1.1893 0.6935 1.71 l1.lncpit 0.6687 0.3015** 2.22 con_ -0.00420.0445 0.00 cointegrating term ( _ce1) -1.15 0.2477 -4.64 the impact of public education expenditures on graduate unemployment: cointegration analysis to ethiopia 13 3.2.6. vec causality analysis for public spending on education and economic growth rate keynesian economists explain the relationship between public spending and economic growth through enhanced employment of idle capacity that could help achieve full-equilibrium in the long-run. the premise is that, increased employment increases the growth of economy; and in turn, fostered economy creates more employment opportunities. towards testing this claim in the context of ethiopia, we used corresponding cointegration coefficients from vecm regression, following (labonte, 2016; tenzin, 2019;zoran, 2015; mohseni and jouzaryan, 2015; casey, 2010). the coefficients of cointegrating equation in vecm regression, where each variable was individually endogenous is presented in the table below. table (7): vec causality of expenditures on education and economic growth 3. null hypothesis: 4. ecm 5. z 6. decision 7. education expenditures does not granger cause economic growth 8. 0.096 9. 1.26 10. accept 11. economic growth does not granger cause education expenditure 12. 1.28 13. 2.58 14. reject source: authors’ compilation using stata 14 based of wb and imf data (2020) in vec granger causality analysis, the decisions to whether or not to reject the null hypothesis was based the reported coefficients of various ect. from evidences in table (7), the null of no granger causality from public expenditures towards economic growth has been accepted, due to the insignificant coefficient of corresponding ect at five per cent level. but, there is evidence significant granger causality from economic growth to government expenditure on the education sector. consequently, there is forward uni-directional causality from economic growth towards public spending on education in ethiopia. that means, no significant causal influence has been detected from public spending on education to rgdp growth, while causality was confirmed in reverse. the revealed trivial causality from public spending would be a bit straight. in the first place, the forward causality results are in contrast to the keynesian hypothesis. though public spending was effective in reducing long-run rate of graduate unemployment, the economy didn’t benefit from expanding participation of graduate. the case has been associated with several possibilities; firstly, the education system might have not been contributing to skill and productivity growth of individuals (adarkwa et al., 2018; khrais and al-wadi, 2016).secondly, the possibility of mismatches in profession and work assignments may prevent individuals from giving their best of effort(zoran, 2015; mohseni and jouzaryan, 2015; agboola et al., 2018; attahir, 2016; nwosa, 2014; berentsen et al., 2017; ayesha, 2013; banda, 2016; labonte, 2016; tenzin, 2019). the first case is quality issue, while the second is more of policy and technical concern. 4. summary, conclusions and recommendations 4.1. summary and conclusions this study was intended basically to examine the impact of government education expenditure on graduate unemployment in ethiopia for the temporal coverage spanning from 1991 to 2019. the world bank and international monetary fund data bases were the exclusive sources of the time series data set used in the present analysis. the individual annual series of data collected include; government spending on education, the number of graduate people seeking a job, rgdp and the cpi variables. the unit-root properties of individual variables were examined employing the augmented dickey fuller (adf) test, and all variables were found non-stationary. but, sequential examination proved that all were difference stationary and the order of integration was one. johnson’s cointegration test was employed to determine whether or not the variable under consideration exhibit long-run amsalu dachito & minyahil alemu & berhanu alemu 14 relationship. accordingly, the presence of at least three ways that the variables in the system move jointly has been suggested, while demonstrating the existence of stable long-term relationship between the variables. then, the study employed the vector error correction model that simultaneously reports the long-run and short-run coefficients. findings from the long-run model estimation reveal that, public spending on education has a negative and significant impact on graduate unemployment rate. besides, the vecm estimates have also confirmed a negative and significant impact of public education spending on graduate unemployment growth rate. the implication follows thus that, public spending has been effective in reducing graduate unemployment growth in ethiopia. this absolutely gives empirical support to the keynesian theory of unemployment in the context of ethiopian economy. inflation was found to have been the dominant driver of graduate unemployment both in the short-run and the long-run. we found positive and strongly significant relationships between cpi proxied inflation and graduate unemployment rates consistently. this rejects the empirical validity of the phillips curve to the context of ethiopian economy. we can then conclude that, the education sector of ethiopian has not been really productive, beyond producing thousands of graduates over the years. that is due to the fact effective education would have given real impetus to economic productivity and economic growth through enhanced skills, creativity and other benefits.if thesehypotheticalgains were true, productivity as well as productions would have boosted profoundly following climbing skilled and creative graduates every year. if it had been a case, inflation wouldn’t have space at all. moreover, the vec causality analysis revealed a unidirectional causality from economic growth to public spending on education. no reverse causality was evidenced. the implication is that, the government of ethiopia has been diverting a significant share of national income growth towards the education sector. besides, the revealed trivial backward causality from public spending to the economic growth manifests that, those expenditures have long been unproductive. in conclusion, public spending on education has no longer been effective in targeting economic growth, except the revealed successes in creating job opportunities to significant proportion of graduates over the years. however, the causality analysis provides evidence those achievements in reducing graduate unemployment rates have no role beyond. an economic gain from rising graduate employment was found to be only trivial. it farther reveals that, the education system of the country has not been effective in realizing the hypothetical benefits of education. 4.2. recommendations we suggest the following measures that would help target lower rate of graduate unemployment and as the same time achieve economic gains from widespread provision of higher education in ethiopia.  since the government of ethiopia has been effective, at least, in reducing the rate of graduate unemployment, the recent courtesy to the education sector should be strengthened. there is a need to look for alternative source of cheap funds that could supplement domestic effort in targeting the education sector. however, the pros and cons of external funds should also be given due concern.  there is a need for drastic measures to improve the educational sector through adequate investment in education that will help in skills development and creativity. there is a need to either revise the curriculum or give exceptional emphasis on the way of delivery so as to realize the hypothetical gains from education. established insignificant causality from education to economic growth demonstrates that, the country’s education system was ineffective producing skilled labor force, beyond certifying thousands.  schemes to lower the rate of dynamic inflation are much helpful in reducing graduate unemployment. yet, readjustment in the educational system of the country in a manner that could foster skill and productivity growth through its positive implication to real production is crucial to lower inflation as well as graduate unemployment rate. price shocks associated with real production sector necessitate larger investmentsin agriculture. thus, improved domestic as well as foreign direct investment undertakings in thesesectors could help target lower rate of inflation; and hence graduate unemployment. 4.3. suggestions for the future studies due to inadequate availability of time series data (especially for graduate unemployment rate) before 1991, the present study has considered only 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(2015): “analysis of the impact of public education expenditure on economic growth of european union and brics”, research paper in economics, economic analysis, 48(1-2); pp.19-38 international journal of commerce and finance, vol. 7, issue 1, 2021, 109-121 109 impact of fiscal policy on development financing: evidence from nigeria mukaila abiola tonade olabısı onabanjo unıversıty, nigeria bamidele ilo olabısı onabanjo unıversıty, nigeria olusola enitan olowofela olabısı onabanjo unıversıty, nigeria received: february 17, 2021 accepted: april 14, 2021 published: may 01, 2021 abstract this study examined the relationship between fiscal policy and development financing in nigeria and the extent to which the former effects the latter. the study employed public choice framework and the model is estimated with time-series data from 1981 to 2014, using the johansen estimation technique. the findings revealed that there is a strong positive relationship between fiscal policy and d evelopment financing, real gdp per capital, consumer price index and capital expenditure respectively. the results further confirmed that more expenses were incurred funding recurrent than capital and this had taken its toll on development. the study recommended that government should increase revenue base so as to fund capital expenditure in order to achieve sustainable development while it is also necessary to reduce recurrent expenditures and domestic debt. keywords: fiscal policy, economic growth, development financing jel classification: b22, c25, e62, h2 1. introduction the modern-day economic crisis has invigorated the debate on importance of fiscal policy over monetary policy in achieving gross domestic growth. developing countries economic crises had shown that monetary policy may not offer adequate response to macroeconomic challenges, hence there is need to bring into discussion how fiscal policy can serve as a machinery to correct dampening gross domestic growth and increase capital expenditure. this thought continued to spark debate among researchers, developmental institutions and academics among others. fiscal policy is an essential determinant of cyclical dynamics of macroeconomic aggregates that contributes positively in achieving stabilization and inclusive growth. it could take either expansionary or contractionary approaches. it’s also involves the use of government spending, taxation and borrowing to influence the pattern of economic activities, growth of aggregate demand, output and employment and economic stability in order to achieve inclusive growth and development (olugbenga, and owoye, 2007). nigeria, like most developing countries depend solely on revenue from crude oil as a major source of income in achieving macroeconomic goals and other developmental projects. however, this major source of income is subjected to revenue volatility as a result of decline in global oil price thereby creating disruption in provision of government essential services since the quantum of income flows usually determines the level and pace of development attainable by the country. intently, governmental development activities in developing countries particularly nigeria has continued to increase despite the serious threat posed by shortage of funds for developmental propose (shonchoy, 2010). it is therefore expedient for government to consider alternative source of income in order to increase capital expenditure because of the growing population and problems connected with urbanization which often aggravate the need for government to increase public expenditure (shelton, 2007). as a result of these, government mobilizes long-term funds either directly or indirectly for the capital expenditure and in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e olusola enitan olowofela 110 other development aspirations of government. development financing mix available to nigerian economy can broadly be classified into internal and external sources. it can also be categorized into debt and non-debt ( duc-anh, phu and arnelie ,2015). the debt source includes treasury bonds, development loan stocks and loan from bilateral, multilateral and international capital market sources used by government to finance development. the non-debt sources include public and private savings and gains from international trade. others include foreign direct investment, foreign aids and grants (bolaji, olukayode and abdulmaq, 2011). intently, taiwo and abayomi (2011) affirmed that the degree and composition of public expenditure will determine the pattern and growth in output of the economy. however, how this development financing mix has transformed capital expenditure remain puzzle. the examination of country’s debt sources of finance shows that domestic debt in 1981 is about 11.19billion representing 11.87% of gdp, this continue to increase till 1994 to 407.58billion representing 29.12% of gdp. recently the amount contracted on domestic debt in 2014 is about 7904.02billion representing 8.88% of gdp. external debt on the other hand rose from 2.33billion in 1981 representing 2.47% of gdp to an all time highest point in 1987/92 of about 60% of gdp due to the introduction of structural adjustment programme (sap). this trend continues to the beginning of this current republic when external debt was contracted to the tune of about 50% of gdp. recently the amount contracted on external debt had fallen to all time low point of about 1.83% of gdp (cbn, 2015). the same thing can be said of the government fiscal policy, much of the government revenue has been used to finance recurrent expenditure which leaves very little for capital expenditure. majority of the project still surviving till today are those projects which have been executed since the 90s. right from the beginning of this republic investment in capital project has been on the downward trend till it drops to 7.78% of the total government revenue in 2014. despite all this funds from various financing mix, the economy has been engaging in deficit financing throughout these periods of study except in 1995/96 when the economy had a surplus, not much has been gained in terms of investment on development since much of these finance usually go into recurrent expenditure. the amount spent on capital expenditure during the period hovers around 5% of gdp in fact in 2014 only 0.88% of gdp was spent on capital expenditure. from the foregoing, the main objective of this study is to examine the extent to which government fiscal policy has impacted on development financing, using both fiscal policy mix and development financing mix as complement and substitute and regressing the same on capital expenditure. many works previously conducted in this area have been looking at the nexus between fiscal policy and economic growth or purely on development financing and economic growth. apart from the introduction, the rest of the paper is divided into five sections. section 2 literature review, section three (3) focuses on research methodology, section four (4) is discussion of findings and section five (5) concludes the paper. 2. theoretical review/ literature review the theoretical postulates linking fiscal policy to development financing can be established through the way and manner in which fiscal policy, particularly deficit financing affect economic growth and development as government expenditure is believed to be financed by different development financing mix available. there is consensus in the literature that most of the government expenditure should be channelled to capital spending particularly in developing economy for meaningful development to take place. fiscal policy aims at stabilizing the economy (amada &essi, 2006). increases in government spending or a reduction in taxes tend to pull the economy out of a recession; while reduced spending or increased taxes slow down a boom (dornbusch& fischer, 1990). government interventions in economic activities are basically in the form of controls of selected areas/sectors of the economy. these controls differ, and depend on the specific needs or purpose the government desires to achieve. samuelson &nordhaus (1998), distinguished between two forms of regulation, namely: economic regulation (involving control of prices, entry and exit conditions, regulation of public utilities, such as transportation and media organizations, regulation of the financial sector operations and social regulation (aimed at protecting the health and safety of workers at work place, the environment, and protection of consumer rights. our focus is on economic regulation.proponents of government expansion (the keynesian economist) are of the view that government expenditures provide valuable public goods including: education, roads, infrastructure, and security, among (mitchell, 2005). they claim that increases in government spending are capable of enhancing growth through, perhaps, increase in purchasing power of the citizenry, both in the shortand long run (samson, 2013). the importance of fiscal policy as an instrument of economic development was first envisaged by keynes in his general impact of fiscal policy on development financing: evidence from nigeria 111 theory wherein he showed that the total national income was an index of economic activity and brought out the relationship of economic activity to total spending (emanuele 2003). hence fiscal policy could be used to influence economic development. proponents of minimal government spending (the neo-classical economist), however, are of the opinion that high government spending do crowd-out private investments and hence, undermine economic growth. they are of the opinion that increases in government spending often transfer resources from the productive sector of the economy to government, where the resources are likely to be used inefficiently. they also argue that expanding public sector can complicate efforts aimed at implementing pro-growth policies such as, fundamental tax reform and personal retirement accounts (mitchell, 2005). thomas (2012) submitted that effectiveness of fiscal policy depends on the theoretical model of the macro economy that is adopted. that is because fiscal policy works through aggregate demand, and the impact of aggregate demand on the real economy depends on macroeconomic perspective. the implication is that fiscal policy debate is ultimately a debate over macroeconomic theory. no theoretical paradigm is completely satisfying. comparison of paradigms spotlights the critical assumptions each makes; provides a better basis of understanding; and can help guide and improve policy ajisafe and folorunsho (2002) investigate relative effectiveness of fiscal and monetary policy on macroeconomic management in nigeria using co-integration and error correction modeling techniques. the result of the analysis shows that monetary rather than fiscal policy exerts a great impact on economic activity in nigeria. the emphasis on fiscal action of the government has led to greater distortion in the nigerian economy. the result however, suggests that both monetary and fiscal policies should be complementary. nurudeen and usman (2010) investigate effect of government expenditure on economic growth in a disaggregated analysis using co-integration and error correction methods to analyze data. their findings revealed that government total capital expenditure, total recurrent expenditures, and government expenditure on education have negative effect on economic growth. on the contrary, rising government expenditure on transport and communication, and health results to an increase in economic growth. the study recommends that government should increase both capital expenditure and recurrent expenditure, including expenditures on education, as well as ensuring that funds meant for the development of these sectors are properly managed. secondly, government should increase its investment in the development of transport and communication, in order to create an enabling environment for business to strive. thirdly, government should raise its expenditure in the development of the health sector since it would enhance labour productivity and economic growth. lastly, government should encourage and increase the funding of anti-corruption agencies in order to tackle the high level of corruption found in public office. babalola and aminu (2011) investigate impact of fiscal policy on economic growth in nigeria using error correction mechanism. the result indicates that productive expenditure positively impacted on economic growth during the period and that long run relationship exist between them. the paper recommends that there should be an improvement in government expenditure on health and education and economic services, as components of productive expenditure, to boost economic growth. joshua, kenneth and brian (2007) considered optimal public investment and fiscal policy for developing countries that have limited tax and debt capacities using non stochastic constant returns to scale (crs) endogenous growth model where public expenditure is captured in the production process, in countries where distortions and policy enforcement neglect affect fiscal abilities, as captured by a maximal effective tax rate. the finding revealed that flow of public expenditure increase productivity. it furthered show that government should not borrow to finance as this can lead to increase in public debt, which would lower welfare and the growth rate. liu chih, hsu, and younis (2008) considered causality between gdp and public expenditure of united state between 19472002. the result showed that total government expenditure causes growth of gdp. while growth of gdp does not create expansion of government expenditure. estimation analysis results indicated that public expenditure raises the us economic growth. akanni and osinowo (2013) discussed effect of fiscal instability on economic growth in nigeria. the cyclical effects of fiscal spending component were quantified using the hodrickprescot (hp)-filtered fiscal spending components and output with the correlation technique. results indicated that between 1970 and 1985, both the real gross domestic product and real total fiscal spending were highly volatile. however, total fiscal spending appears to be countercyclical between 1970 to 1986. but from 1987 to 2010, olusola enitan olowofela 112 the variation in total fiscal spending was relatively stationary while real output was still relatively unstable. the paper concludes that fiscal discipline is required to ensure a sustainably stable economic environment in nigeria. agu, okwo, ugwunta&idike (2015) discussed impact of various components of fiscal policy on the nigerian economy using descriptive statistics and ols multiple regression analysis for estimation. findings revealed that total government expenditures have tended to increase with government revenue, with expenditures peaking faster than revenue. investment expenditures were much lower than recurrent expenditures evidencing the poor growth in the country’s economy. hence, there were some evidence of positive correlation between government expenditure on economic services and economic growth. therefore, in public spending, it is important to note that the effectiveness of the private sector depends on the stability and predictability of the public incentive framework, which promotes or crowds out private investment. babalola (2015) examined the short-run and long-run impact of fiscal policy on economic development in nigeria using pair-wise correlation, co-integration and error correction mechanism. the result showed that government recurrent expenditure and government investment have positive and significant impact on economic development both in the short-run and long-run. capital expenditure however, appeared to have short-run positive impact but not in the long-run. tax revenue had an inverse significant impact both in the short run and long run. cyril (2016) investigates the effect of fiscal policy on economic growth in nigeria. using descriptive statistics and ordinary least square (ols) multiple regression analysis, the result reveals that total government expenditures is significant and positively related to government revenue. investment expenditures were much lower than recurrent expenditures evidencing poor growth in the country’s economy. the paper recommends that government should formulate and implement viable fiscal policy option that will stabilize the economy. olugbenga and owoye (2007) considered the relationship between government expenditure and economic growth in thirty (30) countries during the period of 1970-2005. their study revealed that a long-run relationship exists between government expenditure and economic growth. also, the causality runs from economic growth to government expenditure in 10 of the countries, this affirmed wagner’s law. from the foregoing, and inconformity with abata, kehinde and bolarinwa, (2012), it is clearer that if fiscal policy is used with circumspection and synchronized with other measures, it will likely smoothen out business cycles and lead to economic growth and stability. this paper contribute empirically to literature by looking at the nexus between fiscal policy and development financing in nigeria.to the best of our knowledge we have not been able to see any works looking at the nexus between fiscal policy and development financing directly. 3. research methodology the annual data used in this study cover a period of 33 years from 1981 to 2014; these years were picked because it comprised of the periods of economic, political and financial sector transformation in nigeria and there was data availability. the data was sourced from central bank of nigeria statistical bulletin, 2014, and world development indicators (wdi, 2014). 3.1. definitions and measurement of variables variables definition/measurement dependent variable: devna this depicts development financing and proxied by capital expenditure. development is only financed when financing capital expenditure. all fund expended on recurrent expenditure is only for consumption independent variables: impact of fiscal policy on development financing: evidence from nigeria 113 ddbt domestic debt exdbt external debt defin deficit financing, measured as difference between total revenue and total expenditure nonoilr non-oil revenue (mainly tax), measured as non-oil tax revenue and other revenue from other sources apart from oil. control variables: rgdppc real gdp per capita, a proxy for economic development to measure the interaction between development financing and economic development. measured at 2005 constant price cpi consumer price index, a proxy for the level of inflation 3.2. empirical model and estimation technique the paper examines the impact of fiscal policy on development financing in nigeria. the relationship between fiscal policy and development financing is specified as follows: where; development financing is expressed as a function of fiscal policy mix available to the government and some control variables. the model is therefore specified in econometric form as: where, devna = development financing, ddbt= domestic debt, exdbt= external debt, defin= deficit financing, nonoilr= non-oil revenue, rgdp per capita= proxy for economic development and cpi= consumer price index. μ= error term, β1 to β6 = coefficient of regression equation. 3.3. descriptive statistics table 3.3: descriptive statistics mean maximum median minimum std error devna 347.0652 1152.797 240.5696 4.100100 371.8570 ddbt 1546.756 7904.020 531.2906 11.19260 2212.566 olusola enitan olowofela 114 exdbt 1119.329 4890.270 606.6260 2.331200 1363.869 defin 243.5869 1158.518 67.71415 -32.04940 382.4501 nonoilr 661.0862 3275.121 152.6488 2.984100 940.5360 rgdppc 695.0275 1098.040 597.9042 494.2390 189.8668 cpi 39.32688 145.7960 25.00820 0.493799 43.86516 sources: extract from appendix ii note: devna = development financing. ddbt= domestic debt. exdbt= external debt. defin= deficit financing. nonoilr= total non-oil revenue. rgdppc= real gdp per capita. cpi= consumer price index. the characteristics of data series used in the regression analysis are presented in table 3.8 below. it provides information about the mean, median, standard deviation and their maximum and minimum values. the mean value of development financing is #347.07billion while the mean value of fiscal policy mix, for instance, domestic and external debt is #1546.76billion and #1119.33billion. the mean value of deficit financing is #243.57billion and that of non-oil revenue is #661.09billion. on the other hand, the mean value of real gdp per capita is #695.03billion while the mean value of consumer price index is 39.33. the data shows that all the series display high level of consistency as their mean and median values are within their maximum and minimum values. table 3.4: correlation devna ddbt exdbt defin nonoilr rgdp cpi devna 1.0000 ddbt 0.8414 1.0000 exdbt 0.1955 0.1492 1.0000 defin 0.8059 0.9298 0.1534 1.0000 nonoilr 0.8844 0.9881 0.1594 0.9097 1.0000 rgdppc 0.8581 0.8936 0.0320 0.8117 0.9115 1.0000 cpi 0.9296 0.9630 0.2594 0.8775 0.9734 0.9146 1.0000 sources: extract from appendix iii note: devna = development financing. ddbt= domestic debt. exdbt= external debt. defin= deficit financing. nonoilr= total non-oil revenue. rgdppc= real gdp per capita. cpi= consumer price index. the table 3.4 shows the correlation matrix result measuring the degree of relationship between the variables in the study. the result shows that there exist a very strong positive correlation between development financing and impact of fiscal policy on development financing: evidence from nigeria 115 domestic debt, deficit financing, non-oil revenue, real gdp per capita and consumer price index respectively at 0.84, 0.81, 0.88, 0.86 and 0.93 respectively. the correlation between external debt and capital spending is weak and positive at 0.20. augmented dickey fuller test is used to check the stationary of the variables. a time series data usually show trend with time. this trend can be removed by differencing. the results of adf test are given in the table below: table 3.5: adf unit root test 1st difference 2nd difference lag length variables t-statistics variables t-statistics devna -3.711722* 1 ddbt -4.413812* 1 exdbt -3.891276* 1 defin -3.780040* 1 nonoilr -4.045837* 1 rgdppc -3.212804** 1 cpi -3.249275** 1 critical values: critical values: 1% -3.661661* 1% -4.296729* 5% -2.960411** 5% -3.568379** 10% -2.619160*** 10% -3.218382*** sources: extract from appendix vi note: devna = development financing. ddbt= domestic debt. exdbt= external debt. defin= deficit financing. nonoilr= total non-oil revenue. rgdppc= real gdp per capita. cpi= consumer price index. from the result above, development financing, external debt, deficit financing and non-oil revenue are stationary at first difference at 1 percent level while real gdp per capita and consumer price index are also stationary at first difference but at 5 percent level respectively. domestic debt on the other hand is found to be stationary at second difference at 1 percent level respectively. based on the result of johansen co-integration test presented below, there is evidence in support of co-integrating relationship. the test result indicates the existence of 4 co-integrating relationship in the equation at 5 percent level of significant. thus, the null hypothesis of no co-integration is rejected. it indicated that there exist a long-run relationship between fiscal policy and development financing in nigeria. olusola enitan olowofela 116 table 3.6: johansen co-integration test unrestricted cointegration rank test (trace) hypothesized trace 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.908011 240.0834 125.6154 0.0000 at most 1 * 0.847667 163.7286 95.75366 0.0000 at most 2 * 0.707519 103.5147 69.81889 0.0000 at most 3 * 0.627632 64.17527 47.85613 0.0007 at most 4 0.525856 32.56332 29.79707 0.0234 at most 5 0.232141 8.683532 15.49471 0.3955 at most 6 0.007185 0.230744 3.841466 0.6310 unrestricted cointegration rank test (maximum eigenvalue) hypothesized max-eigen 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.908011 76.35480 46.23142 0.0000 at most 1 * 0.847667 60.21394 40.07757 0.0001 at most 2 * 0.707519 39.33942 33.87687 0.0101 at most 3 * 0.627632 31.61195 27.58434 0.0143 at most 4 0.525856 23.87979 21.13162 0.0200 at most 5 0.232141 8.452789 14.26460 0.3345 at most 6 0.007185 0.230744 3.841466 0.6310 trace test and maximum eigenvalue indicates 4 cointegratingeqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **mackinnon-haug-michelis (1999) p-values pairwise granger causality test presented below shows the direction of causality between development financing, and fiscal policy mix in the model. the result shows evidence in support of a uni-directional causality among development financing, domestic debt, deficit financing, external debt, non-oil revenue and real gdp per capita. impact of fiscal policy on development financing: evidence from nigeria 117 causality is running from development financing to domestic debt, from development financing to deficit financing, capital spending to non-oil revenue, and development financing to real gdp per capita while causality is running in opposite direction from external debt development financing. table 3.7: pairwise granger causality test null hypothesis: lags obs f-statistic prob. cpi does not granger cause devna 2 32 0.77008 0.4729 devna does not granger cause cpi 1.03516 0.3688 ddbt does not granger cause devna 2 32 2.17648 0.1329 devna does not granger cause ddbt 11.9646 0.0002 defin does not granger cause devna 2 32 25.5159 6.e-07 devna does not granger cause defin 10.1730 0.0005 exdbt does not granger cause devna 2 32 2.70512 0.0850 devna does not granger cause exdbt 0.81544 0.4530 nonoilr does not granger cause devna 2 32 0.55716 0.5793 devna does not granger cause nonoilr 5.06245 0.0136 rgdppc does not granger cause devna 2 32 1.67817 0.2056 devna does not granger cause rgdppc 2.59252 0.0933 sources: extract from appendix v note: devna = development financing. ddbt= domestic debt. exdbt= external debt. defin= deficit financing. nonoilr= total non-oil revenue. rgdppc= real gdp per capita. cpi= consumer price index. the regression result as presented below in table 3.8 shows that proxies for fiscal policy like deficit financing, nonoil revenue and consumer price index exert positively and significantly on proxy for development financing (capital spending) at 1 percent level respectively. indicating that a 1 unit increase in deficit financing, non-oil revenue and consumer price index would increase development financing (capital spending) by 0.4728, 0.3857 and 16.0930 units respectively. on the other hand, domestic debt, external debt and real gdp per capita exert negatively and significantly on development financing. indicating that a 1 unit increase in domestic debt, external debt and real gdp per capita would reduce development financing (capital spending) by 0.3737, 0.0518, and 0.3310 units respectively. the r-square value of 0.966 (96.6%) implies that 96.6 percent of total variation in development financing is explained by proxies for fiscal policy in nigeria. coincidentally the adjusted r-square, measuring the goodness fit remained high at 95.9 percent after adjusting for the degree of freedom. the dw statistics of 1.78 is observed to be higher than r-square of 0.966 indicating that the regression is nonspurious (meaningful), therefore it can be used for policy purpose. the dw statistics of 1.78 indicate the absence of olusola enitan olowofela 118 autocorrelation. the f-statistics of 129.0901 with a p-value of less than i percent shows that we can reject the null hypothesis and conclude that fiscal policy exert significantly on development financing in nigeria. table 3.8: regression result dependent variable: devna variable coefficient std. error t-statistics p-value ddbt -0.373679 0.045454 -8.221053 0.0000 exdbt -0.051767 0.012853 -4.027725 0.0004 defin 0.472763 0.095922 4.928604 0.0000 nonoilr 0.385668 0.110612 3.486675 0.0017 rgdppc -0.330984 0.205011 -1.614467 0.1181 cpi 16.09299 1.733211 9.285075 0.0000 constant 210.0361 117.5184 1.787261 0.0851 r-square adj r-square dw f-stats p-value 0.966315 0.958829 1.782279 129.0901 0.0000 sources: extract from appendix i note: devna = development financing ddbt= domestic debt. exdbt= external debt. defin= deficit financing. nonoilr= total non-oil revenue. rgdppc= real gdp per capita. cpi= consumer price index. the result of diagnostic tests is shown in table 3.6 the result shows that error term are not normally distributed. the model passes the breusch-pagan heteroskedasticity test, autoregressive conditional heteroskedasticity (arch) test, the serial correlation test and the ramsey reset test suggests that the model is well specified. table 3.9: sensitivity test test f-statistics p-value normalty 15.3561 0.0005 breusch-pagan heteroskedasticity 0.8529 0.5412 arch test 0.0349 0.8530 serial correlation test 2.4580 0.1060 ramsey rest test 1.4103 0.2457 4. discussion and conclusion impact of fiscal policy on development financing: evidence from nigeria 119 the paper examines impact of fiscal policy on development financing in nigeria from 1981 to 2014. the result of the correlation coefficient reveals that a very high positive association exists among fiscal policy and development financing. an increase in domestic debt, external debt, deficit financing, non-oil revenue, real gdp per capita and consumer price index is associated with 84.14%, 19.6%, 80.89%, 88.44%, 85.81% and 92.96% increase in development financing respectively. the results from the augmented-dickey fuller unit root test shows that all the series are stationary at first difference signifying that there is no presence of unit root in the data used therefore confirming the consistency in the data. the johansen co-integration test establishes evidence in support of a long run relationship among the proxy for fiscal policy and development financing. this is shown by the presence of four co-integrating equations at 5 percent level of significance. while the pair-wise granger causality test shows that there is a uni-directional causality among fiscal policy and development financing, but the causality runs from development financing to domestic debt, to deficit financing, to non-oil revenue and real gdp per capita while it runs in the opposite direction from external debt to development financing and no causality exist between consumer price index and development financing. the regression result shows that proxies for fiscal policy, like deficit financing, non-oil revenue and consumer price index exert positively and significantly on proxy for development financing (capital spending) at 1 percent level respectively. indicating that a 1 unit increase in deficit financing, non-oil revenue and consumer price index would increase development financing (capital spending) by 0.4728, 0.3857 and 16.0930 units respectively. this finding is in line with theoretical postulations of fiscal policy leading to development when an appropriate fiscal policy is geared toward appropriately financing capital expenditure. on the other hand, domestic debt, external debt and real gdp per capita exert negatively and significantly on development financing (capital expenditure). indicating that a 1 unit increase in domestic debt, external debt and real gdp per capita would reduce development financing (capital spending) by 0.3737, 0.0518, and 0.3310 units respectively. this finding is only speaking the mind of the data since over the years the development of infrastructure as been neglected in favour of current consumption by the government. it implies that most of the debt contracted by the government as not been use for the purpose for which they are meant leading to waste and problems of financial obligations associated with paying back these debts and accrued interest on it. the r-square value of 0.966 (96.6%) implies that 96.6 percent of total variation in development financing is explained by proxies for fiscal policy in nigeria. coincidentally the adjusted r-square, measuring the goodness fit remained high at 95.9 percent after adjusting for the degree of freedom. the dw statistics of 1.78 is observed to be higher than r-square of 0.966 indicating that the regression is non-spurious (meaningful), therefore it can be used for policy purpose. the dw statistics of 1.78 indicate the absence of autocorrelation. the f-statistics of 129.0901 with a p-value of less than i percent shows that we can reject the null hypothesis and conclude that fiscal policy exert significantly on development financing in nigeria. all the result presented passes all required diagnostic test. the implication of the above findings is that a long-run a significant relationship exist between fiscal policy and development financing in nigeria. the various result presented shows some interesting result which is pointing to the fact that government fiscal policy measures should be directed towards mobilizing the needed funds for development financing and these funds should be well monitored such that all money so received from various sources are channel towards developing capital projects. a situation in which debt is contracted to finance recurrent expenditure and the little earmarked for capital expenditure is not judiciously spent leave less to be desired. a serious development cannot take place in a country where more 70 percent of its revenue goes into recurrent expenditure and only 0.88 percent of gdp is spent capital expenditure. so in the current situation of economic recession the country is battling with, the policy makers should engineer a policy direction that will diversify the economy from primary base to manufacturing, improving all available infrastructures an opening up of new ones, opening all our rail system and all road network should be expanded and more should be constructed to cater for the ever increasing economic activities. energy needs of the country should be cater for and the security of lives and property should be assured at all times. all the above can be achieved through a judicious use of the resources available to government from various sources and a large scale and extensive investment in capital project. there is dearth of studies linking fiscal policy to development financing. the commonest literatures explored fiscal policy and economic growth. this paper tries to cover this gap by examining the extent to which fiscal policy measures supports development financing in nigeria. the result confirms the presence of long-run relationship between fiscal policy and development financing in nigeria. a positive and significant relationship was confirmed olusola enitan olowofela 120 between development financing and deficit financing, non-oil revenue and consumer price index. while a negative significant relationship was confirmed between development financing, domestic debt, external debt and real gdp per capita. the various reliability test shows that the results are reliable. the paper therefore recommends that:  government should mobilize more tax revenue by carrying out a comprehensive audit of all firms in the country particularly those in the informal sector so as to bring in more tax payer into the tax net. they should block all leakages in the tax system and ensure that those resources so mobilize are directed towards capital expenditure.  government should cut its consumption on recurrent expenditure and divert same into capital expenditure. capital spending is recommended not to be less than 40 percent of total revenue for serious development to take place.  government should avoid contracting more debt particularly external debt, and if they must do it should be solely for development sake (capital expenditure) it should not be used to pay personnel cost. increasing the level of domestic debt can also be detrimental to the economy as it can crowd-out private investors.  the amount of deficit financing should be kept at 4 percent level of gdp as recommended by the west african monetary zone. references abata, m. a., kehinde, j. s., &bolarinwa, s. a. 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(2007). public expenditure and economic growth: new evidence from oecd countries. oriavwote, e., &eshenake, s. j. does fiscal policy matters for economic growth? an empirical assessment of the nigerian situation. osuka, b. o., &chioma, a. j. (2014).the impact of budget deficits on macroeconomic variables in the nigerian economy. international journal for innovation education and research, 2(11). taiwo, a. s. & agbatogun, k. k (2011). government expenditure in nigeria: a sine qua non for economic growth and development. jorind, 9(2), 155 – 162. samson, a. a. (2013). government spending and economic growth: evidence from nigeria.http://mpra.ub.unimuench. de/43916/. samuelson, p. a., & nordhaus, w. d. (1998).economics (16thed). boston: irwin/mcgraw-hill. shelton, c.a (2007). the size and composition of government expenditure. j public econ 91:2230–2260 shonchoy, a.s (2010). determinants of government consumption expenditure in developing countries: a panel data analysis (ide discussion paper no. 266). chiba, japan: institute of developing economies, jetro international journal of commerce and finance, vol. 7, issue 1, 2021, 156-165 156 the relationship between financial statements disaggregation and audit fees aydin asheghi oskooee allameh tabataba'i university, iran mohammad marfou allameh tabataba'i university, iran mousa bozorg asl allameh tabataba'i university, iran received: april 06, 2021 accepted: april 27, 2021 published: may 01, 2021 abstract this paper studies the relationship between financial statements disaggregation and audit fees. financial statements disaggregation is about detailed disclosure of information and is based on the better quality of finer information. to measure this characteristic, native standards and resources (from iran) were used. our method of measurement is based on chen et al.’s (2015) approach, but with a basis of local resources. providing more detailed information in the financial statements can affect the auditors’ judgment regarding audit scope, which can affect their demanded fee. the results indicate that there is a significant relationship between financial statements disaggregation and audit fees. keywords: disaggregation, financial statements, financial statement items, audit fee 1. introduction the term “disclosure” is a comprehensive term and covers almost the entire financial reporting process. one of the basic principles of accounting is the disclosure of all facts of importance and related events and financial activities of a single entity, in particular, public corporations (alivar, 1991). researchers have adopted different approaches to measuring and operationalizing the disclosure quality, with significant differences in their structure. major disclosure studies have focused on the extent to which compulsory and optional information have been disclosed, which generally includes indicators designed by the researcher in accordance with legal requirements, such as the standards and regulatory rules of countries for compulsory items (ahmad and nicholls, 1994) or optional items (kashanipour et al., 2001; botosan, 1997). measurement of disclosure quality is one of the issues considered by the securities and exchange organization. ratings made by the securities and exchange organization are based on the reliability and timeliness of the information. given the extent of the disclosure issue and the factors affecting its quality, there are certainly other aspects of this measure that can be used as a complement to the standards used by the securities and stock market organization. the factor to be considered in this study is financial statements’ disaggregation. using the financial statements’ disaggregation as a measure of disclosure quality is a new approach that was first proposed by chen et al. (2015). chen et al. (2015) introduced the financial statements’ disaggregation as an indicator for disclosure (based on the higher quality of finer information). the requirements to break down the financial information in financial statements provided in accounting standards are usually generalized and based on the nature and function of each item. compliance with these requirements and disclosure of sums based on the minimum segments referred to in the standard by the reporting units is essential. however, there is no limitation to further breaking down and more detailed presentation of the financial statements. the reporting units, according to management judgment, split or aggregate reported items. subsequently, this study examines the relationship between the disaggregation of accounting information and audit fees. different researches have been done to identify the effective factors in in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the relationship between financial statements disaggregation and audit fees 157 determining audit fees. factors such as the volume of operations, the complexity of the operations and the type of audit firm (nikbakht and tanani, 2010), the ownership of state and sub-state institutions, and the auditor's expertise in the industry (vaez et al., 2014) are effective in determining audit fees. disaggregation of financial statements information can also be effective in determining audit fees. further breakdowns of information may affect the auditor’s judgment of significance level of a single disclosed item compared to a situation when the same item is disclosed in aggregate with other items. in these circumstances, the auditor may increase the volume of their work and determine a higher number of samples to ensure that the reported numbers are accurate, depending on the importance of the items disclosed separately. this will lead to more time spent on processing the information and, as a result, will require higher audit fees (beck et al., 2016). for this purpose, this paper examines the extent to which the level of financial statements disaggregation affects audit fees. 2. literature review 2.1. disclosure quality the terms "disclosure quality of accounting information" and "transparency of disclosure" are generally synonymous, and it is difficult to define precisely the "transparency" and "quality" that exists on this consensus. in this regard, so far, various structures as the representative of the disclosure quality have been used such as relevance, comprehensiveness, awareness and timeliness (alavi tabari et al., 2011). ball et al. (2000) interpret transparency as a combination of timeliness and conservatism. barth and schipper (2008) describe the transparency of financial reporting as part of a financial report that identifies the underlying economic affairs of a business entity, whic h is understandable to users. singhavi and desai (1971) argue that quality refers to the characteristics of completeness, accuracy, and reliability. according to brown and hillegeist (2006), the disclosure quality provides a general overview of the company's overall disclosures and depends on the amount of information disclosed, the timeliness of the information and its accuracy. 2.2.disclosure quality in iran the securities and exchange organization of iran determines the disclosure quality of the information of companies admitted to tehran stock exchange based on timeliness and reliability of financial statements. to be timely in the theoretical framework is to provide timely information that can influence decisions of decision makers (fasb, 2010). by interpreting this definition, it can be said that timeliness is relative, information at anytime can or cannot have this attribute, and prescribing a specific date or time period for its presentation, while considering the different approaches of each user, if not impossible, it will surely be very difficult. if a report is submitted on a date after the date specified in the instruction, the timeliness rank of the company will be reduced, although, from the user's point of view, the information provided may be timely. in their respected calculations, the volatility and changes in the forward-looking estimates as well as the differences between the expected amounts and the actual audited performance are reliability measures. the calculation of points based on the described items and ignoring other factors affecting reliability (such as the quality of the reported statement, the level of error in the report, etc.) are among the weaknesses of this criterion. 2.3.financial statements disaggregation the explanatory notes include information presented in addition to the information available in the financial statements. they include descriptions or disaggregated amounts of the items included in these statements (iasb, 2007). the disaggregation quality is based on the blackwell’s (1951) view of "finer information is of higher quality". further disaggregation provides investors with more accurate and more information. a detailed disclosure of information reduces information asymmetry and increases the accuracy of financial statements, and provides investors with more information for valuation and reduces the likelihood of a wrong pricing (fairfield et al., 1996; jegadeesh and livant, 2006). in addition, further disaggregation increases the credibility of the corporate ea rnings forecast report and reduces manager’s freedom in managing reported numbers (chen et al., 2015; d’souza et al., 2010; hirst et al., 2007). chen et al. (2015) found that disaggregation quality has a positive and significant relationship with the accuracy of analysts' forecasts, and a negative and significant relationship with information asymmetry and capital cost. aydin asheghi oskooee & mohammad marfou & mousa bozorg asl 158 dq is a comprehensive measure for accuracy of information provided in the annual financial statements of the companies. although the level of detail provided in the financial reports is an important part of the disclosure behavior of the organizations, it has not been under a lot of attention by researchers. this criterion, conceptually, is very different with other metrics of disclosure quality, such as managerial predictions and self-made indicators of researchers. the difference of this benchmark with others is due to its focus on the accuracy of data that reflects the degree of separation of items in the financial statements (chen et al., 2015). contrary to the widespread literature in the field of disclosure in general, and the disclosure of the optional and compulsory information in particular, there are no standards or studies in iran to measure the disclosure quality based on the extent of the disaggregation in the financial statements. according to chen et al. (2015) there are three significant points in designing and implementing this benchmark. first, the purpose of this study is to construct a brief, intuitive, and relatively free of researcher’s judgment. therefore, the implicit assumption of this research is the higher quality of "finer information" and there are no differences between recognition (financial statements items) and disclosure (accompanying notes). second, this criterion focuses on examining the details contained in the annual reports based on aggregation rather than aggregation with the classification change (for example, classification of long-term receivables as short-term to illustrate a better picture of the company's situation). third, with regard to the need to maintain comparability in preparing financial statements, companies will not have a yearly jump in this indicator. the limitation of changes in this criterion in companies over time will make it a suitable tool for cross-sectional and event-driven research. for example, the dq can be used to evaluate changes in classification after the change of auditor, major changes in the entity's business or management change. while financial statements, in accordance with accepted accounting principles, necessarily integrate accounting data to provide useful information in a cost-effective manner, the standard-makers require financial statements to provide disaggregated accounting information, for simple accounting metrics, such as income, to avoid particular attention to these simplified criteria. therefore, financial reporting standards consider the costs and benefits of disaggregated accounting data, but do not provide guidance on the appropriate level of disaggregation in financial reports (beck et al., 2016). since managers have a significant discretion when choosing the level of separation in compulsory reports, companies differ in the amount of disaggregated accounting data. chen et al. (2015) measured the quality of the financial statements disaggregation by counting all line items in compustat and dividing the number of items disclosed into the total line items defined for each account. in order to construct a relevant criterion for evaluating the disaggregation level of information presented in financial statements for general purposes, this study used chen et al. (2015) method but with a different basis. accounting standards specify the disclosure requirements in annual financial statements. also, during the audit process, charted accountants are required to complete the disclosure checklist designed by the iacpa which is based on accounting standards. using the accounting standards, the disclosure checklist of the aicpa, and the instruction of disclosing information provided by the securities and stock exchange organization, in order to provide the objectives of this research, a table was designed to be used in order to rank the level of disaggregation quality in companies. 2.4.disaggregation in statement of financial position items ias 1 describes the statement of financial position and the minimum required items which comprise it. according to par. 55 of ias 1, if in addition to principal items, there are other titles and sub categories that are relevant to understanding the entity’s financial position the entity shall provide them in the case of a financial position. when presenting these subgroups, they should consist of the main items and be presented and named in such a way that the principal items are clear and comprehensible; they should also be uniform across periods. the standard also requires the separation of assets and liabilities to current and non-current (except where liquidity-based provision provides more relevant and reliable information). these in fact, mean the same in terms of disaggregating amounts in other for users to be better able to understand and comprehend the financial position of an entity. the sub-categories of the main items that should be disclosed in the notes in accordance with the standard should be classified according to the entity's operations. as necessary, each sub-item should be subdivided into more sub-items according to its nature. the determination of the sub-categories depends on the requirements of the accounting standards, size, nature and operation of the items. notable points to the separate presentation of these items as per the relationship between financial statements disaggregation and audit fees 159 standard include the nature and capability of the asset, the operation of the assets in the business unit and the amounts, nature and timing of debt repayments. 2.5.audit fee it is important to study the factors affecting the audit fee in terms of its impact on the quality of the audit. research suggests that audit fees are to a mostly a function of audit team labor hours and its cost, and a risk component. four major phases of audit process include: (1) planning, (2) risk assessment, (3) conducting the audit, and (4) evaluating the results and issuing the report. when deciding about the audit fee, the decisions and assessments made during the planning and risk assessment are of high importance (ittonen & peni, 2012). audit fees are effective in the planning and implementation of the proper and high-quality financial audit work. the low quality of the audit results in decreased confidence of the users of financial statements, which not only leads to failure to achieve audit objectives, but also reduces the credibility of the audit process and prevents the optimal allocation of capital in the securities market and leads to the increase of cost of capital and financing (rajabi, 2004). determining the factors influencing the audit fee will help the client understand the benefits of this service and what this cost is due to. obviously, knowing this will accelerate and facilitate auditors work, and due to the involvement of the client, a higher quality audit will take place (gist, 1992). 2.6.financial statements disaggregation and audit fee empirical research has provided an insight into the reasons for manager’s decision to disaggregate financial statements items. heitzmann, weisley and zimmerman (2010) and riedl and srinivasan (2010) presented evidence that managers' decisions in disaggregation of financial statements items were influenced by the importance of these items for the company and, consequently, for investors. for example, in the area of segment reporting, berger and han (2003 and 2007) found that corporate executives tended to conceal losses of segments with aggregating their numbers with profitable sectors to hide bad performance, and prevent scrutiny by investors. in this example, the bad performance of the client directly relates to his/her business risk, which is one of the factors influencing the determination of audit fees. in line with these researches, it can be said that the disaggregation quality of financial statements could have potential effects on the auditor's assessment of the importance of the items presented. disaggregation of an item that was previously presented collectively and at that time, its’ importance in terms of the auditor's opinion was low, may become an item of high importance to the auditor. disaggregation of this item could be effective on user decisions, and as a result, the auditor may need to ask for more evidence, carry out more tests and anticipate conducting more extensive audit procedures at the planning stage, which may result in asking for a higher fee (beck et al., 2016). 3. research hypothesis based on the above and reviewing existing literature, the main hypothesis of the research is as follows: h1: there is a positive relationship between financial statement disaggregation and audit fees. in order to test the research hypothesis, the standard audit fee model, which includes control variables identified in prior research, that affect the auditor's fees is used. these variables include company size, complexity, operational risk, and financial risk. in this equation, the variable ln_fees is equal to the natural logarithm of the audit fee. this model was first purposed by beck et al. (2016), and is modified to fit the structure of iran’s available information and market structure. equation 1: ln_feesit=β0+β1dqit+β2ln_assetsit+β3leverageit+β4lossit+β5roait+β6cfoit+β7reportlagit+ β8big2it+β9cfovolit+β10salegrowthit+β11mtbit+β12new_financingit+β13audittenureit +β14specialistit+β 15fiscalyearit + εit 4. research variables 4.1.independent variable disaggregation quality (dq): indicates the accuracy of information that is reflected in disaggregation of accounting data in annual reports (chen et al., 2015). aydin asheghi oskooee & mohammad marfou & mousa bozorg asl 160 in order to measure disaggregation, we used the tables which lists the information included in financial statements. in the preparation of tables, the sample financial statements designed by the audit organization, a disclosure checklist by iacpa and accounting standard no. 1 of iran have been used. for each account group, the parent account and for each parent account, the subcategories were defined. in two cases, the account balance will not be shown at each of the defined levels: 1. the remainder of this account is zero, or 2. balance of this account has been disclosed as aggregated with other items. if the first state is realized, the disclosure score will be calculated by eliminating the effect of the corresponding account. first, the weight of each section is determined relative to the remainder of the total. then the number of subclauses in each of these headings is counted and divided by the total number of subcategories determined (according to the table) and multiplied by the weight of that account. then, the initial disclosure rate is split only for the balance sheet (due to its two parts), so that the final disclosure rate is calculated from one. 4.2.dependent variable audit fees: audit fees are the amount auditor receives in return for providing audit services and reports from the client. in this study, the audit fees are extracted from the explanatory notes accompanying the financial statements of the companies and, in order to facilitate the calculation, the natural logarithms of these amounts were used. 4.3.control variables the list of control variables used in this study and how they are measured are described in table 1. table 1. control variables variable how it was measured ln_assets natural logarithm of total assets. leverage total debts to total assets. loss 1 for companies which reported loss, otherwise 0. roa return on assets. cfo operational cash flow divided by total assets. fiscalyear 1 if the company’s fiscal year ends in 12/29, otherwise 0. reportlag the interval between the date of the end of the fiscal year of the company and the date of the auditor's report. big2 1 for the companies which have been audited by audit organization or mofid rahbar (the two biggest auditors of iran), otherwise 0. audittenure the number of continuous years which an auditor examined financial reports of a company. specialist 1 if the auditor is an industry specialist, otherwise 0. salegrowth current year’s sales divided by last years. mtb conservatism measured by capital market value divided by nominal value. cfovol standard deviation of cfot, cfot-1, and cfot-2. new_financing 1 if the company has issued new shares or bonds in a year, otherwise 0. the relationship between financial statements disaggregation and audit fees 161 5. research method this research is an applied research in terms of its application type. the purpose of the applied research is the development of applied knowledge in a particular context. in terms of research method, it is a descriptive correlation study. first, this paper studies the current status of the statistical population, meaning the variables of the research, and then examining the correlation and determining its type among the variables. 6. statistical population and sample the statistical population of this study includes companies accepted in tehran stock exchange and the time period of the research are years 2011 to 2015. to determine the ranking of disclosure based on the criteria used in the research and testing of hypotheses, a sample of 61 companies was selected based on the following criteria: 1. the company has to be admitted to the exchange market before the year 2011 and by the end of the year 2015 its name should not have been removed from the list. 2. it must have been a manufacturing company (non-investment and non-holding). 3. the audit fee must have been disclosed in the financial statements of the company. 7. data collection method in order to collect the required data, we use the publisher’s comprehensive information system (codal), the rahavard novin 3 and other websites related to the securities and stock market organization such as the financial information processing center of iran. 8. research findings 8.1.descriptive statistics in order to provide a general overview of the characteristics of the research variables, table 2 presents some descriptive statistics related to them. table 2. descriptive statistics std. deviation mean median variable std. deviation mean median variable 2.1225 2.645767 2.104 mtb 0.786057 6.408 6.4848 ln_fees 0.302670 0.1016 0.000 new_financing 0.108695 0.761 0.744 dq 26.85323 74.327 74.00 report_lag 0.164319 0.114 0.138 cfo 17.54413 11.272 10.21 roa 0.074295 0.076 0.090 cfovol 0.3917 0.1889 0.1516 salegrowth 0.367817 1.000 0.839 fiscal_year 0.500690 0.5114 1.000 specialist 0.451109 0.619 0.6610 leverage 1.121626 2.0426 2.000 tenure 1.107018 13.42 13.291 ln_assets 0.3981 0.196 0.000 big2 0.367817 0.000 0.1606 loss 8.2. reliability test of variables one of the conditions for using regression is the reliability of the variables studied in the research. in order to verify the reliability, we used im, pesaran and shin test. the results of this test are shown in table 3. table 3. reliability test p-value w-stat variable p-value w-stat variable 0.0000 -4.0036 report_lag 0.0000 -18.8735 ln_fees 0.0000 -11.3384 roa 0.0016 -2.94177 cfo 0.0000 -11.2136 tenure 0.0001 -3.77039 cfovol 0.0340 -1.82507 salegrowth 0.000 -8.00537 leverage 0.0335 -1.83229 dq 0.000 -11.5321 ln_assets 0.0038 -2.67352 mtb aydin asheghi oskooee & mohammad marfou & mousa bozorg asl 162 according to the results of the ips test, in all variables, the null hypothesis is rejected (the level of significance is less than 0.05), as a result, research variables during the research period are reliable, and the use of these variables in the model does not lead to false regression. 8.3. inferential statistics in this research, we seek to discover the relationship between several variables. before fitting the regression models, it is necessary to first select the optimal model by using statistical tests and linear regression assumptions. 8.4. diagnostic tests hausman's test is used to determine the use of a constant effect model versus a random effect model. the limer test also examines whether there are different results at different intervals or the results are the same. the results of the limer and hausman tests are as follows. table 4. limer and husman test result prob. test statistic type of test panel model null hypothesis rejected 0.0000 4.968345 limer panel with random effects null hypothesis not rejected. 0.7870 10.503125 husman the result of the limer test shows that the panel data method should be used to estimate the research’s regression model and the results of the husman test shows the optimal panel model is with random effects. 9. the classic regression assumptions test 9.1. independence test of errors durbin-watson statistic tests the serial correlation between the regression errors. the independence of the errors in the regression model can be achieved when the statistic is between 1.5 and 2.5. the durbin-watson statistic of the model is 1.996643, which indicates the independence of errors from each other. 9.2. heterogeneity of variances in this study, white's test was used to estimate the heterogeneity of variance. white's statistic of the research model is 1.336634 and its p-value equals to 0.1791. as a result, the null hypothesis at the error level of 0.05 is not rejected and ols regression model can be used. 9.3. multicolinearity test of independent variables according to table 5, the degree of tolerance for all independent variables is greater than 0.2, and the variance inflation factor is also close to 1, indicating a lack of multicolinearity between independent variables. table 5. multicolinearity test of independent variables vif tolerance variable vif tolerance variable 1.138254 0.878539 mtb 1.188221 0.841594 dq 1.057284 0.94582 new_financing 1.227322 0.814782 ln_assets 1.259495 0.793969 tenure 1.067262 0.936977 leverage 1.384775 0.722139 specialist 1.722652 0.5805 loss 1.368125 0.730927 fiscal_year 2.686655 0.37221 roa 1.257318 0.795344 cfovol 1.82215 0.548802 cfo 1.448437 0.690399 big2 1.320788 0.757124 report_lag 1.055891 0.947067 salegrowth the relationship between financial statements disaggregation and audit fees 163 10. testing the research hypothesis: results from running regression model we hypothesized that financial statements disaggregation has a positive relationship with audit fee. the results from running the regression model are shown in the table below. the fstatistic of the research model is 15.44 and indicates the significance of the whole regression model. the value of the adjusted r-squared of the model is also equal to 0.41, which shows that the independent variables of the model explain 41% of the variation of the dependent variable (natural logarithm of the audit fee) and indicate the acceptable power of the independent variables in explaining the variation of the dependent variable. the results of the model estimation indicate the significance of the β1 coefficient. the coefficient of dq is positive and significant, and shows the direct relationship of this variable with the dependent variable (audit fee). in this way, according to the results of table 5, the research hypothesis is approved. other notable results are the significance of the coefficients of the company's size variable, the report lag, the auditor's tenure, the auditor's specialty in the industry, and the type of auditor. 11. conclusion the results of the research indicate that there is a direct and significant relationship between the disaggregation quality of financial statements and audit fees. it seems so that more disaggregated financial statements make auditors spend more time investigating and conducting an audit process that affects their demanded fee. items that, if presented in aggregation, may be insignificant from the auditor’s point of view and the users of the financial statements, may attract more attention when presented separately. the results of testing the hypothesis are consistent with the results of beck et al. (2016), which have found a positive and significant relationship between the financial statement disaggregation and audit effort. according to the results of the study, it is suggested that further studies be carried out to investigate the effects of the disaggregated information on user decisions as well as the possibility of using this criterion as an alternative or complementary criterion provided by the stock exchange for disclosure quality. also, determining the optimal level of financial statements’ disaggregation from supervisory and regulating institutions according to financial reporting objectives can be one of the issues to be considered. table 6. results from running the regression model variable coefficient std. error t-statistic prob. c -0.723888 0.633548 -1.142594 0.2542 dq 0.920104 0.348850 2.637536 0.0088 ln_assets 0.455012 0.041272 11.02483 0.0000 leverage -0.057386 0.054334 -1.056173 0.2918 loss -0.060570 0.087918 -0.688934 0.4914 roa -0.002851 0.002532 -1.125655 0.2612 cfo 0.041929 0.207653 0.201918 0.8401 report_lag 0.003130 0.001429 2.190602 0.0293 salegrowth 0.035267 0.067066 0.525859 0.5994 mtb 0.014798 0.012859 1.150812 0.2508 new_financing 0.010459 0.081904 0.127703 0.8985 tenure 0.060493 0.023856 2.535722 0.0117 specialist 0.161704 0.076572 2.111791 0.0356 fiscal_year -0.001484 0.137720 -0.010777 0.9914 cfovol -0.524494 0.454145 -1.154904 0.2491 big2 0.564704 0.128774 4.385216 0.0000 f-statistic 15.44207 adjusted r-squared 0.416093 prob(f-statistic) 0.000000 aydin asheghi oskooee & mohammad marfou & mousa bozorg asl 164 references ahmed, k. and nicholls, d., 1994. the impact of non-financial company characteristics on mandatory disclosure compliance in developing countries: the case of bangladesh. alavi tabari, s.h., rajabi, r. and shahbazi, m. 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(in persian) international journal of commerce and finance, vol. 7, issue 1, 2021, 181-190 181 the impact of positive psychological capital on organizational cynicism zeineb cherni istanbul commerce university, turkey aylin gözen istanbul commerce university received: april 12, 2021 accepted: april 30, 2021 published: may 01, 2021 abstract the concept of positive psychological capital has started to possess an important role in the literature by the beginning of the 1990s, and many researches regarding this field have been conducted heavily throughout the 2000s. positive psychological capital focuses on identifying people's strengths and their results personally and on an organizational level, and how it contributes to achieving the desired organizational success. as individuals and organizations determine success/high performance or revenues as goals to be achieved, a lot of intense effort must be made to prepare a suitable environment in order to overcome challenges and problems. since the 1980s, an approach called "cynicism" developed among an organization’s employees has started to attract attention in the business world. therefore, the concept of positive psychological capital is thought to be the best alternative to reduce the negative outcomes of cynicism in organizat ions in order to have a healthier work environment for better positive outcomes. in this respect, the aim of this article is to understand how positive psychological capital impacts organizational cynicism throughout reviewing the literature since the 2000s. keywords: positive psychological capital, hope, optimism, self-efficacy, resilience, organizational cynicism 1. introduction introduced by the american psychological association under the foresight of martin seligman, the concept of positive psychology focused on people’s positive traits rather than their negative traits. on the organizational level, positive psychology brought together both positive organizational school and positive organizational behavior (luthans et al., 2006). positive organizational scholarship (pos), which was reported by scientists at the university of michigan, emphasized the improving organizational endurance and effectiveness in crisis and conflicting conditions. positive organizational behavior, on the other hand, focused on the positive strengths of employees. it focuses on psychological capacities that affect their performance. psychological capacities such as self-efficacy / trust, hope, optimism and resilience are known as the sub dimensions of positive psychological capital. (luthans and youssef, 2004; luthans et al., 2006; oruç, 2015). positive psychological capital came out from positive psychology and positive organizational behavior approaches. it's defined to be a set of qualities that will positively affect employee’s productivity (shahnawaz, 2015). this type of capital is unique that can be measured and developed and it is also considered to be an effective capital that plays an important role on performance (luthans and jensen, 2002; luthans and yusuf, 2004) it is also known as a key factor for organizations in achieving competitive advantage (luthans and jensen, 2002; luthans and yusuf, 2004) and a key factor for organizations in achieving competitive advantage (hodges ,2010). just like investing in human and social capitals, it is necessary for the benefit of the organizations to invest in psychological capital. in contrast to traditional financial capital and physical assets, managing psychological capital is less costly. since, positive psychological capacities are “states” (rather than fixed traits), always open for developing “(luthans et al., 2004). researches on positive psychological capital proved that this type of capital has many positive impacts on the organization’s outcomes. it generates more creativity, less work absence and cynicism behavior; it also increases the organization’s performance and commitment among the employees which will lead to more positive behaviors. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e zeineb cherni & aylin gözen 182 positive psychological capital also carries the realization and the enhancement of employees' talents and potentials (toor & ofori, 2010; luthans et al., 2010; peterson et al., 2011; çetin, 2011; lewis, 2011; avey et al., 2008; clappsmith et al., 2009) (luthans et al., 2007). 2. positive psychological capital positive psychological capital is “the study and application of positively oriented human resource strengths and psychological capacities that can be measured, developed, and effectively managed for performance improvement in today’s workplace”. (gohel, 2012; luthans et al., 2005) (luthans et al., 2007). in this context, luthans and youssef (2004) stated that positive psychological capital is: i. measurable ii. developed iii. effective on performance iv. original the four dimensions that make up positive psychological capital have been defined to be: self-efficacy, hope, optimism and resilience. these four dimensions are conceptually independent and empirically ones as stated by bryant & cyrengro’s (2004) and luthans et al. (2007). 3. the sub-dimensions of positive psychological capital the sub-dimensions of positive psychological capital are known as “self-efficacy, optimism, hope and resilience” and abbreviated as hero in the literature. researches have shown that individual's high positive psychological capital offers high self-efficacy, sets more optimistic expectations and higher goals for themselves which help them strive and thrive (lyubomirsky et al., 2005). 3.1. hope hope represents the motivational power that helps determining the path to goals, (luthans et al., 2007). hope also represents the belief in determining the purpose and process to overcome obstacles (çetin & basım, 2011). individuals with higher hope usually have higher energy in target persuasion, (snyder et al., 2000). table 1 shows the characteristic traits of hopeful individual as shown in many researches: table 1. characteristic traits of hopeful individuals characteristics previous studies 1. optimistic bressler et al., (2010), erbasi & ozbek (2017), dos santos et al., (2018). 2. high academic performance snyder (2000), snyder et al, (2002), gallagher et al., (2017) ben-naim et al., (2017), marques & lopez (2017), carmona-halty et al., (2018), yotsidi et al., (2018) 3. wellbeing diener (1984), fritze et al., (2008), griggs (2017), vela et al., (2018), martins et al., (2018). 4. resilient brooks (1994), avey et al., (2008), youssef & luthans (2007), kim et al., (2017). 5. independent thinkers luthans et al., (2007), nelissen (2017). 6. agentic (goal direction) thinking snyder et al., (1998), gilman et al., (2006), holder (2007), tuzun et al., (2018). 7. risk takers snyder (2002), mishra et al., (2017). 8. creative problem solving zhoe & george (2003), luthans et al., (2007). 9. high willpower larson & luthans (2006), muwonge et al., (2017). 10. reduced depression snyder et al., (1997), bjornnes et al., (2018). source : luxmi m, ashu v.,2019 the impact of positive psychological capital on organizational cynicism 183 3.2.resilience technically, resilience means elasticity of the capacity of something to gain the previous shape before an extern forced is applied on it. psychologically, an individual's resilience is expressed as the capacity to recover from the setbacks by overcoming difficulties and uncertainties to succeed (gooty et al., 2009; luthans et al., 2006;2007) research has shown various characteristics of individuals that possess high resilience; some of these are listed in table 2: table 2. characteristic traits of resilient individuals characteristics previous studies 1. optimistic/positive attitude klohnen (2009), fredrickson (2004), youssef & luthans (2007), smith et al., (2008), souri &hasanirad (2011), segovia et al., (2012), martinez & ruch (2017), kleiman et al., (2017). 2. emotional intelligence mccrimmon et al., (2017), di fabio & saklfske (2008). 3. embrace failure positively goodman et al., (2017), khan et al., (2017). 4. flexible coutu (2002), desjardine et al., (2017), shoss et al., (2017). 5. survivors (bounce back from setbacks) coutu (2002), tengblad & ouduis., (2018), akhtar (2018), siebert (2009), ogrean (2018). 6. energetic towards life klohnen (1996), gilman et al., (2006), holder (2007), tuzun et al., (2018). 7. curious/ open-to-new experience klohnen (2002), siebert (2006), sonnet (2016), o’herlihy (2016). 8. humorous cohler (1987), billing (2018), akhtar (2018). 9. creative explorers cohler (1987), coutu (2002), rego et al., (2012), wu et al., (2018). 10. innovative fredrickson (2004), peterson et al., (2018), williams & anyanwu (2017), hallak et al., (2018). 11. adaptive to change luthans et al., (2017), siebert (2009), parsons (2010), bimrose & hearne (2012). 12. risk takers hagevik (1998), peterson et al., (2008), siebert (2009). 13. sense of control masten (2001), coutu (2002), akhtar (2018). source : luxmi m, ashu v.,2019 3.3.optimism optimism defined to be a positive perspective to the future and a mindset to perceive positive events under one’s self control (luthans et al., 2007). according to snyder et al. (1991), optimistic individuals always expect the best and have persistency in achieving their goals. according to luthans and youssef (2004), it refers to a positive way to interpret events: in which individuals' attribution to both positive and negative goes to different causes: while the positive ones is referred to internal, invariable and regular causes, the negative events go to external, momentary and conditional causes. people who adapt this approach have high self-esteem and spirit. optimistic individuals characterize positive events as introverted and negative events as extroverted and temporary, especially in relation to situational factors (seligman, 1998), (peterson, 2000). contradictory to hope, optimism has been applied not only to clinical practice but also to organizational settings (martin et al., 2003), (carver & scheier, 2002). studies have shown various traits of individuals with high optimism; some of these are listed in table 3: zeineb cherni & aylin gözen 184 table 3. characteristic traits of optimistic individuals characteristics previous studies 1. positive attitude fry (1995) , avey et al.,(2008) , kim et.,(2017) 2. future oriented peterson,c.(2000) 3. highly motivated wicker et al.,(2004), demetriou and schmitz (2011), durrah et al.,(2017). 4. highly satisfied fry(1995), chang et al.,(1997) , puri and robinson,(2007) ,sahai and singh(2017) 5. creative problem solving lyubomirsky et al., (2005). peterson ct al., (2008), medlin & gr= (2009), kluernpet et al., (2009), michad et al., (2011), sweetman et al.,(201 1), rego et al., (2012). rego et al., (2018). 6. competent wrosch ct al.. (2003). petton et el..(2004). wright (2005). el-anzi (2005), (lutbans et al., (2008), hassan (2010), saleem ct al., (2012), 7. high wellbeing strutton & lumpkin (1992). seligman (1998).chang ct al.. (2000), sahai & singh (2017). 8. self -officious wright (2005), karademas ei al., (2007), saleem ct al. (2012).kim et al.,(2017). 9. resilient stein & book (2003). \vright (2005), thompson & gaudreau (2008), kim et al., (2017), muinus & nekimken (2017). source : luxmi m, ashu v.,2019 3.4.self-efficacy: self-efficacy can be understood as a person's reliance on his/her own skills by being self-motivated, and using its own emotional /psychological resources in order to fulfill a specific task (luthans & youssef, 2004). according to keleş (2011), high self-efficacy level encourages individuals to overcome obstacles by choosing challenging tasks and developing sophisticated ways; they become persistent and determined to success during adversity, (shahnawaz & jafri, 2009). studies have shown various characteristics of individuals with high self-efficacy; some of these are listed in the table4: table4. characteristics traits of self-efficacious individuals characteristics previous studies 1. preservance bandura & locke (2003), markman et al., (2005), sbahnawaz & jafii (2009). laurencelle & scanlan (20 18). 2. self motivated stajkovic & luthans(1998). barbaranelli et al., (20 18). 3. goal oriented sbahnawaz & jafii (2009).vieira et al..(2018). 4. self confidence lim & loo (2003).bandura & locke (2003).oooty et al..(2009).feltz & oncu (20 14).halper et al.. (2017). laurencelle & the impact of positive psychological capital on organizational cynicism 185 scanlan (20 1s). 5. high performance stajkovic & luthans (1998). bandma (2000). bauei·et al.. (2007).judge et al.. (2007).stajkovic et al.. (2018). 6. high commitment harris & cameron (2005).lin et al.. (201s). 7. creative tierney & frumer (2002). stru'key et al.. (2017). hallak et al.. (2018). 8. innovative bandura (1986). orth & vobner (2017). klaeijsen et al.. (2017). source : luxmi m, ashu v.,2019 according to luthans and youssef (2004), each one of these four dimensions of positive psychological capital meets the rule of positive organizational behavior as they are all positive, unique, quantifiable, open for development and related to performance. culbertson et al. (2010) has stated that the variance between each dimension consists of the high-level factor, positive psychological capital. individuals with high positive psychological capital exhibit the following characteristics (avey et al., 2008; luthans et al., 2007): a) they are able to create new paths (hope) to achieve their dreams b) they have high self-confidence (self-efficacy) necessary to achieve desired goals. c) they have positive perspectives for the future (optimism). d) they tend to overcome setbacks (resilience) in difficult times. in everyday terms, there is a fine line of difference between the 4 structures of hero. yet, in both of the psychological capital (snyder & lopez, 2002) and positive organizational behavior literature (luthans & youssef, 2007), authors made a clear differentiation between hope, efficiency, resilience and optimism. also, they experimentally analyzed and proved the specificity of each one of the capacities mentioned (bryant and cvengros, 2004; luthans, 2007; youssef & luthans, 2007), (snyder & lopez, 2002), (luthans & youssef, 2007), (bryant & cvengros, 2004), (luthans, 2007), (youssef & luthans, 2007). 4. organizational cynicism dean et al. (1998) has pointed out different types of cynicism such as “social cynicism, employee cynicism, civil servant cynicism, work cynicism, and organizational cynicism.” generally, cynicism is a self-manner that expresses negative impressions about human behavior (abraham, 2000). cynicism may rise from employment experiences (andersson, 1996), (bruch & vogel, 2006). individuals who show cynic behavior exhibit negative emotions such as hatred, anger, hopelessness and disappointment towards the staff and the organization (lewis 1985), (andersson, 1996), (reicher et al., 1997), (özler et al., 2010 ;2011) dean et al. (1998) classified cynicism behavior as follows: i. overt cynicism: it involves the expression of negative emotions using direct comments or statements that question the integrity of the organization. ii. covert cynicism: it involves the expression of negative emotions using sarcastic and non-verbal behavior. individuals suffering from cynicism have a hostile attitude and express a feel of disappointment towards their organization as they perceive their organization lacking authenticity, morality and justice (andersson &bateman, 1997), (brockway et al., 2002), (johnson & o'leary-kelly, 2003). (kutanis, 2009), (nair & kamalanabhan, 2010). such employees resist the development and the change in their organizations and thus damage their status (abraham, 2000), (arabacı, 2010). organizational cynicism is a reaction gained by experiences rather than a personality-based tendency (wanous et al., 2000). in 1998, dean et al., stated that organizational cynicism has three dimensions as follows: zeineb cherni & aylin gözen 186 4.1.cognitive dimension this dimension indicates to employee's position in which he/she disbelieves the honesty of the organization and how it lacks justice, authenticity and sincerity in its practices (urbany, 2005). therefore, it risen the employee’s feeling of being deceived, (dean et al., 1998). 4.2.emotional dimension the sensitive or emotional dimension indicates employee's arduous responses towards the organization. pessimist employees may possess feelings such as disrespectfulness and outrage against their organization; or they may feel displeasure, enmity, or even shame (dean et al., 1998), or suffering from other sensitive reactions like “anxiety, shame, anger or disappointment “(o’leary, 2002) or irritation/negativity (brandes, 1999) or lack of respect, anger, lack of concern and dishonor (abraham,2000); whenever their organization is mentioned. 4.3.behavioral dimension the third dimension points out the negative attitudes and utterances carried on by pessimist employees towards their organization through criticizing or even disgracing it. this dimension shows the level of ferocity in the criticizing behavior of these employees and how they express clearly that their organization lacks honesty and truthfulness (dean et al., 1998), (turner & valentine, 2001). as a result, criticizing employees find themselves excluded from their organization at this stage (o’brien et al., 2004). 5. literature review of the studies regarding positive psychological capital and organizational cynicism cynicism; is addressed to be a position characterized by despair, annoyance and disappointment and associated with humiliation, disgust and insecurity. therefore, when employees’ level of hope is high, optimistic, with high levels of psychological resilience and self-efficacy, they tend to tolerate more easily, and show less cynical behaviors. (çalışkan, 2014). in the studies analyzing the relationship between the positive psychological capital and organizational cynicism both in the national and international literature, conclusions have been reached to support the negative relationship between those two concepts. (çalıskan, 2014; karacaoğlu and ince, 2013; avey et al., 2010; avey et al, 2009; avey et al., 2013). avey, wernsing, and luthans (2008) investigated whether high psychological capital levels of employees result in positive outcomes through various attitudes and organizational behaviors. 132 employees from different sectors have participated in this study. participant ages varied between 18-65 and the average age was 30.4. as a result of the study, it has been found that positive emotions play a mediating role between psychological capital and organizational participation. however, a significant negative relationship has been found between positive emotions, psychological capital and cynicism. in a study by avey, luthans and youssef (2010) namely “the additive value of positive psychological capital in predicting work attitudes and behaviors”, on an employee sample (n = 336) from a wide cross-section of organizations, psychological capital and organizational cynicism’s negative relationship has once again been demonstrated. karacaoğlu and ince (2013) carried out a study that investigates the effects of positive organizational behavior on organizational cynicism in the organizations of manufacturing industry of kayseri. research findings revealed that there is a negative relationship between organizational cynicism and positive organizational behavior. when these findings are evaluated in connection with the sub-dimensions of positive organizational behavior (self-efficacy, hope, resilience, and optimism), it can be seen that there is a negative relationship between positive psychological capital and organizational cynicism. additionally, positive organizational behavior has been observed to have a negative impact on organizational cynicism. similarly, the sub-dimensions of positive organizational behavior; self-efficacy and optimism has been found to possess a negative impact on organizational cynicism. in 2014, çalıskan conducted a research about positive organizational behavior variables and their effects on devotion, exhaustion and cynicism and organizational justice. the study aimed to reveal the effects of the positive organizational behavior variables; hope, emphasizing the importance of optimism, resilience and self-efficacy for businesses and employee behavior. research was conducted in göztepe hospital, which has the largest patient the impact of positive psychological capital on organizational cynicism 187 capacity in the anatolian side. hospital’s employees were selected as a sample study. in the framework of the research model, two negative employee behaviors were associated with organizational behavior variables ("cynicism" and "exhaustion") and opposite to that, “commitment”, were chosen as dependent variables. it is revealed that positive organizational behavior variables have a negative but very low explanatory effect on cynicism. all positive organizational behavior variables inserted into the regression equation; to find out that only “optimism “variable affects cynicism negatively. according to research results, positive organizational behavior variables possess a positive effect on commitment, whereas on burnout and cynicism they have a negative one. (çalışkan, 2014). 6. conclusion psychological capital is drawn from positive organizational behavior (pob) and has undergone much research in the field of positive psychology (mohanty & kolhe, 2016). it is “an individual’s positive psychological state of development characterized by hope, efficacy, resilience, and optimism “(luthans & youssef-morgan, 2017; nwanzu & babalola, 2019). reviewing the literature helped in understanding that this trend can improve the performance of the organizations by positively/ negatively affecting the desired outcomes (e.g., performance, commitment, organizational cynicism, burnout etc...). however, advanced reviews showed that the four psychological resources of psychological capital together may not necessarily relate the same way with an employee’s cynicism behavior. each of the four positive psychological resources is conceptually distinct and may not measure work outcomes the same in desired positive outcomes. indeed, further research is required as many studies didn’t show the same result of this negatively oriented relationship between psychological capital and organizational cynicism. a deep study on each of the psychological capital components’ impact on organizational cynicism is recommended. moreover, future studies on the predictive relationship between psychological capital and organizational cynicism may provide a clear understanding about if, and to what extent this relationship is valid. hence, researchers should consider also conducting more studies in varied organizational and cultural settings. references abraham, r. 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(2000). cynicism about organizational change: measurement, antecedents, and correlates. group and organization management, 3(1), 32-43. international journal of commerce and finance, vol. 7, issue 1, 2021, 191-201 191 the effect of customer relationship marketing in customer retention and customer acquisition mehmet sağlam istanbul commerce university, turkey soukaina el montaser istanbul commerce university, turkey received: april 05, 2021 accepted: april 26, 2021 published: may 01, 2021 abstract without a good marketing team and strategy, any company is bound to fail. to remain competitive and profitable in the market, companies should attract and maintain successful customers. for client relationship marketing, this is definitely finished. marketing for partnerships is a business philosophy, a strategic orientation that focuses on maintaining and developing existing customers instead of gaining new customers. the goal of this research is to examine the role of marketing customer relationships in customer acquisition and retention of customers. the research is based on a survey. for this research, the study sample was taken by cosmetics customers. data studies have been performed using frequencies, means and standard deviations. furthermore, bivariate correlations and multiple regressions are used with inferential statistics. the findings of this study show that consumer marketing relationships are significant and strongly associated with the acquisition and retention of customers. furthermore, the study shows that trust, commitment, communication and conflict handling have an important effect on the customer’s retention and customer’s acquisition. the practical implications of this study are that organizations should build a better customer retention marketing plan. keywords: customer relationship marketing, crm, customer retention, customer acquisition 1. introduction in modern marketing, customers are important and the aim of every organization is to acquire, retain and expand customers. also "the aim of every organization is simply to acquire, retain and expand customers until it has removed all activities that keep everyone occupied every day". the company will not be living if it does not has customers (peppers and roggers, 2004). relationship marketing is a plan in order to increase or grow a certain business without gaining new customers. this modern marketing philosophy was first seen in marketing literature published in 1983 (mudie et al, 2006). as a result of intensified rivalry, companies used relationship marketing as a strategy that attracts, retains and enhances customer relationships and develops loyalty and retention (lodge and wood, 2008). xu and walton (2005) argue that marketing companies are in a position to retain current clients, boost consumer loyalty, save money and enhance customer life. there are varied and diverse research studies which have brought to light a sense of trust, cooperation, conflict management and various studies that have raised the appreciation as the building stones of relationship marketing. juanamasta et al describes marketing as a method of marketing which is used to establish and maintain enduring ties with consumers, suppliers and all those working in the market. this is a marketing form that is focused on consumers rather than individual customers in terms of customer retention and satisfaction (juanamasta et al, 2019). a company should focus on their customers to retain its customer base. therefore, this research demonstrates that firms have overlooked a clear connection between crm dimensions and customer retention and customer acquisition. this study provides research for other studies regarding marketing of other cosmetics in turkey. the study examined cosmetic crm practices and its impact on customer retention and customer acquisition in retail clients. this study offers invaluable information about establishment of effective crm strategy. the research offers in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e mehmet sağlam & soukaina el montaser 192 the turkish cosmetic industry another chance to re-examine and improve their targeting and advertising techniques. it enables consumers a chance to look at themselves as an equal partner. 2. conceptual framework 2.1. customer relationship management (crm) to understand the importance of customer relationship management requires a firm grasp of the core of the matter. relationship marketing (rm) has become part of marketing lexicon. (mulindwa 2005). many different authors have defined customer relationship in different ways. on the text, key words used throughout include maintain, develop, enhance, build and manage. kotler describes relationship marketing as the process of building relationship and value with customers and other stakeholders in an organisation (gui, zhang and feng, 2009). the focus is to develop the whole customer life-cycle to expand the customers beyond its life-time (woodward, and anderson, 2009, 2-10). it is said that increasing customer retention rates have a positive effect on customer churn rates. this in turn has increased profits within your organization (mulindwa 2005). some studies have concluded that by increasing customer retention rate by 5 percent, a business has a potential to increase its profits by 25 percent-95 percent (payne, 2012). these companies are acting in the best interests of the consumers when they use direct marketing as a strategy in order to get repeat customers that will be profitable for the company. in order to have profitable relationship with customers, the company should advocate the brand to others as well. 2.2.the concept of customer retention customer retention has usually been defined in the ginn et al. definition of "the continuation of an affiliation between the customer and the company" as an opportunity of a company to receive a repurchase of the current clients (ginn et al. 2010: 115). the bucket hypothesis can be taken that the missing customers are the result of issues in the management of customer relations that directly influence retention. jobber and fahy (2004) reported that marketing for acquisitions was six times more expensive than marketing for retention. hwang et al. (2004) indicates that retention is a successful technique because of the understanding of its clients by the company and the ability to customize market targeting. 2.3.the concept of customer acquisition “acquiring correct customers is a first step in customer relationship management. it can be used to identify potential profitable, loyal new customers." (sharp 2003). depending on a particular circumstance of an organization the position and relative value of the client acquisition varies considerably. for example, a new market entrant will concentrate more on attracting customers and an existing business will focus more on maintaining its customers. in new product releases and with new company startups, customer acquisition is often the most important target. customer acquisition is also as important as customer retention for small businesses with aspirations to expand. by acquiring another customer, one customer will double the customer base. in comparison, the loss may be a bankruptcy of the single client. customer buyback is also often important in order to compensate for natural attrition (ang, and buttle, 2006). it remains that it is much more costly to replace a lost customer than to retain the old customers. 3. hypothesis development in this study, trust, commitment, communication and conflict management have been taken as crm subdimensions. on crm processes, all parties are properly focused on developing and rewarding the relationship and thus begin to commit themselves to making it succeed (al-abdi and kang 2010). clients are more likely to buy back from a brand that they deem to be trustworthy, and that loyalty is a core component of long-term partnerships (schoenbachler, and gordon, 2002). in the marketing of transactions, sales and communication are critical elements. good communication has a significant effect on client retention, engagement and confidence. (ryals and knox, 2001). conflict management reflects the desire of the provider to stay away from future disputes, solve apparent issues until they cause problems, and the capacity to talk openly, clarify problems (silverthorne, 2005). the effect of customer relationship marketing in customer retention and customer acquisition 193 3.1.trust and customer retention and acquisition literature represents trust as a result of consumer experiences with a specific brand and their interpretation of these interactions. trust is important that consumers are motivated to repeat their business to build their trust and help create loyalty progressively over time (paliwoda, et al., 2009). as one of the most significant activities impacting consumer loyalty, trust has been highly stressed. research in the banking sector in ghana has shown that the confidence relationship in customer loyalty is negative and insignificant because it has a sound regulatory structure in ghana (mhidze, and njuguna, 2018). thus, we hypothesize the following: h1: trust has an effect on customer retention h2: trust has an effect on customer acquisition 3.2.commitment and customer retention and acquisition consumer commitment has a number of components in dynamic relationships. hsu, liu and lee (2010) suggest, for example, that consumers' satisfaction directly affects the formation of loyalty through 17 responses, confidence, group identification and buying behavior (hsu, liu, and lee, 2010). interestingly, palmatier, jarvis, bechkoff and kardes (2009) find that recognition is important as a factor in building relationships in their work on factors that promote confidence and commitment. (palmatier et al., 2009). thus, we hypothesize the following: h3: commitment has an effect on customer retention h4: commitment has an effect on customer acquisition 3.3.communication and customer retention and acquisition so, king, sparks, and wang (2016) stress the importance of consumer participation in their discussion of customer communication by finding that it accentuates customer understanding of the brand, confidence and loyalty. communication is seen as one of the most critical aspects of the growth of ties through relationship marketing, which has a tremendous effect on customer success and loyalty (schivinski and dabrowski 2016). thus, we hypothesize the following: h5: communication has an effect on customer retention h6: communication has an effect on customer acquisition 3.4.conflict handling and customer retention and acquisition prasad and aryasri (2008) note that successful conflict management is an essential factor in building customer loyalty. conflict in customer relations is viewed as unavoidable (prasad and aryasri, 2008). in addition, some studies stress that conflict management is, as in most studies, the first major contributor to consumer loyalty, rather than trust (mugito, 2016). conflict management directly influences whether a customer maintains a relationship with the company (malhotra, agarwal and ndubisi, 2010). thus, we hypothesize the following: h7: conflict handling has an effect on customer retention h8: conflict handling has an effect on customer acquisition 4. research methodology the purpose of this research is to define the effect on the retention and purchase of customers in the cosmetics industry of customer relationship marketing. the research question is how customer relationship marketing dimensions does affects customer retention and acquisition? the research model connecting all the hypotheses is displayed in fig. 1. mehmet sağlam & soukaina el montaser 194 fig. 1. research model 4.1.procedure and sampling in the cosmetics industry of turkey, this analysis was carried out. this was mainly because, compared to other industry in other parts of the world, information needed for the study was very open to the cosmetics industry in turkey. the collection of respondents from the employees of the firm, who work in the customer service department, the industry manager and the company customers were performed with the purposeful sampling technique. a purposeful sampling technique also known as a judgment sample is an unlikely sample which allows the researcher, on the basis of his/her characteristics and goal, to select a sample from the population. a 199-person sample size was intentionally chosen. the reason for choosing the approach is primarily because of the researcher's interest and time-limit, because this analysis is time-limited. the research considered the proportion of all cosmetic industry customers and workers working in the case study for the determination of the sampling system. 4.2.measurement of constructs for measurement of customer relationship marketing we used four dimension (communication, commitment, trust and conflict handling) and we used for trust (churchill and surprenant, 1982), for the communication, conflict handling and as source of measurement (morgan and hunt, 1994) this measurement scale consist on 10 items. for measurement of customer retention gyasi, (2012) as source of measurement. this measurement scale consist on 9 items. for measurement of customer acquisition we used alhawari, (2012) as source of measurement. this measurement scale consist on 8 items. a five point likert scale is used (1=strongly disagree to 5= strongly agree). 4.3.tools for data collection the questionnaires were automatically sent by the researcher to the respondents. data were mainly collected by the use of the questionnaire to collect data in the cosmetic industry to determine customer relations and customer retention. closed ended questions were presented. in order to ensure the clarity and accuracy of the questionnaire, a pilot study with four experts has been performed, two managers and two consumers in the cosmetic industry. the pre-test indicated that the interviewees did not understand any of the questions correctly. some questions were too long and tumultuous, the respondents also revealed. this resulted in the rewording of some of the questions to be correct and evident. 4.4.data analysis and results for the analysis of this study, we used spss 23 and amos 21 version. in statistics, descriptive, correlation statistics, confirmatory factor analysis and regression analysis for model 1 and model 2. participants the effect of customer relationship marketing in customer retention and customer acquisition 195 of the 199 participants, 61.8% (n=123) are female and 38.2% (n=76) are male. it is found at participants that 27.1% (n=54) of the respondents were from 18-25; 42.7% (n=85) were from 26-35; 19% (n=38) were from 36-45 years; and 11% (n=22) were from 46-55 years. the participant statistics illustrate that there were 7.5% (n=15) graduates, 41.7% (n=83) masters, 42.2% (n=84) m.phil. participants and 8.5% (n=17) phd trained participants. the participant statistics illustrate that there were 24% (n=48) marketing analyst, 38% (n=76) marketing managers, 20% (n=40) marketing consultants, 7.5% (n=15) marketing managers, 4.5% (n=9) public officer, 5.5% (n=11) finance managers. 4.5.cfa, validity and reliability analysis validity and reliability analysis related with the measurement model are demonstrated in table 1. to calculate the convergent validity of the items of the variables, factor loading, average variance extract, and finally the composite reliability (cr) were assessed. factor loading was calculated to find out the confirmatory factor analysis (cfa) to estimate the measurement model of the study. cfa technique was used to refine the variables’ items that were used in the questionnaire to access the validity of the constructs. according to (hair, ringle, and sarstedt, 2011), the validity of the items is convergent when the factor loadings of the items are at least 0.50. a confirmatory factor measurement indices is conducted to assess the validity of the scale. the findings for customer relationship marketing (x2= 231 d.f. = 186, x2/d.f. = 1.241, gfi= 0.89, cfi= 0.78, rmsea= 0.04, rmr = 0.0.2) as found in the study of (reimann, schilke, & thomas, 2010). for customer retention (x2= 279.23 d.f. = 176, x2/d.f. = 1.558, gfi= 0.76, cfi= 0.88, rmsea= 0.03, rmr = 0.04) (fečiková, 2004). while for the customer acquisition (x2= 261.23 d.f. = 168, x2/d.f. = 1.553, gfi= 0.89, cfi= 0.79, rmsea= 0.06, rmr = 0.03) suggested that the validity level of the scale is appropriate (arnold, fang, & palmatier, 2011). in the current research, communication factor’s loading was within the range of 0.649 to 0.654 moreover, the commitment factor’s loading was within the range of 0.826 to 0.705. meanwhile, the range of the factor loading for the conflict handling was 0.768 to 0. 876. trust factor’s loading was within the range of 0.835 to 0.903. moreover, the customer retention factor’s loading was within the range of 0.678 to 0.786. meanwhile, the range of the factor loading for the customer acquisition was 0.913 to 0.675. hence, the requirement of the factor loading met the variables’ items. ave values of the communication, commitment, conflict handling, trust, consumer retention and customer acquisition were 0.563, 0.765, 0.678, 0.976, 0.855 and 0.986; respectively. hence, all the values of ave of the variables met the criteria, since the values were greater than 0.50. the composite reliability of the communication, commitment, conflict handling, trust, consumer retention and customer acquisition were 0.928, 0.924, 0.863, 0.765, 0.786 and 0.876; respectively. hence, all the values of cr met the requirement, and all the values were greater than 0.80 (bacon, sauer, & young, 1995). table 1. cfa, validity and reliability analysis results variable name items (cr) loadings (ave) cronbach alpha communication com1 0.928 0.649 0.563 0.89 com2 0.654 commitment comm1 0.924 0.826 0.765 0.088 comm2 0.705 conflict handling ch1 0.863 0.768 0.678 0.87 ch2 0.755 ch3 0.876 trust t1 0.765 0.835 0.976 0.876 t2 0.856 t3 0.903 mehmet sağlam & soukaina el montaser 196 customer retention cr-1 0.786 0.678 0.855 0.897 cr-2 0.785 cr-3 0.876 cr-4 0.867 cr-5 0.785 cr-6 0.976 cr-7 0.878 cr-8 0.768 cr-9 0.786 customer acquisition ca-1 0.876 0.913 0.986 0.789 ca-2 0.786 ca-3 0.834 ca-4 0.765 ca-5 0.987 ca-6 0.876 ca-7 0.675 ca-8 0.675 4.6.correlation analysis the correlation coefficients between variables are shown in table 2. the relationship between two and more variables is technically a measure of the relationship. correlations can range from -1.00 to +1.00. the value of –1.00 is totally negative, and the value of +1.00 is totally positive (altmann, cristadoro, & degli esposti, 2012). as shown that the highest relationship was between customer retention and trust dimension (r=0.822**). on the other hand the highest relationship was between customer acquisition and communication (r=0.675**). table 2. pearson correlation and decision results relationship pearson correlation decision 1 customer acquisition* customer retention .787** strong 2 communication*customer retention .524** week 3 commitment* customer retention .821** strong 4 conflict handling* customer retention .670** medium 5 trust* customer retention .822** strong 6 communication* customer acquisition .675** medium 7 commitment* customer acquisition .631** medium 8 conflict handling* customer acquisition .583** week the effect of customer relationship marketing in customer retention and customer acquisition 197 9 trust* customer acquisition .657** medium 4.7.regression analysis in order to ensure that the data can be analyzed by multiple regressions, part of the process must first be used before multiple regressions. we used multiple regressions with below four assumptions. the best fit line revealed a parametric assumption where variances remained the same to those on the best fit line. multicollinearity is not allowed where items are separated. this problem arises because it's difficult to interpret the independent variable and a regression model is not easy to estimate. the coefficient of variation for the dependent variable. therefore, the data did not show multi-collinearity via a correlation coefficient inspection and vif/tolerance values. there are no major outlier, high leverage or influential point. nevertheless, this describes an odd trend in the data set. in this case, a regression analysis is done. finally, the remaining errors are verified. this improved model corresponded to normality. for the verification of the declaration, histogram and standard p-p plot are used (poole, & o'farrell, 1971; osborne, & waters, 2002; williams, grajales, & kurkiewicz, 2013). in a separate phased study of customer retention (y) the marketing variables for customer relations were performed (x). 0.10 was used to measure the strength of the association between independent and dependent variables. to test the hypotheses, the relationship between consumer retention and customer relationship marketing variables has been tested by a multiple regression analysis. the results in the regression analysis below the table decide how the regression model is advantageous and suited. table 3 show the final finding of this study: 4.7.1.regression analysis for model 1 table 3. model 1 summary model r r square adjusted r square std. error of the estimate durbinwatson 1 .949a .901 .899 .25521 1.627 model sum of squares df mean square f sig. 1 regression 115.106 4 28.777 441.821 .000b residual 12.636 194 .065 total 127.742 198 a. dependent variable: customer retention b. predictors: (constant), trust, conflict handling, communication, commitment table 3 displays the model description explaining the marketing considerations for customer relations in conjunction with customer retention. a multiple correlation coefficient can be used as the customer retention prediction norm (r). in the study sample the value indicates a high degree of prediction (r=0.949). the resolution coefficient (r2) (dv) also displays the variance ratio (iv). according to anova's (f) table, the value of (r2 = 0.901) indicates that the marketing factors of customer relations (communication, engagement, conflict management and trust) reflect the percentage of variance in customer retention. the model for many regressions is considered satisfactory. the following table shows durbin watson's statistical data (dw). this is an autocorrelation test in the residues per linear regression analysis. durbin-figures watson's usually differ between 0 and 4 (hill, & flack, 1987). a 2.0 value does not imply autocorrelation in your study. a positive autocorrelation is seen between values between 0 and less than 2 and a negative autocorrelation between values between 2 and 4. the table reveals a positive autonomy of 1.627. the anova model test says about the overall health of the model. mehmet sağlam & soukaina el montaser 198 table 4. model 1 regression coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) .486 .063 7.669 .000 communication -.015 .026 -.017 -.578 .054 commitment .327 .024 .450 13.77 .000 conflicthandling .470 .017 .689 27.84 .000 trust .061 .031 .070 1.967 .051 p=0,10 the findings of the crm model discussed by the customer retention are illustrated in table 4. all variables have a positive and substantive relationship in this regard. it confirmed that the impact of consumer trust, conflict handling, communication, commitment on customer retention. all hypothesis were accepted. in order to evaluate the hypotheses, the consumer acquisition relationship with the customer relationship marketing variables was analyzed using several reversal analysis. the results in the regression analysis below the table 5 decide how the regression model is advantageous and suited. 4.7.2.regression analysis for model 2 table 5. model 2 summary mode l r r square adjusted r square std. error of the estimate durbinwatson 1 .827a .683 .677 .40407 1.936 model sum of squares df mean square f sig. 1 regression 68.306 4 17.077 104.592 .000b residual 31.674 194 .163 total 99.981 198 a. dependent variable: customer acquisition b. predictors: (constant), trust, conflict handling, communication, commitment the model description explaining the marketing variables of customer relation according to customer acquisition is shown in table 5. by multiple correlation coefficients, the customer acquisition norm can be determined (r). the research sample indicates a high degree of prediction (r=0.827). the resolution coefficient (r2) (dv) also displays the variance ratio (iv). the value of (r1= 0.683) indicates, as per the anova (f) table, that the percentage of consumer acquisition variance is accounted for through the marketing relationship factors (communication, engagement, conflict management and confidence. the model for many regressions is considered satisfactory. the anova test says about the overall health of the model. the effect of customer relationship marketing in customer retention and customer acquisition 199 table 6. model 2 regression coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) .624 .100 6.220 .000 communication .236 .041 .302 5.718 .000 commitment .170 .038 .264 4.513 .000 conflicthandling .204 .027 .338 7.641 .000 trust .137 .049 .176 2.772 .006 p=0,10 the results of the model in which the consumer acquisition is tackled are illustrated in table 6. all variables have a positive and substantive relationship in this regard. it confirmed that the impact of consumer trust, conflict handling, communication, commitment on customer acquisition. all hypothesis were accepted. 5. discussion and conclusion in order to determine which marketing strategies have contributed to the cosmetic industry's continued growth and retention of its consumers, past and present, even in times of difficult business, this article analyzed how different marketing strategies used by the industry have impacted consumers' perceptions of viability in it. to this end, this study has analyzed consumer relationships which have affected the acquisition and retention of customers in the use and purchase of cosmetic products, as well as marketing practices that have facilitated the contact between cosmetic brand and its customers. the findings show that businesses are greatly affected by their customers and build a more efficient business by working with their customers on specific products and services. companies should establish the advantages over other companies that will protect the interests of customers. healthy customer communication makes sure customers engage in a conversation about their problems right away. companies should assist in the creation of goods and services that meet customers' needs, allowing the customers to provide input on the selection of those products and services. companies must have a service turn-around program that aligns to the customer collective; in order for the company to do so, it must develop a turn-around program that mirrors the corporate marketing strategies and business areas. the increase in satisfaction would encourage the customer to come back to buy more products from the business, raising its profits and encouraging the organization to keep working on new products. this adds another loyal customer for the corporation. in order to ensure its competitiveness in the turkish cosmetics market, the management of any cosmetics manufacturing plant is required, not only to take the findings of this study into consideration, but also to act within the set scope of the study and identify its customers' needs in delivery of quality services by gaining an understanding of this consumer loyalty. this study reported that calculating the "underpinnings" of rm is capable at least in the turkish cosmetic sector of predicting customer trust. academics and professionals who pursue customer service should also concentrate on trust, commitment, communication and conflict handling issues. conclusions suggest that different actions involve different commitments. this proposes tailor-made marketing campaigns. our findings show that, in order to maximise customer engagement, cosmetic marketers must ensure that consumers are safe and secure, have minimal risk and are pleased with relationships. the social characteristics of corporate relations not only strengthen relationships, but also increase company engagement (goodwin & gremler, 1996). mehmet sağlam & soukaina el montaser 200 references al-abdi, y., and kang, y. 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(2009). does beta react to market conditions? estimates of ‘bull’and ‘bear’betas using a nonlinear market model with an endogenous threshold parameter. quantitative finance, 9(8),913924. international journal of commerce and finance, vol. 7, issue 1, 2021, 51-61 51 the relationship between authentic leadership and entrepreneurship orientation perceptions in exporting companies with different export performances ali emre i̇şlek istanbul commerce university, turkey necla öykü i̇yi̇gün istanbul commerce university, turkey received: dec 02, 2020 accepted: april 30, 2021 published: may 01, 2021 abstract this study aims to examine the relationship between authentic leadership and entrepreneurship orientation perceptions in exporting companies with increasing and decreasing export performances. objective data was compiled from turkish exporters assembly (tim) publications between the years 2013 and 2018 to separate the exporters in the research universe into two separate export performances and the subjective data were collected by using the survey method. the sample comprises 438 mid-to-high-level white-collar employees from 21 companies operating in exporting goods. confirmatory factor analysis (cfa) was used for validity as the theoretical structures of the scales were revealed by the researchers who developed the scales. then reliability analysis performed and finally the relationship between authentic leadership and entrepreneurship orientation perceptions in exporting companies with different export performances was examined by linear regression analysis. the research findings indicated that there were significant relationships between authentic leadership and the entrepreneurship orientation for the companies with both increasing and decreasing export performances. considering authentic leadership and entrepreneurship orientation scale averages together, higher averages were observed in the group whose export performance increased. the research findings also show that, when the authentic leadership scale increased, then it causes an increase in entrepreneurship orientation scores for both groups. keywords: authentic leadership, entrepreneurship, export, exporting companies, export performance 1. introduction authentic leadership emerges as a concept that emerged in the fields of sociology and education in the 1990s and has recently begun to be discussed in leadership literature (chan et al., 2005). authentic leaders know who they are and what they believe. they show transparency and consistency between value judgments, ethical reasoning and attitudes. they focus on developing a positive mood within themselves and among themselves and with colleagues, such as trust, optimism and flexibility. they are also well-known and therefore respected for their honesty (avolio & gardner, 2005). the entrepreneurial orientation of a company has the function of being a driving force in the growth and performance of that company. kuratko, et al. (2001) revealed that the entrepreneurial behavior of companies provides a competitive advantage and improves the performance of the company. kaya (2006) defined corporate entrepreneurship as the sum of a company's innovation, enterprise and renewal efforts and stated that corporate entrepreneurship affects also company performance. dess, et al. (1997) specified that an entrepreneurial approach to strategy building was vital to organizational success and there was a positive relationship between expectations such as sales, profitability and company performance. in this context, a business with entrepreneurial orientation is a business that is trying to be proactive in order to stay one step ahead of its competitors in the market, making highly risky investments, continuously improving, competitive advantage by making products, processes and market innovations (yılmaz et al, 2019, p.2). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e ali emre i̇şlek & necla öykü i̇yi̇gün 52 the redrawing of world political borders, the establishment of trade blocks, bilateral and regional trade agreements, the establishment of the world trade organization, the establishment of inter-country trade rules and the opening of new consumption markets have created new opportunities for exporting businesses. then; an export-based economic model was implemented in turkey that would allow foreign currency entry in place of "imported substitute" policies. as a result of all these efforts, turkey has reached approximately 172 billion dollars export figure as of the end of 2019 from approximately 3 billion dollars in 1980. however, in the same period, our foreign trade deficit also increased and followed a fluctuating process from about 5 billion dollars in 1980 to approximately 31 billion dollars in 2019. this problem has been an issue that turkey's governments are trying to fix it at all times, but unfortunately, the foreign trade balance has not been in favor of exports at any time (tui̇k, 2020). while the research topic was chosen, in addition to foreign trade deficit figures, authentic leadership and entrepreneurship orientation literature analyzed beside the studies in the literature that have established a relationship with these two variables. and then it was evaluated that authentic leadership elements would positively contribute to the entrepreneurial orientation of exporting companies on the basis of export performances although mentioned relation has not been studied in the literature before on the basis of export performance of exporting companies. the entrepreneurship orientation is expressed as "the processes of entrepreneurial strategy formation that senior managers use to achieve organizational goals, maintain the vision of the enterprise in a healthy way and at the same time create a continuous competitive advantage to the business" (rauch et al., 2009, p. 763). on the other hand, authentic leadership encompasses a highly developed moral standard as well as distinguished managerial skills. finally, as it can be understood from the findings of the study, the relationship between authentic leadership and entrepreneurship orientation was revealed in the limitation of this study and the results were evaluated. it is also observed that, as more space opens up for authentic leadership in businesses, the entrepreneurial orientation will develop. this development might provide better exporting performance for the companies which might also affect turkey’s foreign trade balance positively. so, for these reasons, the relation between authentic leadership and entrepreneurship orientation was investigated, evaluated and the results were revealed. to summarize briefly, firstly the theoretical framework of export performance, authentic leadership and entrepreneurship orientation were explained and subsequently research hypotheses took their place. later, participants, data collection and instruments were explained, validity and reliability analyze were made, then the relationship between two variables was examined by linear regression analysis and finally the article was concluded with findings, discussion and conclusion. 2. theoretical framework 2.1. export performance despite a great deal of scientific work being done to define export performance, there is still no consensus on a single agreed definition or measurement. however, when we consider various definitions made in the literature, we believe that the best definition of export performance can be summarized as "the degree to which the companies exporting goods or services reach their strategic and economic targets as a result of their activities" (anıl, 2009, p.1). then literature on the measurement of export performance was further examined, it was seen that katsikeas (katsikeas et al., 2000, pp. 493-511) and sousa (sousa, 2004, pp. 1-22) who had done the most comprehensive studies in the literature. and then the need to measure export performance has emerged in order to learn how the export performance of the enterprise is and then to make strategic decisions for the enterprise in the light of these data (menon & varadarajan, 1992, p.63; chakravarthy, 1986, p.437). the reason for including the export performance variable in the research is primarily to reveal the effects of authentic leadership on entrepreneurship orientation in exporting companies under the category of increasing and decreasing export performance. 2.2. authentic leadership the concept of authentic leadership is new in the field of management, but it is not a new concept in the literature of philosophy and psychology (müceldili et al., 2013, p. 674). authentic leadership is a form of leadership that is based on knowledge, draws strength from value judgments and is practiced with the skill. many of the definitions attributed to authentic leadership begin with the underlying structure of authenticity. the authenticity structure implies knowing oneself, accepting oneself, being oneself and being honest the relationship between authentic leadership and entrepreneurship orientation perceptions in exporting companies with different export performances 53 with oneself. kernis (2003) defined authentic behavior as acting in accordance with one's value judgments, preferences and needs (klenke, 2007). luthans and avolio (2003) defined authentic leadership as a process that combines positive leadership capacity and a highly developed institutional context. authentic leadership emerges as an approach included in modern leadership approaches. considering the corporate moral bankruptcies that occurred in the last quarter of the 20th century, it is seen that these are the scandals due to lack of leadership. as a result of the studies conducted on these scandals, it was seen that there was evidence of the existence of knowledge that could prevent the dimensions of the disaster in the system, but it was seen that the problems caused by the losses due to the lack of authentic leadership elements caused great damage to the businesses and the system they were affiliated with (tabak et al., 2012). authentic leaders are motivated not by any standard or by predetermined rules by others but by a perception of self (sendjaya et al., 2014, p.127). they also pay very careful attention to everyone they work with and continuously evaluate them whether they feel good about what they are working with or not. they are very sensitive about personal values, morality and ethical behaviors and also expect to show the same attitude from the others at the highest level. (akgündüz, 2012, p.20). also, the understanding of being willing, open and transparent about sharing information required in decision-making processes and providing efficient feedback to employees is one of the ways authentic leaders internalize and practice (walumbwa and others, 2008, p.5). authentic leaders are motivated by the positive state of their colleagues, organization and society, which includes everyone they work with (sendjaya et al., 2014, p.127). michael hyatt points out that authentic leaders have at least 5 characteristics in addition to their deep influence on their followers. according to him, the first one is the inner visions which will guide them in a way they act clearly when they are in a complex situation. the second one is their ability to take initiative, which they do not sit and wait for but they lead as an example by taking risks. the third one is that they have an effective domain which makes it contagious. the fourth one is their ability to persuade people with superior ability. and finally, they have a view to live their lives with the highest values and their determination and determination to achieve these high values will continue unnoticed but increasing in the whole process (hyatt, 2018). in the literature agreed upon, authentic leadership has 4 sub-dimensions. these sub-dimensions are defined as selfawareness, relational transparency, balanced processing, and internalized moral perspective (avolio et al., 2009, p.424). the first dimension, self-awareness means focusing on understanding how the leader makes sense of the world, ways to achieve authentic leadership and the impact of this process on the reactions of his employees. (walumbwa et al., 2008, p.95). the second dimension relational-transparency focuses on increasing trust through openly shared honest, transparent and reciprocal relationships. this means that the true meaning or discourse of the action is expressed transparently (kernis, 2003, p.16). third dimension balanced-processing means impartial and careful analysis of all relevant information before it is finalized (gardner et al., 2005, p.352). the fourth and final dimension, the internalized moral perspective expresses self-arrangements driven by internal moral principles and values abstracted from collective, organizational and social pressures. these actions are not for previously explained decision-making but for producing and implementing rational, consistent behaviors in terms of internalized values (avolio&gardner, 2005, p.327). 2.3. entrepreneurial orientation the concept of entrepreneurship orientation has emerged as an approach to establishing relationships with each other that leads to an entrepreneurial change by bringing together entrepreneurial behaviors in enterprises with ongoing activities (pearce et al., 2010, p. 219). entrepreneurship orientation is a phenomenon that includes strategy formulation, planning, analysis, decisionmaking, implementation, measurement, feedback which also includes the entire enterprise's organizational culture, values structure and mission. therefore, entrepreneurship orientation is expressed as the processes of entrepreneurial strategy formation that senior managers use to achieve organizational goals, maintain the vision of the enterprise healthily, and at the same time create a continuous competitive advantage to the business (rauch et al., 2009, p. 763). there is also an approach that values innovation and risky projects in the market, products and services for businesses that have adopted an entrepreneurial orientation. ali emre i̇şlek & necla öykü i̇yi̇gün 54 this approach also covers processes, practices and decision-making functions that allow new inputs (lumpkin and dess, 1996, p. 136). miller (1983) one of the leaders of the concept of entrepreneurship orientation has listed the dimensions as 1-) innovativeness, which is defined as “the willingness to support creativity, experimentation, the use of new technologies and research in the development of new products, services and processes, and the continuous funding of these researches in the presentation of new products and services to the public”, 2-) risk-taking, which is the risk-taking intention of the business and the level of tolerance for possible failure as a result of this risk-taken and 3-) proactiveness, which is defined as "taking the initiative to act before the problems, needs and changes that will arise in the future and to follow new opportunities or to enter new markets before the competitors" (miller, 1983, p.771; lumpkin and dess, 1996, p.146; lumpkin and dess, 2001, p.431; ). lumpkin and dess (1996) added a dimension to these dimensions in their work and named it 4-) competitive aggressiveness which refers to the efforts to push their competitors out of the system with which they compete in the market (lumpkin and dess, 1996, p.139; koçooğlu, 2012, pp.41-42). and finally 5-) autonomy which refers to the independent activities carried out to create, develop and complete a business idea. (marangoz and erboy, 2013, p. 71; koçooğlu, 2012, pp.42-43). 2.4. authentic leadership and entrepreneur orientation bill george (2018) wrote the following on authentic leadership in his book "lead true". “we learned that authentic leaders are constantly learning and developing from their leadership experience. they become more effective by taking on new challenges. when they find themselves in completely new situations; they make use of past life experiences, as well as tend to learn from colleagues and adapt themselves to the new situation. this approach allows them to be more effective as leaders. authentic leaders, to be true leaders and live a meaningful life; they know that the leader must work towards the goals that are important to them, they know the need to do hard work to improve themselves, and they have a strong moral compass based on their beliefs and values. they are also aware that they are not perfect, and they never try to be perfect. they also make mistakes in the process, they are willing to admit their mistakes, learn from them and continuously improve” (p.17). in order for the entrepreneurship orientation to occur in organizations, there is a need for a decentralized structure, participation in decisions at all levels, the existence of a collaborative environment, and processes without bureaucracy. in addition, it is vital that the management encourages employees to take risks and be innovative, and that the resources allocated are in harmony with the goals for the entrepreneurial orientation to produce successful results. finally, the skills and awareness of employees are also of great importance in the formation and quality of entrepreneurship orientation (zampetakis & moustakis, 2007, p. 414). in light of these evaluations both authentic leadership and entrepreneurship orientation, hypotheses were developed as follows: hypothesis 1 h0: there is no meaningful relationship between authentic leadership and entrepreneurship orientation in the exporting companies with increased export performance. h1: there is a meaningful relationship between authentic leadership and entrepreneurship orientation in the exporting companies with increased export performance. hypothesis 2 h0: there is no meaningful relationship between authentic leadership and entrepreneurship orientation in exporting companies with decreased export performance. h1: there is a meaningful relationship between authentic leadership and entrepreneurship orientation in businesses with decreased export performance. 3. method 3.1. participants 97 companies have been identified from the turkey exporters assembly (tim) top 1,000 exporters research list that are fully in the list and also share the data allows to obtain both export sales and export sales intensity data between 2013 and 2018. and as a result of the studies carried out during the 8 months of 2020, a total of 22 companies participated in the survey and a total of 438 mid-to-high-level white-collar employees filled the authentic leadership and entrepreneurship orientation questionnaires. the relationship between authentic leadership and entrepreneurship orientation perceptions in exporting companies with different export performances 55 the reason for choosing mid-to-high-level white-collar personnel for the surveys is that it is evaluated that the management understanding of the authentic leadership and entrepreneurship orientation could be compiled in the best way. depending on the purpose of the research in this study, criterion sampling, which is a type of judgmental sampling method was used because it met certain criteria and required to work with companies with certain characteristics (eyiler, 2019, p.120). yazıcıoğlu ve erdoğan prepared a table regarding the minimum sample sizes that should be used in research, considering various population sizes and sampling (yazıcıoğlu ve erdoğan, 2007, p. 72). as a result of the evaluation of all this literature, in agreement with the thesis jury, it was decided that if the number of valid questionnaires of at least 384 white-collar employees in total was reached, the level of representation of the main population of the sample determined in the study was considered to be realized. the surveys to be used in the study were planned to be conducted primarily by visiting the companies and the requests were conveyed to the companies. some of the questionnaires were conducted in this and similar manner, for companies that did not accept the visit request but still accepted the survey, via the "google forms" channel used. 3.2. data collection instruments export sales volume and export sales intensity, which are the two objective scales that are found to be used the most for assessing export performance in the literature were used (katsikeas et al, 2000, p.498; sousa, 2004, p.9). the export performance categories revealed in the study are just as similar to hall and lee's 2008 (hall & leee, 2008, p.58), hoang's 1998 (kalaycıoğlu, 2017, p.62) and de luz's 1993 (de luz, 1993, p.94) export sales and export sales density are calculated based on the five-year averages. secondary data was compiled from turkish exporters assembly (tim) publications between the years 2013 and 2018. in deciding the subjective scales to be used for this study, it was preferred to use scales that were previously developed and whose validity and reliability was tested before. for the authentic leadership scale; the scale developed by walumbwa et al. (2008) and reliability and validity tests completed in turkey by tabak et al. (2012) was used and for the entrepreneurship orientation scale; the scale developed by lumpkin and dess (1996) and reliability and validity tests completed in turkey by koçoğlu (2012) was used. 3.2.1. validity and reliability analyzes of authentic leadership scale as a result of the cfa analysis of the authentic leadership scale, which consists of four dimensions compatible with the original scale (walumbwa et al., 2008), the factor loads of the items vary between 0.841 and 0.955. according to tabachnick and fidell (2013), the factor load of items to a factor must be a minimum of 0.32. in this context, it was observed that the factor loadings of the scale items met the criteria. table 1. authentic leadership scale goodness of fit index the goodness of fit index acceptable limit scale value x2/sd <5 moderate 228,895/98=2,335 <3 good fit cfi >0,90 0,987 nnfi >0,90 0,984 agfi >0,90 0,982 rmsea <0,08 0,055 source : (çokluk et al., 2010, pp.271-272) ali emre i̇şlek & necla öykü i̇yi̇gün 56 when the compliance and performance criteria are examined, it is seen that the data are well adapted to the tested structure. therefore, the original scale structure was confirmed by the data of this research. table 2. authentic leadership scale reliability analysis sub-dimensions cronbach alfa relational transparency 0,855 internalized moral perspective 0,852 balanced processing 0,805 self-awareness 0,898 scale overall (stratified cronbach alfa) 0,959 this reliability value appears to be quite sufficient which means that the reliability of the items is quite high. cronbach alpha was used for scale reliability analysis and the stratified cronbach alpha coefficient was used in overall scale reliability analysis. cronbach, schonemann and brennan (1965) proposed the use of the stratified cronbach alpha for the confidence of combined scores obtained from sub-dimension measuring tools. (büyüköztürk, 2011). 3.2.2. validity and reliability analyzes of entrepreneurship orientation scale as a result of the cfa analysis of the authentic leadership scale, which consists of four dimensions compatible with the original scale (walumbwa et al., 2008), the factor loads of the items vary between 0.436 and 0.891. in this context, it was observed that the factor loadings of the scale items met the criteria. table 3. entrepreneurship orientation scale goodness of fit index goodness of fit index acceptable limit first level cfa second level cfa scale value scale value x2/sd <5 moderate 450,866/84=5,36 465,560/86=5,29 <3 good fit cfi >0,90 0,898 0,893 nnfi >0,90 0,895 0,888 agfi >0,90 0,929 0,928 rmsea <0,08 0,091 0,091 source : (çokluk et. al., 2010, pp.271-272) when the compliance and performance criteria given in table 8 are examined, it is seen that the data adapts closely to the tested structure. therefore, the original scale structure was confirmed by the data of this research. table 4. entrepreneurship orientation scale reliability analysis sub-dimensions cronbach alfa innovativeness 0.597 proactiveness 0.736 risk-taking 0.616 autonomy 0.758 scale overall (stratified cronbach alfa) 0.796 the relationship between authentic leadership and entrepreneurship orientation perceptions in exporting companies with different export performances 57 cronbach alpha was used for scale reliability analysis and the stratified cronbach alpha coefficient was used in overall scale reliability analysis. cronbach, schonemann and brennan (1965) proposed the use of the stratified cronbach alpha for the confidence of combined scores obtained from sub-dimension measuring tools (büyüköztürk, 2011). according to the reliability analysis results of the entrepreneurship orientation scale, the overall reliability of the scale was calculated as 0.796. it seems that this reliability value is sufficient. 3.3. data analysis procedure as a result of this study, 32 companies with increased export performance and 65 companies with decreased export performance were gathered under two separate groups as an increasing export performance and decreasing export performance. finally, "the relationship between authentic leadership and entrepreneurship orientation perception in exporting companies with different export performances" research and analysis have been done separately for each category and the results are also evaluated comparatively. 4. findings the relationship between authentic leadership and entrepreneurship orientation. table 5. increased export performance analysis result variances non-standardized standardized t p beta std. error beta constant 33.850 2.476 13.670 0.00* authentic leadership 0.209 0.041 0.341 5.070 0.00* f=25.707 ; p=0.00* ; r=0.341 r2=0.117 *p<.01 as outlined in table 5, the existence of a meaningful relationship between authentic leadership and entrepreneurial orientation has been identified (f (1,237) =25,707; p<.01). accordingly, when authentic leadership scores increase by one unit, entrepreneurship orientation causes an increase of 0.209 units in their scores. finally, authentic leadership perception scores account for approximately 12% of the total variance (r2=0,117) in entrepreneurship trend scores, and the regression equation is as follows: entrepreneurship orientation = 33.850 + 0.209*authentic leadership therefore, h1 of hypothesis 1 is accepted because the existence of a meaningful relationship between authentic leadership and entrepreneurial orientation has been identified. table 6. decreased export performance analysis result variables non-standardized standardized t p beta std. error beta constant 34.479 1.545 22.314 0.00* authentic leadership 0.149 0.287 0.319 5.186 0.00* f=26.863 ; p=0.00* ; r=0.319 r2=0.102 *p<.01 ali emre i̇şlek & necla öykü i̇yi̇gün 58 as outlined in table 6, the existence of a meaningful relationship between authentic leadership and entrepreneurship orientation has been identified (f (1.237) = 26.863; p <.01). the defined coefficient was calculated as 0.149. accordingly, when authentic leadership scores increase by one unit, it causes an increase of 0.149 units in entrepreneurship orientation scores. finally, authentic leadership perception scores explain approximately 10% of the total variance (r2=0.102) in entrepreneurship scores and the regression equation is as follows: entrepreneurship orientation = 34.479 + 0.149 * authentic leadership perception therefore, h1 of hypothesis 2 is accepted because the existence of a meaningful relationship between authentic leadership and entrepreneurial orientation has been identified. also, since the scale scores of authentic leadership and entrepreneurship orientation show a normal distribution, the independent samples t-test was used to compare group averages based on export performance. given the total score of the authentic leadership scale, the scale average of the group whose export performance increased was found 58,586 and the scale average of the group whose export performance decreased was found 51,413, and the difference between these two averages was significant (t=5,325; p<0.05). given the total score of the entrepreneurship orientation scale, the scale average of the group whose export performance increased was found 46,086 and the scale average of the group whose export performance decreased was found 42,138, and the difference between these two averages was significant (t=5,568; p<0.05). 5. discussion and conclusion 5.1. discussion considering authentic leadership and entrepreneurship orientation scale averages together, higher averages were observed in the group whose export performance increased. so, these findings can be interpreted as the more authentic leadership features that the leaders can realize than the more entrepreneurship trends in the companies will be. this finding might also be valuable for the practitioners because it might mean that more authentic leadership features that the leaders in exporting companies than more innovative, risk-taker, proactive, autonomous and competitive trends in the companies. the majority of authentic leadership scale averages that has been identified in the studies support the results of this research (koçak, 2019, p.58; çiftçi, 2018, p.117; yetgin, 2017, p.94-95, boz, 2016, p.120). in only one study (korku, 2018, p. 108), the mean of the scale was slightly below the average compared to the mentioned literature. also, the entrepreneurship orientation scale averages that have been identified in the studies support the results of this research (koçoğlu, 2012, p.157; pehlivan, 2017, p.83). additionally, as per the research finding; when authentic leadership scores increase then it causes an increase in entrepreneurship orientation scores in both categories. therefore, in the limitedity of this research, these findings can be interpreted that the more authentic leadership perception the leaders can realize in the companies, the more the export performances will increase. this finding might also be valuable for the practitioners because it might mean that more authentic leadership features in exporting companies then the better export performance will be. it is also necessary to specify that, the relationship between authentic leadership and entrepreneurship orientation has not yet been the subject of academic research on the basis of export performance of exporting companies. due to this reason, i am also hoping that the research findings will theoretically contribute to the literature. finally, as per the limitation of the study; surveys were conducted with 21 of the 97 companies in the research universe and with 438 mid-to-high-level white-collar employees working in these companies. although the number of samples is sufficient to represent the research universe, the inability to conduct surveys with more companies can be considered a limitedity. 5.2. conclusion according to this research results, it will be valuable to note that, working with authentic leaders may not be easy for businesses with established rules and norms. because they will not manage their areas of responsibility by using the usual established rules and norms. authentic leaders do not take a leadership role for the position or other personal interests and they have a purpose and a mission they want to achieve. the managerial processes practiced by authentic leaders are by no means simulated, and they often internalize these processes based on their personal experiences. they both expect universal morality and ethical behavior from others and show themselves at the highest level. they also know that they are not perfect, and they do not try to be perfect. the relationship between authentic leadership and entrepreneurship orientation perceptions in exporting companies with different export performances 59 authentic leaders do not act according to any standards or rules predetermined by others or the expectations of others, they review currently applied standards, rules and expectations, and eventually act according to their own reality. so, in the limitations of this research, yes authentic leaders can turn the businesses they lead into more entrepreneurs and also put them into a better export performance level but during this process, they will not act against their own values. they will also be extremely willing to use all modern management devices while trying to achieve better results but will never be managed by instructions. they will also use their authorizations to the end during trying to achieve the best commercial results, take risks in the process and share all the processes and results of their leadership with the most modern and transparent methods possible. but in this whole process, they will walk the path of wisdom and positive science and will also remain independent and free. references akgündüz, y. 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(2006) 2: 413–428 international journal of commerce and finance, vol. 2, issue 1, 2016, 137-146 a comparison of optimal portfolio performances of three optimization methods aylin cevizci, (msc) istanbul commerce university, istanbul abstract: this study compares performances of three portfolios established based on markowitz optimization, shrinkage optimization, and black litterman optimization. bist30 companies are used to test the results. markowitz optimization is unrestricted, thus generates the highest possible utility. however, portfolio weights display high values of shortselling needs. shrinkage optimization restricts short selling needs gradually, but it does not block shortselling. on the other hand, blacklitterman model totally prohibits shortselling. results show that the lowest utility is originated by blacklitterman model. shrinkage model generates average returns and lessthanaverage risk. therefore, shrinkage ratio is a strong candidate for future portfolio building. the results also suggest that short selling should be included in portfolio activities to maximize performance. shortselling improves portfolio performance significantly keywords: optimization techniques, portfolio choice and investment decisions. 1. introduction: increasing investments to stock markets has special importance in emerging countries. finance policies are established in a way to attract more investors and increase financial trust, efficiency, and profits from the stock exchanges. efficiency and returns can be measured shortterm and longterm and it is expected that policies are set to attract more longterm investors. as number of longterm investors increase in a stock market, volatility reduces, trust is built and efficiency increases. thus, increasing profitability and efficiency has a special importance in stock markets. this article compares the performances of three optimization models by using stocks from bist30. the optimization models to compare are markowitz optimization, shrinkage optimization, and blacklitterman model of optimization. the results suggest that markowitz optimization provides the highest return and risk combination for an investor. that optimization is very attractive for risklover investor type. blacklitterman optimization provides very low return and risk combination, which could be a good address for riskaverse investors. however, the return is lower than the shorttermed treasury bills. therefore, sharpe ratio of blacklitterman portfolio is negative. on the other hand, shrinkage portfolio presents a higher than medium return, and a medium risk that would be very attractive for a medium riskaverse investor. the results have some suggestions to investors. avoiding risk is an advice for every investor, however taking risk is the main way of making profits. limiting shortselling would benefit highly risklover investors in extreme market conditions but on the other hand, it would harm medium risklover investors. shrinkage portfolio in this study, allows shortselling up a medium level. the performance of the portfolio is remarkable. on the other hand, black litterman portfolio is suffering from restrictions. one contribution of this article is that it is the first article that compares the three optimization methods using turkish stock market to our knowledge. second, portfolio selection period is three years, which represents the long term investments. representing longterm investments is a rare choice, for most of previous studies form portfolios for 3or 6months. third, the performances of the three method are so clear that they suggest a policy: use more shortselling. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 138 aylin cevizci http://ijcf.ticaret.edu.tr the paper is organized as follows. section 2 reviews the literature of markowitz optimization, shrinkage optimization, blacklitterman optimization and empirical studies that compare optimization methods in turkey. section 3 explains the theoretical foundations of the three models. section 4 introduces data and hypothesis of the study. section 5 presents empirical results. section 6 concludes. 2. literature review a. markowitz optimization the first model that explains investment behavior in mathematical terms is markowitz optimization model based on markowitz’s cornerstone work in 1952 (markowitz, 1952). markowitz, detailed his idea in a book (markowitz, 1959). in his book, he introduces a quadratic utility function that depicts attitude of a riskaverse investor. a risk averse investor likes higher return but is afraid of higher risk: therefore, he holds a tradeoff between risk and return. markowitz define risk by using several tools, most accepted of which, is standard deviation. by maximizing the utility function, an investor maximizes her return and minimizes risk (rubinstein, 2002). asset returns that have negative correlation with each other should be selected for a portfolio so that the total risk of the portfolio will be reduced (markowitz, 1952). benefits of markowitz (meanvariance) optimization can be summarized as follows (michaud,1989): optimization provides a framework for investor constraints in the model setup, investor is free to choose a level of risk; exposure to various risk factors, stock universe, and performance benchmarks can be chosen; performance of portfolio is not directly dependent on the performance of individual stocks; due to simplicity in implementation, it allows timely portfolio changes. similarly, the two most important problems with the markowitz model can be summarized as following (michaud, 1989; norstad, 2011): first, it is a purely mathematical model, it does not have investment sense and the portfolios may not have investment value. performance of a portfolio depends on the structure of variancecovariance matrix. therefore, unintuitive portfolios can come out. second, the model maximizes estimation errors. risk and return estimates are subject to estimation errors. the model overweighs securities with large estimated returns, negative correlations, and small variances. it underweights securities with small estimated returns, positive correlations, and large variances. therefore, estimation can be large. intuitive constraints should be added to the model to reach meaningful portfolios. b. shrinkage optimization due to sensitivity of portfolio weights to mean and variance of portfolios and also due to large estimation errors, classical markowitz optimization needs to be improved (elton and gruber, 1973; jobson and korkie, 1981; jorion, 1985; jorion, 1986; bengtsson and holst, 2002; chan, karceski and lakonishok, 1999; disatnik and beninnga, 2007; laloux, cizeau, bouchaud and potters, 1999; laloux, cizeau, bouchaud and potters, 2000; ledoit and wolf, 2003; ledoit and wolf, 2004; plerou,gopikrishnan, rosenow, amaral and stanley, 1999; won, lim, kim and rajaratnam, 2009). a shrinkage method is an improvement which suggests mixing of covariance matrix with a smaller version of itself. a covariance matrix contains the interactions of all asset returns. we call the matrix a purediagonal matrix if we demote the covariances between assets to zero, and keep only the variances with the same asset. a purediagonal matrix assumes no relationship among assets, and therefore imposes certainty to the problem. we can assign weight to covariance matrix and purediagonal matrix in order to create a mixed covariance matrix. in this framework, the covariance matrix represents the markowitz world; and the purediagonal matrix represents the certainty case, in which assets have no covariance. this method partly protects us from the disadvantages of markowitz optimization. however, this method is not a new method that hedge against the problems caused by markowitz; it only diminishes the problems. besides, the choice of the weight for covariance and pure diagonal matrix has no prescription, it usually is a personal decision and depends on experience or solved by trialanderror method (pollak, 2011). a comparison of optimal portfolio performances of three optimization methods 139 http://ijcf.ticaret.edu.tr c. black litterman optimization black and litterman model was first published in 1991 (black and litterman 1991a). black and litterman (1991b), he and litterman (1999), and litterman (2003) are the examples of papers from the authors are the following contributions of the authors that completes the technical details. several other researchers contributed the model by introducing updates, calibrations, and other applications (bevan and winkelmann, 1998; satchell and scowcroft, 2000; drobetz, 2001; firoozye and blamont, 2003; herold, 2003; idzorek, 2005; mankert, 2006; bertsimas, gupta and kallus, 2013; meucci, 2006; meucci, 2008; giacommeti, bertocchi, rachev and fabozzi, 2007; krishnan and mains, 2005; beach and orlov, 2007; braga and natale, 2007; martellini and ziemann, 2007; esch and michaud,2012;walters, 2014). among all, one study is more important for this paper. fusai and meucci (2003) introduce a nonbayesian version of the model. their model is also called the shrinkage model. this model is largely used in applications. d. empirical studies that compare optimization methods in turkey caliskan (2010) and caliskan (2011) form several short termed portfolios from bist30 companies to compare the performances of markowitz and blacklitterman optimization techniques. zerey and terzi (2015) form an efficient portfolio from bist30 companies by employing finnet portfolio advisor program. the program makes selections based on markowitz optimization theory. similarly, topal and ilarslan (2009) form a portfolio from bist30 based on markowitz optimization by using excel solver. kardiyen (2007) uses mean absolute deviation model, which transforms the portfolio optimization problem in linear programming to form an optimal portfolio in bist30. toraman and yuruk (2014) test markowitz quadratic base programming model to form efficient portfolios from bist100 companies. genel (2004) tests portfolio optimization by genetic algorithms. he finds that genetic algorithms perform at least as good as markowitz optimization, in many cases they perform much better. ayan and akay (2013) develop new measures of performance, and a new optimization technique. their empirical tests on bist30 companies show that the new method is more efficient than modern portfolio theory optimization results. 3. model the optimization problem for all methods can be defined as following (beninga, 2008, p. 261-266). (1) s.t. (2) where (3) (4) e(rx) in equation (1) represents the expected return of the portfolio, c is a lower benchmark on returns (such as the riskfree rate), σx represents the volatility of the portfolio. the object of the maximization problem is to maximize the sharpe ratio. by this means, return at a certain level of risk is maximized. the only restriction of the maximization is the restriction on weights, which is presented in equation (2). x represents the number of assets in 140 aylin cevizci http://ijcf.ticaret.edu.tr the portfolio. the sum of weights should be equal to 1. the last two equations display how expected return (eqution 3) and volatility (equation 4) of the portfolio are computed. expected return is the arithmetic average of asset returns, while volatility is the geometric average of asset volatilities of asset returns and their covariance terms. each optimization type mentioned below uses these terms. a. markowitz optimization we solve the below optimization problem for implications purposes in markowitz optimization (benninga, 2008, p. 357): = * b. shrinkage method this model is an enhanced version of markowitz model. the only difference from the markowitz optimization is to establish shrinkage variancecovariance matrix. in this paper, i adopt the following formula (benninga, 2008, p. 308): = λ. + (1-λ). according to the formula above, shrunk variancecovariance matrix is a convex combination of sample variance covariance matrix and purediagonal matrix. the shrinkage factor λ is selected to maximize expected accuracy of the formula. this method is especially successful in small samples of assets. the intensity of shrinkage will tend to zero as sample size increases. shrinkage factor being 0 is equal to markowitz optimization (schäfer and strimmer, 2005). c. blacklitterman model blacklitterman model can be perceived as a developed model of shrinkage optimization. blacklitterman approach solves the problem of shrinkage optimization by weighting the variancecovariance matrix based on market capitalization (benninga, 2008, p. 355-356). in this paper, we follow benninga (2008, p. 359) methodology and solve the below equation: = 4. data and hypothesis we use bist30 stocks to test the hypotheses. we obtain stocks’ daily prices for 31.12.201231.12.2014 period from bloomberg. pgsus prices were not available for most of the analysis period; therefore, we exclude this stock from analysis. we also obtained daily prices of xu100 index, which is a capitalization-weighted index composed of a comparison of optimal portfolio performances of three optimization methods 141 http://ijcf.ticaret.edu.tr national market companies in turkey (bloomberg, 2016). we use it as a proxy for market return. we use turkish treasury bills annual compound rate as a proxy for riskfree asset in the market. we obtain these rates from the statistics database of republic of turkey undersecretariat of treasury website (http://www.treasury.gov.tr/enus/mainpage). market capitalization of companies were obtained from finnet. in order to compute daily stock returns, we deploy the following formula: rt=ln(pt+1/pt) (5) where rt is the daily stock return at day t, and pt is the daily stock price at day t. then we computed excess returns over the riskfree rate: excess returns= rtrf,t (6) the correlation table of excess returns is provided in table 1. the table shows that some stocks have quite high correlations whereas others have lower or even negative correlations. having negative correlations among asset returns ensures that there will be efficiency from diversification when we establish a portfolio. the sample characteristics of stocks are displayed in table 2. average annual returns range within -15% (kozal) and 12% (otkar). minimum return is -21,40% (kozal) and maximum return is 15,92% (otkar). median values are very close to zero, showing that number of positive and negative return days are almost even. standard deviations range from 1,75% (ttkom and bimas) to 3,42 (kozal). 22 of 29 companies have slightly negative skewness, indicating small lefttail risk. kurtosis ranges between 5,96 (toaso) and 0,84 (akbnk). beta ranges between 1,39 (halkb) and 0,59 (enkai). alpha is almost zero for all stocks. sharpe ratio ranges between -4% (kozal) and 5% (otkar). http://www.treasury.gov.tr/en-us/mainpage http://www.treasury.gov.tr/en-us/mainpage 142 aylin cevizci http://ijcf.ticaret.edu.tr we impose no restrictions on markowitz optimization model. therefore, it is expected that markowitz portfolio performs better than the shrinkage portfolio. blacklitterman model uses market capitalizations as a weight for the variancecovariance matrix (we can call it a restriction). therefore, markowitz portfolio is expected to perform better than blacklitterman, too. since the restrictions on shrinkage portfolio is less than the restrictions on black litterman portfolio, we expect shrinkage portfolio performs better than blacklitterman portfolio. we use sharpe ratios as a measure of performance measure. our hypothesis can be stated as the following: h0: srmarkowitz > srshrinkage >srblacklitterman, h1: otherwise. 5. analysis this study establishes three portfolios from daily stock returns of bist30 firms for january 2013december 2015 period and compares portfolio performances. the first portfolio is optimized by markowitz model principles; thus we call it markowitz portfolio. we compute variancecovariance matrix and asset weights based on the method described in benninga (2008, p. 294-301). the weights obtained from markowitz optimization is presented in the first column of table 3. the weights contain many negative values. negative weights correspond to short selling. in turn, there are weights greater than 1. investor borrows and sell the assets which have negative weights, and buys the assets which have weights more than 1. shortselling is the sale of a security that is not owned by the seller. the seller borrows the security to pay back in the future, sells the security in the market. after a while, the seller buys the security from the market and pays back to the lender. investors apply shortselling when they believe that the price of the security will decline. they aim to make profits from the price difference. the implication is that borrowing costs less than the profits made from capital gains. short selling contains risks in its stem, but at the same time it can benefit an investor by yielding extra returns. shortselling reinforces the highrisk, highreturn attributes of portfolios. sobaci, sensoy and erturk (2014) shows that short selling increases the performances of investments in bist. a comparison of optimal portfolio performances of three optimization methods 143 http://ijcf.ticaret.edu.tr the second portfolio is shrinkage portfolio. we computed variance covariance matrix, pure diagonal matrix and the shrunk matrix based on the methods defined in benninga (2008). we determined the shrinkage factor at 0.5. there is no academic research and intuition behind the value of shrinkage factor. it is basically determined by practical factors and riskaverseness of the researcher. a medium value would represent a more or less risk neutral behavior. benninga (2008) uses the shrinkage factor as 0,3; however, this value is attained by trialanderror. there is no mathematical intuition has been developed for this value to our knowledge. the weights obtained from shrinkage optimization is presented in the second column of table 3. there are shortsales, but their number and density is much lower than that of markowitz optimization. this method allows short sales, but limit them at lower amounts. therefore, it contains less risk than markowitz optimization technique. the last model is blacklitterman optimization. we followed the methods described in benninga (2008, p.358) to form the portfolio. the weights are presented in the third column of table 3. there are no negative weights, and all stocks earn positive but small weights. this method was developed in a way that does not allow shortselling, and thus preferred by riskaverse investors. lastly, performances of the portfolios are compared. to do that, i compute the expected daily returns of each portfolio by using the weights. then, i compute annual average return and annualized standard deviation of each portfolio; and lastly i compute sharpe ratios of each portfolio. sharpe ratio is the most applied performance measure in finance. it measures the excess returnrisk tradeoff. the higher the sharpe ratio, the higher the performance. annual average returns, standard deviations, and sharpe ratio of each portfolio is presented in table 4. the sharpe ratios of the three portfolio are 0,54; 0,49; -0,03. it is clear that the highest performance belongs to markowitz portfolio. shrinkage portfolio is a step behind the markowitz. however, the performance of black_ litterman is way behind the other two portfolios. first of all, sharpe ratio of black-litterman portfolio is negative because the annual average return of the portfolio is less than the annual average return of the riskfree rate. secondly, even though the ranking is expected to be in this order, the very low performance of blacklitterman is surprising as former studies in the field finds blacklitterman almost as successful as markowitz if not more (caliskan, 2011). 144 aylin cevizci http://ijcf.ticaret.edu.tr these results suggest that investing by the highly risk-averse instincts would harm investors in the turkish stock market. turkey is an emerging market and it is highly risky by the nature. sharing higher level of risk would benefit the investor in the longrun. it also suggests that prohibiting shortsales mitigates the efficiency of financial portfolios and cause redundant efforts to increase yields. 6. conclusion: the results of this article suggest that markowitz optimization provides the highest return and risk combination for an investor. riskseeking investor would love this type of portfolios. blacklitterman optimization provides very low return and risk combination, which could address highly riskaverse investors. however, the annual average return of blacklitterman portfolio is lower than the return of the shorttermed treasury bills. therefore, sharpe ratio of blacklitterman portfolio is negative. on the other hand, shrinkage portfolio presents a higher than medium return, and a medium risk that would be very attractive for a medium riskaverse investor. as a conclusion, we can suggest investors not to avoid risk all the times. limiting shortselling would benefit in negative extreme market conditions but on the other hand, it would harm medium risklover investors. shrinkage portfolio in this study, allows shortselling up a medium level. the performance of the portfolio is remarkable. on the other hand, black litterman portfolio is suffering because restrictions on shortselling prohibits the portfolio from making 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covariance estimation with a condition number constraint, technical report no: 2009-10, department of statistics, stanford university. zerey, gokce and terzi, erol, (2015), portfoy secimi ve bist30 uzerine bir uygulama, iaaoj, scientific science, 3(2), 38-46. http://www.norstad.org/ https://engineering.purdue.edu/~ipollak/camsap_2011_pollak.pdf http://www.bepress.com/sagmb/vol4/iss1/art32 http://www.bepress.com/sagmb/vol4/iss1/art32 international journal of commerce and finance, vol. 7, issue 1, 2021, 77-91 77 operating leverage and firm value of manufacturing firms in nigeria olumuyiwa ganiyu yinusa olabisi onabanjo university, nigeria mayowa ebenezer ariyibi olabisi onabanjo university, nigeria lateef adewale yunusa olabisi onabanjo university, nigeria kehinde isiaq olaiya olabisi onabanjo university, nigeria received: february 07, 2021 accepted: april 13, 2021 published: may 01, 2021 abstract the study examined the impact of operating leverage on firm value of quoted manufacturing firms in nigeria. the study selected twentytwo (22) listed (consumer goods sector) manufacturing firms listed on nigeria stock exchange from 2013-2019.the data used for this study are panel data. the result of this study revealed that dvas (variability in sales) has negative insignificant effect on firm value at (β=-1.04, p>0.05). dvpbit (variability in profit before interest and tax) has positive insignificant effect on firm value at (β=12.6, p>0.05). ople (operating leverage in asset) has negative significant effect on firm value at (β=-18.95, p<0.05). based on the findings of the study, it were therefore recommended that; firms would benefit from the quick variability in fixed asset to current asset. (changes in fixed cost into variable cost influences sales and long-run profit). keywords: leverage; operating leverage; firm value; firm; nigeria jel classification: g31, g32, c5 1. introduction a firm is an organic structure working in a systematic flow towards actualizing shareholder’s fund. but in actualizing this time-bound goal the financial manager who is in the tactical level of the organization is saddled with financing and investment decision which are the two germane finance decision. these decisions adjusts in respects to firm intrinsic attributes; such as firm location, corporate structure and type of industry. however, the financial decision details about the capital structure (debt-to-equity mix) that firm will combine in investing on project with positive net present value. the capital structure variability (financial leverage) and variability in its operation (operating leverage) have to be put into consideration in terms of mitigating against risk (financial and business risk) and increase the returns on firm (pandey, 2005). in terms of operating leverage, it is variability in operation that gives a picture on how a firm will employ its fixed cost among all the various type of cost in increasing its operating profit. this study examined the impact of operating leverage on firm value based on the implication of traditional measurement of operating leverage in studies like pradeep, shailendra & pijush (2016), john, samuel & richard (2013), soin & sangbum (2014) and dagogo (2014) which do not capture the cost and risk exposure. the degree of operating leverage measurement assumes a percentage change in output of firms and also does not take a direct cognizance of firms that have incurred losses in past years subject to calculations. but penman (2012) indicated the relevance of direct measures and akingunola (2016) indicated the measures which will aid to show the firms cost and in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e olumuyiwa ganiyu yi̇nusa & mayowa ebenezer ari̇yi̇bi̇ & lateef adewale yunusa & kehinde isiaq olai̇ya 78 risk exposure in terms of operating leverage. this measure will allow the operating leverage be deduced from various sections of the firm final account. this measurement will aid the firm to understand its risk complexion (bierman & hass, 1975). depicting that operating leverage will be measured in terms of operating leverage in asset, variability of sales and variability of profit before interest and tax, this measurement will aid to validate the ideology of beirman and hass (1975) that relevance of operating leverage is to indicate the risk exposure and cost implication in the operating activities of a firm. an implication of using operating leverage when studying this phenomenon is that fixed and variable cost are not easily obtained from the financial statement. companies tend to report them as operating costs or sometimes more specific, but not labeled as either fixed or variable cost. when costs are separated into categories in the financial statement, it opens up for the possibility of estimating fixed and variable cost which aid to deduce direct costs and risk implication component from the financial statement (harjoto, 2017). operating leverage measures the sensitivity (or elasticity) of profit with respect to sales, and varies directly with the proportion of fixed cost in total cost. concomitantly, business risk is influenced by the variation in operating input such as; demand variability, sales price variability, input price variability, ability to adjust output prices for change in input prices, the extent to which cost are fixed (akinsulire 2011).all these factors are determined partly by the company’s industry characteristics. in other words, business risk is the riskiness of the firm’s asset if it uses no debt. conceptually, the firm has a certain amount of risk inherent in its operation related to the economic conditions in which it operates. e.g the business risk of public utilities is usually significantly less than that of manufacturing firms. this reflects the tendency for fluctuation in the demand for the services provided by utility companies such as electricity companies to be small relative to those experienced by industrial firms, whose demand for products tend to be unstable to the minimum. in a nutshell, the cost structure of a firm influences the operating leverage, the higher the fixed cost of operations, the greater the operating leverage. the impact of operating leverage on earnings is on short term when fixed cost of operation can be determined, fixed costs are unaffected cost irrespective of the variability in the volume of overall production (brigham 1997). in the long run, all cost incurred by the firm are categorized as variable cost thus mitigate the effect of operating leverage on earnings (goddess, 2007). according to briggs (1978), stock prices have been used has the only determinants of performance in the model. the value of firm can be measured from different perspective, depending on the horizon or the school of thought the researcher want to address in the study. the traditional measurement used to determine the firm value in most studies have been the accounting net worth. but the measurement is inconsistent due to the accounting principle of historical cost and conservatism. the second conventional measurement, value the firm based on the operation of the firm on the market floor and its outstanding shares. it is the most prominent method used in valuation of a firm that is already public listed on the stock exchange market. it usage employs an effective and efficient market shares. based on premises above the study would examine the impact of operating leverage on firm value using earing yield to measure the value of the firm. 2. literature review 2.1. conceptual review operating leverage is defined as the ratio of difference between fixed and variables cost of a firm on future earnings (balakrishnan, sivaramakrishman & sprinkle, 2013). operating leverage of the firm is strongly influenced by its cost structure, the higher the fixed cost of operation, the greater the operating leverage. the effect of operating leverage on earnings is just in the short –run when fixed cost of operation can be ascertained, fixed costs are unaffected costs irrespective of the change in the volume of overall production. for operating leverage, the discussion typically centers on the break-even point the level of sales at which total revenues and expenses are equal and operating income is zero. this concept makes it possible to compare scenarios with differing levels of operating leverage and highlights the risk-return aspect; at higher volume levels, leverage pays off in the form of higher operating income, but at lower levels of volume, losses can be magnified. if is finance manager/management are optimistic about future economic conditions and about the demand for the firm‘s product, they are more likely to select highly automated production facilities, buy buildings and equipment, and hire fewer workers, perhaps on a salaried basis, all decisions that increase the fixed costs of doing business. if, on the other hand, the future holds uncertainty, the management might select less automation, rent their facilities and equipment, and hire more workers, perhaps paid by hourly wages. this high variable-cost, more labor-intensive operating leverage and firm value of manufacturing firms in nigeria 79 stance permits flexibility if demand is not materialized, because casual workers can be laid off. similarly, a rental agreement or short-term lease is less binding than ownership. the competitive nature of the industry also plays a role. if the firm seeks to become a leader within its industry, perhaps a more highly levered posture will be required an assumption of higher risk in pursuit of higher returns. operating leverage is simply: categorized both variable and fixed costs; generate an income statement using a contribution margin format (sales – variable costs – fixed costs = operating income, or earnings before interest and taxes); divide the contribution margin (sales less variable costs) by operating income (also the contribution margin less fixed costs), and you produce the degree of operating leverage (dol), a number greater than 1 (or equal to) 1.00. because managers have access to all costs and their behavior patterns (given the aid of their cost accountants) this is fairly routine matter. external financing reporting however, does not categorize cost information in this manner, so it is quite a different matter for external analysts to gauge the degree of operating leverage. the interpretation of degree of operating leverage of say, 1.60 is for every 1.00 % change in volume, the operating income will increase by 1.60%; higher leverage offers higher potential return and lower leverage will offer lower potential return and business risk. one complicating factor is that this measure will differ in magnitude depending on how close a firm is operating to its break-even point. for external users attempting to compare firm this poses additional problem. according to watson & head (2010), operating leverage provides a vivid explanation of the extent to which an organization relies on fixed costs in its quest for maximizing its operating profit. it should be noted that, an increase in profits is as a result of controlling the fixed cost components of the company such that the total revenue covers a higher margin than the fixed cost of the product. that is, when operating leverage continue to increase, there is the likelihood of an equal proportional increase in the fixed operating cost of the company which has the propensity of decreasing the margin of the operating profit of the organization in the long run. in effect, if the variable cost component is predominant among the operating cost of the organization then there is also the likelihood that the operating leverage of the company will decline and a comparable effect can be envisaged on the net profit for a company with a high degree of financial leverage. however, operating leverage and financial leverage combine in a multiplicative form to bring about a more proportion change in earnings per share for a given percentage change in activity this is the total leverage or composite leverage. the latter arise the dispersion and risk of possible earnings are increased. with the presence of fixed operation costs and fixed financing costs, a given changes in sales is translated into a larger relative changes in earnings per share through a two-step magnification process. firm’s valuation and value is essential for deriving stock prices, an item of significance in many models (key & briggs 1990). according to briggs (1978), stock prices sometimes is the sole measure of performance in the model. more commonly it is a major components of weighted average that includes other measure. the value of firms can be obtained through different measures, each of which is likely to give a value that differs from that obtained by another. the traditional or most readily available measure of the value of firm is its accounting net worth or book value. the measure is problematic, due to principle of historical cost and conservatism. the second measure is the market value of all its outstanding shares. this is a popular method of valuating public corporations. it application however requires an efficient real market for shares. this condition is not met in models that do not allow participants to trade shares, and even when such trading is allowed, the trades are generally too few and too infrequent for reliable valuation. the third measure is the capitalized value of its projected future performance. modigliani and miller (1961) pointed out that although four distinct method of capitalization can be applied for this purpose, all four give rise to precisely the same valuation when the markets are perfect, people are completely rational, and the future is known with perfect certainty. however, the capitalized valued measure has a problem as it requires at least one arbitrary parameter (m), if the goosen’s method is applied. the fourth measure is the deductive application of human judgment. with this method, firms are rated along a psychometric scale. the results are then converted by formula to monetary values. the problem of this measure is that it requires subjective judgment. the fifth measure is the firm’s accounting net worth adjusted for intangible and the idiosyncrasies of accounting rules used in the simulation. although general principle could be laid out for the adjustment, the specific principle must depend upon the particulars of the model. olumuyiwa ganiyu yi̇nusa & mayowa ebenezer ari̇yi̇bi̇ & lateef adewale yunusa & kehinde isiaq olai̇ya 80 2.2.theoretical review the break-even model operating leverage includes business risk. generally, increase in leverage result in increase in risk and return, whereas decrease in leverage result in decreases in risk and return. there are three cost classification that firm induce in their activity which are variable cost (a cost that changes in total naira amount with the change in the level of activity),fixed cost (a cost that does not change, in total with the change in activity or output) and mixed cost. the break-even model aid to study the relationship between fixed cost, variable cost, sales volume (activity) and profit. also called the cost/volume/profit analysis (cvp analysis) (judith, 2010). the break-even helps to predict the attribute of business risk exposure, employed by the operating leverage ratio of an industry attribute and in industry having its own firm characteristics. business risk depends on the extent to which a firm builds fixed costs into its operation. operating leverage is simply the employment of an asset for which the firm pays a fixed cost. concurrently, any time a firm has a fixed cost that must be met, regardless of the output, operating leverage occurs. operating leverage operates that short-run analysis. since at the long-run all cost are variable. a firm acquires a fixed cost asset in the hope that the volume of the firm will produce revenue more than sufficient to cover all fixed and variable cost. moreover, variable cost varies directly with level of output, while fixed cost does not vary as volume/output changes. the variable cost include general and administrative expenses, direct selling commissions, raw material, and direct labor costs are part of overall utility bills. the fixed cost include depreciation of buildings and equipment, insurance, property taxes, part of the overall utility bills and portion of the cost of management (akingunola, 2016).with the static costs, the percentage change in profits accompanying a change in volume is greater than percentage change in volume. the phenomenon is known as operating leverage. if fixed costs are high even a small decline in sales can lead to a large decline in ebit(operating profits),the higher a firm’s fixed costs, the lowers its business risk while the lower a firm’s fixed cost, the lower it business risk. higher fixed cost are generally associated with more highly automated, capital intensive firms and industries and lower fixed costs are generally associated with less capital intensive firms. if a percentage of total cost is fixed, then the firm is said to have a high degree of operating leverage. n total revenue profit total cost b variable cost loss fixed cost o q fig.1 break even analysis from above diagram, the intersection of the total costs line with the revenue line represents the break-even point. the fixed costs that must be covered from the revenue after deduction of variable costs determine the volume necessary to break even. at the break-even point, variable cost plus fixed cost equal total revenue. fc+vc(x)=p(x) where x= volume of output (in units) f= fixed costs v= variable costs per units p= price per units operating leverage and firm value of manufacturing firms in nigeria 81 in a nutshell, operating leverage centers on the breakeven analysis. the break-even point represents the level which total revenue and expenses are equal, influenced by sales level, while operating income is zero. the break-even analysis depicts the intersection of the total costs line with the revenue line represents the break-even point the break-even points is peculiar to an industry-firm characteristics and low/high growth performance. 2.3. empirical review kajola, alao, sanyaolu & ojuringbe (2020) examined the effect of liquidity and leverage on financial performance of nigerian listed consumer goods firms. the sample size of the study was selected from seventeen consumer goods firms listed on the nigerian stock exchange. the time period was within 2012-2017. the pooled regression technique was employed to determine the econometric relationship of the dependent variables and independent variables. the findings of the study revealed that degree of operating leverage and degree of combined leverage has significant effect on financial performance while current ratio and quick asset ratio has significant effect on financial performance. the study was unable to give a vivid distinction between financial performance and firm value using eps (earning per share) to measure financial performance may not have indicated eps (earning per share) has a firm value proxy and not financial performance which looks from the holistic perspectives. also using degree of operating leverage and combined leverage, does not aid to expose or capture the risk and cost implication in terms of measurement. ghozali, handriani & hersungodo (2020) investigates into the most germane determinants of leverage in the indonesia manufacturing firms. the sample size of (300) three hundred manufacturing firms listed in indonesia stock exchange within 20102018. the hypothesis was drawn from the theoretical framework of modigliani & miller (1958) and pecking order theory. the major findings of the study indicate that bankruptcy cost, firm size, firm growth and risk measurements has positive influence on the debt ratio. the study suggests that the indonesia manufacturing sector should cling to the pecking order postulation that fund from internal environment of firms should be employed in executing net present value project. the study can be made robust by looking at the debt ratio from the period perspective in terms of short-term, mediumterm and long-term. leverage is an umbrella in finance terminologies that covers the financial, operating and combined leverage, than using the debt ratio alone (financial leverage). li, li & zeng (2020) examined into the influence of contraction flexibility, operating leverage and financial leverage from the school of thoughts of internal, ownership and agents conflicts of shareholders and debt holder’s. the study added to literature by creating a link with financial leverage with operating flexibility, including production flexibility. giving a concise role of debt governance in alleviating agency problems. the findings of the high proportion of banks loans or long-term debt in total liabilities can help levered firms alleviate the agency problem arising from contraction decisions. grau & reig (2019) analyses the effect that operating leverage exerts on the profitability of small and medium scale enterprises. the panel regression and data from 20092016 was employed. the bane of the study is considering relevance of sme’s in their economic development proponent while considering their institutional and legal environment. the findings suggest that operating leverage does not only influence profitability, but also affect other sources of risk like indebtedness, size, innovation which are all depending on the level of operating leverage of the company. orajaka (2017) investigated into the impact of leverage financing on financial performance of manufacturing firms in nigeria stock exchange. the sample size of four (4) companies was used, which data was gathered from their financial statement. the regression technique was used to validate the relationship dependent and independent variables in the applied study. the findings revealed that return on equity is significant to return on assets, net profit margin and asset turnover.net profit margin is also significant to return on equity, return on assets and assets turnover. also assets turnover is significant to return on equity, return to assets and net profit margin. kogan, li & zhang (2019) examines the relationship between operating hedge and gross profitability premium. the study explains into the hedging effect induced by intermediate inputs in production and it’s impacts on fundamental risk of firm cash flow and stock returns. the occurrence of hedging changes with respect to firms and has weaker preference for more profitable firms. this situation allows profitable firm have high exposure to aggregate profitability shocks giving rise to a gross profitability premium. olumuyiwa ganiyu yi̇nusa & mayowa ebenezer ari̇yi̇bi̇ & lateef adewale yunusa & kehinde isiaq olai̇ya 82 chen, harford & kamara (2018) examines operating leverage, profitability and capital structure. the study employed the pooled regression technique. the findings suggest that operating leverage increase profitability and reduces optimal financial leverage and thus that operating leverage generates negative relation between profitability and financial leverage that is thought to be inconsistent with trade-off theory. uremadu & onyekechi (2019) investigated into the impact of capital structure on corporate performance in nigeria. the multiple regression technique was used to analyze the data. the results from the study showed a negative and insignificant impact of capital structure on corporate performance of the consumer goods firm sector of nigeria. that long-term debt ratio to total asset had a negative and insignificant impact on returns on assets, while total debt ratio to equity also had a negative and insignificant impact on returns on assets. the study, therefore, concluded that capital structure is not a major determinant of firm performance. hence, the study recommends that managers should be careful while using debt as a source of finance since a negative impact exist between the capital structure and corporate firm’s performance. also, that corporate firms should try to finance their activities with retained earnings and use debt as a last option as this is consistent with the pecking order theory. this implies that, the study strongly recommends that corporate firms should use more of equity than debt in financing their business activities, this is because in spite of the fact that the value of a business can be enhanced with debt capital, it gets to a point that it becomes detrimental (negative) or unfavorable to the business. akingunola (2016) posited a theoretical justification on the impact of financial leverage, operating leverage and return. the study modeled an econometric model which can be used to investigate the impact of corporate leverage on return. the study concluded based on the happenings in the nigerian business environment that the modigliani and miller 1958 theory is not inconsistent. 3. methodology this research work utilizes a descriptive research design which is ex-post facto nature, relying on secondary data obtained after the occurrence of the event which the researcher has no control over. both inferential and descriptive statistics are relied on to examine effect of operating leverage on firm value of manufacturing quoted firms on the nigeria stock exchange (consumer goods sector).the data required for the study include; earning yield (ey), (ople) operating leverage in asset and (vas) variability in sales. the data for the study was gathered from the financial statement of the firm and other various publication related to the study. the analytical method of data was panel regression technique (hausman, random and fixed effect model). 3.1. model specification this model was adapted and adjusted to suit the present study from the study of enekwe, agu & eziedu (2014) and akingunola (2016). ……………………………..1 ……………….2 where; ey; earning yield. ople; operating leverage in asset vas; variability in sales vpbit: variability in profit before interest and tax u= disturbance term/white noise at time t i= nth term α = intercept α1– α3 = coefficient of the independent variables. operating leverage and firm value of manufacturing firms in nigeria 83 3.2 table 1: description of variables variables description measurement dependent variable ey it refers to the earnings per share for the most recent twelve (12) month period divided by current market price per share. it is the inverse of p/e it measured by earnings per share eps/ market price per share. independent variables ople operating leverage in asset is the residuals, that aid to depict the variable component of the firm that will influence return it is measured by fixed asset/total asset. vas variability of sales is the extent of dynamism of turnover of a firm, which aid to depict the extent of its risk exposure and investment prospects. it is measured by (standard deviation of sales). akingunola (2016) vpbit variability of profit before interest and tax is the variability of earnings of a firm, before interest on creditor and tax. it is the variability that will help to depict the true contribution margin of the variability of cost on the return. it is measured by (standard deviation of pbit). author’s compilation, 2019 4. data presentation, analysis and discussion this section summarizes the data collected and the statistical method of analysis, using the methodology adopted in the prior chapter. the 48 respondents engaged in this study were: one (1) finance director; one (1) directors at the internal audit unit; one (1) director (management); one (1) manager (hr); three (3) staff of the internal audit unit; seven (7) from accounting and finance department; four (4) staff from the human resource department; three (3) from general administration; nine (9) staff from the procurement and logistics department; and eighteen (18) field officers. 4.1. results and discussions of findings this section deals with the analysis and discussion of empirical findings. this covers the descriptive statistics, correlation matrix, hausman test and fixed & random effect model. table 2: showing the descriptive statistics ey dvas dvpbit ople mean 9.294466 5.745515 0.540681 0.542242 median 3.383115 0.124714 0.059526 0.518948 maximum 150.5775 388.4643 31.34843 1.659695 minimum 0.001745 0.000000 0.000000 0.059396 std. dev. 21.77029 46.40732 3.737475 0.290566 skewness 4.650516 8.185845 8.173616 1.595719 olumuyiwa ganiyu yi̇nusa & mayowa ebenezer ari̇yi̇bi̇ & lateef adewale yunusa & kehinde isiaq olai̇ya 84 kurtosis 27.95858 68.01026 67.87787 6.686070 jarque-bera 2069.199 13108.57 13056.08 69.33614 probability 0.000000 0.000000 0.000000 0.000000 sum 650.6126 402.1860 37.84770 37.95693 sum sq. dev. 32702.23 148601.1 963.8419 5.825588 observations 70 70 70 70 author’s compilation, 2019 the above table depicted the descriptive statistics used in the study. ey (earnings yield) has a mean value of 9.29%, median value of 3.38% and standard deviation which is a variation from the mean value to be 21.7% .dvas (variability in sales) has a mean value of 5.74%, median value of 0.12% and standard deviation which is a variation from the mean value to be 46.4%. dvpbit (variability in profit before interest and tax) has a mean value of 0.54%, median value of 0.05% and standard deviation which is a variation from the mean value to 3.73%. ople (operating leverage in asset) has a mean value of 0.54%, median value of 0.51% and standard deviation which is a variation from the mean value of 0.29%. the minimum value and maximum value of the variable include the following: ey (earning yield) has a minimum value of 0.00 and maximum value of 150.5. dvas (variability in sales) has a minimum 0.00 and maximum value of 31.4. dvpbit (variability in profit before interest and tax) has a minimum value of 0.00 and maximum value of 31.3. ople (operating leverage in asset) has a minimum value 0.05 and maximum value of 1.65. the skewness in the variable include ey (earning yeild) mirrors a long-tailed (positive skewness) at 4.65. dvas (variability in sales) mirrors long-tailed (positive skewness) at 8.18. dvpbit (variability in profit before interest and tax) mirrors a long-tailed (positive skewness) of 8.17. ople (operating leverage in asset) mirror a normal skewness at 1.59. the kurtosis in the variable include: ey (earning yield) is leptokutic at 27.9, since (27.9>3). dvas (variability in sales) is leptokutic at 68.0, since (68.0>3). dvpbit (variability in profit before interest and tax) is leptokutic at 67.8, since (67.8>3). ople (operating leverage in asset) is leptokutic at 6.68, since (6.68>3). the jarque-bera statistics include: ey (earning yield) is 2069.1 at 0.00 which is indicating the variable is normally distributed. dvas (variability in sales) is 13108.5 at 0.000 which is indicating the variable is normally distributed. dvpbit (variability in profit before interest and tax) is 13056.0 which is indicating the variable is normally distributed 0.000. ople (operating profit in asset) is 69.33 which is indicating the variable is normally distributed 0.00. table 3: correlation matrix ey dvas dvpbit ople ey 1.000000 dvas -0.049818 1.000000 dvpbit -0.050261 0.999507 1.000000 ople -0.037816 -0.201746 -0.202762 1.000000 author’s compilation, 2019 table 3 above show the correlation among the variables used in the study: ey (earning yield) has a negative relationship with dvas (variability in sales) at -0.04, dvpbit (variability in profit before interest and tax) at -0.05 and operating leverage in asset at -0.03. operating leverage and firm value of manufacturing firms in nigeria 85 table 4: regression analysis dependent variable: earnings yield (ey) variable pooled fixed random c 11.7508 (0.0599) 21.5951 (0.0008) 18.7369 (0.0101) dvas 0.2213 (0.9044) -1.4842 (0.5601) -1.0466 (0.6026) dvpbit -3.0994 (0.0923)** 18.259 (0.5633) 12.6645 (0.6115) ople -3.7848 (0.6884) -25.1647 (0.0177)* -18.9514 (0.0427)* r2 0.2951 0.4834 0.3616 adjusted r2 0.2400 0.3011 0.3189 durbin watson 1.1378 2.0231 1.7240 f-statistics 0.1138 2.6516 1.444 prob (f-statistics) 0.9516 0.0032 0.0378 hausman test 0.3485 p<0.05*; p<0.1** the pooled regression model results depicts that dvas (variability in sales) has a positive relationship with ey (earning yield) of selected manufacturing companies in nigeria and statistically insignificant to ey (earning yield) which implies that a percentage increase in dvas (variability in asset) will lead to 0.22 increase in ey (earning yield). dvpbit (variability in profit before interest and tax) has a negative relationship with ey (earning yield) of selected manufacturing companies in nigeria and statistically significant to ey (earning yield) which implies that a percentage increase in dvpbit (variability in profit before interest and tax) will lead to 3.09 decrease in ey (earning yield). ople (operating leverage in asset) has a negative relationship with ey (earning yield) of selected manufacturing companies in nigeria and statistically insignificant to ey (earning yield) which implies that a percentage increase in ople (operating leverage in asset) will lead to 3.78 decrease in ey (earning yield). the coefficient of determination using adjusted r2 shows that the explanatory variables (dvas, dvpbit and ople) explained 29.51% percent variation in manufacturing firms in nigeria. that is 70.49% is explained by other variables not included in the model. the overall statistical level of the model depicts that the model is not fit for forecasting giving the f-statistics of 11.38 and its probability of 0.9516 since the p-value is higher than 0.05, hence we conclude that the model is statistically insignificant and brings about the acceptance of the null hypothesis. this means that variability in sales, variability in profit before interest and tax and operating leverage in asset have an insignificant effect on consumer manufacturing firms in nigeria. the fixed regression model results depicts that dvas (variability in sales) has a negative relationship with ey (earning yield) of selected manufacturing companies in nigeria and statistically insignificant to ey (earning yield) which implies that a percentage increase in dvas (variability in asset) will lead to 1.48 decrease in ey (earning yield). dvpbit (variability in profit before interest and tax) has a positive relationship with ey (earning yield) of selected manufacturing companies in nigeria and statistically insignificant to ey (earning yield) which implies that a percentage increase in dvpbit (variability in profit before interest and tax) will lead to 18.2 increase in ey (earning yield). ople (operating leverage in asset) has a negative relationship with ey (earning yield) of selected manufacturing companies in nigeria and statistically significant to ey (earning yield) which implies that a percentage increase in ople (operating leverage in asset) will lead to 25.1 decrease in ey (earning yield). the coefficient of determination using adjusted r2 shows that the explanatory variables (dvas, dvpbit and ople) explained 48.34% percent variation in manufacturing firms in nigeria. that is 51.66% is explained by other variables not included in the model. the overall statistical level of the model depicts that the model is fit for olumuyiwa ganiyu yi̇nusa & mayowa ebenezer ari̇yi̇bi̇ & lateef adewale yunusa & kehinde isiaq olai̇ya 86 forecasting giving the f-statistics of 2.65 and its probability of 0.0032 since the p-value is less than 0.05, hence we conclude that the model is statistically significant and brings about the rejection of the null hypothesis. this means that variability in sales, variability in profit before interest and tax and operating leverage in asset has a significant effect on consumer manufacturing firms in nigeria. the random regression model results depicts that dvas (variability in sales) has a negative relationship with ey (earning yield) of selected manufacturing companies in nigeria and statistically insignificant to ey (earning yield) which implies that a percentage increase in dvas (variability in asset) will lead to 1.04 decrease in ey (earning yield). dvpbit (variability in profit before interest and tax) has a positive relationship with ey (earning yield) of selected manufacturing companies in nigeria and statistically insignificant to ey (earning yield) which implies that a percentage increase in dvpbit (variability in profit before interest and tax) will lead to 12.6 increase in ey (earning yield). ople (operating leverage in asset) has a negative relationship with ey (earning yield) of selected manufacturing companies in nigeria and statistically significant to ey (earning yield) which implies that a percentage increase in ople (operating leverage in asset) will lead to 18.9 decrease in ey (earning yield). the coefficient of determination using adjusted r2 shows that the explanatory variables (dvas, dvpbit and ople) explained 36.16% percent variation in manufacturing firms in nigeria. that is 63.84% is explained by other variables not included in the model. the overall statistical level of the model depicts that the model is fit for forecasting giving the f-statistics of 1.44 and its probability of 0.0378 since the p-value is less than 0.05, hence we conclude that the model is statistically significant and brings about the rejection of the null hypothesis. this means that variability in sales, variability in profit before interest and tax and operating leverage in asset has a significant effect on consumer manufacturing firms in nigeria. the result shows the hausman test diagnostic which depicts the appropriate model for forecasting. the result shows that the appropriate model for forecasting is the random effect as the hausman test with f (p-value) of 0.3485 shows the acceptance of the alternative hypothesis of the random effects. hence, we accept the estimation of random effect for forecasting. there is a need to further check the appropriateness of the random-effect model. 5. conclusion and recommendations this study investigated the effect of operating leverage of firm value of quoted manufacturing firms in nigeria. the study established that earning yield is dependent on variability in sales, variability in profit before interest and tax and operating leverage in asset. based on the random effect model. variability is sales (_d_vas) and (ople) operating leverage in assets has a negative effect on of firm value (earnings yield), while vpbit (variability in profit before interest and tax) has positive effect on firm value (earning yield). operating leverage in asset has a significant effect on firm value. the findings is consistent with the findings of pradeep & shailendra (2016). it is therefore recommended that firm’s would benefit from the quick variability in fixed asset to current asset. changes in fixed cost into variable cost influences sales and long-run term profit. but must make sure, this variability is recouped back as soon has the profit is earned, because the total asset valuation also depicts the goodwill of a firm and not to be carried away with demand of sales/turnover providing room strength at the occurrence of bankruptcy/liquidation treat. 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(2013), impact of working capital management and capital structure on profitability of automobile firms in pakistan. retrieved from http;//www.ssrn.com. international journal of commerce and finance, vol. 6, issue 1, 2020, 113-126 113 challenges and prospects of taxing informal economy at jimma zone, oromia national regional state, ethiopia sıntayehu tulu wondimu jimma university, ethiopia mengistu deyassa dadi jimma university, ethiopia abstract this study explored the challenges and prospects of taxing an informal economy in the developing country conducted with survey data in an ordered logistic regression model. the variables of the study like sizes of the informal economy, institutional quality, growth, presumption taxes, governance, and revenue have statistically significant and also they are related to the taxing of an informal economy withholding positive and negative signs. the sign directions of the variables show that the supporting of taxing of an informal economy and also the consequences impacted on informal economy tax practices and approaches. taxing of an informal economy would be recommendable and mandatory for mobilizing the domestic revenues in the developing countries, for required tax compliances and improve the bargaining powers of the society of taxpayers; even though as constraints would be the limited revenue, high cost, and weakened governances and reduces the institutional quality. availing of tax for an informal economy required to supports with technology and skilled human resources to improve the tax systems and to manage costs and meet the expected domestic revenue mobilizations for the expected amounts of government expenditure in each fiscal period. keywords: taxes informal economy, tax compliance, presumption tax, jimma, ethiopia jel classification: h20, h23 & h26 1. introduction tax is an involuntary levy and a policy tool that helps to mobilize revenue to provide public goods and services of the government expenditures. tax is a tool to perform the redistributions of income and wealth. in addition to that, also encourages economic activities with creating work opportunities, investment, equity and supporting economic advancements of the developing as well as developed countries. in real practice, the good tax system meets to overcome the principles of efficiency, fairness and easy to administer, and facilitates the operations of taxations with minimum costs. as the goals of the good tax systems address how much the appropriate tax revenues generated for the government expenditures in each fiscal period. in most cases, the determinants of tax revenue of countries would be measured with the ratio of tax to gdp; this situation would be subjected to many types of researches and researchable areas of taxes. the findings of different scholars supported the traditional factors, conventional kinds of literature to indicate the country‘s economic structure and institutional sophistication levels on the variations of tax revenue (undp, 2004). the taxation would be emphasized in the definition as a financial charges or other levy imposed upon a taxpayer by the appropriate body of the state or federal governments to do such function given by the law of a given country (granger, 2013). in this perspective categorized taxes as direct taxes on income and wealth, and indirect taxes on the consumption. nowadays, seen an observable growing interest of the donors to improve a good tax system of the developing countries to come up with the principles of taxation in parallel to the developed countries' tax system. the purpose to be reflected on the concerns on domestic revenue mobilization to finance the public goods and services with owning the generated amounts of revenue from the internal sources rather than the aids of the dependence of the foreign donations; additionally, domestic revenue mobilization forwarded the recognition of the centrality of taxation for growth and redistribution. an effective tax system is considered central for sustainable in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e sıntayehu tulu wondimu & mengistu deyassa dadi development because it can mobilize the domestic revenue base as a key mechanism for developing countries to escape from the aid of western countries. the developed countries shifted the aid after the global financial crisis and give attention to the extent and effectiveness of the aid they provide, and to ensure that they support rather than discourage the latter’s revenue-raising efforts (nickson and iwanami, 2008). in the real practices, the growing recognition of taxation and state-building would be a great link to justify in the present conditions for the modern state-buildings of every nation (braütigam et al., 2008), as cited in(nickson and iwanami, 2008). even different kinds of literature provide a strong argument to gain from mobilizing domestic financial resources through the tax system. under mascagni, moore, & mccluskey(2014) study explanations the tax system may contribute to improves governance through three main dimensions in their statements. firstly, fiscal bargaining and negotiation between the state and citizens over taxes are central to the development of social fiscal contracts. this implies that the taxpayers have a legitimate right to expect a return for the relative amounts of taxes paid and this may suggest for the government how much underperformed or not impacts on the requests of taxpayers. secondly, governments have stronger incentives to promote the economic growth of the taxpayers and to meet the prosperity of taxpayers. lastly, dependence on taxes requires states to develop a bureaucratic apparatus to tax the collection. this is maybe the expected to lead to broader improvements in public administration for countries undertaken such consideration on the domestic revenue mobilization as the primary issue. overall the domestic revenue mobilizations in developing countries obtained an increasing prominence in the policy debate of the most developing nations(mascagni, moore and mccluskey, 2014). in this perspective, the domestic revenue mobilization brings the potential benefits of taxation for the state-building; independence from foreign aid; the fiscal effects of trade liberalization; the financial and debt crisis of the western countries; and the acute financial needs of developing countries(mascagni, moore and mccluskey, 2014). in actual practice to mobilize the domestic revenues in developing countries the governments faces great challenges, which results in a gap between what they could collect and what they collect. the challenges impacted on the tax gaps include tax evasion and avoidance, tax exemptions, and inequitable rent-sharing in the extractive sector. most of the studies recommends to minimizes for the tax gaps of the developing countries needed to supports and push forward in existed international initiatives to reform the global tax system; providing increased financial and technical assistance to support local capacity in tax administrations and supported the existing regional organizations like the african tax administration forum in developing shared principles on issues such as tax exemptions, and tax regimes for natural resource contracts(mascagni, moore and mccluskey, 2014). also the developing countries and development partners alike increasingly realize the importance of mobilizing domestic financial resources for development, such as the doha declaration on financing for development (2008) and the busan partnership for effective development cooperation (2011) both encourage a greater role for domestic resources, taxation in particular, in funding development(oecd, 2013). nowadays most of the studies state the comparisons of the governments of the developing countries collect much lower proportions of their gdps in tax revenue than do the governments of the organization for economic cooperation and development (oecd) countries. their tax effort indices, revenue collections relative to estimated revenue potentials, are also lower than those of the oecd countries. however, the scholars agreed on the potential to increase tax revenue in developing countries contrary to the developed countries. but, the developing countries face extensive political, economic and administrative challenges in closing up the tax gaps. even to do the tax reform is difficult in the developing countries with the interest groups dominance in the initially designed system of the countries. presently the tax authorities of the developing countries suffer from the weak capacity of shortages of skilled staff and lack of modern infrastructures like information technology (it) systems and property registers. in contrary, the developing country economies face the challenging to tax the given large size of their agriculture sectors, small tax bases, and their high degree of informality(mascagni, moore and mccluskey, 2014). some of the figures expressed the comparisons of the developing and developed countries collected from taxes as stated in their study as the developing countries typically collected from taxes in between 10 to 20 percent of their gdp, whereas the average for developed countries is more than 40percent(besley and persson, 2014). this evidence shows that the amount of tax to gdp ratio would be low in the developing countries relative to the developed countries. the consequence that contributes to such a discrepancy between them is the nature of the business of t he developing countries. the statistical results show that the developing countries have an informal sector representing an average of around 40%, perhaps up to 60% in some countries. the developing countries informal sectors are characterized as mass small informal traders that may not be efficient to bring them into the tax net, incurred high challenges and prospects of taxing informal economy at jimma zone, oromia national regional state, ethiopia 115 cost of collection and limited revenue potentials, although they required a broader governance benefit from the governments. additionally, they have an issue of non-compliant entities this may hard to tax them, companies do evasion of taxes and difficult to put into the tax net(granger, 2013). the nature of the informal business sector would be the direct impact on the tax revenues of the developing countries' expected to be collected. under the international labor organization (ilo) mission statement to africa in the early 1970s, characterized the informal sectors as street vendors, garbage collectors, home-based garment workers, and home-based electronic workers. in general speaking about the informal sectors, they operate their business on the streets or in the open air; would be the most visible informal workers business operation areas for the sectors (chen and alter, 2012). some observers feel the sector is simply too varied or heterogeneous to be meaningful as a concept (peattie, 1987), as cited in (chen, 2001). however, in the early 1970s and again in the late 1990s, several independent schools of thought converged on the fact that the informal sector as a whole accounts for a significant share of employment and output; even though cannot be dismissed or disregarded the sector(chen, 2001). in the contextual meanings in this study used terms such as the informal economy, informal work, informal sector, and informal economic activity would be used interchangeably, even though their activities do not cover the illegal operations to perform business in an informal economy. most of the scholars expresses the informal economy with the terms as the irregular economy (ferman & ferman, 1973), the subterranean economy (gutmann, 1977), the underground economy (simon & witte, 1982; houston, 1987), the black economy (dilnot & morris, 1981), the shadow economy (frey, weck, & pommerehne, 1982; cassel & cichy, 1986), and the informal economy (mccrohan & smith, 1986), as cited in(losby, else, kingslow, edgcomb, malm & kao, 2002). also the most popular media uses terms for the informal economy with a words of invisible, hidden, submerged, shadow, irregular, non-official, unrecorded, or clandestine (u.s. department of labor, 1992), as cited in(losby et al, 2002). in common senses the activities of an informal economy would not be recorded or imperfectly reflected in the national official economy and may not meet the nations gdp records. in the application of an informal economy would be issues of equity, economic opportunity, and social development, the term informal economy first came into widespread use as a means of describing a dualistic economic structure found in developing countries. per the smith (1987) study as cited in sookram & watson (2008) defined the informal economy as a non-formal once that does not consider in the national official accounts. this definition implies that the informal economy activities may not be recorded in the official gdp accounts of the nation. ogunc, fethi, yilmaz, and gokhan (2000) research, as cited in boitano & franco abanto(2019) mentioned that the informal economy as a parallel or shadow economy terms uses to refer the informal economy, although no formally agreed definitions of an informal economy. schneider & hofreither(1986) defined the informal economy as the set of activities that add value and could be accounted for the national income but are not registered. rosca (2019) expresses the production of goods and services of an informal economy that is not included in the official gdp of the nations. juhdi, wan, othman, & moksin (2010) in their research point out the informal economy with dividing into three categories as the informal sector, parallel markets, and black markets. eilat and zinnes (2000), as cited boitano and franco abanto(2019) mentioned that the term informal has been mainly used to refer to small and artisan activities usually carried out in developing countries. other terms recognized by eilat and zinnes (2000), as cited boitano and franco abanto(2019) are the hidden and underground economy, used to refer to them as tax avoidance; the parallel and black economy, refer to illicit activities; the unofficial and unrecorded economy refer to non-recorded activities in the national statistics and the shadow economy (tanzi, 1982), as cited in (boitano and franco abanto, 2019). 2. literature review most of the research scholars highlighted in their studies on the taxation of the informal economy in the developing and transition countries taken as a priority attention in the current periods. even though whether taxing or not on the informal economy they give justifications with subjecting into the longstanding controversy issues of an informal economy business situation and natures. in critics of taxing an informal economy stands with the potential revenue yields are low, administrative costs are high, tax incidence is likely to be regressive, and tax enforcement risks sıntayehu tulu wondimu & mengistu deyassa dadi exposing vulnerable firms to harassment (keen, 2012), as cited in(joshi, prichard, & heady, 2014). however, recent interest forces the taxation of an informal economy to promote the growing attention of the potential benefits from the informal sector taxation in terms of revenue, growth, and governance. inline to the three benefits of informal economy taxation the scholars indicated in their studies independently with respect to revenue, the informal sector forms a large and, in many countries, the growing share of gdp, and thus represents a potentially significant source of tax revenue for the cash-strapped governments (schneider, buehn, & montenegro, 2010; schneider & klinglmair, 2004), as cited in (joshi et al., 2014). this taxing of the informal economy may be essential to sustain the tax morale and tax compliance for the larger firms of the nations (alm, martinez-vazquez, & schneider, 2003; terkper, 2003; torgler, 2003), cited in (joshi et al., 2014). in respect to growth, evidence shows that the taxation of an informal economy contributes for formalization, accelerates the growth rates of informal sector firms, and may also the broader benefits for the existing formal sector firms (de mel, mckenzie, & woodruff, 2012; fajnzylber, maloney, & montes rojas, 2009a, 2009b; loeprick, 2009; mcculloch, schulze, & voss, 2010; perry et al., 2007), as cited in (joshi et al., 2014). finally, in the respect of governance, taxing an informal economy as an argument creates the senses of ownerships of the taxpayers and may be taken as a method of engaging firms with the state, and thus promoting legitimacy, good governance, and political accountability of the taxpayer societies(joshi et al., 2014). this study addresses the challenges and prospects of taxing of an informal economy on the basis prior studies and adopting variables the study such as the sizes of an informal economy, revenue, growth, governance, corruptions or institutional quality and presumptions on the taxing of informal sectors and, the final purposes of the study draws the alternative strategies and promotes for the taxing of informal economy in the developing countries. additionally, explore the technical and political economy barriers to the relevant reform on the taxation of an informal economy (joshi et al., 2014). per the pieces of evidence of the scholars, the growth and governance of an informal economy benefits would be improved in the informal sector taxation for large potential under specific contexts even though with an uncertainty. by contrast, the costs to small producers are evident and potentially significant in the contexts of widespread corruption and abuse(joshi et al., 2014). understandably the taxation of the informal economy in the present times obtained greater economic attention and occupies an important domain of revenue to the basis of domestic resources generating from internal sources for the developing countries’ economies. although the informal economy is part of an economic unit which is not officially registered and monitored under the government regulations (calbreath, 2010), as cited in(udoh, 2015). the informal economy functioned for self-employed persons, small and microenterprises and other forms of economic activities. incomes generated with such operators of the informal sector, would not be officially captured into the tax net systems of the state or federal governments for most of the countries. in the common practices of an informal sector usually exists a greater percentage of tax defaulters, most of the tax evasions leading to discharges for the government revenue expectations. per different scholars' statements the attention of taxation of the informal economy grounded in its potential importance of revenue, growth, and governance. the arguments give the weight for taxation of an informal economy based on the indirect benefits, particularly the prospect of accelerated growth and the potential for governance gains(joshi et al., 2014). understandably know that the informal economy describes as the set of productive activities would be subject to tax and social contributions, intentionally hidden from the tax authorities’ with the in frustration of the tax burdens. the purposes of reducing the numbers of informal economy in practices not only for tax collection may undertake to increases the tax base and to reduces, but the tax evasion even these practices also observed in the last periods of an ethiopia’s economic growth. however, focusing only on tax purposes, the tax structure in ethiopia and sub-saharan africa is dominated by indirect taxes, which results in low redistributive capacity and higher inequality. on the contrary, in developed countries, the system is progressive meaning concentrated on the direct taxes. concentrating on direct taxes improves welfare and equality but is only possible by absorbing the informal economy and reducing informal employment(oecd, eclac, ciat & idb, 2016), as cited in (boitano and franco abanto, 2019). under the scholars and corresponded studies results they suggest that the structure of an economy would be the determinant for the tax revenue, although in the informal economy their economic structure contributes the difficulty to the expected tax revenues from the sectors (undp, 2004). mukherjee (2016) study, as cited in (boitano & franco abanto, 2019) indicated that the informal economy is huge in numbers and will continue in time. a large informal sector is found to be a persistent phenomenon in low-income and emerging economies. taxation is often seen as a key ingredient for formalization, and developing countries might benefit from increases in revenues, growth effects from improved productivity, and a more vital relationship between taxpayers and the state authorities. even challenges and prospects of taxing informal economy at jimma zone, oromia national regional state, ethiopia 117 though may be difficult to draw the general conclusions whether the informal sector taxation lead to improvements or any other impacts on the economy of the developing country(kundt, 2017). the size of an informal economy in a developing country would be large and impacted on the expected taxation of an informal economy. in comparison, the taxation of the oecd countries has direct taxation, efficient, transparent, and highly related to tax to gdp ratio and adopted technology whereas the developing countries taxation mostly indirect taxes, high costs, mismatch the collected revenue and costs incurred for taxes. the developing countries face challenges in increasing their revenue from domestic sources. the challenges of the developing countries would be characterized with a small tax base, a large sizes of informal sector, weak governance and administrative capacity, low levels of per capita income, domestic savings and investment and possibly tax avoidance by elites(oecd, 2013). the most common method of taxing small informal firms in the developing countries would be through presumptive taxes. taxing small informal sector firms is hindered by two factors: high compliance costs for small taxpayers and high costs of collection for tax administrations (loeprick, 2009), as cited in (joshi et al., 2014). presumptive taxes resolve these problems by using a simplified indicator of the tax base to simplify recordkeeping for firms and estimation of tax liabilities by tax collectors. 3. research design and methodology the concepts of research design and research methodology presented with a compound words and also the concepts design and methodology attached to the noun research(van zyl, 2012). research design is a plan for a study, providing the overall framework for collecting data as leedy (1997:195), cited in (van zyl, 2012). it is also a plan for selecting subjects, research sites, and data collection procedures to answer the research question(s) as (macmillan and schumacher, 2001:166), cited in (van zyl, 2012). whereas the research methodology as a theory of how an inquiry should proceed as (schwardt, 2007:195), cited in (van zyl, 2012). it involves analysis of the assumptions, principles and procedures in a particular approach to inquiry. according to schwardt (2007), creswell and tashakkori (2007), and teddlie and tashakkori (2007), as cited in van zyl(2012), methodologies explicate and define the kinds of problems that are worth investigating; what constitutes a researchable problem; testable hypotheses; how to frame a problem in such a way that it can be investigated using particular designs and procedures; and how to select and develop appropriate means of collecting data. in line with the general perspectives of the research design and methodology, this study used the mixed research design to undertaken the challenges and prospects of taxing an informal economy in the developing country at jimma zone. to be effective in this study the descriptive survey method would be employed for the study. 3.1. sources of data, types of data and methods of data collection the study would be used in both primary and secondary sources of data. the primary data sources would be collected by using the self-administered questionnaires’ and semi-structured interviews. the questionnaires would be comprised of both open and closed-ended questions. open-ended questions would be used to allow the respondents to write their own opinions without the restrictions of ideas and to include ideas that might not be incorporated in the questionnaires. in addition to the open-ended questions also used the closed-ended questions, which is designed with the measurement of the five points likert scale. the scaling was developed in (1) represent strongly disagree, (2) disagree, (3) neutral, (4) agree, and (5) strongly agree. thus, the variables can be scaled to measure the degree of the agreement or the disagreement of the respondents in which the variables can be elicited. the purpose of using the close-ended questions and incorporating in the questionnaires would be to access a high response rate from the respondents within a short period, and this may save the respondents’ time and expected to increases the response rates. the researcher also integrates the secondary data to support the primary data and collected from official documents and records relating to the particular study. 3.2. target population, sample size and sampling techniques sıntayehu tulu wondimu & mengistu deyassa dadi the target population of the study would be the informal business sectors of the jimma city and selected jimma zone districts. in jimma zone presently around 22 districts including the jimma city administration. per the information of the revenue office of the jimma zone recently 6520 informal business sectors would be functioned in the business operations of the fiscal year even though the numbers would vary from time to time. in the determination of the sample size purposes taken into an account of the three criteria, it aid to determine the appropriate sample size of the study such as level of precision, level of confidence or risk, and degree of variability in the attributes being measured(morse, 2000) and also for populations that are large, as cochran (1963:75), cited in (morse, 2000) developed the equation to yield a representative sample for proportions. where: n_0 sample size z2 abscissa of normal an area α at the tails (1_α equals the desired confidence level 95%), e is desired level of precision, p estimated proportion of an attribute i.e., presented in target population, and q is 1-p. the above sample size equation provides a somehow large sample size to the study even though to minimize the sample size and to access proportionately more information from a small sample adjusts the sample size with an equation as followed. where: n sample size, n target population in accordance to the above equations would be determined the sample size of the study as follows; this study selected some districts and used a multi-stage sampling technique to determine the sample size of the study. then, a proportional random sampling method was employed to select the sample business operators from each stratum. 3.3. methods of data analysis after accomplishing data collection from the expected sample respondents, would be conducted data analysis operations. the research would be used descriptive statistics to analyze the collected data with the aid of statistical software. in addition to the descriptive statistics, the econometric model known as the ordered logistic model would be employed for the study. 3.3.1.model specification: ordered logistic regression model (ologit) when the outcome variable is ordinal and the relative ordering of response values is known and have the exact distance between them then the most popular method is the ordered logistic regression model, which is also known as the proportional odds model(williams, 2016). unfortunately, experience suggests that the assumptions of the ordered logistic model are frequently violated indicated the situations most of experts studies as (long & freese, 2014), cited in (williams, 2016). the ordered logistic model is a regression model for ordinal response variables. the model is based on the cumulative probabilities of the response variable: in particular, the logistic of each cumulative probability is assumed to be a linear function of the covariates with regression coefficients constant across response categories(michaels, 1989). it is tempting to analyze ordinal outcomes with the linear regression model, assuming equal distances between categories. however, this approach has several drawbacks which are well known in literature as (mckelvey and zavoina, 1975; winship and mare, 1984; lu, 1999), cited in (michaels, 1989). when the response variable of interest is ordinal, it is advisable to use a specific model known as the ordered logit model. questions relating to the challenges and prospects of taxing an informal economy are usually ordinal in nature. under this study the ordered logistic model would be uses to estimate the relationships between ordinal responses challenges and prospects of taxing informal economy at jimma zone, oromia national regional state, ethiopia 119 on the challenges and prospects of taxing an informal economy and selected exogenous variables of the study. the collected responses are categorical as well as ordered them sequential from the small magnitude to the large magnitude with setting an equal distances between each other’s’, the responses expressed as strongly disagree [1], disagree [2], agree [3] and strongly agree [4]. let be an ordinal response variable with categories for the subject, alongside with a vector of covariates . a regression model establishes a relationship between the covariates and the set of probabilities of the categories , usually, regression models for ordinal responses are not expressed in terms of probabilities of the categories, but they refer to convenient one-to-one transformations, such as the cumulative probabilities of . note that the last cumulative probability is necessarily equal to 1, so the model specifies only cumulative probabilities. an ordered logistic model for an ordinal response with categories is defined by a set of equations where the cumulative probabilities are related to a linear predictor through the logit function: . (1) the parameters , called thresholds or cut-points, are in increasing order ( it is not possible to simultaneously estimate the overall intercept and all the thresholds: in fact, adding an arbitrary constant to the overall intercept can be counteracted by adding the same constant to each threshold . this identification problem is usually solved by either omitting the overall constant from the linear predictor (i.e. ) or fixing the first threshold to zero (i.e. ). the vector of the slopes is not indexed by the category index thus the effects of the covariates are constant across response categories. this feature is called the parallel regression assumption: indeed, plotting against a covariate yields parallel lines or parallel curves in case of a non-linear specification. in model (1) the minus before implies that increasing a covariate with a positive slope is associated with a shift towards the right-end of the response scale, namely a rise of the probabilities of the higher categories. some authors write the model with a plus before : in that case the interpretation of the effects of the covariates is reversed. from equation (1), the cumulative probability for category is the ordered logistic model is also known as the proportional odds model because the parallel regression assumption implies the proportionality of the odds of not exceeding the category : in fact, the ratio of these odds for two units, say and , is ], which does not depend on and thus it is constant across response categories. 4. result and discussions 4.1. descriptive statistics of the study table 1: summary of the endogenous variable responses in their categories taxing informal economy freq. percent cum. strongly disagree 15 4.13 4.13 disagree 20 5.51 9.64 agree 10 2.75 12.40 sıntayehu tulu wondimu & mengistu deyassa dadi strongly agree 318 87.60 100.00 total 363 100.00 source: author’s survey data, 2019 the above table indicates that the endogenous variable responses from the sampled respondents of the study. per the respondents' responses, the respondents for the strongly disagree would be equal to 4.13 %(15), disagree 5.51 %(20), agree 2.75 %(10) and also strongly agree 87.60%(318). this statistical result implies that most of the respondents respond as strongly agree on the taxations of an informal economy. on average most of the sample respondents agreed for the taxation of an informal economy. table 2: descriptive statistics for the endogeneous and exogeneous variables of the study variables obs. mean std. dev. min max taxing informal economy 363 3.738292 .7435501 1 4 size of informal economy 363 3.338154 .8349522 1 4.625 corruptions 363 3.432163 .5002627 1.25 5 governance 363 3.254545 .8404156 1 4.4 growth 363 3.758953 .7103388 1 4.5 revenue 363 2.738598 .4332092 1.222222 4.111111 presumptive tax 363 3.035601 .3986034 1.461539 3.769231 source: author’s survey data, 2019 table 2 presents the summaries of the endogenous and exogenous of the ordered logistic model variables. in the above table listed the numbers of sampled respondents of the study mean or average values, standard deviations, minimum and maximum values of the categorical variables of the study given the responses from the selected respondents of the study. the expected value of the dependent variable, known as the taxing of an informal economy is closed to 3.738 and its standard deviation also closed to 0.744. this value implies that the sample respondents' responses would deviate in between agree and strongly agree on the scales. the expected values of the independent variables namely, the size of the informal economy, corruption, governance, growth, revenue, and presumptive tax would be stated in the above table. the expected value of the size of the informal economy would be equal to 3.338 from the given responses of the sample respondents and the standard deviation also equal to 0.835. the expected value of the corruption of tax officials would be equal to 3.432 from the given responses of the sample respondents whereas the standard deviation equal to 0.500. the expected value of the governances of the sectors would be equal to 3.255 and also the standard deviation would be equal to 0.8403. the expected values of growth of an informal economy, contributions of revenues from an informal economy and presumptive tax from an informal economy would be 3.759, 2.739 and 3.035 respectively. also, their standard deviations would be 0.710, 0.433 and 0.399. the expected values imply that the respondents' responses agree on the situations specified variables of the study, which are the average responses above 2.5. the selected variables such as the size of the informal economy, corruption, governance, growth, revenue, and presumptive tax would be ready to undertake the data analysis with the specified econometrics model. according to the measures of the central tendency especially the mean values and standard deviations indicate that the distributions of the data would be concentrated to the center and also their standard deviation indicates that the data distributions closed to the center. 4.2. ordered logistic model estimation results 4.2.1. evaluating ordered logistic model fit table 3: the pearson chi-square tests for the model fit dependent variable independent variables df pearson chi-square p-values taxing informal eco. size of informal eco 36 339.8960 0.000 taxing informal eco. corruptions of officials 39 826.3703 0.000 challenges and prospects of taxing informal economy at jimma zone, oromia national regional state, ethiopia 121 taxing informal eco. governance of info. 45 672.5306 0.000 taxing informal eco. growth of info. 18 638.3129 0.000 taxing informal eco. revenue from info. 45 996.2524 0.000 taxing informal eco. presumptive tax of inf. 39 737.1297 0.000 source: author’s survey data, 2019 table 3 presented the pearson chi-square tests, which would be addressed the null hypothesis tests for the fit of the model conducted to know the associations of the studied variables, that is, between the dependent variable and independent variables. under the pearson chi-squares tests for each of the independent variables with the dependent variable observed that from the above-given table there would be an association between the studied variables, which the outcome variable with an endogenous variable. in addition to that, the p-values from each dependent and independent variables would be less than 0.05 or the value of alpha. these situations would be suggested that acceptance of the research hypothesis and in another direction would be required to reject the null hypothesis of this study. 4.3. discussion 4.3.1. ordered logistic model interpretations with the coefficients iteration log: this is a listing of the log-likelihoods for each of the iteration. the ordered logistic regression uses the maximum likelihood estimation, which is an iterative procedure. the first iteration for the iteration of zero is the log-likelihood of the null or empty model; that is, a model with no predictors. next to the zero iteration, the predictors are included in the model. the iteration of the log-likelihood increases because the goal is to maximize the log-likelihood. when the difference between successive iterations is very small, the model is said to have converged, finally the iterating stops, and the results are displayed, under these expressions, the model iteration would be converged to -101.6979 contextual in this model. model summary ordered logistic regression number of obs. = 363 lr chi2 (6) = 164.15 prob. > chi2 = 0.0000 log likelihood = -101.6979 pseudo r2 = 0.4466 number of observations: this shows that the number of observations used in the ordered logistic regression model. the number of observation would be 363 and there is no missing value from the data sets. lr chi2 (6): this is the likelihood ratio (lr) chi-square test that at least one of the predictors’ regression coefficients is not equal to zero in the model. the number in the parenthesis indicates that the degree of freedom of the chi-square distribution used to test the lr chi-square statistics and defined by the number of predictors in the model. the lr chi-square statistics would be calculated as; -2(l (null model) l (fitted model)) = -2[(-183.77464)-(101.6979)] =164.15. where l (null model) is from the log-likelihood with just the response variable in the model (iteration 0) and l (fitted model) is the log-likelihood from the final iteration (assuming the model converged) with all the parameters. in general speaking, the lr chi-square (6) shows that the model fits the data well as compared to the null hypothesis. pro > chi2: this is the probability of getting an lr test statistics as extreme as, or more so than the observed under the null hypothesis is that all of the regression coefficients in the model are equal to zero. in other words, this is the probability of obtaining these chi-square statistics (164.15) if there is, in fact, no effect of the predictor variables. this p-value is compared to a specified alpha level, this is the willingness to accept type i error, which is typically set at 0.05 or 0.01. the small p-value from the lr test, <0.0001, would lead us to conclude that a least one of the regression coefficients in the model is not equal to zero. the parameter of the chi-square distribution used to test the null hypothesis is defined by the degree of freedom in the prior line, chi2 (6). in this study, the p-value shows sıntayehu tulu wondimu & mengistu deyassa dadi that a highly significant for the exogenous variables of the study, and this implies that the size of an informal economy, corruption, governances, growths, revenues, and presumptive taxes would be the statistically significant effects on the taxing of an informal economy. pseudo r2: this is mcfadden’s pseudo r-squared logistic regression does not have an equivalent to the r-square that is found in ols regression. then the value of mcfadden r2 (aka pseudo r2) would be computed as follows; mcfadden r2 (aka pseudo r2) is (remember, =-2* = -2*-183.77464 = 367.54928) according to the above expressions the pseudo r2 of the model output as well as the computed values of pseudo r2 with an equation obtained an identical value. table 4: parameter estimates taxing informal eco. coef. std. err. z p>z a [95% conf. interval] b size of informal .8083195 .2715137 2.98 0.003 .2761623 1.340477 corruptions 1.079828 .3424071 3.15 0.002 .4087224 1.750934 governance -1.178154 .4796327 -2.46 0.014 -2.118217 -.2380908 growth 2.694581 .4522616 5.96 0.000 1.808164 3.580997 revenue -3.895929 .6288067 -6.20 0.000 -5.128368 -2.663491 presumptive tax 3.422215 .6758621 5.06 0.000 2.097549 4.74688 /cut1 6.681841 1.248791 4.234256 9.129427 /cut2 8.715686 1.404165 5.963573 11.4678 /cut3 9.376016 1.445678 6.54254 12.20949 source: author’s survey data, 2019 coefficients’ of the variables: in the above table indicated that the ordered log-odds (logistic) regression coefficients of the exogenous variables of the study. to conduct the interpretation of the coefficients of the variables would be taken into accounts of the standard of the interpretation of the ordered logistic coefficient taken as for a one-unit increase in the predictor, the response variable level is expected to change by its respective regression coefficient in the ordered log-odds scale while the other variables in the model are held constant. interpretation of the ordered logistic estimates is not dependent on the ancillary parameters; the ancillary parameters are used to differentiate the adjacent levels of the response variable. however, the ordered logistic model estimates one equation overall the levels of the dependent variable, a concern is whether one-equation of the model is valid or a more flexible model is required. per the ordered logistic model, all of the exogenous variables of the study would be statistically significant. the obtained results of the ordered logistic model would interpret with their coefficients of the exogenous variables as per the standard of the ordered logistic model interpretations as follows. the positive coefficient of the exogenous variables would be the sizes of an informal economy, corruption or institutional quality, growth and presumptive tax; this implies that the likelihood of the taxing of an informal economy would be supported by the taxations of an informal economy. whereas the negative coefficient of the exogenous variables would be the governance and revenue; this implies that the likelihood of taxing an informal economy would not be supported in an informal economy rather undertake the taxing on an informal economy may increase the challenges of the governances and significantly may increase the cost of administrations of an informal economy. following the standards of the logistic interpretations the coefficients of the variables interpreted independently as follows; size of an informal economy: when increases one unit to taxing an informal economy, then the sizes of an informal economy expect to 0.80 increases in the log-odds of being the taxing of an informal economy, given all of the other variables in the model are held constant. this implies that the size of an informal economy would be a matter for the taxation of an informal economy. challenges and prospects of taxing informal economy at jimma zone, oromia national regional state, ethiopia 123 corruption or institutional quality: when increasing one unit to taxing of an informal economy, then the corruption expects to 1.08 increases in the log-odds of being the taxing of an informal economy, given all of the other variables in the model are held constant. this implies that the quality of public institutions would be a significant contribution as well as a key factor for the expansions of an informal economy and have the potential values for the taxation of an informal economy. governances: when increases one unit to taxing of an informal economy, then the challenges of administering or governing the informal economy increases with the expected values of 1.18 in the log-odds of being the taxing of an informal economy, given all of the other variables in the model are held constant. this implies that the governances of an informal economy bring the disadvantages to the state to mobilize the taxing of an informal economy unless the tax infrastructures aided with technology and skilled human resources’ otherwise may increases costs and reduces the quality of the services of the administrations. growth: for one unit increase in the growth of an informal economy, would expect a 2.69 increase in the log-odds of being in a higher level of taxing an informal economy, given all of the other variables in the model are held constant. this implies that the growth rate of an informal economy is beyond the expectation in the developing countries to observe the unemployed people even though immediate to tax them may discourage their growth. revenue: when increases one unit to taxing of an informal economy, then the costs of taxing the informal economy increases with the expected values of 3.90 in the log-odds of being the taxing of an informal economy, given all of the other variables in the model are held constant. this implies that costs and benefits of taxing the informal economy have focused on the direct revenue and equity implications of the taxes even though taxing of the informal economy needed to support technology and skilled human resources to minimize the extravagant costs. presumptive taxes: for one unit increase in the presumptive taxes of an informal economy, would expect 3.42 increases in the log-odds of being in a higher level of taxing an informal economy, given all of the other variables in the model are held constant. this implies that the presumptive taxing practices of an informal economy bring advantages to the developing countries as an argument the direct taxing of an informal economy faces the difficulties for the costs of compliances and administrative and insignificant collection of revenues. ancillary parameters: these refer to the cut-points (a.k.a. thresholds) used to differentiate the adjacent levels of the response variable. in this study the threshold points for the endogenous variable would be discrete and easily observable to distinguish them; this may result in the different observed values on the proxy variable. _cut1: this is the estimated cut-point on the endogenous variable used to differentiate strongly disagree of taxing of an informal economy from disagree, agree and strongly agree taxing of an informal economy when values of the predictor variables are evaluated at zero. subjects that had a value of 6.68 or less on the underlying endogenous variable that gave rise to the taxing of an informal economy variable would be classified as strongly disagree of taxing of an informal economy. _cut2: this is the estimated cut-point on the endogenous variable used to differentiate strongly disagree and disagree taxing of an informal economy from agree and strongly agree of taxing of an informal economy when values of the predictor variables are evaluated at zero. subjects that had a value of 8.72 or less on the underlying endogenous variable that gave rise to the taxing of an informal economy variable would be classified as strongly disagree and disagree of taxing of an informal economy. _cut3: this is the estimated cut-point on the endogenous variable used to differentiate strongly disagree, disagree and agree taxing of an informal economy from strongly agree of taxing of an informal economy when values of the predictor variables are evaluated at zero. subjects that had a value of 9.38 or less on the underlying endogenous variable that gave rise to the taxing of an informal economy variable would be classified as strongly disagree, disagree and agree of taxing of an informal economy. in general speaking the marginal effects of the outcome variable the probabilities of the categories to be becoming of the strongly disagree(1), disagree(2), agree(3) and strongly agree(4) would be indicated as 0.00144887, 0.01438601, 0.02071824 and 0.96344688 respectively. this implies that the respondents of the sampled study would be responded to for the taxing of an informal economy as strongly agreed. while, the post estimations of the marginal effects would be run after the running of the ordered logistic regression, would have obtained the probabilities of the sıntayehu tulu wondimu & mengistu deyassa dadi given categories. this implies that in the future the taxing of an informal economy brings an advantage to the gdps of the country. std. err.: this shows that the standard errors of the individual regression coefficients of the ordered logistic model. they are used in the calculation of the z test statistic, the superscript a in the model output, and the confidence interval of the regression coefficient, superscript b in the model output. z and p>|z|: this shows that the test statistics and p-value, respectively, for the null hypothesis of an individual predictor’s regression coefficient is zero given that the rest of the predictors are in the model. the test statistic z is the ratio of the coefficient to the standard error of the respective predictor. the z value follows a standard normal distribution which is used to test against a two-sided alternative hypothesis that the coefficient is not equal to zero. the probability that a particular z test statistic is as extreme as, or more so, than what has been observed under the null hypothesis is defined by p>|z|. in accordance to the z test statistic for each predictor’s such as the size of an informal economy, corruption, governance, growth, revenue and presumptive taxes of an informal economy would be 3.98; 3.15; -2.46; 5.96; -6.20 and 5.06 with an associated p-value approximately for all exogenous variables less than 0.05. if we set our alpha level to 0.05, we would reject the null hypothesis and conclude that the regression coefficient for the size of an informal economy, corruption, governance, growth, revenue and presumptive taxes of an informal economy is statistically different from zero in estimating taxing of an informal economy. [95% conf. interval]: this is the confidence interval (ci) for an individual regression coefficient given the other predictors is in the model. for a given predictor with a level of 95% confidence, we would say that we are 95% confident that the true population regression coefficient lies in between the lower and upper limit of the interval. it is calculated as the coef. ± (zα/2)*(std.err.), where zα/2 is a critical value on the standard normal distribution. the ci is equivalent to the z test statistic: if the ci includes zero, we would fail to reject the null hypothesis that a particular regression coefficient is zero given the other predictors are in the model. an advantage of a ci is that it is illustrative; it provides a range where the true parameter may lie. 5. conclusion and recommendation the study would be conducted on the challenges and prospects of taxing of an informal economy by taking survey data from jimma zone selected districts. taxing of an informal economy brings advantages to the governments and also one step to startup for the formalization processes of an informal economy to formal business structures. taxing of an informal economy faces different controversial issues even though the relative advantages would be better than the non-taxing practices of the informal economy. per the output of the model, the variables of the study like sizes of an informal economy, corruption or institutional quality, governance, growth, revenue and presumptive of tax as a whole show a significant withholding the positive and negative signs and statistically significant for the taxing of an informal economy. under this study, the results concluded as taxing of an informal economy would be mandatory to maximize the revenue as well as a precondition for the mobilization of the domestic revenues. in addition to that, the results show also to avail the taxation of an informal economy it may require to support the technology and skilled human resources to improve the tax systems and to reduce the costs of taxations and to generate the expected domestic revenue mobilizations. actually in the present literature and different studies proposes the taxation of an informal economy with the expectations of the future significant benefits from the informal economy and to hold the growing of the gdp of each fiscal period. this may be emphasized in terms of the long-term revenue collection, economic growth, quality of governance, and quality of institutions. even though constraints state that the limited revenue and significant costs to avail the taxation of an informal economy and additional may weaken the administration and also the obstacle for the institutional quality and good governances. per this study, results recommended the taxation of an informal economy with the expectations of the futures benefits and also to qualify the tax compliance through time, so improve the tax bargaining powers, as well as overcome tax compliance takes time. overall tax for such sectors required to improve the human resources skills and also supports with technology. challenges and prospects of taxing informal economy at jimma zone, oromia national regional state, ethiopia 125 references besley, t. and persson, t. 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(2012) ‘chapter 4 : research design and methods’, (2003), pp. 117–154. appendix: ordered logistic model output /cut3 9.376016 1.445678 6.54254 12.20949 /cut2 8.715686 1.404165 5.963573 11.4678 /cut1 6.681841 1.248791 4.234256 9.129427 presumptivetax 3.422215 .6758621 5.06 0.000 2.097549 4.74688 revenue -3.895929 .6288067 -6.20 0.000 -5.128368 -2.663491 growth 2.694581 .4522616 5.96 0.000 1.808164 3.580997 governance -1.178154 .4796327 -2.46 0.014 -2.118217 -.2380908 corruptions 1.079828 .3424071 3.15 0.002 .4087224 1.750934 sieconomy .8083195 .2715137 2.98 0.003 .2761623 1.340477 trmay coef. std. err. z p>|z| [95% conf. interval] log likelihood = -101.6979 pseudo r2 = 0.4466 prob > chi2 = 0.0000 lr chi2(6) = 164.15 ordered logistic regression number of obs = 363 iteration 8: log likelihood = -101.6979 iteration 7: log likelihood = -101.6979 iteration 6: log likelihood = -101.69876 iteration 5: log likelihood = -102.12446 iteration 4: log likelihood = -114.64964 iteration 3: log likelihood = -141.74762 iteration 2: log likelihood = -166.96007 iteration 1: log likelihood = -171.25846 iteration 0: log likelihood = -183.77464 international journal of commerce and finance, vol. 7, issue 2, 2021, 50-70 50 the effect of banking sector efficiency on the economic development in west africa aboubacar doucoure ma in international finance serkan çankaya istanbul commerce university submitted: 03.06.2021 accepted: 10.08.2021 published: 02.12.2021 abstract the primary goal of this research is to analyze whether the financial efficiency of the banking sector in the economic community of west african states region estimated by financial indicators as return on asset (roa), return on equity (roe) and net interest income (nim) affects the economic development measured by the gross domestic product (gdp) growth. the choice of these profitability and rentability variables is inspired by the world bank’s indicators of financial institutions efficiency at country level. this research investigated the impact of banking sector efficiency on the economic development in country members of the economic community of west african states (ecowas) from 2010 to 2019. this study uses quantitative methodology in order to attain the main objective. the research proposes to develop a methodology, through theoretical study as well as making use of related literatures, which can be used in determining the impact of banking sector performance and economic development in west african region. the required data can be classified into two main categories: the factors that determine bank efficiency, and the economic indicator that explains growth in the region. the goal is to analyze whether the financial efficiency of banks lead to growth in the economies of countries. in our model, the banking sector efficiency measured by financial indicators as roa, roe, and nim indicates the explanatory variables while annual growth rate of gdp for economic development measures the predicted variable. the effect of banking sector efficiency on the economic development in west africa 51 the model uses panel generalized method of moment (gmm) to test the hypothesis from eviews software. the result of our survey suggests that among all the explanatory variables only the return on asset (roa) has statistically significant influence on the gross domestic product (gdp) growth rate meaning that the banking sector financial performance measured by roa has significant impact on the economic growth in west africa. the research shows that the main actors in banking sector and authorities should focus on the efficiency of banking system in order to drive a sustainable economic growth. in addition, this research obviously provides some important information to researchers, governments, financial analysts, banking policy makers and supervisory authorities keywords: banking sector, efficiency, economy, west africa 1. introduction the banking sector in west africa has developed in recent years. bank credit to the economy has risen sharply in most countries since the mid-2000s. the banking system in the region is heterogeneous with low diversity. baking institutions dominate largely financial systems in west africa by detaining 90% of financial sector assets (imf, 2021). after the countries in the region accessed to independence, the banking sector was mainly constituted of state banks and some international banks from the former colonial powers. over the last decades, major changes have progressively changed the banking sector. an important transformation was the emergence of first private banks, followed by the implementation of their regional networks. the sector was also marked by the gradual decrease in number of big foreign groups and the important difficulties of state banks. another major transformation was the creation of regional markets, which favored the creation of african banking groups with a regional and even continental dimension. recently, the different stages and repetitive changes have shaped financial systems of west african countries. aboubacar doucoure & serkan çankaya 52 the financial system is characterized by important changes during the last years in the region. for instance, the number of branches and bank accounts have significantly increased. the role of banks in maintaining strong and stable financial system is primordial for the economies. consolidated by important wave of reforms, the banking sector started to expand activities, spread funding and develop scope through new products. the appearance of local banking groups and high competition are leading the banking industry to develop innovation strategies. despite its importance, the banking sector must overcome new challenges to contribute on the region’s economic development. mckinsey and company (2018) reported that the banking sector in africa is one of the most dynamic of the world and represents the second global banking market regarding growth, benefit, and innovation. in addition, the paper revealed that the dynamic banking sector is pushing new business models to emerge aiming to overcome challenges such as the low proportion of banking market penetration, liquidity usage, and the small geographical mesh physical agencies and atms, especially in the retail banking. the african development bank (2021) acknowledges that africa’s gdp is expected to grow by 3.4% in 2021, following a 2.1% contraction in 2020 caused by the covid-19 pandemic. the recovery will be supported by the expected rebound in tourism, an increase commodity prices and an easing of pandemicinduced restrictions. the african banking sector is growing rapidly and almost showing profitability twice above the global average. the market penetration level of retail banking in africa is only 38% of the gdp according to a survey made by mckinsey in 2018. this number represents half of the global average of other emerging countries of the world. in terms of size, the banking sector represented about 86 billion usd in revenue in 2018, with an expected growth of 8.5% yearly, banks of the continent will bring total revenue in to 129 billion dollars (mckinsey and co, 2018). another characteristic of the sector in west africa is the tremendous growth in number of banked individuals. in 2018 approximately 300 million adults were banked, compared to 170 million in 2012 (statista, 2019). this number is expected to be 450 million people by 2022 which is nearly half of the total african population. african banks are the effect of banking sector efficiency on the economic development in west africa 53 facing many challenges such as low level of income in many countries, the strong use of liquidity in most countries, and the low coverage of credit. however, some banks are already seizing opportunities from these challenges. the extension of digital banking service solutions in africa allows the sector to design low-cost offers and adopt innovative distribution. thanks to these innovations, the growth of banks turnover could increase significantly over the next five years. africa is making significant growth rate that pulls millions of people from extreme poverty, creates a class of emerging consumers and stimulates a rapid economic growth in many countries. 2. literature review the performance of banking sector has been subjected to several empirical studies. the main goal of our research is to examine the relationship between bank performance and economic growth in west african countries. therefore, this section analyses factors that influence the performance and development of banks based on related literature. durosinmi (2019) conducted a survey to determine the impact of capital structure on the performance of nigerian banks. the author's goal was to investigate the impact of equity on financial efficiency, and thus the relationship between financial leverage and bank performance. in his model, the bank's financial soundness was measured using capital adequacy, asset quality, earnings, and liquidity, while the equity-to-debt ratio and total debtto-total-capital ratio represented capital structure. the researcher examined secondary data collected from financial proxies of the sample between 2010 and 2017 using descriptive statistics methodology and a regression technique. he concluded that debt ratio has a negative impact on bank performance, while shareholders' funds have a positive impact on their soundness, whereas there is a statistically significant negative relationship between leverage and bank solvency in nigeria at a level of 1%. according to his research, the country's banking institutions should prioritize shareholder equity over debt in their capital structure. aboubacar doucoure & serkan çankaya 54 oni (2019) analyzed the factors influencing non-performing loans of the banking institutions in sub-saharan africa. according to the author, there's a relationship between npls risk minimization and growth in the banking system and growth within the continent. his model focused on bank-specific, macro-economic, global, and institutional factors as key determinants of npls of deposit money banks in the geographical area. the researcher applied the system gmm technique with an elaborated econometric method, supported a panel set from 23 sub-sahara african countries. the results of his research suggested that banks in africa should emphasize mainly the performance of the real economy when enlarging loans to their customers, especially during expansion; because according to the author, loan delinquencies are likely to be higher in periods of an economic downswing. in addition, he suggests that governments of african countries should develop legal structuring to prevent adverse effects of bad loans and improve the regulatory body. otoo (2019) investigated the role of internal control in the financial performance of ghanaian banks. a qualitative approach was used in his study to evaluate the real market life experiences of ghanaian bank executives and employees with extensive knowledge of internal control strategies in the banking sector. according to the researcher, the findings confirmed that developing effective internal control strategies would be simple for ghanaian banks to implement for financial efficiency. it also enables banks to secure potential customers' and shareholders' investments. however, the author revealed that implementing effective strategic internal control practices in banking can be extremely difficult from a practical standpoint in ghana, because while ghanaian banks continue to profit and increase shareholder wealth, some banks are closed down by the government due to insolvency or a lack of cash in reserves. tiamiyu (2019) investigated the impact of risk management on the financial effectiveness of nigerian banks. his research goals are to assess the impact of various risks on bank performance, including credit risk, liquidity risk, operational risk, capital adequacy risk, and market risk management. between 2008 and 2017, he used data from deposit banks' annual the effect of banking sector efficiency on the economic development in west africa 55 reports and accounts traded on the nigerian stock exchange. to validate his assumptions, the author analyzed the data using various statistical techniques such as descriptive analysis, pearson correlation, and regression analysis. the findings revealed that operational risk has a statistically significant negative effect on return on assets, whereas capital adequacy risk has a statistically significant positive effect on return on equity. furthermore, credit and operational risk have a negative significant impact on returns on equity, whereas capital adequacy risk, foreign exchange risk, liquidity risk, and interest rate risk have no positive or negative significant impact on returns on assets (tiamiyu, 2019). areola (2018) surveyed the impact of credit risk indicators on the financial efficiency of nigerian banks. the author aimed to assess the impact of loan inefficiency, the contribution of liquidity, and the impact of gdp on bank financial performance. roa was used to measure bank performance in his study, while non-performing loan ratio, capital adequacy ratio, and loan to total deposit ratio were used to estimate risk level. the researcher examined data from ten commercial banks from 2010 to 2015, and his findings indicated that credit risk indicators have a positive impact on bank financial solvency. however, he revealed that the real gross domestic product is statistically insignificant in terms of bank performance. yinusa (2018) investigated the role of intellectual capital in the development of nigeria's banking sector. a mixed-method design was used in his research, which included both primary and secondary data. the primary data were gathered through a questionnaire distributed to a random sample of deposit money bank employees, and the secondary data were gathered from the annual reports of nineteen (19) nigerian deposit money banks. according to yinusa, the primary data was examined using the partial least squares path modeling method, while secondary data was examined using multiple least square and general least square regression in stata (2018). he reveals that the findings of his research using both methods show that structural capital has a significant and positive effect on banks. as a result, the researcher aboubacar doucoure & serkan çankaya 56 concludes that policymakers in the banking sector regard intellectual capital and its components (human and structural capital) as an important business resource. luo (2014) investigated the relationship between financial liberalization and bank development. the author aimed to examine find the effect financial liberalization on banking sector effectiveness. he used statistical techniques such frontier estimation methods, regressions, and granger causality to develop his model. his study indeed covered data from bank scope and economic data at country level for a sample of 1536 commercial banks covering 88 countries over the period 2000 to 2009. the result of the study showed that financial liberalization contributes positively to profit efficiency while the impact on cost efficiency is generally mixed. moreover, the researcher said that for the influence of risk in banking, the result suggested that financial liberalization, lower cost efficiency and higher profit efficiency of banks increase the potential for default risk. additionally, the author mentioned that greater competition in banking contributes to higher cost but lower profit efficiency of banks under financial liberalization. ekata (2011) studies the impact of investment in information technology (it) and on the financial performance of the nigerian bank. in his research, it investment and financial performance data were collected on 21 of the 24 commercial banks in nigeria for 2005 through 2009 period. the researcher claims that his result of quantitative correlation design study shows a positive significant association between it expenditure and return on assets (roa) while his research found no correlations between it expenditure and net income or return on equity (roe), between it budget and net profit, and between it training cost and net profit. he concluded that there's an existence of paradox in it productivity in the banking sector of nigeria. demetriades and fielding (2011) studied the effect of data on banking sector development in west africa. they identified the determinants of individual banks’ loans and assets in some west african countries. their study affirmed that higher loan default rates decrease both the the effect of banking sector efficiency on the economic development in west africa 57 loans to asset ratio and the volume of assets. they revealed that the scale of those impacts is sensitive to bank age and ownership structure because younger, private, domestically owned banks are most plagued by the informational disadvantages compared to the mature government-owned banks. kamau (2011) examined the intermediation efficiency and productivity of the banking sector in kenya. the author made a non-parametric data employment analysis (dea) live the intermediation efficiency and employed and malmquist productivity index (mpi) to investigate the productivity of the banking sector in kenya. the survey concludes that banks weren't fully efficient while they perform fairly and suggests that they will be more productive by improving their technology, skills and spreading their scale of operations. additionally, the paper claimed that policies favoring competition, product diversification, risk minimization through increased capital regulation, and privatization of some banks are essential. kessy (2007) analyzed the connection between bank efficiency and the economic process of the geographical region community (eac) countries. the study covered the banking sector in east african countries from 1994 to 2005 by employing quantitative and qualitative aspects. firstly, the author evaluated bank efficiency by using the data envelopment analysis model, then he used efficiency scores to look at the impact of a well-functioning financial setup on economic development. according to him, the empirical analysis of the connection between financial set-up efficiency and economic growth is predicated on an equation relating gdp growth to bank efficiency scores and credit to the private sector. the results of the study affirmed that commercial banks’ credit to the non-public sector is statistically significant meaning that credit allowed to the non-public sector by banks has a positive effect on the economic expansion. moreover, the researcher suggested that commercial banks’ efficiency is positively related to both the common capital productivity and level of savings, also he affirmed that these intermediate variables are positively and statistically associated with gdp growth. aboubacar doucoure & serkan çankaya 58 3. macroeconomic condition in west africa africa is one of the world's largest and most populous continents, with a land area of 30.3 million square kilometers and a population of 1.3 billion people in 2018. due to high natality, the population of black africa continues to grow at a rate of 2.7 percent per year. children under the age of 25 account for 62 percent of the population, compared to 44 percent in developing countries overall and 27 percent in developed countries (wdi, 2020). as a result, africa may be a young continent with numerous growth opportunities. its population increased nearly fivefold between 1960 and 2020, compared to 2.7 times for asia and three times for geographic region, and it now accounts for 16% of the world's population, up from 7% in 1960. west africa is a vast and diverse continent. according to the european investment bank, it is made up of the west african economic and monetary union (waemu, which includes benin, burkina faso, côte d'ivoire, guinea-bissau, mali, niger, senegal, and togo) and eight other countries (cabo verde, gambia, ghana, guinea, liberia, mauritania, nigeria, and sierra leone) (2020). these countries form the economic community of west african states (ecowas). it is a political and economic union that groups fifteen countries located in geographic region of west africa (ecowas, 2016). funded in 1975, the union mission is to develop economic and political cooperation between states. in line with un projections, the region’s population is predicted to succeed in 550 to 600 million in 2050. moreover, with 5% of the world’s population and a neighborhood covering 40% of geographic region, it's the foremost densely populated continent. according to the european investment bank, west africa is an economically diverse geographical region with four middle-income and twelve low-income countries (2020). some are rich in natural resources; for example, nigeria, the region's largest economy, is the world's eighth-largest oil producer, while ghana is one of the world's leading gold exporters, according to the eib (2020). other countries have enormous agricultural potential, such as mali, which is one of the world's largest supplier of cotton. the effect of banking sector efficiency on the economic development in west africa 59 in recent years, economic development has reflected the region's diverse economic structures and, as a result, varying degrees of oil dependency. nigeria was on the verge of emerging from an economic slump in 2017, owing primarily to rising oil prices, whereas ghana was able to record a sharp increase in the rate of growth after a two-year slowdown. furthermore, the economic process within the west african waemu, which includes former french colonies, has remained strong, with a nearly 6-percentage-point increase for the sixth year in a row (eib, 2020). the region's diversification is due to its colonial history. indeed, it brings together west african monetary union (waemu) member countries benin, burkina faso, an african country, guinea-bissau, mali, niger, senegal, and togo, which are ex-french territories with a common currency, and countries colonized by the british empire. in 2019, the population of the geographical region totaled 392 million people, with 201 million of them residing in nigeria (eib, 2020). in 2019, the estimated gdp per capita was usd 5,497 (in purchasing power parity, ppp), ranging from us$1,106 in niger to us$6,055 in nigeria. on the availability front, west african economies are entirely based on services, which account for 55% of gdp (eib, 2020). industry contributed 23% of gdp, while agriculture contributed 22%. in terms of demand, consumption accounts for 86% of gdp, while investment contributed 18% and net exports contributed 4%. (eib, 2020). the banking system within the geographic area accounted for 142 establishments by the year 2018 against 138 establishments in 2017 consistent with the eib (2020). the expansion in gdp has favored the growth of the banking network constantly. the number of agencies increased by 14.1% to achieve 3396 in 2018, plus the atms increased by 9.9% yearly to achieve 2,976 (eib, 2020). additionally, the banking sector total assets increased by 6.8% from 2017 to 2018 to achieve 57.6 billion euros according to the eib (2020). earnings and profitability ratio estimated by roa and roe show the financial soundness of the african banking sector. according to the imf (2021), the average roa was estimated at 1.3 percent aboubacar doucoure & serkan çankaya 60 and roe at 15.3 percent in 2019. in fact, the high roe of african banks is supported by high banking margins supported by high interest rates (mckinsey and co, 2021). in addition, the banking sector in africa is very liquid with average liquid assets to total assets of 26% in 2019 and 24 % in 2020 (imf, 2021). in 2018, the waemu banking sector was made up of 29 international and regional banking groups. these groups dominate banking activity in the region, accounting for 86.8 percent of total banking assets and 83.4 percent of customer bank accounts (eib, 2020). as shown in table 1, the banking market is highly concentrated, the ecobank; and bmce bank of africa groups are the largest, with market shares of percent and 10.1 percent of total assets, respectively (eib, 2020). in addition, eight largest african banking groups detain 64% of total market share (table 1). the banking sector in nigeria constitutes 25 deposit banks, four are foreign banks, which hold nearly 13% of the overall assets of the complete banking sector (imf, 2019). the banking sector in ghana is more fragmented and comprises 34 banks, the highest three banks holding nearly 41% of all operating assets and 42% of deposits (eib, 2018). nigeria and ghana have relatively large and complex financial sectors. systemic crises are averted in recent years, illustrating the nice resilience of the banking sectors and the effectiveness of the proactive actions implemented by central banks. however, following the slump that occurred over the 2014-2016 period thanks to fall in oil prices, the financial sectors faced series of challenges. overall, the financial soundness indicators associated with capital adequacy and asset quality have deteriorated in both countries since 2014 and number of other banks are subject to enhanced supervision or perhaps placed under supervision. in both countries, deposits are the most source of financing, representing about 60% of total liabilities (eib, 2018). the effect of banking sector efficiency on the economic development in west africa 61 table 1. major west african banking groups source: european investment bank (2020) 3.1 empirical research the methodology is consisted of two important elements in this survey, specifically the sample and data collection variables and their indicators. empirical models for the analysis of key results are also provided in this section. the design of this research is aiming to analyze whether the financial efficiency of banking sector in west africa has an impact on the economic growth in the region. in the study, we employ quantitative research approach and use secondary data to satisfy the research objectives. thus, banking institutions are key actors in african economy, and to verify whether their performances affect growth may be relevant for different economic agents. in the research, we will mainly investigate the effect of banking sector financial efficiency on the economic growth in west africa. the study covers 14 country members of the ecowas over the period 2010 to 2017 giving rise to 122 observations. to conduct our survey, we apply the generalized method of moments (gmm). the advantages of using the gmm are multiples because it is compatible with dynamic panel models, control heteroscedasticity and potential endogeneity (independent variables that are not strictly exogenous), and autocorrelation within panel or group. our model is a dynamic panel data of 14 countries extracted from the world development indicators (2020). group presence in countries market share (%) number of agencies number of accounts ecobank (eti) 8 15.3 225 1,131,339 société général 4 11.2 129 524,584 bank of africa group 6 10.1 145 573,827 ajariwafa bank 4 8.7 210 571,078 bnp paribas 7 7 176 362,658 abi (ex-afg) 4 6.2 81 442,144 united bank for africa 4 3.3 59 212,941 bsic 7 2.4 73 68,649 63.9 1098 3,887,720total aboubacar doucoure & serkan çankaya 62 based on the main objective of this research, the following hypothesis has been tested: h1: banking sector financial efficiency in the economic community of west african states expressed by return on asset (roa), return on equity (roe), and net interest margin (nim) has significant effect on the economic development of the region measured by the gross domestic product (gdp) growth rate. the variables used in our assumption are measures used by the world bank to express the efficiency of financial institutions at country level. the result suggests that the probability value (p-value = 0.0002) corresponding to the variable (roe) is less than 1%, so the variable (roe) is significant at 1 percent level, and the sign of its coefficient is positive which corresponds to the expected sign. therefore, there is a positive impact of the return on equity on economic growth. this positive relationship can be explained by the fact that the capital base for the banking sector is different than other corporations. they have more incentives to concentrate on managing capital, thus the high rate of returns of african banks demonstrates the efficient management of capital. in addition, the probability value of the variable (nim) shows that there is a statistically significant positive relationship between this independent variable and the gross domestic product (gdp) growth at 5 percent significant level (p-value = 0.048 < 0.05). the financial indicator of (nim) is the difference between interest revenue and interest expense, on average earning assets. the high interest rate margins reflect the disincentive cost of credit in africa, which is due to a combination of factors, including the small size of the market. thus, the nim is a solid financial rentability and profitability indicator of the banking sector. in this survey, the result suggests that the high rate of the variable (nim) stimulates the economy expansion. this can be explained by the level of credit allowance of banks to the economy. in fact, the west african region contains major projects such as development in infrastructures that are mainly financed by banks. therefore, the positive relationship between the variables (nim and gdp) is due to the important role of the banking sector in financing major economic activities. moreover, the return on asset (roa) variable has a positive influence on gpd growth rate at a significant level of 1% (p-value < 0.01) with a coefficient the effect of banking sector efficiency on the economic development in west africa 63 2.47. among all the explanatory variables, bank return on asset has the most important effect on economic growth. the result demonstrates the optimal use of bank assets, the banking sector in west africa is profitable and contributes to economic expansion. table 2. test results variable coefficient std. error t-statistic prob. gdp(-1) 0.198265 0.024923 7.955183 0.0000 nim 0.191316 0.095155 2.010577 0.0477** roa 2.471291 1.201398 2.057013 0.0000*** roe 0.265639 0.163544 1.624264 0.0002*** ***significant at 1% level, ** significant at 5% level, * significant at 10% level since our model is estimated by generalized method of moments (gmm), the arellano-bond test is necessary to test the serial correlation. the test is consisted of two statistics, one for first order correlation (ar(1)), and one for second order correlation (ar(2)). in this case we expect the first order (ar(1)) statistic to be significant and the second order (ar(2)) statistic to be insignificant. the result of the serial correlation test shows that the first order statistic is significant (p-value = 0.000), while the second order is statistic is not significant (p-value = 0.332). this suggest that our expectation is met, and the model error terms are serial uncorrelated in levels. table 3: arellano-bond serial correlation test test order m-statistic rho se(rho) prob. ar(1) -5.073939 -763.734250 150.520963 0.0000 ar(2) -0.969046 -707.723357 730.329727 0.3325 aboubacar doucoure & serkan çankaya 64 table.4 denotes the summary of descriptive statistics of our variables. the gdp variable has a mean of 4.86 and a maximum value of 20.71. this implies that the average growth rate in the ecowas region is 4.86 percent. in addition, the means of roa, roe, and nim are respectively 2.12 percent, 16.76 percent, and 5.99%. the highest value of roe (95.10%) and gdp growth rate are both connected to sierra leonne. indeed, the country have experienced an economic boost recently from severe recession in 2015. the table also shows that our variables are not normally distributed. the decision criteria for jarque-bera is: (p-value > 0.05 for null hypothesis (normal distribution) and p-value < 0.05 for non-null hypothesis (nonnormal distribution). in addition, the skewness and kurtosis results demonstrate that all the variables are not normally distributed. table 4: descriptive statistics variables gdpg roa roe nim mean 4.859967 2.116198 16.79176 5.989097 median 5.382500 1.974160 16.08000 4.778535 maximum 20.71577 9.663920 95.10100 21.43420 minimum -20.59877 -3.769060 -32.95120 1.162210 std. dev. 4.368862 1.767879 13.46648 3.551930 skewness -1.508308 0.305705 1.404750 1.456380 kurtosis 13.81240 6.409249 14.11754 5.652688 observations 112 112 112 112 jarque-bera 588.0372 55.98508 613.6338 72.43100 probability 0.000000 0.000000 0.000000 0.000000 the effect of banking sector efficiency on the economic development in west africa 65 since our model contains time series, we must examine their stationarity. if the initial series is not stationary, this condition should be verified for the first and possibly second difference. in this case we checked the condition unit root at level and first difference. a series is said to be stationary if it has no trend, no seasonality, and, moreover, no factor that changes over time. only stationary series allow for reliable econometric forecasting. table 5: arellano-bond serial correlation test variables p-value statistic critical value at 5% gdp 0.0086** -1.60512 -2.862186 roa 0.0009** -1.98854 -2.862274 roe 0.0098** -1.60384 -2.864212 nim 0.9715** 1.88732 -2.863919 the acceptance of the null hypothesis states that the common unit root exists, according to the augmented dickey-fuller (adf) test method. the acceptance of the alternative hypothesis, on the other hand, states that there is no unit root. to determine whether there is stationarity or non-stationarity, we verify if the probability is less than the chosen significance level (5 percent in our case). the adf test shows that all variables are stationary at the significance level of 5% except the net interest margin (nim). 4. conclusion the spirit that prevailed throughout this work was to show the role of banking system financial efficiency on economic growth in the ecowas area. we reviewed the literature on banking performance and the role of banking institutions on economic development all around the aboubacar doucoure & serkan çankaya 66 world. to verify our hypothesis, we have collected data which are of secondary source, from the annual publication of the world bank, more precisely in the book of world development indicators and we did an econometric study that involved testing a model from the e-views software trough generalized method of moments (gmm) technique. the choice of profitability indicators to measure bank efficiency is inspired by the word bank measurement of financial institutions efficiency at country level. the main goal was to analyze whether the independent variables estimated by roa, roe, and nim have any impact on the economic growth in ecowas area. the result shows that among the explanatory variables, only return on asset (roa) has a significantly statistically impact on the gdp growth rate meaning that return on asset of the banking sector in ecowas area affects the economic growth positively in the region. however, return on equity (roe) and net interest margin (nim) has no significant impact on the gdp growth rate statistically at a confidence level of one percent (1%). the model estimated is a dynamic model that experienced a stationarity test to see the significance of the variables. it follows that all the variables are significant. moreover, the results show that the financial indicators corresponding to bank efficiency have a positive effect on growth. the existence of an efficient financial system is conditioned to some prerequisites: macroeconomic stability, a range of diversified financial products, and effective enforcement of legislation and regulation and a properly functioning asset registration system. access to information and its transparency are also essential to filtering costs and prevent an anti-selection phenomenon. the research shows that banking groups in africa tend to prefer the assets of large companies and states to minimize risks. in addition, because of the lack of information on creditors and the fear of failures, the financial system is atomized, with a large part of the population unable to access financing. the financial system is one of the foundations of economic development. to ensure that the available resources are mobilized and distributed effectively between the different actors, the the effect of banking 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(2018), “impact of intellectual capital on performance of deposit money banks in nigeria”, kwara state university (nigeria), proquest dissertations publishing, 2018, 13422898. https://databank.worldbank.org/source/world-development-indicators https://databank.worldbank.org/source/world-development-indicators international journal of commerce and finance, vol. 8, issue 2, 2022, 1-20 * *olabisi onabanjo university, nigeria, ariyibimayowa@gmail.com, ** olabisi onabanjo university, nigeria, brainwilly1@gmail.com, *** olabisi onabanjo university, nigeria, asogbaisreal@gmail.com 1 debt financing and growth of quoted manufacturing firms in nigeria ariyibi mayoma ebenezer* oyakhilamo tolulope williams** asogba israel oludare*** submitted: 01.05.2021 accepted: 02.07.2022 published: 01.11.2022 abstract the study examined the impact of debt financing on the growth of manufacturing companies in nigeria within 2011 to 2018. the study employed the ex-post facto research design. panel regression technique was employed for the analysis, but hausman test was used determine which model is actually accurate for inference drawing among fixed and random models. the findings based on the random effect revealed that ltd (long-term debt) has a negative significant effect on sg (sales growth) at (β= -3.37, p<0.05), std (short-term debt) has a positive significant effect on sg (sales growth) at (β= -0.08, p<0.05) and roe (return on equity) has a negative insignificant effect on sg (sales growth) at (β= -0.24, p>0.05). the study recommended that firm can mix the periodic debt components of short-term and long-term debt in its capital structure, because of the benefit of tax shield inherent in the postulation of the static-trade off theory, but must also make the sure interest payment on debt does not affect the profitability status and growth of the company. business enterprises can use debt, as it offers the potential to increase the volume of their operations and increase the average return on their equity. few studies have been able to investigate the influence of sales growth on the debt exposure of the manufacturing companies, knowing full well that sales in directly proportional to increase in revenue. keywords: debt financing; long-term debt; short-term debt; growth; firms; nigeria mailto:ariyibimayowa@gmail.com mailto:brainwilly1@gmail.com international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 2 jel classification: g31, g32, c5 1. introduction the financial manager and the strategic level of any organization are faced in taking some cogent investment and financial decision which is very coherent in the continuity and survival prospects of a corporate entity. the corporate entity is a financial body that is saddled with the prospects of maximizing scarce funds and effectively utilizing such funds to improve the corporate overall npvs (net present value) generated from good investment decision. but this investment decision can push the managerial level in determining which capital component will drive the proposed positive npvs identified by the organization. moreover, avenue to source for funds in a corporate organization varies according to the character or attribute of the company’s assets, the seasonal and cyclical fluctuation in the business volume, its level of growth, its size, and other operations which influence its position as a potential borrower. these factors also determine the capital structure of the organization, shifting the managerial and financial manager in choosing the mix between equity and debt in financing, its operation (adam, 2014). in today’s modern world, capital structure is very germane in determining the growth and value of a company in terms of improvement in sales and assets. so it's left with the managerial or strategic level to determine a strategy in the mix between debt and equity which in the long-run would determine sales growth and stimulate value in terms of book based value and marketbased value. capital structure is the openness to debt and the intrinsic attribute of equity to finance the operation of an organization. it is a financial policy that determines the actual profit and growth of a firm after interest and expenses have been deducted from the profit generated through sales (damodaran, 2001). also, it is the managerial strategy that influences risk and returns which are the driving force behind any investment phenomenon (pandey, 2010). in fact, the capital structure and company’s growth is important for any firm because the progress and performance of any company depend on its growth and that, of course, requires capital from any preferred capital giver or investor (ajao & inyang, 2012). also growth is an intrinsic phenomenon is determining continuity of a firm. growth is a multi-faceted phenomenon that connotes revenue generation, value addition, and expansion in terms of the volume of business. it can also be defined as the improvement in market position, quality of international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 3 product and customer goodwill, which is stimulated through an accurate strategic decision that is attributable to the business policy used in the internal environments of the organization. in the same vein the debt component in the financial structure of a company is also attached with the problem of repayment at a particular price of money, which the company in the longrun is engrossed with the capability of efficient utilization of the debt ratio in the overall financial structure. various studies like onaja & ovayioza (2015), racheal, chelichi and raymond (2017), aziz & abbas (2019), muhugia (2013), dube (2013), tauseef, & lohano and khan (2015), onchong, muturi and atambo (2018), radhe, pradhan, and khadke (2017), asare and angmor (2015), harelimana (2017), olufunso, herbst and lombard (2010), akoto and vitor (2014) have investigated into the influence of debt oriented capital on performance, but few studies have been able examine the period horizon of such debt components on the growth characteristics of a firm. knowing fully well that the classes of debt is horizon centric in terms of sourcing and servicing which has the inmate capacity to determine the growth (sales and asset growth) level of a routinely based firm in terms of goods and services it render’s to its customers. moreover, debt financing has for a long period being a common phenomenon in corporate finance and the corporate world all around the globe, because of the tax-saving benefit to the organization and the ability to postpone consumption from the perspective of the debenture holders to the organization. it is a financial pathway that gives a corporate organization the opportunity of filling financing deficits due to lack of enough internal resources to fund its positive npvs and current or daily obligation to keep the organization going (dare & sola, 2015). in financing or sourcing for capital, a firm is open to source capital either internally, externally (equity/preference shares) or through debt (corporate bond). the financial policy implored in an organization directly influences the price of money, uncertainty and share dynamics on the market floor. while myers (2001) agrees that there is no universal theory on the debt to equity choice. he, however, notes that some theories attempt to explain the amount of debt in the capital structure. he cites the tradeoff theory which advocates for debt uptake by seeking debt levels that balance the tax advantages of against the costs of possible financial distress. the pecking order theory asserts that firms will rather borrow than issue equity when all internal cash is not sufficient to fund capital expenditure (myers, 2001). this is because debt financing has a non-dilutive effect on the ownership stratum of the shareholders. international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 4 however, some of the reason for the inclusion of debt in the financial components of the bluechip companies is the cheap source of finance as compared to equity which tends to increase the number of shareholders or equity holder in the organization, if that is the last resort for firms to finance their capital or fund unavailability. in the real world or according to a financial analyst it expected that firms should incorporate loans up to a certain limit because if loan continues to increase (leverage or gearing), it is expected that interest on the loan will simultaneously increase which will harm the performance and growth of the company (chowdhury & chowdhury, 2010). if the company has no ability to pay off the debt then it should not take high level of debt. there should be an optimal capital structure which balances the tax-saving benefit and bankruptcy cost, but high leverage will cause the increase in cost of capital and ultimately decrease the value of the company (ogbulu & emeni, 2012) concurrently, debt financing also has an advantage and a disadvantage on the growth of corporations and for its strategic investments (asif, a., w. rasool & kamal, y, 2011). according to fama and french (2002), the benefits of debt financing include the taxdeductibility of interest and the reduction of free cash flow problems, while the costs of debt financing include potential bankruptcy costs and agency conflicts between stockholders and debt holders. therefore, in making debt financing decisions, managers try to create a balance between the corporate tax advantages of debt financing and the costs of financial distress that arise from bankruptcy risks (kraus and litzenberger, 1973) and agency costs (jensen and meckling, 1976). however, debt component in the financial structure posits the reduction of free cash flow problem (fama & french, 2002) and cost of maintaining the debt include potential bankruptcy costs and agency conflicts between stockholders and debt holders. due to the double-edged sword of the benefit and demerit of debt financing (jensen & meckling, 1976). managers are compelled or responsible to maintain an optimal balance between the corporate tax advantages of debt financing and bankruptcy risk due to operational distress to remain floating in the industry (kraus & litzenbeger, 1973). the argument for the existence of optimal debt financing level has remained a bane of concern in finance literature and studies have analyzed debt financing to determine whether optimal debt finance level really exist. an optimal debt finance level would be one that will minimize the cost of capital of an organization while maximizing the value and growth in the organization. according to miller (2012) optimal capital structure can be determined by international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 5 balancing the bankruptcy costs and against tax-saving on debt financing. the accurate equityto-debt mix remains a puzzle in corporations financial structure which has metamorphosed different scholastic view from the modigliani & miller theory, trade-off theory and pecking order theory all these theories gives different understanding on the extent and mode of debt that should be accommodated in the financial structure of an organization. the rest of this paper is organized as follows. the second part discusses the literature review, the third part is dealing with methodology while part four presents the empirical results and the last part concludes. 2. literature review 2.1 conceptual review capital structure is the effectiveness of the firm in combining equity and debt in its financial policy. the capital available to corporation can be divided into equity and debt. under the firm capital structure, the firm is characterized with bank credit, market capitalization which has its own merit and demerits, but play a germane role in the firm in determining a perfect capital structure that attributes a favorable risk and return components for the different classes on shareholders attached to the firm in terms of their cash. the apex and external medium of fund for a corporate entity is equity capital and debt capital. the equities are referred to the owners of the firms that receive dividend from the yearly accrued profit after all other interest holders have been serviced. debt is phenomenon that carries different connotation looking from different angle of an individual or a corporate organization. it can be termed has money owned to a creditor in terms of an individual but corporate term the creditor can be called a debenture holder having his money returned with interest in a specified period of time. it stands has a obligation to the party owing to fulfill its mandate. according to swanson and marshall (2008) debt is the activity of putting to use the ability to consume or purchase in the present to the future, in addition to earn due to time lapse. a firm can innovate and access debt financing in its operation through different means. they include i) secured and unsecured debt; (ii) private and public debt and (iii) syndicated and bilateral debt and other mode of debt that features the identification of the term debt above (ajao & inyang, 2012). pandey (2005) illustrate the debt capacity of firm to be the amount and viable capacity a firm can attract and retract back to the creditors with interest at the end of a financial year, still having the capacity to sustain its market share. debt stimulate international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 6 the book value of a firm because it disallows managers from wasting resources according to denis and denis (1998), but of course this is only minute among the surrounding argument. kaplan (1998) pushes the argument further by depicting that debt financing induce the pressure on managers to efficiently manage the funds of the firm, to the ability of servicing the debt and also improve the current assets in the financial structure, so that they would be worth more if intended to be sold. they both opined that a firm with high expected future earning can enlarge it taste for more debt as means of enjoying the taxsaving bracket from the corporate earnings. debt financing is the position when a company source for fund outside the internal environment of the firm to be paid back at a stipulated future date with interest. debt financing can be form of a secured and unsecured loan. a loan is used either to finance working capital or acquisition of asset. organization employs debts in their operations due to the fact that debt aid to improve return on equity through increase in the volume. this proposed increased can only be visible when the rate of return on debt is lower that rate of return on investment (watkins, 2002). firms subject their financial structure to debt in-order to improve turnover and enhance profit. debt financing can only be beneficial when corporate taxable earnings and free cash flows are predictable and large. the use of debt becomes costly and problematic when the firm cannot cover its interest, it is referred to as financial distress (robichet and myers, 1965). to myers (1997) as firms adds debt to its financial structure it will make firms to add value through the projects its engage itself with so has avoid the ability to service debt. debt have the capacity to prevent firms from making good investment (myers and lambrecht 1977). it is very important that a optimal level of debt must be determined to reduce the cost of under-investment which has a long-run negative effect on the firm. growth can be given different connotation, but it looks beyond just financial performance of an organization. growth combines the non-financial and financial aspect of the organization. growth can be in terms of increase in terms of volume of business, value creation and addition and revenue generation. the non-financial parameters include market position, goodwill of the customer and quality of the product (berzkaline, 2012). 2.3 empirical review international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 7 aziz & abbas (2019) investigated into relationship between debt financing and firm performance. the study area is pakistan where fourteen (14) sector was employed for the study. the secondary date was sourced from the financial statement of the companies listed on the pakistan stock exchange within a time period of 2006-2014. the study revealed that debt financing has a significant negative effect on firm performance in pakistan. it is recommended that companies should rely on the internal sources of finance to execute it project and operation because reliable and cheap due to the pakistan environment. onchong, muturi and atambo (2018) examined inot the impact of debt financing on business financial performance. the study employed sixty (60) firms listed on the nairobi security exchange that have debt component in their capital structure. the independent variable includes long-term debt ratio (ltdr), short term debt ratio (stdr) while the dependent variable which is the financial performance includes profit margin, liquidity ratio, and return on asset (roa). the secondary date was sourced from the financial audited statement of the firms within 20092012. the findings revealed that return on asset suggest return on asset suggest that a unit increase of short term debt reduces return on asset by 0.1%. a unit level increase in short-term debt will reduce the profit margin by 1.05%. the liquidity ratio response to a unit increase in short term debt ratio leads to a decrease of liquidity ration by 0.838. it therefore recommended that debt financing have the intrinsic capacity to influence firm performance, noting the ability to monitor ineffectiveness from the managers of funds. racheal, chelichi and raymond (2017) researched into the influence of financial leverage on food production and firm’s financial performance companies in nigeria. the proxied the performance in terms of earning per share, return on equity, and return on asset. the ex-post facto research design was used were the data was obtained from the financial statements of the firm within 2009-2014. the statistical package for social sciences (spss) version 2.0 was used to test the formulated hypothesis. the findings showed that financial leverage has significant effect on earnings per share and insignificant effect on return on assets and equity. it therefore recommended that among other things that the amount of debt finance in the financial mix of the firm should be at the optimal level in order to ensure the firms’ assets are utilization appropriately. jeleli and olayiwola (2017) investigated the effect of leverage on firm performance. this study was carried out on chemical and paints firms listed on the nigeria stock exchnage. the sample size of three firms was selected from the total nine firms listed on the sector. the time frame of international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 8 (10) ten years from 2000-2009 was employed. the ordinary least square (ols) was used has the technique of the study, while the secondary data was drawn from the nigeria stock exchange fact book and financial statement of the firms. the dependent variable include (roa) while the independent variable is the equity (eqt) and debt ratio (dr). the study revealed that equity and debt ratio has a positive significant and negative insignificant effect on firm performance. foyeke, olusola, and aderemi (2016) examined the influence of financial structure on profitability of manufacturing companies in nigeria. the secondary data was sourced from the financial statement of the firms. the stata package was used where the spearman’s rank, correlation and regression technique was executed on. a sample size of twenty-five companies quoted on the nigeria stock exchange within the period of 2008-2012. the findings of the study depicted that equity has a positive significant relationship with firm profitability of manufacturing companies in nigeria. it is recommended that managers should place emphasis on the facilitation of equity capital and encourage manufacturing companies by reducing the cost of debt which the firms have exposed themselves into. gamis and khatiwada (2016) examined into the effect and relationship between debt, productivity and firm-level perspectives. the study was carried due to the scarcity in literature in studies that employ micro-data between the relationship between finance and economic growth. the study examines the influence of financial development on growth using the firmlevel data. the study covers over 100 countries span close to 30 years (19862014) revealing that firm-level leverage can influence productivity, association strength reduces employment in the firm. also the aggregate leverage in a country has a negative impact on firm productivity. furthermore, given the potential issue of endogeneity, the study examine the impact of leverage on expected and unexpected components of productivity, the results show that leverage is positively associated with the unexpected component of firm productivity, thus providing evidence against reverse causality nyamita garbharran and dorasamy (2016) investigated into factors influencing debt financing decision of corporations. the study combined the theoretical, empirical and methodological model of enquiries in the study. over the past half-century, there has been an increasing interest on identifying the factors influencing debt financing within corporations. based on available literature, both from developed and developing economies, this literature review paper examined the factors influencing debt financing decisions within corporations. applying international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 9 desktop research methodology, the paper used a three-thronged approach: theoretical, methodological and empirical. the theoretical approach reviewed the key theories proposed with respect to corporations’ debt financing decisions. the methodology approach helped in identifying the common applicable conceptual models and the empirical findings related to the factors affecting debt financing of corporations. the factors identified were both firm-specific and macroeconomic factors, and the empirical findings showed either positive or negative relationship results. tauseef, lohano, and khan (2015) investigated into the relationship between debt financing and corporate financial performance. the secondary panel data was sourced from the financial statements of the firm from 2003 -2008 which where the 95 textile companies in pakistan. the result depicts that a linear relationship exist between return on equity and debt-to-asset ratio. showing that when the debt to asset ratio increases the return on equity also increases until debt optimal level is attained, then a decreasing begins. the optimal debt-to-asset is estimated at 56%. the firm’s sales growth has a significant positive effect on return on equity and insignificant effect on firm size. akoto & victor (2014) examined into the determinants of debt policy of manufacturing firms listed in ghana. the secondary data was sourced from seven listed firms in ghana within 20002009. the panel regression technique was employed. it was observed that manufacturing firms in ghana employ 17% equity and 83% debt to finance their financial operations within a calendar year. in which the debt component is divided into 46% long term debt and 37% short term debt. it was observed that the firms tends to admire the short-term debt so has to guard against the distress occurrence in long term debt or deficiency. the study also finds a positive and statistically significant relationship between total debt and asset structure but a positive and insignificant relationship between total debt and liquidity. it recommended that profitability and size have a statistical and positive association with total debt in the firms muhugia (2013) investigated into the impact of debt financing and firm profitability. the descriptive design and census method of all the existing 43 commercial banks. the pearson correlation was used on the data that within 5 years, which are 2008-2012. the study revealed that there exist a positive relationship between profitability and short-term debt knowing fully well that short term debt is less expensive than long term debt increasing it with a low interest rate will lead to stimulating the profit level. a negative relationship is established between international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 10 (lda) long term debt and performance. it is recommended that banks should go for short-term loans since avoiding bad capital structure is germane. cole and sokolyk (2012) examine the debt financing, survival, and growth of start-up firms. the study analyzes how different forms of debt financing at the firm’s start-up affect subsequent firm outcomes. we find that, after three years, firms using debt at start-up, in particular, business debt but not personal debt are significantly more likely to survive and to achieve higher levels of revenues than other firms. we provide evidence that superior outcomes are attributable not only to the selection of better-quality firms by bankers but also to subsequent monitoring by the firms’ bankers. we also find that better-quality start-ups are more likely to use credit, and are more likely to use business rather than personal credit. olufunso, herbst, and lombard (2010) examine the investigation of the usage of debt on the profitability of small and medium scale enterprises. to achieve the objective, the research hypothesized that the usage of debt has a negative impact on the profitability of smes. the research further hypothesized that smes have a difficulty in accessing debt finance from commercial banks. the study is important because smes, despite their contributions to the south african economy, have not been given due attention as research on corporate finance has been biased towards large firms. the results indicated that the usage of debt has a significantly negative impact on the profitability of smes. the results also indicated that smes have difficulties accessing debt from commercial banks. lastly, the study recommended some measures that are expected to improve the accessibility to debt and reduce the cost of debt to smes. these measures among others include reduction in interest rates, awareness programmers by the banks, more bank competition (specifically commercial banks that are focused on lending to smes) and training of the owners of smes in the areas of writing business plans. 3. methodology the data used for this study is mainly panel data from 20112018 which were obtained from the financial statement of selected manufacturing companies in nigeria. growth is represented by sg (sales growth) which is the dependent variable while the independent variables are ltd (long-term debt), std (short-term debt) and roe (return on equity). the study makes use international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 11 of the inferential analysis with the pooled effect model, fixed effect model and random effect model and hausman test was used as the decision criteria. 3.1 model specification the model for this study was adapted from the work of yinusa, somoye, alimi & ilo (2012) and foyeke, olusola & aderemi (2016). the model for this study is therefore specified below to examine the impact of debt financing on the growth of manufacturing companies in nigeria which is explained as follows: 𝑆𝐺𝑖,𝑡 = 𝑓(𝐿𝑇𝐷, 𝑆𝑇𝐷, 𝑅𝑂𝐸, )…………………………1 𝑆𝐺𝑖,𝑡 = (𝛼0 + 𝛽1𝐿𝑇𝐷𝑖,𝑡 + 𝛽2𝑆𝑇𝐷𝑖,𝑡 +𝛽3𝑅𝑂𝐸𝑖,𝑡 + 𝜇𝑡 )……………….2 where: sg= sales growth at time t ltd= long-term debt at time t std= short-term debt at time t roe= return on equity at time t u= disturbance term/white noise at time t i= nth term α = intercept α1– α6 = coefficient of the independent variables table 1. variables description and measurement type of variables variables measurement/justification dependent sg it is the percentage increase in the turnover of a firm within a specified period. it is calculated by log differential of turnover or (net sales1net sales0)/ net sales independent ltd it is the liabilities the firm is opened to that is beyond a calendar year. it is calculated by long-term debt/total assets. foyeke, olusola & aderemi (2016) std it is the liabilities the firm is exposed to that is within one calendar year. (short-term debt/total asset) roe it is the overall return on investment of equity given by shareholders. it is calculated by pbit/shareholder’s fund source: authors compilation, 2020 table 2 variables, denotations, and expected signs international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 12 variables sales growth sign long-term debt significant positive short-term debt significant negative return on equity significant positive total debt significant negative source: authors compilation, 2020 4. results and discussion this part of the paper presents the correlation matrix, pooled, fixed and random effect model and hausman test. 4.1 correlation matrix table 3. correlation matrix of the data set sg std roe ltd sg 1 std 0.20 1 roe -0.02 0.46 1 ltd -0.17 -0.33 -0.13 1 source: authors compilation, 2020 table 3: above depicts that sg (sales growth) has a positive relationship with std (short-term debt) and a negative relationship with roe (return on equity) and ltd (long-term debt). 4.2 panel regression results variable pooled fixed random c -0.1133 (0.7450) 0.7178 (0.2263) 0.0533 (0.8879) ltd -0.9085 (0.0198)* -3.2726 (0.0428)* -1.0968 (0.0618)** std 1.0844 (0.0856)** 0.0810 (0.0318)** 1.0284 (0.0219)* roe -0.2203 -0.2409 -0.2371 international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 13 (0.2542) (0.2836) (0.2217) r2 0.3700 0.2644 0.1725 adjusted r2 0.3333 0.2315 0.2344 durbin watson 2.1797 2.0673 2.2222 f-statistics 1.907172 1.1356 1.9385 prob (f-statistics) 0.10354 0.0418 0.0304 hausman test 0.0585 p<0.05*; p<0.1** the pooled regression model results depict that ltd (long-term debt) has a negative relationship with sg (sales growth) of selected manufacturing companies and statistically significant to sg (sales growth). it implies that a percentage increase in ltd (long-term debt) will lead to a 0.9085 unit decrease in sg (sales growth). std (short-term debt) has a positive relationship with sg (sales growth) of selected manufacturing companies and statistically significant to sg (sales growth). it implies that a percentage increase in std (short-term debt) will lead to a 1.0844 unit increase in sg (sales growth). roe (return on equity) has a negative relationship with sg (sales growth) of selected manufacturing companies and statistically insignificant to sg (sales growth). it implies that a percentage increase in roe (return on equity) will lead to a 0.2203 unit decrease in sg (sales growth). the coefficient of determination using adjusted r2 shows that the explanatory variables (ltd, std and roe) explained 37.00% percent variation in manufacturing growth rate. that is 63.00% is explained by other variables not included in the model. the overall statistical level of the model depicts that the model is not fit for forecasting giving the f-statistics of 90.71 and its probability of 0.1035 since the p-value is higher than 0.05, hence we conclude that the model is statistically insignificant and brings about the acceptance of the null hypothesis. this means that long-term debt, short-term debt and return on equity have an insignificant effect on the growth rate of manufacturing companies. the fixed regression model depicts that ltd (long-term debt) has a negative relationship with sg (sales growth) of selected manufacturing companies and statistically significant to sg (sales growth). it implies that a percentage increase in ltd (long-term debt) will lead to a 3.2726 unit decrease in sg (sales growth). std (short-term debt) has a positive relationship with sg (sales growth) of selected manufacturing companies and statistically significant to sg (sales growth). it implies that a percentage increase in std (short-term debt) will lead to a international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 14 0.0810 unit increase in sg (sales growth). roe (return on equity) has a negative relationship with sg (sales growth) of selected manufacturing companies and statistically insignificant to sg (sales growth). it implies that a percentage increase in roe (return on equity) will lead to a 0.2409 unit decrease in sg (sales growth). the coefficient of determination using adjusted r2 shows that the explanatory variables (ltd, std, and roe) explained 26.44% percent variation in the manufacturing growth rate. that is 73.56% is explained by other variables not included in the model. the overall statistical level of the model depicts that the model is fit for forecasting giving the f-statistics of 13.56 and its probability of 0.0418 since the p-value is less than 0.05, hence we conclude that the model is statistically significant and brings about the acceptance of the null hypothesis. this means that long-term debt, short-term debt and return on equity have a significant effect on the growth rate of manufacturing companies. the random regression model results depict that ltd (long-term debt) has a negative relationship with sg (sales growth) of selected manufacturing companies and statistically significant to sg (sales growth). it implies that a percentage increase in ltd (long-term debt) will lead to a 1.0968 unit decrease in sg (sales growth). std (short-term debt) has a positive relationship with sg (sales growth) of selected manufacturing companies and statistically significant to sg (sales growth). it implies that a percentage increase in std (short-term debt) will lead to a 1.0284 unit increase in sg (sales growth). roe (return on equity) has a negative relationship with sg (sales growth) of selected manufacturing companies and statistically insignificant to sg (sales growth). it implies that a percentage increase in roe (return on equity) will lead to a 0.2371 unit decrease in sg (sales growth). the coefficient of determination using adjusted r2 shows that the explanatory variables (ltd, std, and roe) explained 17.25% percent variation in the manufacturing growth rate. that is 82.75% is explained by other variables not included in the model. the overall statistical level of the model depicts that the model is fit for forecasting giving the f-statistics of 93.85 and its probability of 0.0304 since the p-value is less than 0.05, hence we conclude that the model is statistically significant and brings about the acceptance of the null hypothesis. this means that long-term debt, short-term debt and return on equity have a significant effect on the growth rate of manufacturing companies. 5. summary international journal of commerce and finance ariyibi mayoma ebenezer & oyakhilamo tolulope williams & asogba israel oludare 15 the study examined the impact of debt financing on the growth of manufacturing firms in nigeria using panel data from 2011-2018. this study employed panel regression analysis (pooled, fixed & random effect model), but hausman test being the decision criteria test to determine the model which inference will be drawn from. the findings revealed from the random effect model that ltd (long-term debt) has a negative relationship with sg (sales growth) of selected manufacturing firms in nigeria and statistically significant to sg (sales growth) at 0.1%. std (short-term debt) has a positive relationship with sg (sales growth) of selected manufacturing firms in nigeria and statistically significant to sg (sales growth). roe (return on equity) negative relationship with sg (sales growth) of selected manufacturing firms in nigeria and statistically insignificant to sg (sales growth).the findings agree with the postulation of the pecking-order theory that debt is part of the source of capital that can be used in maintaining the continuity of the firm since debt will not warrant ownership being given to the debenture holder only interest will be given after every calendar year, the study also aligns with the study of gamis & khatunde (2016), onchong, muturi & atambo (2018) and tauseef, lohano & khan (2015). the firm should/can employ long-term debt in its capital/fund sourcing but make sure it well managed so it has not to grow above the equity status of the firm. the firm should make sure short-term debt is meet urgently so it has not to threaten the workingcapital status of the firm, which can influence the asset growth and sales growth of the firm. the firm should not rely on a hundred percent of debt components to finance a firm because of it dangerous and can lead to knight takeovers. the firm can mix the periodic debt components of short-term and long-term debt in its capital structure, because of the benefit of the tax shield inherent in the postulation of the static-trade off theory. references abor, j. 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(charles, 2003: 3) the value chain included various processes from the procurement of raw materials to the end user in products and services. today, the business philosophy known as supply chain management consists of process, suppliers, customers, consumers and other supporting businesses. in this respect, supply chain management is directly related to information technologies, raw material supply, relations between businesses, strategies, and cultural formation(çengel, 2008: 99). the reason why supply chain management has suffered today is the covid-19 pandemic that has left deep wounds in the world. in addition to posing a major health threat, companies are trying to cope with the pandemic. the measures taken to prevent further transmission of this pandemic negatively affect the activities in the supply chain, individual consumption habits, production processes and employment. when we look at the world in general, the pandemic deeply affected the global economy, as well as restrictions imposed for covid-19 have caused an unprecedented decline in retail sales and store traffic. in this study, first of all, literature on supply chain management has been reviewed and e-supply chain dimensions have been evaluated. afterwards, the effects of the covid-19 pandemic on the supply chain were revealed. 2. literature review this section reviews related literature of the study that was written by other researchers. supply chain management, esupply chain and covid-19 pandemic are examined in detail. 2.1. supply chain management supply chain management is defined as the integration of all business processes that add value to customers and other stakeholders in the chain such as product, service and information sharing in a supply chain that continues from the end customer to the main suppliers (douglas, 1998).supply chain management refers to inter-business relations and cooperation and the entire activities including the process of the arrival of raw material procured from in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e impact of covid-19 on supply chain management 73 2nd degree supplier to 1st degree supplier, becoming a semi-finished product or a product in the manufacturer, delivery to the customer with the distributor logistics companies in between and finally transferring from customer to end user. (koçog ̆lu,2010: 98). today, supply chain management has become an important tool in the planning of many production and service businesses (ungan, 2011: 65). there is a supply chain management that constantly renews itself depending on the developments. concerning supply chain management, concepts such as lean supply chain management, agile supply chain management, reverse supply chain management and green supply chain management have recently emerged. supply chain management generally covers the following topics: purchasing, procurement, logistics and transportation, stock control, production planning and control, facility planning, outsourcing, marketing, organizational behavior and relationship management, contracts, information systems, network design, performance. measurement, etc. methods such as mathematical modeling, optimization and game theory are used to solve problems in these subjects. (aktas ̧, 2010: 46). the key features of supply chain management can be defined as follows: the supply chain includes all processes for the manufacture of goods and services, from manufacturers to consumers. in order to satisfy consumer needs, the supply chain requires the involvement of all players, directly and indirectly. distribution service providers (carriers, warehouse managers, etc.), retailers and consumers contribute to the supply chain, not only to the relationship of the manufacturer and supplier, but also to all stakeholders. by commodity (raw material, semi-finished, finished part), information and money flow, each stage is interconnected. the supply chain requires the inclusion of all functions (new product development, marketing, operations, distribution, finance and customer service). all these characteristics include both internal and inter-business process-oriented thought and the subsequent development of an organisational framework. the goal of the supply chain should be to optimise all the value that is produced. the value produced in the supply chain is the difference between what is provided for the consumer by the value of the finished product and the cost of the supply chain to meet customer needs. the relationship model that prioritises mutual benefit, rather than the conventional confrontational attitude, between the supplier and the consumer, is the fundamental concept in the supply leg of effective chain management. businesses minimise the number of suppliers and costs with a long-term partnership strategy and achieve competitive advantage in foreign markets by building an environment of confidence (erdal, 2011: 11). 2.2. e-supply chain the basic condition for the success of supply chain management is the effective sharing of fast and accurate information on departments such as procurement, production, marketing and logistics. kulkarni (2001) defined internet-based supply chain management as the establishment of the system on internet that enables the supply of raw materials used in production, the transportation of these materials to the production points, and the delivery of the manufactured products to the customers. internet-based supply chain management will make a significant contribution to the regulation of stocks, production plans, logistics plans, optimal use of resources and reduction of costs in response to changes in the market (lancioni et al. 2000: 98). accordingly, internet-based supply chain management will play an important role in the development of communication and cooperation between businesses that are independent from each other in the process from the supply of raw materials to the realization of production and presentation to customers. at the same time, the fact that the internet gives the opportunity to know and control the businesses on the supply chain provides a more successful implementation of supply chain management (tanyeri ve barutçu, 2003: 76). internet, which is an important force for the development of supply chain management, enables businesses to reduce their costs and increase their efficiency. the availability of a real-time communication opportunity between the enterprises in the supply chain, the timely ordering of raw materials to meet the demand, has enabled the reduction of stock costs and, in a sense, working with virtual stocks (lancioni et al., 2003: 56). it has been determined that the dilek ulucan erkesi̇m 74 internet contributes to the integration of businesses by providing the necessary information flow for the coordination of business activities. at the same time, the internet has contributed to the functioning of the market mechanism such as price competition and provided the opportunity to purchase some products at lower prices. (schmelz vd., 2001: 10). 2.3. covid-19 pandemic given the past of the planet, epidemics have a global impact. management and life variations are caused by them. in several instances, from diet to architecture and particularly the destruction of civilizations, outbreaks in history have been accepted as the cause of new innovations. after the spanish flu, covid-19 is the first infectious disease outbreak that the entire world has experienced. a group of doctors led by dr david tyrrell in england performed several analyses on the common cold in 1965. they based on a virus that in tissue culture appears to be new and studied it under an electron microscope in detail. they discovered that this virus was very similar in the 1930s to the virus isolated from bronchitis chickens. the ability of coronaviruses to infect humans has now been demonstrated for the first time with the discovery of this virus ( aysan, 2020: 21). on december 31, 2019, the world health organization china country office confirmed cases of pneumonia, the cause of which is not currently known, in wuhan, china's hubei province. a new coronavirus that had not been observed in humans before was identified on january 5, 2020. covid-19 was later named for this disorder, which was first called 2019-ncov. it gradually infected the entire world three months after it was found in china (who, 2020). in a press release released on march 13, 2020 by the world health organisation, general director dr. tedros adhanom delivered a speech on the pandemic of ghebreyesus. in order to reduce covid-19's rate of spread, he said the following; "you can't fight a virus that you don't know where." to split the covid-19 spread chain, detect, isolate, test and treat! the propagation of the disease will be constrained by any case we identify and treat." the use of the term is descriptive about the direction the disease will follow. (üstün, 2020: 143). the outbreak of covid-19 has now become a global pandemic. not only is this epidemic medical. it has created a variety of social, professional, political, economic, ethical and moral implications. due to the fact that the world is not prepared for the covid-19 epidemic, some delays and misunderstanding exist in the steps to be taken, the epidemic spread has been calculated to become a pandemic (üstün, 2020: 147). 3. effects of covid-19 pandemic on the supply chain it is not possible to compare the effects of the coronavirus pandemic with other global crises such as the 2008 financial crisis. because covid-19, besides being a global epidemic, did not focus on low and middle-income countries. interest rates are the lowest interest rates seen in the historical period. countries of the world are more connected and integrated with each other. the current crisis has spillover effects along supply chains and there is also a simultaneous supply and demand shock. unfortunately, the economic effects of covid-19 are felt seriously in sectors and countries. when we look at the global effects, automobile manufacturers such as volkswagen and ferrari have suspended production in europe. key sectors that make up almost a quarter of a country's gdp, such as transportation, entertainment, retail, hotels and restaurants, have suffered seriously. dow jones lost 2,977 points on march 16, 2020, recording its worst one-day drop. tourist attractions such as paris, madrid, venice and rome were abandoned, trade fairs and events were canceled. public meetings and sports events have been canceled, and land, sea and air transportation have ceased until may. millions of people lost their jobs in china, all of the hundreds of movie theaters in canada were closed. (cinel, 2020: 128). companies producing luxury goods stopped production, and switzerland opened its doors only to its citizens, residents and vehicles after the pandemic. there are still too many uncertainties and question marks regarding covid19. available data show that covid-19 is more contagious than sars. on the other hand, covid-19 has a much lower mortality rate (between 2-4%) compared to sars (10%), and both had a much lower mortality rate than bird flu (60%) (chou vd., 2004: 42). the human factor directly affects the supply and demand side of the supply chain. for this reason, the covid-19 pandemic has had an impact on all sectors, especially health, agriculture, food, transportation, logistics, education and tourism. due to many factors such as quarantine, illness, closed schools and curfew, people in many parts of the world cannot go to work and cause supply-side problems. this situation caused factory closures in industries such as technology, automotive, depending on the shortage of raw materials and semi-finished products (yıldız, 2020:65). impact of covid-19 on supply chain management 75 similar effects that covid-19 shows in all the world supply chain are also seen in turkey. at the time of the first occurrence of the covid-19 virus, reports containing positive economic forecast with the possibility of production shifting from china to turkey reversed with the spread of the virus and finally seen in our country. the global structure created in supply chains also showed its effects in turkey. the supply-side situation of the supply chain for manufacturing companies caused many sectors, especially automobile companies, to suspend their production due to the shortage of raw materials and spare parts. firms have tried to reduce the number of workers with practices such as shift reduction, unpaid leave, etc. those who have suitable machinery have started to produce products such as respirators and masks that are needed in case of a pandemic (yes ̧ilyurt, 2020: 78). tourism, transportation and food and beverage sectors which are called as the service sector; are the sectors most affected by this crisis. the cessation of the companies operating in this field caused the supply chain members operating in this field to not manage their demand and supply balances well. a significant decrease was observed in the non-food consumer products sector, especially in furniture and decoration, stationery, clothing and accessories expenditures (tepav, 2021). the continuous change and development of technology day by day has led to the emergence of different business potentials for companies. especially communication technology offers companies international market opportunities. while these developments in the technology world create job opportunities in different markets, the supply chain also changes in accordance with the changing conditions. therefore, companies benefit effectively from the internet-based supply chain. the electronic supply chain is a platform where companies can perform their procurement, production and logistics activities more quickly during the covid-19 pandemic, collaborate with other companies on this chain and provide cost savings by sharing information. for this reason, meeting the requests and requirements of the people in the electronic environment during the pandemic period has been a great advantage in terms of both the procurement activities of the companies and the fulfillment of the requests of the people. during covid-19, e-supply chain management has been the most emphasized and spoken management system throughout its history. 4. conclusion one of the most important channels through which covid-19 deeply affects the global economy is supply chain networks. after covid-19, there are disruptions in the functioning of global procurement, which has created spillover effects at different levels in supplier networks. for example, automotive companies have had to stop their production due to a lack of parts, as in many different industrial sectors. even in luxury items such as swiss watches, manufacturers have faced a shortage of parts. these negativities in supply chains have increased the cost of work for manufacturing companies. manufacturers that supply almost 70% of their products from china are on the brink of bankruptcy. as factories in china closed and transportation routes collapsed, it has become increasingly difficult to market products around the world. 75% of companies in the usa announced that there are disruptions in their supply chains. many us companies have doubled their lead times from routine (taylor and schwartz, 2020). after covid-19, there was a shortage of raw materials and final products in the world. the insufficiency of air and sea transportation options has exacerbated the problems. as the virus infects even more countries, the interest and demand for chinese products has decreased, which has revealed the fear of recession. many different countries have started to implement risk reduction strategies due to the high costs that arise. it is very difficult to manage these risks by a single company. therefore, supply chain risk management has been developed to manage risks in a wider scope. there are many types of risks that must be managed by the supply chain. these are risks that occur in different types such as natural disasters, hurricanes, pandemics, war, fire and flood. the covid-19 virus, which the whole world lives, is just one of these risks. although the expectation of pandemics is known by both governments and companies, the low probability of realization has created difficulties in terms of evaluating these risks. many companies around the world have not been able to manage their supply chains against the pandemic and have faced significant disruptions. there were difficulties in meeting the needs, especially health and food supplies. this situation shows that supply chains are not ready for the pandemic and cannot cope with 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constituting economic, political and judicial fabric of the society and as the product of a historical development process, is applied in many countries as a dynamic process that is able to rapidly adapt to both changing economic and social conditions and changes in technological structure and plays the most effective role in determining employment conditions. a collective labor agreement is primarily formed for the purpose of improving working conditions of workers and to recover their material circumstances through other side benefits provided in goods and money in addition to salary increases. naturally, aspiration of employees to benefit from collective labor agreement applied in the workplace they serve is for their self-interest. however, to be able to benefit from collective labor agreement, while only aspiring is not sufficient to utilize it; fulfilling a set of conditions is also necessary. keywords: collective bargaining, labour unions, collective labour agreements, employees. 1. introduction collective agreement system is the product of a historical development process (zaim, 1977). it is applied in many countries as a dynamic process that is able to rapidly adapt to both changing economic and social conditions and changes in technological structure and plays the most effective role in determining employment conditions (ekin, 1979). whereas it can be observed that more than 150 thousand collective agreements are in force in the usa simultaneously; the system adapts to not only political regimes but also rapidly changing character of industrial life with its democratic and dynamic quality. according to harold w. davey, collective agreement always plays an effective role as a useful mechanism for ensuring balance, stability and alteration in labor relations all together (dawey, 1963). collective agreements, in essence, include issues to be handled in determining working conditions in the workplace. terms regarding wages and work hours are particularly foremost among these issues undoubtedly. staff management, human relations and, more generally, many issues included in behavioral sciences started to be considered in labor agreement provisions in recent years. moreover, collective agreements perceive many other issues from physical working conditions to relations of workers with employers and their own organizations and from settlement of disputes to complaints mechanisms. in this respect, collective bargaining system should be considered as a main and indispensable institution of democratization of industrial relations (ekin, 1979). 1 this article has been generated from the doctoral dissertation of the author under the title of “a research investigating out of scope employee application in turkish collective agreement system and attitudes of workmen regarding the issue”. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 62 mehmet saim aşçı http://ijcf.ticaret.edu.tr collective agreement system does not indicate relations of individuals trying to agree upon certain principles but rather relations of organized groups. in other words, collective agreement system is an institutionalized representation process and an entity generated to enhance workers’ bargaining power through economic imperatives (zaim, 1977). in a broader scanning, collective agreement system involves one of the main problems constituting economic, political and judicial fabric of society. this is the content of social fabric and separation of powers in an industrializing society. in other words, it refers to mutual interactions of industrialization and social structure, i.e. the issues of relations between ruling and ruled ones in industry and the balance of power between the groups. the ultimate aim of all these issues is to configure fabric of industrial society so as to maximize its social and economic welfare. in all countries of contemporary world, economic and industrial structure in particular is closely connected to harmonious development of labor relations. the principal method in regulating these relations is collective bargaining system in democratic countries. collective agreement system contemporarily has three aims in general: 1. to determine the price of worker’s labor, i.e. wages, 2. to establish an industrial jurisprudence system about labor disputes, 3. to constitute a systematics to represent individual and collective interests of workers and employers. in fact, collective bargaining is a difficult process requiring a careful preparation and high-level management skills. in spite of all difficulties, collective bargaining is a beneficial application for the protection of labor force-management autonomy in a free society. if the settlement of labor disputes is left to third parties, freedoms of labor force and management will be restricted. therefore, while collective bargaining serves to interests of labor force and management, it also serves to interests of the free society in the long term as well (davis,1988). collective bargaining is also a channel to “participation to the management” enabling share of management authority in determination of economic and non-economic rules regarding working conditions. in this sense, it is a tool contributing democratization of management in the workplace (koray, 1992). collective bargaining is also a tool used for “remedy of the problems” to solve the conflict of interests between the parties of labor and employer which have separate interests (koray, 1992). collective bargaining determines rights and responsibilities of parties, carries out its liability to maintain labor peace and concludes procedures to be applied in the case of disputes and hence it is a conciliator remedy in labor relations. western societies have achieved to provide consensus and continuity in industrial relations systems due to they use collective bargaining for not only a bargaining relation gathering opposite interests but also an institution to solve this conflict (barbash, 1980). collective agreement system has attracted the attention of various disciplines because of its such multifaceted character. while it constitutes examination field of economics, law, political sciences disciplines on the one hand, it is included in research topics of sociology and psychology due to it is a form of group relations among people on the other. thus, psychological researches investigating dynamic process of group activities in the society deal with humane facade of collective agreement system. a business attracts sociologists attention as a community and a social system. as for collective agreement system, it draws attention with respect to its effects on relations between individuals and groups within the frame of a business or a branch of industry. benefiting from the collective labor agreement in turkish collective bargaining system 63 http://ijcf.ticaret.edu.tr collective agreement system is one of important power elements of a society with its economic, judicial, social, political and psycho-sociologic significance (zaim, 1977). apart from terms of law of obligations with 1926 date on “general contract”, the first law to regulate collective labor agreements was the law with 1963 date and 275 number in turkey. after the acceptance of 1982 constitution, 275 numbered law was replaced with “law of collective bargaining agreements, strike and lock-out” with 5th may 1983 date and 2822 number (oğuzman, -). finally, 18th october 2012 dated and 6356 numbered “law of trade unions and collective bargaining system” was published in 7th november 2012 official gazette for the purpose “to enact a long-running law moving turkish industrial relations system forward, reflecting values of the age and providing radical solutions for the problems of turkish working life as well” (6356 numbered law of trade unions and collective bargaining system, general preamble) and substituted for the laws of “trade unions” with 2821 number and “collective bargaining agreements, strike and lock-out” with 2822 number. in article 33 and 35 of law of trade unions and collective bargaining system, essential elements for the definition of the collective agreement have been given. in article 33 of the law, following statements are included: “(1) a collective labor agreement shall contain provisions on the conclusion, content and expiration of a contract of employment. (2) collective labor agreements may also contain other stipulations as to the mutual rights and obligations of the parties, application and supervision of the agreement and the means to be resorted for the settlement of disputes. (3) a framework agreement shall apply to members of workers’ and employers’ confederations which are parties to this agreement and may cover the arrangements concerning vocational training, health and safety at work, social responsibility and employment policies. (4) framework contract is placed for minimum one and maximum three years upon the invitation of one party and affirmative response of the other party. (5) collective labor agreements and framework agreements shall not include arrangements contrary to the constitution and the binding provisions of the laws.”. in article 35 of the law, an imperative regulation was enacted and to place collective labor agreement in written was emphasized through the statement of “a collective labor agreement shall be done in written.” (kılıçoğlu, 2013). by considering such provisions of the law, collective labor agreement can be defined as: collective labor agreement is a written contract placed in order to regulate provisions on conclusion, content and expiration of the labor contract between labor union and employer’s union or employer that is not a member of employer’s union and it may also include mutual rights and obligations of the parties, application and supervision of the agreement and means to be resorted for settlement of disputes (çelik, 2015). on the basis of these definitions principal elements of collective labor agreement can be listed as follows (i̇nce, 1985): 1. collective labor agreement is a sui generis private law contract. 2. on the parties of collective labor agreement is necessarily labor union. the other party is the employer or the employer’s union. according to definition in the law, if the employer is a member of an employer’s 64 mehmet saim aşçı http://ijcf.ticaret.edu.tr union, then the party of the contract shall become the employer’s union. the contract concluded by labor communities not having labor union legibility will not be deemed as collective labor agreement. 3. collective labor agreement regulates the issues about conclusion, content and expiration of labor contract in principle. in other words, issues constituting the content of labor contract such as working conditions, work hours, holidays and leaves, wages and payments of benefits are included in collective labor agreement in addition to terms about conclusion and termination of the labor contract. 4. collective labor agreement may include terms about rights and obligations of the parties and application and supervision in addition to regulation indicated above. in other words, issues such as assignment of the representatives, tasks of the representatives, notice board, complaint management, settlement of disputes may be included in collective labor agreements. 2. the concept of benefiting from the collective agreement collective labor agreement is primarily formed for the purpose of improving working conditions of workers and to recover their material circumstances through other side benefits provided in goods and money in addition to salary increases as indicated above. then, aspiration of workers to benefit from collective labor agreement applied in the workplace they serve is for their self-interest. however, to be able to benefit from collective labor agreement, while only aspiring is not sufficient to benefit from it; fulfilling a set of conditions is also necessary (akı, 1975). 2.1. beneficiaries of collective agreement in the law of trade unions and collective labor agreements with the number of 6356, the issue of benefiting from the collective labor agreement by members and non-members of a workers’ trade union which is one of the parties is included in article 39. it is possible to handle these matters in the following sub-titles (çelik, 2015). 2.1.1. members of a workers’ trade union which is one of the parties in the 6356 numbered law, it is obviously indicated that members of a workers’ trade union which is one of the parties benefit from the collective labor agreement. (a.39/1). in application of this provision, the scope and level of collective labor agreement do not matter. collective labor agreement may have been concluded in the forms of workplace, workplaces or enterprise collective labor agreement. the important thing is whether the worker employed in the workplace included in the scope of a concluded collective labor agreement is the member of the signatory union. now then, workers who are employed in a workplace included in the scope of a concluded collective labor agreement and members of signatory union can benefit from the contract as it is obviously indicated in article 39. 6356 numbered law regulates that the amount of the membership dues shall be fixed by the general board in accordance with the procedures and principles identified in unions’ statutes (a.18/1). the 6356 numbered law clarifies on which date members of the trade union that is the party of a collective labor agreement can start to benefit from the contract. according to the law, members of a trade union at the date of signing the collective labor agreement to which that trade union is a party shall benefit from that agreement as of the commencement date; workers who become members after the date of signature shall benefit from the agreement as of the date when the trade union communicates their membership to the employer (a.39/2). 2.1.2. non-members of a workers’ trade union which is one of the parties a) benefiting from the agreement through payment of solidarity dues as it was in former 275 numbered and 2822 numbered laws, a provision regarding benefiting from the agreement by non-members of the signatory union through payment of solidarity dues is included in 6356 numbered law as well. in the law, it is obviously indicated that the consent of the trade union shall not be required in benefiting from the collective labor agreement by paying solidarity contributions (a.39/4). in the law, the provision of that benefiting from the collective labor agreement by paying solidarity contributions shall do so starting from the date on which such request is made (a.39/4). benefiting from the collective labor agreement in turkish collective bargaining system 65 http://ijcf.ticaret.edu.tr in the law of trade unions and collective bargaining agreements with 6356 number, the provision of that “the amount of the solidarity dues shall be determined with the trade union statute, provided that the amount is not above the amount of the membership dues” has been enacted (a.39/5). the opportunity that the law provides for non-members of the signatory trade union to benefit from collective agreement by paying solidarity contributions is in compliance with the principles of optional affiliation to unions and prohibition of forcing someone for membership indicated in the constitution and trade unions law, due to it does not force the worker to become a member of the union basically. on the other hand, individuals other than those providing material and moral support for the union in its important and difficult activity to conclude collective labor agreement and hence eligible to benefit from it are also able to utilize it without bearing any cross and the law found that inconvenient with respect to getting stronger and development of the unions and accepted that nonmembers of the signatory union may benefit from the activity in the exchange of an amount to be paid to the union. while, differently from 2821 numbered law in article 18 of 6356 numbered law, the fact that an upper limit has not been determined for union dues and it has been stipulated that the amount of the membership dues shall be fixed by the general board in accordance with the procedures and principles identified in their statutes and a restriction proportional to membership dues has been determined with respect to solidarity contribution has an importance in the sense of protecting autonomy in the operation of unions, there is also a necessity to protect existing balance in execution. herein, it should be taken into consideration that membership dues consist one of the important income sources with respect to continuity of the union on the one hand, and it should not be as much high as to make benefiting from the right of union association too difficult on the other. it also should be noted that the amount of solidarity contribution should be determined in compliance with the point to protect the freedom of staying away from the union (alpagut, 2012). b) application of the agreement to the non-members through written consent of the union law of trade unions and collective labor agreement with 6356 number stipulated application of rights and interests that workers’ and employers’ institutions provide to their members through their own activities to non-members and necessitated written consent of these institutions (kılıçoğlu, 2013). according to the law, “the extension of the rights and benefits that organization provides for its members through its activities to those who are not members shall be dependent upon its written approval, without prejudice to the provisions included from the part seven to the part twelve of this law (a.26/4). in pursuant to this article, through the written approval of a labor union, the people who are not a member of the relevant union can benefit from the collective labor agreement and other activities that the union carries out. however, in applications to date, it has not been commonly observed that labor unions give a written approval to enable non-members to benefit from a collective labor agreement. it was sometimes observed in the past that labor unions conclude some terms to be applied to all workers in some payments of benefit issues such as transportation and meal in collective labor agreements. however, conclusions ensuring application of terms of a collective labor agreement regarding monetary issues to all workers were almost never encountered. undoubtedly, it cannot be expected that trade unions(**) which does not want non-members to benefit from the contracts by paying solidarity contribution would pave the way to written approval option to enable non-members to benefit from the contract in which there is not any matter of contribution. 2.1.3. extend of the agreement through cabinet decree in 275 numbered law, provisions regarding extension was included for the purpose of providing uniform conditions in labor market in the cases of some workers are not able to benefit from the contract due to uninvolved employers start to run after the conclusion of a collective labor agreement applying to majority of workers in a business line and prevention of unnecessary strikes and lock-outs (interim commission report, tgna, p.132). however, there was not any extension application in former periods. therefore, 2822 numbered law stipulated new principles in order ** in the negotiations of 6356 numbered law of trade unions and collective labor agreement during the discussion in tgna, removal of benefiting from the collective labor agreement through paying solidarity contribution in relevant workplace was demanded (musa çam, tgna reports) 66 mehmet saim aşçı http://ijcf.ticaret.edu.tr to ease functionality of extension and reduce the numbers of workers not being able to benefit from collective labor agreements (mis & özsoy, 1983). according to regulation made by 2822 numbered law, council of ministers can extend a collective labor agreement completely, partly or after making necessary amendments which is concluded by the union having the greatest number of members among the unions representing at least ten percent of the workers in a certain business line to the other workplaces or some of them in the same business line not having collective labor agreement upon the demand of labor and employer unions in the business line or relevant employers or minister of labor and after taking opinions of high board of arbitration (tsglk a. 11/i). in order to benefit from extended contract, workers do not need to pay even solidarity contribution. after the termination of extended collective labor agreement, extension decision terminates as well (a. ll/iii). however, when council of ministers finds it necessary, it can repeal the decree by explaining its preamble (a. 11/iv). as it can be seen, extension is to ensure application of a collective labor agreement to the workplaces out of the scope of the agreement through an administrative action of council of ministers. indeed, extension is a way that eliminates unfair competition circumstances among employers arising from opting of some employers out of collective labor agreement in a certain business line and ensures application of the collective labor agreement in a broader sphere and rise level of living of workers as well as placement of uniform rules and prevention of unnecessary strikes and lock-outs and public interest is forefront in all these reasons (oğuzman, -). after entry into force of 2822 numbered law, it can be observed that council of minister sometimes used its extension authority (reisoğlu, 1986). rules of extension of collective labor agreement have been regulated in article 40 of trade unions and collective labor agreement with 6356 number. in this new regulation, there are some partial differences from the regulation included in 2821 numbered law (a.11). the law maker has obviously emphasized that extension cannot come into force retroactively. on the other hand, conclusion of a new collective labor agreement before the due date of extended labor agreement has been allowed due to parties may agree and conclude a new collective labor agreement (tu and cla. m.40). in that case, application of extended collective labor agreement will terminate automatically (kılıçoğlu, 2013). 2.2. the concept and types of out-of-scope staff as the exception of benefiting from the collective agreement workers falling out of the scope of a collective labor agreement should be examined in two parts. the first part is to fall out of the scope because of the law and the second one is to be excluded from the scope through the wills of the parties concluding the contract (reisoğlu, 1986). collective labor agreement, which is a kind of private law contracts, is concluded in line with the wills of the parties in compliance with stipulations of constitution and laws. however, some workers are directly excluded from the execution scope of collective labor agreement through a legal regulation before their will due to their task and position. here, workers that serves to an employer under a service contract but excluded from the scope of collective labor agreement through a legal regulation and for various reasons are the matter (reisoğlu, 1986). benefiting from the collective labor agreement in turkish collective bargaining system 67 http://ijcf.ticaret.edu.tr in article 21 of 2821 numbered law, those forbidden from membership of a union were determined as follows; 1. “military staff 2. inspectors, controllers and directors working in administrations, organizations, institutions, banks and insurance companies indicated in the second clause of article 40 and other managers equal and superior to those, 3. teachers working in the schools subjected to law of private education institutions with 8th june 1965 date and 625 number cannot be a member of labor and employer unions and cannot establish unions.” here, workers that serves to an employer under a service contract but excluded from the scope of collective labor agreement for various reasons are the matter. in the same article, military staff is included in this prohibition to membership and founder of a union. work relation of military staff is similar with civil servants. in this respect, it is not possible to consider them as labors. moreover, there is not any definition in the law regarding these people. for this reason, benefiting from collective labor agreement by military staff, who is committed to statute law, cannot be thought (eyrenci, 1984). on the other hand, due to labor relation of some of those indicated in article 21 of 2821 numbered trade unions law is on the basis of service contract, whether they can benefit from the rights of freedom of association and collective labor agreement protected by the constitution became a matter of discussion (reisoğlu, 1986). individual freedom of association, which can be defined as being a member, not being a member or resignation from the membership of a union without any forceful action, is under constitutional security (a.51). however, some provisions included in article 21 of 2821 numbered trade unions law used to restrict such freedoms in places (kutal, 1987). in addition to that these restrictions are contradictory with individual freedom of association protected by constitutional level, it also conflicts with the “workers and employers, without distinction whatsoever, shall have the right to establish and, subject only to the rules of the organization concerned, to join organizations of their own choosing without previous authorization” terms of article 2 of ilo convention regarding “freedom of association and protection of the right to organize” with 87 number and approved in 1993. in article 17 of 6356 numbered law of trade unions and collective labor agreement, acquisition of membership has been regulated for elimination of restrictions and conflicts limiting the freedoms. in the article, all workers are entitled to become a member of a union through the statement of “any person who completes 15 years of age and who is considered as a worker in accordance with the provisions of this law may join a workers’ trade union”. through 6356 numbered trade unions and collective labor agreement law, a liberal approach has been adopted in establishment of membership relations in compliance with international norms, liberty to become a member or not has been ensured. workers serving to a second employer in different workplaces belonging to different employers in the same business line are entitled to become a member of more than one union. regulation aims to enable employees working with flexible hours to become members of more than one union in the case of concluding labor contracts with different employers in the same business line (kılıçoğlu, 2013). 2.2.1. out-of-scope employees for being deemed to representative of employer according to 2/1-e and 2/2 articles of 6356 numbered law of trade unions and collective labor agreement, “employer’s representative refers to the persons authorized to manage an entire enterprise in the name of the employer. the employer’s representatives shall be considered as employers for the purposes of the implementation of this law.” employer’s representatives are dependent to employer on the basis of service contract or statute law according to quality of workplace or enterprise whether it is private sector or public institution. as a rule, there exists a “labor contract relationship” between employer and employer’s representative in all workplaces of private sector. 68 mehmet saim aşçı http://ijcf.ticaret.edu.tr therefore, such kind of employer’s representatives can benefit from protective provisions of 4857 numbered labor law. according to law of trade unions and collective labor agreement, definition of employer’s representative has been regulated to prohibit entrance of these people to labor unions in essence. naturally, it cannot be suggested that an individual representing employer and not a member of labor union can benefit from collective labor contract. such individuals cannot make any claim to benefit from collective labor agreement by paying solidarity contribution as well, and their relationship with employer is only determined on the basis of labor contract (reisoğlu, 1986). moreover, with respect to definition of employer’s representative concept, differences between labor law and trade unions law should be taken for granted by considering aims of both regulations. in the definition of labor law, “management of the work and workplace” was taken as a basis and a broader definition was preferred with respect to scope for the purpose of operating management function. on the other hand, law of trade unions and collective labor agreements regulates union and collective labor agreement rights of workers as stipulated by constitution (a.51-53) and prevents deprivation of workers that are deemed employer’s representative according to labor law and works under labor contract from this right through is narrower scope (centel, 1992). moreover, lawmaker deems employees authorized to administration of whole enterprise as employer and entitle them to become a member of employer unions. in this sense, individuals acting as a party in collective labor agreement or collective bargaining with a representative title out of those deemed as employer’s representative by law labor are considered as employer with respect to application of 6356 numbered law of trade unions and collective labor agreement (tra un and cla a.39/7) indeed, being out-of-scope of such people should be taken for granted due to an individual acting on behalf of employer in agreement bargains with representative title and defending rights of employer cannot benefit from collective labor agreement (even though she/he pays solidarity contribution). 2.2.2. workers not participating or withdrawing from applied strike according to clause 1 of article 64 of 6356 numbered law of trade unions and collective labor agreement, employer is free to employ workers not participating or withdrawing from the strike. workers who operated in the workplace with the except of those operated mandatorily according to article 65(***) cannot benefit from the collective labor agreement concluded at the end of the strike, unless there is a provision to decide on the contrary (tra un and cla a. 39/8). here, falling out of scope of some workers is stipulated because of the law. while these workers may be members of signatory labor union, they may be non-union or member of another union as well. they cannot benefit from the agreement, unless there is a provision to decide on the contrary in the collective labor agreement. these workers cannot benefit from the agreement even if they pay solidarity contribution (oğuzman, -, şahlanan, 1992, kutal, 1983). whereas prevention of workers not participating or withdrawing from participating to strike from benefiting from a collective labor agreement concluded afterwards is evaluated as narrowing application sphere of the agreement like workers excluded from the scope of the agreement, these two applications are different from each other. while outof-scopestaff application is a matter for workers operating certain tasks; the prohibition about benefiting from collective labor agreement regulated in clause 1 of article 64 in 6356 numbered law of trade unions and collective *** workers who have to operate in the workplace during a strike and lock-out application are those who ensure: -continuity of the works that there is a technical necessity about their continuity in the sense of quality, -workplace security and prevention of machinery and inventory stock, tools, raw materials, semi-finished and finished materials from decay, -protection of animals and plants. benefiting from the collective labor agreement in turkish collective bargaining system 69 http://ijcf.ticaret.edu.tr labor agreement unless otherwise decidedis valid for all workers not participating or withdrawing from participating to a strike regardless of their tasks and positions. on the other hand, whereas change of task of a worker formerly excluded from the scope of the agreement enables the worker to benefit from collective labor agreement through eliminating out-of-scope quality; change of tasks of workers not participating and withdrawing from the participating to strike do not give a way to enable them to benefit from the agreement (can, 1995). according to article 65 of 6356 numbered law of trade unions and collective labor agreement, while workers who have obligation to work during the strike and lock-out have to work, employer has to enable them to work as well. likewise, operation of these works stipulated in this article is not only for the benefit of employer, it is also compulsory for the protection of national wealth and prevention of loss of jobs for workers (yarsuvat, 1978). 2.2.3. exclusion of some workers from the scope by the agreement of parties of collective labor agreement exclusion of some workers such as directors, chiefs, engineers and even all office staff which are members or able to be a member of labor unions from the scope of the agreement is a commonly encountered case in application of collective labor agreements, hence they are left to sphere of service contract (çelik, 2015). this is regulated through scope articles included in collective labor agreements. out-of-scope staff concept in industrial relation applications refers to people excluded from collective labor agreement regime even though they are able to be member of a labor union, and even they are, as a result of consensus of the parties of collective labor agreement, in other words those to whom collective labor agreement is not applied. conclusion collective bargaining refers to the process in which labor unions representing workers on the one hand and employers or employers’ institutions on the other gather and come to the table in order to determine working rules and conditions of both parties and the process to conclude the collective agreement. through concluded collective agreements as a result of collective bargaining, parties present working conditions on which they made a consensus and they presume themselves to be bounded with these working provisions. as for collective agreement, it is “a contract concluded between one or more labor organization and one or more employers or employer organization in one or more workplaces or business line for regulation of individual and collective relations between workers and employers and determination of rights and obligations between the parties of the contract”. aspiration of employees to benefit from collective labor agreement which is concluded for the purpose of improving working conditions of workers and to recover their material circumstances through other side benefits is for their self-interest. however, it is necessary to fulfill some kind of conditions to be able to benefit from collective labor agreement. references akı, e. (1975). türk hukukunda toplu i̇ş sözleşmesinden yararlanma. i̇zmir: karaca ofset basımevi. alpagut, g. (2012). 6356 sayılı yasa'nın toplu i̇ş sözleşmesi ve toplu i̇ş uyuşmazlıklarına i̇lişkin hükümlerinin değerlendirilmesiuluslararası normlara uyum. legal i̇ş hukuku ve sosyal güvenlik dergisi, 9(35), 25-55. barbash, j. (1980). the work humanization movement: us and european experience compared. labor relations in advanced industrial societies, edited by benjamin martin and everett m. kassalow. washington, dc: carnegie endowment for international peace, 184-95. can, m. (1995, february). toplu i̇ş sözleşmesi düzeninde kapsam dışı personelin niteliği. tühi̇s i̇ş hukuku ve i̇ktisat dergisi, 13(4), 5-49. centel, t. (1992). i̇ş hukuku. i̇stanbul: kazancı yayınları. 70 mehmet saim aşçı http://ijcf.ticaret.edu.tr cordova, e. (1982). collective bargaining. in comparative labour law and industrial relations (pp. 220-242). springer netherlands. çelik, n. (2015). i̇ş hukuku dersleri (28.baskı). i̇stanbul: beta yayınları. davis, k. (1988). i̇şletmede i̇nsan davranışı. i̇stanbul: yön ajans. dawey, h. w. (1963). contemporary collective bargaining. new jersey: prentice hall. ekin, n. (1979). endüstri i̇lişkileri. i̇stanbul: elektronik ofset. eyrenci, ö. (1984). sendikalar hukuku. i̇stanbul: banksis yayını. i̇nce, e. (1985). toplu pazarlık hukuku (c. 3, ser. 2). i̇stanbul: kazancı hukuk yayınları. kılıçoğlu, m. (2013). 6356 sayılı sendikalar ve toplu i̇ş sözleşmesi kanunu yorumu. ankara: bilge yayınevi. koray, m. (1992). endüstri i̇lişkileri. i̇zmir: basisen yayınları. kutal, m. (1987, temmuz). uluslararası normlar karşısında türkiye'de sendikacılık ve toplu pazarlık hukuku. i̇ktisat ve maliye, xxxiv(4), 148. oğuzman, k. (tarih yok). hukuki yönden i̇şçi-i̇şveren i̇lişkileri (4.baskı, c. 1). i̇stanbul: yön ajans. reisoğlu, s. (1986). 2822 sayılı toplu i̇ş sözleşmesi grev ve lokavt kanunu şerhi. ankara: ayyıldız matbaası. yarsuvat, d. (1978). çalışma ceza hukuku sendika özgürlüğüne karşı suçlar kanunsuz grev ve lokavt suçları. i̇stanbul: i̇stanbul üniversitesi yayınları. zaim, s. (1977). çalışma ekonomisi. i̇stanbul: elektronik ofset. international journal of commerce and finance, vol. 2, issue 2, 2016, 85-95 influencing factors of currency risk of deposit banks in turkey by using probit method serhat yüksel (asst. prof.) konya food and agriculture university mustafa özsarı (res. asst) konya food and agriculture university i̇smail canöz (res. asst) i̇stanbul arel university abstract in this paper, we aimed to analyze the factors that affect currency risk of the banks. within this scope, annual data of 23 d eposit banks for the periods between 2005 and 2015 was evaluated. in addition to this situation, panel probit model was used in order to achieve this objective. regarding the subject of the currency risk, this model was firstly used in this study. according to the results of the analysis, it was determined that 3 independent variables affect the currency risk of deposit banks in turkey. firstly, it was identified that there is a positive relationship between total assets and currency risk. this situation explains that when the size of the banks increases, they tend to take more currency risk. in addition to this variable, it was also defined that there is a direct relationship between economic growth and currency risk of the banks. this result refers that in case of an increment in the market stability; banks think that the market is safer and they increase their currency risk. moreover, it was also concluded that there is a negative relationship between interest rate and currency risk of the banks. this aspect shows that when interest rate decreases, it will lower uncertainty in the market. thus, banks would take higher currency risk in such markets. keywords: turkish banking sector, deposit banks, currency risk, panel probit jel codes: f31, g21, g32, 1. introduction banks are the institutes which collect money from the people who have savings (mishkin, 2007). owing to this issue, these people have a chance to earn interest income. on the other side, they give money as a loan to the companies. therefore, these companies can reach the fund they need to invest and to fulfill their operational needs (dinçer et. al., 2016). because of this situation, it can be said that banks play a significant role for the economy. hence, the banks should provide the performance stability for the economy to improve (zengin and yüksel, 2016). however, banks face different type of the risks in their operations (hacıoğlu et. al., 2013), (van greuning and brajovic-bratanovic, 2009). the most significant risk of the banks is credit risk which means the possibility that customers cannot pay their debt to the banks (altman and saunders, 1998). on the other side, banks are also subject to the market risk in addition to the credit risk. the reason for this condition is that there is uncertainty in the market. in other words, some variables in the market, such as interest rate and currency risk can change very easily and it is too difficult to estimate the future value of these variables (alexander, 2009). because of this aspect, banks may have high amount of loss if they do not take necessary actions to hedge those risks. currency risk is one of the important types of market risk banks have to manage. the main reason behind this situation is that banks stated to make a lot of operations in foreign currency especially with the effect of globalization. currency risk refers to the risk that causes loss for the banks because of the volatility in exchange rate (shapiro, 1985). as it can be understood from this definition banks are subject to currency risks when there is a difference between foreign exchange assets and liabilities. if these foreign exchange assets of the banks are higher in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 86 serhat yüksel, mustafa özsarı, i̇smail canöz http://ijcf.ticaret.edu.tr than the liabilities, banks will have loss when foreign currency depreciates. on the other hand, in case of higher foreign exchange liabilities than the assets, banks will get loss when there is a foreign currency appreciation. owing to the expressions emphasized above, currency risk is essential for the banks. because of this condition, this risk should be managed effectively by the banks. within this context, first of all, currency risk should be measured appropriately (dinçer and hacıoğlu, 2015). there are mainly two different types of measurement models of the currency risk which are standard method and value at risk method. in addition to this situation, banking regulatory and supervisory agency (brsa) gives very much importance to currency risk that it wants turkish banks to calculate and report currency risk daily. as a result of this analysis, if banks have currency risk which is higher than expected level, brsa can control this risk more effectively. while considering the issues emphasized above, it can be said that studies related to the risks of the banks are essential. parallel to this aspect, in this study, we aim to identify the indicators of the currency risk for turkish banks. within this scope, we used the annual data for the period between 2005 and 2015. additionally, panel probit model was used so as to achieve this objective. as a result of the analysis, it will be possible to understand the influencing factors of the currency risk in turkish banking sector. owing to this objective, this study will be useful to make necessary recommendation in order to minimize the currency risk. the paper is organized as follows: after introduction part, we give information about the similar studies in the literature. moreover, the third part explains research and application to determine the important factors of currency risk in banking sector. in this part, we identify the data, methodology and details of panel probit analysis. finally, the results of the analysis are given in the conclusion part. 2. literature review there are many studies in the literature that aimed to analyze the determinants of currency risk. some of them were detailed on table 1. table 1. studies related to the currency risk authors method scope result shapiro (1985) regression us inflation is the main indicator of the currency risk. levich and thomas (1993) regression us derivatives are useful products to decrease currency risk. de santis and gerard (1998) garch us stock exchange index is an important indicator of currency risk. carlson and osler (1999) survey us interest rate affects the size of currency risk. günay (2001) garch turkey it was analyzed that there is a relationship between interest rate and currency risk. de roon et. al. (2003) regression g5 countries it was identified that futures and options are significant tools to hedge currency risk. yıldırım (2003) augmented dickey fuller test turkey it showed that there is not any relationship between purchasing power parity and currency risk in the long run. lustig and verdelhan (2005) regression us it was concluded that interest rate affects currency risk. ayvaz (2006) granger causality analysis turkey it was defined that volatility in i̇stanbul stock exchange index causes currency risk. lustig and verdelhan (2007) regression japan they determined that large return volatility influences currency risk. çiçek and öztürk mgarch turkey change in international reserve amount is an indicator of influencing factors of currency risk of deposit banks in turkey by using probit method 87 http://ijcf.ticaret.edu.tr authors method scope result (2007) currency risk. zanbak (2008) regression turkey they reached a conclusion that stock return and sector growth rate affect currency risk. demir (2009) logit turkey it was concluded that volatility in the market affects currency risk. schiozer and saito (2009) regression argentina, brazil, chile, and mexico derivatives are important tools so as to hedge currency risk. sever (2009) garch turkey currency risk is affected by export negatively and by import positively. doğukanlı et. al. (2010) johansen cointegration test turkey it was concluded that volatility in the economy increases currency risk. lustig and roussanov (2011) regression us it was determined that interest rate influences currency risk. berke (2012) fmols, ccr and dols turkey it was determined that there is a relationship between bist 100 index and currency risk. ordu (2013) granger causality analysis turkey it was defined that export and import are important determinants of currency risk. kia (2013) regression canada it was found that there is not a significant relationship between interest rate and currency risk. özkan and erden (2015) dcc-garch 78 different countries it was identified that inflation rate influences currency risk. tetik and kanat (2016) garch turkey it was concluded that volatility in the market affects currency risk. başarır and keten (2016) granger causality analysis developing countries there is no causality relationship between cds amount and currency risk. gervais et. al. (2016) vecm canada they reached a conclusion that current account deficit increases currency risk. mohapatra and rath (2016) regression india it was determined that export amount and the size of the companies are the most significant factors of currency risk. eichler and rövekamp (2016) regression 23 emerging markets it was identified that macroeconomic factors are more effective on currency risk rather than internal factors of the company. rodriguez (2016) panel probit 20 latin american countries it was concluded that macroeconomic factors influence currency risk. ahmad et. al. (2016) granger causality analysis asian countries it was defined that export amount and economic growth rate are important factors of currency risk. anzuini et. al. (2016) var euro area gdp growth rate and interest rate influence currency risk. there is plentiful literature about the factors which affect currency risk. while some studies would agree with the others according to the results, some would disagree. this situation shows the importance of making a country-based analysis. in particular, interest rate is one of the common variables used in many studies about currency risk. carlson and osler (1999) used survey method to analyze the effect of interest rate on currency risk. according to their 88 serhat yüksel, mustafa özsarı, i̇smail canöz http://ijcf.ticaret.edu.tr results, it was stated that interest rate determines the size of currency risk in united states. while lustig and verdelhan (2005) and lustig and roussanov (2011) agreed with the result that interest rate has an effect on currency risk through their us scoped regression analysis, kia (2013) came up with another result suggesting that there is not a significant effect of interest rate on currency risk by using the same method for another country, canada. in addition to these studies, anzuini et. al. (2016) and günay (2001) found a significant impact of interest rate on currency risk. moreover, international trade represents a core variable which determines currency risk. using garch method for turkey, sever (2009) showed that currency risk was affected by imports and exports. similar to study, ordu (2013) also indicated the importance of imports and exports in order to determine the currency risk by using granger causality analysis for turkey. likewise, using regression analysis for india, mohapatra and rath (2016) found that export amounts and size of companies are significant determinants of currency risk. ahmad et. al. (2016) supported these results for asian countries. they found that the amount of exports and growth rate are important factors determining currency risk. on the other hand, derivatives and stock exchange indexes are important factors that influence the currency risk. levich and thomas (1993) and schiozer and saito (2009) found that derivatives are important tools to reduce currency risk by using regression analysis. de santis and gerard (1998) and berke (2012) found that stock exchange indexes have an important effect on currency risk. additionally, ayvaz (2006) stated that the volatility in bist index causes currency risk. while de roon et. al. (2003) represents the importance of using futures and options to reduce the currency risk, zanbak (2008) found the impact of stock return and sector growth rate on currency risk. on the contrary, başarır and keten (2016) found that there is no significant relationship between cds amount and currency risk. last but not least, there are macroeconomic variables that affect the currency risk. saphiro (1985) used regression analysis to measure the effect of inflation on currency risk in us. according to the results of this study, inflation is the main determinant of currency risk. however, özkan and erden (2015) found contradictory results. they found that inflation rate increases currency risk by using dcc-garch method for 78 different countries. yıldırım (2003) used augmented dickey-fuller test to analyze the possible effects of purchasing power parity on currency risk. results showed that there is no effect of purchasing power parity on currency risk. using mgarch analysis, çiçek and öztürk (2007) concluded that variation of international reserve amount has an impact on currency risk in turkey. gervais et. al. (2016) found that current account deficit increases currency risk using vecm analysis for canada. rodriguez (2016) used panel probit method for 20 latin american countries and stated that macroeconomic factors had impact on currency risk. furthermore, eichler and rövekamp (2016) found that macroeconomic factors were more important variables to determine currency risk for companies than internal factors by using regression analysis for 23 emerging markets. 3. research and application 3.1. data in this study, we used annual data for the periods between 2005 and 2015. this data of internal variables was provided from turkish banking association. on the other side, the data of external variables was obtained from the website of world bank. in addition to that, we used eviews 8.0 and spss 22 programs to make the analysis. there are 27 deposit banks in turkey. however, because bank of tokyo-mitsubishi ufj turkey, odea bank and rabobank have been newly established and adabank is not an active deposit bank in turkey due to the legal problems with its owners, we removed these banks from the analysis. therefore, in this study, we used the data of 23 deposit banks. the details of these banks were given in table 2. influencing factors of currency risk of deposit banks in turkey by using probit method 89 http://ijcf.ticaret.edu.tr table 2. list of banks analyzed in this study bank name asset size (% of deposit banks) in 2015 asset size (% of total banks) in 2015 türkiye cumhuriyeti ziraat bankası a.ş. 14.23 13.54 türkiye i̇ş bankası a.ş. 12.95 12.33 türkiye garanti bankası a.ş. 11.95 11.37 akbank t.a.ş. 11.03 10.50 yapı ve kredi bankası a.ş. 10.35 9.86 türkiye halk bankası a.ş. 8.82 8.40 türkiye vakıflar bankası t.a.o. 8.59 8.18 finans bank a.ş. 4.03 3.83 denizbank a.ş. 3.96 3.77 türk ekonomi bankası a.ş. 3.38 3.22 ing bank a.ş. 2.31 2.20 hsbc bank a.ş. 1.49 1.42 şekerbank t.a.ş. 1.15 1.09 alternatifbank a.ş. 0.62 0.59 fibabanka a.ş. 0.53 0.50 anadolubank a.ş. 0.52 0.49 burgan bank a.ş. 0.50 0.48 citibank a.ş. 0.39 0.37 icbc turkey bank a.ş. 0.31 0.30 turkland bank a.ş. 0.27 0.26 arap türk bankası a.ş. 0.19 0.18 deutsche bank a.ş. 0.14 0.13 turkish bank a.ş. 0.06 0.05 total 97.76 93.07 source: turkish banking association 3.2. panel probit model three different models can be used for the conditions in which dependent variable takes two different values, such as “0” and “1”. the names of these models are linear probability method, probit and logit (yüksel et. al., 2015). with respect to the linear probability model, the values that are greater than “1” are accepted as “1”. on the other hand, when the values of the dependent variables are less than “0”, they are considered as “0”. as it can be seen from this expression, linear probability method has some disadvantages because this assumption does not reflect the reality effectively. in order to solve this problem, probit and logit models were developed. the main difference between probit model and logit model is that probit model uses normal cumulative distribution function whereas logit model uses logistic distribution function. by using normal distribution function, the values of the dependent variable can be between “0” and “1” in probit analysis (gujarati, 1988). the prerequisite of probit model is that variables should be stationary. so as to satisfy this requirement, augmented dickey fuller unit root test was used. the equation of this test is given below. 90 serhat yüksel, mustafa özsarı, i̇smail canöz http://ijcf.ticaret.edu.tr in the equation above, "∆yt" means the first difference of the series. in this analysis, the value of "γ" is significant. if this value is equal to “0”, this means that there is not a unit root in the equation which means that the variable is stationary (granger, 1969). esquivel and larrain (1998) tried to determine the early warning signals of the financial crisis occurred in 30 different countries by using probit method. additionally, frankel and rose (1996) made a similar study in 105 countries with the help of this method. furthermore, oktar and dalyancı (2010) analyzed turkish financial crises after 1990 and oktar and yüksel (2015) examined russian crisis in 1998 by using probit model. 3.3. variables used in this study with respect to the currency risk, we used the ratio of “(net open fx position + net off-balance sheet position)/total capital”. so as to calculate the value of the dependent variable, firstly we compared the absolute value of each bank’s ratio with the absolute value of the sector average. if the bank’s ratio is greater than the sector average, then it will take the value of “1”, but in other cases, it will be “0”. in other words, the value of “1” refers to the situation of higher currency risk whereas dependent variable will be “0” when banks have lower currency risk. additionally, in order to analyze the influencing factors of currency risk in turkish banks, we decided to use 10 different independent variables. 4 of them are internal explanatory variables and 6 are external variables. the details of these variables were given in table 3. table 3. independent variables used in the study return on equity refers to the ratio of net profit to total equity amount. as it can be seen from the definition, it is a ratio that shows the probability performance of the banks (arditti, 1967). therefore, it is expected that the banks 1 (bist), borsa istanbul, formerly known as istanbul stock exchange market. type of the variables independent variables references internal roe demir (2009), lustig and verdelhan (2007) total assets demir (2009), mohapatra and rath (2016), lustig and verdelhan (2007) total loans/total deposits demir (2009), lustig and verdelhan (2007) derivatives/total loans başarır and keten (2016), mohapatra and rath (2016), ahmad et. al. (2016), schiozer and saito (2009), levich and thomas (1993), de roon et. al. (2003) external economic growth demir (2009), zanbak (2008), kia (2013), eichler and rövekamp (2016), rodriguez (2016), ahmad et. al. (2016), anzuini et. al. (2016) inflation rate özkan and erden (2015), eichler and rövekamp (2016), rodriguez (2016), shapiro (1985) interest rate günay (2001), kia (2013), eichler and rövekamp (2016), rodriguez (2016), anzuini et. al. (2016), lustig and roussanov (2011), carlson and osler (1999), lustig and verdelhan (2005) bist1 100 index ayvaz (2006), berke (2012), demir (2009), zanbak (2008), doğukanlı et. al. (2010), çiçek and öztürk (2007), de santis and gerard (1998), lustig and roussanov (2011) current account deficit/gdp ordu (2013), gervais et. al. (2016), başarır and keten (2016), kia (2013), sever (2009), eichler and rövekamp (2016), rodriguez (2016) reserves çiçek and öztürk (2007) influencing factors of currency risk of deposit banks in turkey by using probit method 91 http://ijcf.ticaret.edu.tr which have higher profit can take higher amount of currency risk. as a consequence of their competitive power, banks, which have higher performance, may take higher amount of currency risk. this situation is also valid for the total assets variable which shows the size of the banks. in addition to these variables, the ratio of total loans to total deposits shows the level of the risk banks take. owing to this situation, there should be positive relationship between this ratio and currency risk. the last internal variable of this study is derivatives. these are the products that can be used in order to hedge currency risk. thus, there should be a negative relationship between currency risk and the amount of derivatives. in addition to the internal variables, we used 6 external variables that may affect the currency risk of the banks. economic growth is a significant indicator of economic stability in the country. as a result of this condition, it is expected to have positive relationship between economic growth and currency risk. due to the same reason, current account deficit amount and inflation rate are expected to decrease currency risk. moreover, because higher interest rate leads to increase the volatility in the market, there should be negative relationship between this variable and currency risk (devereux, 1997). finally, when international reserve amount of a country is high, banks in that country can take higher currency risk. 3.4. results of the model in order to understand the indicators of currency risk, first of all, augmented dickey fuller unit root test was performed. the details of this test were given on table 4. table 4. unit root test results variables level value (probability) first difference value (probability) return on equity 0.0006 total assets 1.0000 0.0027 total loans / total deposits 0.9990 0.0106 derivatives 0.8099 0.0010 economic growth 0.0002 inflation rate 0.0000 interest rate 1.0000 0.0002 bist 100 index 0.0000 current account deficit 0.0285 reserves 0.8613 0.0035 as it can be seen from table 4, 5 explanatory variables (return on equity, economic growth, inflation rate, bist 100 index, and current account deficit) are stationary on their level values. on the other side, it was also identified that 5 independent variables (total assets, total loans / total deposits, derivatives, interest rate and reserves) are not stationary because their probability levels are more than 0.05. therefore, we used the first difference of these variables on the analysis. after that, panel probit analysis was performed by using eviews 8 program. the results of this analysis were shown in table 5. table 5. panel probit test results variables coefficient probability return on equity 0.007 0.471 total assets 0.001 0.075 total loans / total deposits -0.304 0.798 derivatives -0.005 0.639 economic growth 0.124 0.001 interest rate -0.239 0.000 reserves 0.001 0.891 nagelkerke r-squared: 0.228 92 serhat yüksel, mustafa özsarı, i̇smail canöz http://ijcf.ticaret.edu.tr table 5 shows the panel probit analysis result. due to the multicollinearity problem, we had to eliminate the variables of “inflation rate”, “bist 100 index” and “current account deficit” from the analysis. as it can be seen from table 5, the probability values of 3 explanatory variables are less than 0.1. this situation shows that these 3 variables are statistically significant. because the coefficient of total assets is positive (0.001), it can be understood that there is a direct relationship between this variable and currency risk of the banks. that is to say, turkish banks, which have higher size, take more currency risk in comparison with other banks. another significant explanatory variable of this study is economic growth. since its coefficient is positive (0.124), it was defined that there is a direct relationship between economic growth and currency risk of the banks. in other words, when economic growth goes up, currency risk amount of turkish banks rises as well. the main reason behind this condition is that economic growth increases stability of the economy. owing to this aspect, because banks think that the market is safe, so they increase their currency risk in order to make more profit. on the other hand, it was determined that there is an inverse relationship between interest rate and currency risk of the banks due to the negative coefficient of this variable (-0.239). this situation shows that lower interest rate leads banks to take higher currency risk. in other words, because decreasing interest rate shows the stability in the economy, uncertainty in the market goes down for the banks. as a result of this situation, banks can take higher currency risk. 4. conclusion in this study, we tried to determine the influencing factors of currency risk of the deposit banks in turkey. within this context, we analyzed 23 deposit banks in turkey. on the other side, bank of tokyo-mitsubishi ufj turkey, odea bank, rabobank and adabank had to be eliminated since the data for these banks cannot be obtained. in addition to this situation, annual data for the periods between 2005 and 2015 was evaluated in this study. furthermore, analysis was performed by using panel probit approach. in the first stage of the analysis, we made unit root test to the explanatory variables in order to understand whether they are stationary or not. in order to achieve this objective, augmented dickey fuller unit root test was performed. as a result of this analysis, it was identified that 5 explanatory variables (return on equity, economic growth, inflation rate, bist 100 index, and current account deficit) are stationary on their level values. on the contrary, it was also seen that 5 other independent variables (total assets, total loans / total deposits, derivatives, interest rate and reserves) are not stationary because their probability levels are more than 0.05. because of this situation, the first differences of these variables were used in the analysis. after making unit root test, panel probit test was performed. according to the results of this analysis, it was determined that 3 independent variables influence the currency risk of turkish deposit banks. first of all, it was concluded that there is a direct relationship between the amount of total assets and the currency risk of the banks because the coefficient of this variable is positive. this issue refers to the situation that when the size of the banks increases, they tend to have more currency risk in comparison with other banks. another conclusion from this result of this analysis is that there is a positive relationship between economic growth and currency risk of the banks. in other words, it was defined that currency risk amount of turkish banks goes up when there is an economic growth. this condition shows that when economy is growing, market will be assumed as safe by the banks. hence, they can increase the currency risk so as to achieve their profitability. furthermore, it was also identified that lower interest rate causes banks to take higher currency risk. the main reason behind this situation is that uncertainty in the market will be reduced when there is a decrease in interest rate. this study determined the influencing factors of the banks to take currency risk. these results may be directive for regulatory authority to control banks not to take higher currency risk. in other words, it was recommended that banking regulatory and supervisory agency should consider the banks, which have higher size, regarding currency risk because they tend to take more risk according to the results of this study. in addition to this aspect, the conditions in which there is high economic growth and lower interest rate should also be taken into the consideration since banks are willing to take higher currency risk when the market is stable. furthermore, some additional researches can be performed by including lots of countries in order to much detailed results. influencing factors of currency risk of deposit banks in turkey by using probit method 93 http://ijcf.ticaret.edu.tr references ahmad, f., draz, m. u., & yang, s. c. 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(2009). reel döviz kuru belirsizliğinin ticaret performansına etkisi: türkiye uygulaması. girişimcilik ve kalkınma dergisi, 4(2), 77-97. shapiro, a. c. (1985). currency risk and country risk in international banking.the journal of finance, 40(3), 881-891 tetik, n., & kanat, e. (2016). döviz kuru riskinin ölçülmesinde garch yönteminin uygulanması. sosyal ve beşeri bilimler araştırmaları dergisi, 122. yıldırım, o. döviz kurları çerçevesinde satın alma gücü paritesinin zaman serisi analizi ve türkiye ekonomisi uygulaması, bankacılar dergisi, sayı 44, 2003. van greuning, h., & brajovic-bratanovic, s. (2009). analyzing banking risk: a framework for assessing corporate governance and risk management. world bank publications. influencing factors of currency risk of deposit banks in turkey by using probit method 95 http://ijcf.ticaret.edu.tr yüksel, s., dincer, h., & hacioglu, u. (2015). camels-based determinants for the credit rating of turkish deposit banks. international journal of finance & banking studies, 4(4), 1-17. zanbak, m. (2008). döviz kuru riski analizi: türkiye üzerine ampirik bir inceleme (master thesis, akdeniz university). zengin, s., & yüksel, s. (2016). likidite riskini etkileyen faktörler: türk bankacılık sektörü üzerine bir inceleme. i̇stanbul ticaret üniversitesi sosyal bilimler dergisi, 15(29), 77-95. 2grzegorz zajacemin avcı international journal of commerce and finance, vol. 2, issue 2, 2016, 71-83 day of the week effect in conventional and islamic stock indexes emin avcı, (assoc. prof.) marmara university, turkey abstract: in this study, existence of day of the week (dow) effect is examined pre/post subprime crisis periods and in terms of conventional/islamic of indexes. canada, indonesia, japan, uk and usa markets are examined for a period of 2003-2014. the findings of the study showed significant dow effect for all indexes, however such effect is not persistent. when dow effect examined in terms of conventional and islamic indexes of each market, there is not persistent conformity on the dow effect for both indexes of the same markets. keywords: day of the week effect, subprime crisis, islamic indexes jel codes: g10, g14 and g15 1. introduction by 2007, increasing number of defaults in subprime credits hit the housing market and mortgage based financial instruments in united states, and then by 2008 subprime crisis turned out to be a global financial crisis. several financial institutions were collapsed and severe downturns realized in global stock markets. as a consequence, recent financial crisis had a great impact on every fields of global economy, financial institutions and behavior of economic agents. financial crises, not only the recent global financial crisis but even local crises, have an impact on trading behavior of market participants. some studies presented that the individuals’ past experiences influence their risk taking and investment portfolio composition (malmendier and nagel, 2011); crisis periods changes future market risk and return expectations and hence change the risk taking behavior (weber, et.al., 2013); crisis cause a temporary increase in expectations/uncertainty and long term increase in disagreement between market participants (hudomiet, et.al., 2011); as a result of change in perceptions during crisis periods, trading and risk taking behavior are also subject to change (hoffmann, et.al., 2013). not only the individuals but also financial institutions effected from crises from different aspects such as banking regulations and risk taking (calluzzoa and dong, 2015), credit lines (fratzscher, et.al., 2016), hedge funds trading (david, et.al., 2012). such impacts of financial crises on both individual and institutional investors may cause changes in their trading behavior and may cause some structural changes in financial markets; such that, one of the objectives of this study is to analyze the possible change in the market efficiency after subprime crisis. although, there are several analysis or methods for measuring efficiency, the existence of the day of the week (hereafter, dow) effect before, during and after the crisis period will be analyzed in this study. the existence of day of the week effect have been reported in many studies from different aspects of developed markets, developing markets and different indexes. however, there is little for dow effect anomaly for islamic indexes. hence, another objective of this study to analyze the existence of dow effect for islamic indexes and compare the findings with the conventional indexes for pre and post crisis periods. in order to achieve the objectives mentioned above, indexes from 5 countries (united states of america, united kingdom, canada, japan and indonesia) were selected and both islamic and conventional indexes of those markets in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e http://proxy2.marmara-elibrary.com/musesessionid=02105csft/museprotocol=http/musehost=www.sciencedirect.com/musepath/science/article/pii/s0378426614003409?np=y http://proxy2.marmara-elibrary.com/musesessionid=02105csft/museprotocol=http/musehost=www.sciencedirect.com/musepath/science/article/pii/s0378426614003409?np=y http://proxy2.marmara-elibrary.com/musesessionid=02105csft/museprotocol=http/musehost=www.sciencedirect.com/musepath/science/article/pii/s0378426614003409?np=y 72 emin avcı http://ijcf.ticaret.edu.tr were analyzed in this study. the analyses are carried out for a period of 2003-2014. in order to investigate the possible effects of crisis, the data set divided in to three periods: 2003-2007, 2008-2009 and 2010-2014. remainder of this study is organized as follows; section two will present a summary of related literature on dow effect; section three presents the data to be used in analyses and methodological details; section four will be the findings of the analyses, and hence last section is the conclusion. 2. literature review as it is well known, efficient market hypothesis states that all available information is reflected to asset prices (fama, 1970 and 1965), that no one can continuously earn abnormal profits. such proposition of the efficient capital market hypothesis has been one of the most debated topics in finance arena. one aspect of the debates is concentrated on stock price anomalies such as value, size and calendar anomalies, which contradicts the validity of the market efficiency. among these anomalies the calendar anomalies have been at the center of the interest for both practitioners and academicians. the calendar anomalies are basically seasonal or reoccurring patterns in stock returns, which might be used to earn abnormal profit by market timing investment strategies. among different calendar anomalies (like january effect, turn of the month effect, sell in may, holiday effect) the dow effect appeals great attention of researchers. the existence of dow effect, which is significant daily return differences among week days, have been extensively documented in many studies from different aspects of developed markets, developing markets and different indexes. in this part of the study, the previous literature dealing with the dow effect will be summarized for the countries, which are the sample of the below empirical analysis. although, earlier evidences about could be found for us market (as cross, 1973), dow effect appeal great attention by 1980s. french (1980) reported significant negative monday return for s&p composite portfolio. similar result was reported by gibbons and hess (1981) for dow jones 30 securities. keim and stambaugh (1984) analyzed s&p composite index returns and reported persistent lower returns for monday and higher returns for last trading day of the week (friday or saturday). by the use of 90year data for djia, lakonishok and smidt (1988) reported similar results. not only the usa markets presented dow effect but also some evidences were documented for international markets (for international studies the results of the countries, which are the sample of the below empirical analysis, will be summarized). one of the earliest studies in international arena was documented by jaffe and westerfield (1985), who investigate 5 developed markets. although, usa, uk, and canada presented negative monday, japan had the lowest return on tuesday. a similar finding was documented by condoyanni, et.al. (1987), who analyzed 7 markets, while usa, uk and canadian markets presented negative monday returns, negative tuesday was documented for japan for whole period of analysis. when the existence of dow effect was considered for subperiods, all countries had a significant negative monday in some periods, canada and usa had no significant negative tuesday returns. moreover, board and sutcliff (1988) reported dow effect for uk market, however significance of the effect declines over time. although, earlier studies revealed the existence of dow effect for several markets, most of the studies published by the end of 1980s contradicts former evidences. for example, connolly (1989) stated that estimation and testing methodology effects the strength of dow effect. likewise, chang, et.al. (1993) analyzed the robustness of dow effect in 23 markets and reported that dow effect was not significant for most markets after sample size and error term adjustments. although, some markets presented significant dow effect after adjustments, those effects were not strong across calendar. similar findings were also reported by dubois and louvet (1996). moreover, marquering (2006) argued that effect of an anomaly was subject to decrease in two years following its publication. on the other http://www.sciencedirect.com/science/article/pii/0378426695000542 http://www.sciencedirect.com/science/article/pii/0378426695000542 day of the week effect in conventional and islamic stock indexes 73 http://ijcf.ticaret.edu.tr hand, brusa, et.al. (2000) presented the reverse weekend effect, where returns were positive monday for large firms and negative for small firms in four of the us indexes (djia, crsp, s&p500 and nyse). however, it should also be added that such reverse dow effect was not valid for international markets (brusa, et.al., 2003). by 2000s several studies documented the decreasing importance of dow effect in developed countries. among those, kohers, et.al. (2004) reported that although dow effect was valid for 1980s for most of the developed stock markets (negative monday for uk, usa and canada; negative tuesday for japan), however by 1990s almost all dow effect faded except japan, which showed negative monday. in a similar study, cho, et.al. (2007) explored the dow effect for dow jones industrial average (djia), s&p 500, nasdaq, russell 2000, ftse 100, nikkei 222 and crsp indexes. they stressed that although dow effect reversed or weakened for dja and s&p 500 indexes after 1987, it was strong in nasdaq, russell 2000 and crsp. on the other hand, boudreaux, et.al, (2010) found that dow effect was valid for only bear market for djia, s&p500 and nasdaq. similarly, finding also reported by urquhart and mcgroarty (2014), and they added the time varying behavior of dow effect. another study on us markets. similarly, olson, et.al., (2015) explore the dow effect for seven us market indexes for a period of 19732013. they stated that the dow effect was significantly smaller after 1976 and monday returns became similar to other weekday returns. in a cross country analysis, cinko, et.al. (2015) studied the existence of dow effect for 24 indexes in 16 developed countries for a period of 1999-2013. no significant dow effect could be found for us stock indexes (dow jones inds. average, nasdaq100 and s&p500). however, significant negative wednesday for uk stock indexes (ftse all-share and ftse100) and positive friday for canadian s&p/tsx composite index were reported. some other studies in literature compared the existence of dow effect between developed and developing countries. following asian crisis, ndu (2005) examined 10 developed and developing east asian markets for 19982003 period. while indonesian jakarta stock exchange (jse) exhibited negative monday and wednesday returns, japan nikkei225 index presented negative mean returns for all days except tuesday. when maximum and minimum of index returns are analyzed jse had maximum on thursday and minimum on monday; whereas nikkie225 index presented maximum on tuesday and minimum on thursday. on the other hand, hui (2005) considered six stock market indices (s&p 500 composite, nikkei 225, hang seng index, korea se composite, ses all-share index and taiwan se weighted). the dow effect was found in singapore with low returns on monday-tuesday and high returns on wednesday-friday. the evidences for emerging markets also presents mixed evidences. choudhry (2000) analyzed the dow effect for 7 asian emerging countries for 1990-1995 period by using garch methodology. while some markets presented significant dow effect, indonesian jakarta composite index presented significant negative returns for monday but no significant day of the week reported for remaining weekdays. contrary, basher and sadorsky (2006) studied 21 emerging countries for december 1992-october 2003 period. they utilized 5 different models to test the existence of dow effect and results were subject to change under different models. although, majority of the markets did not present dow effect, some markets had strong dow effect. for indonesia, tuesday effect was detected under only one model. however, cinko, et.al. (2014) examined dow effect for 13 developing countries for 12year period. significant dow effects was documented for all countries. indonesian jacarta composite index presented negative monday and positive wednesday, thursday, friday returns. although, the existence of dow effects have been reported in many studies from different aspects of developed markets, developing markets and different indexes, there is little evidence on the existence of dow effect anomaly for islamic indexes. among these, abdullah, et.al. (2011) studied the existence of dow effect on 3 indexes of malaysian market (kuala lumpur shariah index-klsi-, fbm emas shariah and fbm hijrah emas shariah). the findings of the study presented significant negative monday and positive friday for klsi, and no dow effect for 74 emin avcı http://ijcf.ticaret.edu.tr other indexes. in a similar study, lean and tan (2010) explored the dow effect in ftse bursa malaysia index family including shariah indexes for 2006-2008 period (2007-2008 for some indexes). the dow effect could not be found for all indexes except mesdaq index. moreover, wenhui, et.al., (2009) studied for 1999-2007 for ftse bursa malaysia hijrah shariah index and reported significant positive friday return. 3. data and methodology in order to explore the dow effect per and post financial crisis and compare the differences in conventional and islamic indexes, total of 10 indexes will be analyzed. the dataset of 10 indexes composed of 5 conventional and 5 islamic indexes. as a result of data availability, the indexes from canada, japan, indonesia, uk and usa stock markets are selected as samples. the indexes covered are given in table 1. table 1 indexes data type index country symbol conventional ftse 100 uk ftse 100 jakarta composite indonesia jkse nikkei 225 stock average japan nikkei 225 s&p 500 composite usa s&p 500 s&p/tsx composite canada s&p/tsx islamic dow jones islamic market canada canada djicn dow jones islamic market japan japan djijp dow jones islamic market u.s. usa djius dow jones islamic market u.k. uk djiuk jakarta islamic index indonesia jkii in order to analyze possible effect of recent financial crisis the analyses are carried out for a period of 2003 -2014. the data set divided in to three periods: 2003-2007, 2008-2009 and 2010-2014. the daily closing prices of the indexes were used to calculate the returns of each index by the following formula: 𝑟𝑡,𝐼 = 𝑙𝑛 ( 𝐼𝑡,𝑖 𝐼𝑡−1,𝑖 ⁄ ) where rt,i stands for the ith index return at a specific time t; it, i and it-1, i are ith index closing price for time t and t-1 respectively. by following the previous literature, regression analyses conducted to explore possible dow effect (french, 1980; balaban, 1995). the regression model constructed with daily dummies and error term. the following equation presents the regression model utilized in the study: 𝑟𝑡,𝐼 = 𝛽1𝐷𝑀 + 𝛽2𝐷𝑇 + 𝛽3𝐷𝑊 + 𝛽4𝐷𝑇𝐻 + 𝛽5𝐷𝐹 + 𝑒𝐼 day of the week effect in conventional and islamic stock indexes 75 http://ijcf.ticaret.edu.tr where, ri,t stands for i th index return at time t; ei is the random error term. additionally, dm, dt, dw, dth, df are the dummy variables for monday, thursday, wednesday, thursday, and friday, respectively. the descriptive statistics of index returns for 10 indexes are given in appendix i. for whole period of 2003-2014, while lowest standard deviation was realized in canadian conventional index of s&p/tsx, the highest standards deviation is in canadian islamic index. similar finding is valid for 2010-2014 period. for 2003-2007 period, canadian s&p/tsx index has lowest and jkii (indonesia islamic) has highest standard deviation. for crisis period of 20072008, uk ftse index has lowest and djicn (canadanian islamic) has highest standard deviation. when standard deviations of conventional and islamic indexes compared it is observed that conventional indexes have lower standard deviation than islamıc counterparts for most of the sub-periods. 4. empirical findings the impact of recent financial crisis on market efficiency and differences in conventional and islamic indexes have been analyzed for 10 indexes from 5 countries. overall results (coefficients and p values) of the analyses are presented in appendix ii. table 2 sign of the coefficients for all indexes period return monday tuesday wednesday thursday friday 2003-2007 pozitive 7 9 7 10 9 negative 3 1 3 0 1 2008-2009 pozitive 2 6 4 3 4 negative 8 4 6 7 6 2010-2014 pozitive 3 9 7 6 7 negative 7 1 3 4 3 2003-2014 pozitive 0 7 3 10 6 negative 10 3 7 0 4 table 2 summaries the daily coefficient of all returns for whole period and sub-periods. for whole period of 20032014 all of the indexes present negative return on mondays and positive returns on thursdays. for sub-period of 2003-2007 again positive thursdays are observed for all markets, and positive tuesday and friday for 9 indexes. for this period, dominance of positive returns for all indexes is obvious. for crisis period of 2008-2009, majority of the index present positive tuesday but rest of the week days have negative returns. for post crisis period of 2010-2014, the dominance of positive returns can be observed for all indexes except monday. table 3 presents the indexes, which have significant dow effect with their significance level. although, for whole period of 2003-2014, all indexes have negative monday and positive thursday returns (see table 2), only 3 of monday returns are significant. moreover, there are some significant wednesday returns. both of the indonesian conventional (jkse) and islamic (jkii) indexes present the same return patterns (negative monday, positive wednesday and friday returns). similar return pattern can also be observed in uk conventional (ftse100) and islamic (djiuk) indexes with negative wednesday. on the other hand, while canadian islamic (djicn) index presents negative monday and positive friday returns, no dow effect can be observed in conventional counterpart. no significant return pattern can be detected for tuesday and thursdays. 76 emin avcı http://ijcf.ticaret.edu.tr table 3 findings for period of 2003-2014 + or – signs represent positive or negative returns. 1%, 5% and 10% are the significance levels. index monday tuesday wednesday thursday friday ftse 100 -5% jkse -1% +1% +1% djicn -10% +10% djiuk -5% jkii -5% +1% +1% the findings for pre-crisis period of 2003-2007 is presented in table 4. no significant monday and thursday returns are found for this period. moreover, there is no significant negative return for this period. both of the japanese (conventional and islamic) and usa conventional indexes have no dow effect. on the other hand, 6 indexes presented positive friday returns, which are the conventional and islamic indexes of uk (ftse and djiuk), indonesia (jkse and jkii), canada (s&p/tsx and djican). while, positive tuesday returns are observed in indonesian indexes, positive wednesday return is valid for both of the indonesian index and us islamic (djius) index. table 4 findings for period of 2003-2007 index monday tuesday wednesday thursday friday ftse 100 +5% jkse +5% +1% +1% s&p/tsx +5% djican +1% djius + 10% djiuk +5% jkii +5% +5% +1% when the findings for crisis period of 2008-2009 is analyzed, no dow effect can be observed except canadian conventional (s&p/tsx) index. this finding possibly due to the high volatility during the period and the short analysis period. the findings for post crisis period of 2010-2014 is presented in table 5. no dow effect is valid for thursday and friday in any index. in 4 index, there is significant monday returns. while both indexes (s&p500 and djius) of us have positive monday, indonesian indexes (jkse and jkii) have negative monday returns. the conventional uk (ftse) and canadian (s&p/tsx) indexes presented positive tuesday return. hence, positive wednesday returns are valid for indonesian indexes (jkse and jkii) and conventional japanese (nikkei 225) index. day of the week effect in conventional and islamic stock indexes 77 http://ijcf.ticaret.edu.tr table 5 findings for period of 2010-2014 index monday tuesday wednesday thursday friday ftse 100 +5% jkse -10% +1% nikkei 225 +10% s&p 500 +5% s&p/tsx +5% djicn -10% djius +5% jkii -10% +1% the tables 3-4-5 presented the findings of the study, however such findings need interpretation in terms of effect of the recent global crisis and the different dow effects explored in conventional and islamic indexes. table 6 summaries the significant findings of the study both in terms of type of the index (conventional and islamic) on country bases and in terms of period of analysis. table 6 dow effect comparison with respect to index type and crisis period m: monday, t: tuesday, w: wednesday, f: friday. country index type 2003-2007 2008-2009 2010-2014 2003-2014 canada conventional +f -m +t islamic +f -m -m, +f indonesia conventional +t, +w, +f -m, +w -m, +w, +f islamic +t, +w, +f -m, +w -m, +w, +f japan conventional +w islamic uk conventional +f +t -w islamic +f -w usa conventional +m islamic +w +m table 6 demonstrates divergence of weekdays with respect to sample period, while traditional dow effect (negative monday and positive friday) can be observed for canadian islamic index and both of indonesian indexes for full sample of 2003-2014, no dow effect can be observed for japan and usa. when sub-periods are examined, divergence in weekdays quite clear. for pre-crisis period, no significant monday return is existing. however, positive 78 emin avcı http://ijcf.ticaret.edu.tr friday is observed for canada, indonesia and uk markets when post-crisis period is examined, friday effect disappears but mixed monday effect is observed for 3 markets. no significant dow effect is found for crisis period except canada. such finding is consistent with the literate that documented the changing patterns in weekdays, like declining, reversal and disappearance (olson, et.al., 2015; urquhart and mcgroarty, 2014; boudreaux, et.al, 2010; basher and sadorsky, 2006; kohers, et.al., 2004). the proposition by doyle and chen (2009), who stated that weekday effect is in state of flux and changes overtime, try to explain such changing pattern as “wandering weekday effect”. on the other hand, olson, et.al. (2015) stated that such changing patterns in weekdays is a long-term adjustment of the market before disappearance of dow effect. when table 6 is explored according to index type, indonesian indexes presented the same dow effect for each period under investigation. however, it should be noted that as an emerging market, such finding may be due to the limited market efficiency. for developed markets, results are not persistent. while canada and uk indexes demonstrated positive fridays for both type of indexes in pre-crisis period; both indexes of usa have positive monday return for post-crisis period. for whole sample of 2003-2014, both uk indexes have negative monday. for the remaining periods and markets, there is either no dow effect or different effect is present. so, it is not possible assert that conditional and islamic indexes of a market present similar dow effect. although, it is not possible interpret such finding directly with analysis above, it should be noted that especially for the developed markets, islamic indexes composed of relatively small companies with respect to conventional indexes. kamara (1997) and mehdian and perry (2001) uncover the evidences on the differences of dow effect for large and small companies. 5. conclusion day of the week (dow) effect is one of the most researched topic in finance. in this study, dow effect is examined under two aspects: first, the existence of dow effect pre and post crisis periods; second, the existence of dow effect under conventional and islamic of indexes. the analyses cover a period of 2003-2014 with three subperiods. conventional and islamic indexes of canada, indonesia, japan, uk and usa markets are examined. the findings of the study showed significant dow effects for each index, however such effect is not persistent. the divergence of dow effect for different periods can be explained by “wandering weekend effect”. on the other hand, when dow effect examined in terms of conventional and islamic indexes, there is no conformity of the dow effect for conventional and islamic index of a market. while, some markets presented similar dow effect in some periods, such similarity is subject to disappear in another period. references abdullah, r.n.j.r., baharuddin, n.s., shamsudin, n., mahmood, w.m.w., and sahudin, z. 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(2009) “calender effect in shariah-compliant stocks returns; evidence front ftse bursa malaysia hijrah shariah index” proceedings of 2009 international conference on economics, business management and marketing, singapore, 9-11 october, 270-274. appendixes appendix 1: summary statistics period s&p500 jkse ftse 100 nikkei 225 s&p/tsx 2003-2014 mean 0,000272 0,000802 0,000163 0,000227 0,000254 std. dev. 0,012113 0,013773 0,011607 0,014894 0,010995 max -0,0947 -0,10954 -0,09266 -0,12111 -0,09788 min 0,109572 0,076231 0,093843 0,132346 0,093703 djius jkii djiuk djijp djicn mean 0,000322 0,000744 0,000191 0,000136 0,000298 std. dev. 0,011679 0,016101 0,014329 0,013405 0,017545 max -0,09697 -0,13857 -0,09569 -0,09549 -0,13769 min 0,117399 0,087555 0,116762 0,106579 0,118689 s&p500 jkse ftse 100 nikkei 225 s&p/tsx 2003-2007 mean 0,000393 0,001432 0,000379 0,000444 0,000566 std. dev. 0,008188 0,012697 0,008862 0,011541 0,007342 min -0,03587 -0,078 -0,04918 -0,0557 -0,0358 max 0,034814 0,067338 0,059026 0,036031 0,023725 djius jkii djiuk djijp djicn mean 0,00045 0,001528 0,000588 0,000352 0,001008 http://proxy2.marmara-elibrary.com/musesessionid=02105cstb/museprotocol=http/musehost=www.sciencedirect.com/musepath/science/article/pii/s106297691500006x http://proxy2.marmara-elibrary.com/musesessionid=02105cstb/museprotocol=http/musehost=www.sciencedirect.com/musepath/science/article/pii/s106297691500006x http://proxy2.marmara-elibrary.com/musesessionid=02105cstb/museprotocol=http/musehost=www.sciencedirect.com/musepath/science/journal/10629769 http://proxy2.marmara-elibrary.com/musesessionid=02105cstb/museprotocol=http/musehost=www.sciencedirect.com/musepath/science/journal/10629769 http://proxy2.marmara-elibrary.com/musesessionid=02105cvgz/museprotocol=http/musehost=www.sciencedirect.com/musepath/science/journal/10575219 day of the week effect in conventional and islamic stock indexes 81 http://ijcf.ticaret.edu.tr std. dev. 0,008425 0,015088 0,010245 0,011841 0,012818 min -0,03593 -0,10038 -0,05083 -0,06167 -0,07913 max 0,035474 0,075824 0,049083 0,046646 0,044106 s&p500 jkse ftse 100 nikkei 225 s&p/tsx 2008-2009 mean -0,00053 -0,00015 -0,00034 -0,00071 -0,00031 std. dev. 0,021586 0,020046 0,019391 0,023369 0,02068 min -0,0947 -0,10954 -0,09266 -0,12111 -0,09788 max 0,109572 0,076231 0,093843 0,132346 0,093703 djius jkii djiuk djijp djicn mean -0,00033 -0,00032 -0,00045 -0,00049 -0,00038 std. dev. 0,019815 0,0229 0,023693 0,020158 0,031333 min -0,09697 -0,13857 -0,09569 -0,09549 -0,13769 max 0,117399 0,078629 0,116762 0,106579 0,118689 appendix 1: summary statistics (cont.) period s&p500 jkse ftse 100 nikkei 225 s&p/tsx 2010-2014 mean 0,00047 0,000555 0,000148 0,000386 0,000168 std. dev. 0,009917 0,011518 0,009709 0,013432 0,008055 min -0,06896 -0,093 -0,04779 -0,11153 -0,04123 max 0,046317 0,070136 0,050322 0,055223 0,03941 djius jkii djiuk djijp djicn mean 0,000455 0,000387 5,34e-05 0,00017 -0,00014 std. dev. 0,009956 0,013558 0,012765 0,011331 0,013449 min -0,06412 -0,09906 -0,07223 -0,06836 -0,07897 max 0,045858 0,087555 0,058477 0,067542 0,05993 appendix 2: statistical findings s&p 500 2003-2007 2008-2009 2010-2014 2003-2014 beta t sig. beta t sig. beta t sig. beta t sig. monday .020 .725 .468 -.035 -.803 .422 .003 .095 .924 -.006 -.382 .703 tuesday .028 1.021 .307 .036 .810 .418 .054 1.961 .050 .020 1.253 .210 wednesday .043 1.548 .122 -.045 -1.037 .300 .008 .285 .776 -.004 -.241 .810 thursday .011 .398 .691 -.001 -.015 .988 .023 .819 .413 .014 .897 .370 friday .005 .179 .858 -.009 -.202 .840 .018 .667 .505 -.009 -.570 .568 djius 2003-2007 2008-2009 2010-2014 2003-2014 beta t sig. beta t sig. beta t sig. beta t sig. 82 emin avcı http://ijcf.ticaret.edu.tr monday .014 .504 .615 -.021 -.470 .639 .005 .179 .858 -.008 -.493 .622 tuesday .032 1.159 .246 .032 .732 .465 .061 2.186 .029 .015 .965 .334 wednesday .051 1.830 .068 -.046 -1.043 .298 .007 .236 .814 -.002 -.097 .923 thursday .022 .812 .417 .004 .098 .922 .013 .476 .634 .017 1.092 .275 friday .000 .007 .995 -.007 -.166 .868 .017 .610 .542 -.009 -.560 .575 jkse 2003-2007 2008-2009 2010-2014 2003-2014 beta t sig. beta t sig. beta t sig. beta t sig. monday -.017 -.627 .531 -.034 -.768 .443 -.052 -1.896 .058 -.046 -2.848 .004 tuesday .065 2.375 .018 -.031 -.718 .473 .029 1.052 .293 .023 1.434 .152 wednesday .076 2.775 .006 .004 .082 .934 .121 4.403 .000 .058 3.557 .000 thursday .037 1.336 .182 .003 .071 .944 -.004 -.142 .887 .015 .908 .364 friday .090 3.266 .001 .041 .945 .345 .014 .498 .619 .051 3.132 .002 jkii 2003-2007 2008-2009 2010-2014 2003-2014 beta t sig. beta t sig. beta t sig. beta t sig. monday -.011 -.397 .692 -.019 -.423 .673 -.048 -1.749 .081 -.039 -2.392 .017 tuesday .066 2.395 .017 -.029 -.654 .514 .020 .721 .471 .019 1.196 .232 wednesday .067 2.448 .015 -.020 -.460 .646 .116 4.215 .000 .050 3.097 .002 thursday .010 .349 .727 -.007 -.156 .876 -.021 -.755 .450 .003 .197 .844 friday .094 3.401 .001 .043 .985 .325 -.003 -.115 .909 .043 2.668 .008 appendix 2: statistical findings (cont.) ftse100 2003-2007 2008-2009 2010-2014 2003-2014 beta t sig. beta t sig. beta t sig. beta t sig. monday .009 .332 .740 .025 .573 .567 -.011 -.412 .680 -.004 -.248 .804 tuesday -.002 -.087 .931 .025 .568 .570 .060 2.169 .030 .014 .884 .377 wednesday -.002 -.065 .948 -.037 -.837 .403 -.029 -1.048 .295 -.034 -2.099 .036 thursday .025 .908 .364 -.047 -1.061 .289 .013 .477 .634 .005 .291 .771 friday .065 2.364 .018 -.006 -.128 .898 .001 .048 .962 .016 1.014 .311 djiuk 2003-2007 2008-2009 2010-2014 2003-2014 beta t sig. beta t sig. beta t sig. beta t sig. monday -.002 -.081 .936 .012 .274 .784 -.003 -.116 .907 -.009 -.579 .563 tuesday .020 .717 .473 .031 .703 .482 .030 1.085 .278 .013 .844 .399 wednesday .008 .288 .774 -.051 -1.158 .247 -.015 -.553 .580 -.033 -2.095 .036 thursday .045 1.626 .104 -.026 -.603 .547 .003 .092 .927 .010 .632 .528 friday .058 2.080 .038 -.008 -.190 .849 -.005 -.170 .865 .014 .866 .386 nikkei225 2003-2007 2008-2009 2010-2014 2003-2014 beta t sig. beta t sig. beta t sig. beta t sig. monday .028 1.018 .309 -.016 -.372 .710 -.003 -.091 .927 -.008 -.514 .607 tuesday .012 .451 .652 -.007 -.151 .880 -.012 -.436 .663 -.006 -.354 .723 wednesday -.011 -.407 .684 .018 .400 .689 .048 1.723 .085 .006 .385 .700 thursday .034 1.239 .215 -.017 -.398 .691 .018 .647 .518 .007 .442 .659 friday .022 .804 .421 -.046 -1.037 .300 .013 .479 .632 -.002 -.150 .880 djijp 2003-2007 2008-2009 2010-2014 2003-2014 beta t sig. beta t sig. beta t sig. beta t sig. monday .025 .891 .373 -.015 -.338 .736 .010 .351 .725 -.012 -.720 .471 tuesday .010 .371 .710 -.023 -.534 .593 .008 .271 .786 -.001 -.042 .967 wednesday -.020 -.710 .478 .046 1.059 .290 .010 .346 .729 -.007 -.436 .663 thursday .032 1.141 .254 -.011 -.251 .802 .010 .372 .710 .009 .538 .590 friday .019 .702 .483 -.051 -1.170 .243 -.004 -.131 .896 -.009 -.590 .555 s&p/tsx 2003-2007 2008-2009 2010-2014 2003-2014 day of the week effect in conventional and islamic stock indexes 83 http://ijcf.ticaret.edu.tr beta t sig. beta t sig. beta t sig. beta t sig. monday .040 1.437 .151 -.085 -1.932 .054 -.034 -1.238 .216 -.013 -.806 .420 tuesday .022 .805 .421 .032 .737 .461 .060 2.158 .031 .013 .833 .405 wednesday .028 1.026 .305 -.014 -.322 .748 .009 .323 .747 -.009 -.551 .582 thursday .021 .745 .457 .009 .217 .828 .000 .011 .992 .014 .883 .377 friday .061 2.206 .028 .023 .521 .602 .012 .437 .662 .022 1.367 .172 djican 2003-2007 2008-2009 2010-2014 2003-2014 beta t sig. beta t sig. beta t sig. beta t sig. monday .003 .119 .905 -.060 -1.368 .172 -.050 -1.794 .073 -.028 -1.776 .076 tuesday .009 .315 .753 .021 .478 .633 .029 1.037 .300 -.001 -.043 .966 wednesday .040 1.433 .152 .004 .095 .924 -.004 -.141 .888 -.009 -.563 .573 thursday .033 1.209 .227 -.004 -.101 .919 .000 .006 .995 .010 .624 .533 friday .090 3.268 .001 .012 .273 .785 .002 .058 .954 .028 1.743 .081 international journal of commerce and finance, vol. 7, issue 1, 2021, 130-140 130 effect of financial innovation on economic growth: evidence from african countries olumuyiwa ganiyu yinusa olabısı onabanjo unıversıty, nigeria olusola enitan olowofela olabısı onabanjo unıversıty, nigeria adewale lateef yunusa olabısı onabanjo unıversıty, nigeria rahmon abiodun folami olabısı onabanjo unıversıty, nigeria received: march 04, 2021 accepted: april 21, 2021 published: may 01, 2021 abstract financial innovation is a product of technology and the question whether financial innovation spurs economic growth is subject to level of technology in the financial sector of an economy as well as other factors. on this note, this study examines the impact of pr ocess financial innovation on economic growth in some selected african countries. the study used annual panel data obtained from the world bank development indicator comprising of seventeen cross section countries covering the period of fifteen years from 2004 to 2018. generalized method of moment (gmm) was employed to analyze the panel data system. the result shows that financial innovation has significant impact on economic growth of selected countries. automated teller machine (atm) which is a major measure of our process financial innovation has significant impact on economic growth. number of bank branches on the other hand has positive but insignificant impact on the economic growth. financial innovative products such a domestic bank credit also contributes significantly to the economic growth of african countries. it is therefore recommended that policy makers should encourage establishment of more atm terminals, increase the number of bank branches and improve the credit to private sector of the economy. keywords: financial innovation, economic growth, atm, bank branches and credit to private sector jel classification: g21 o47 g2 1. introduction what is the effect of financial innovation on economic growth? to the best of our knowledge, the answer to this question is not very clear in empirical literature. various aspects of financial innovation have been explored such as institutional innovation ( de young, 2001) product innovation and process innovation ( frame and white, 2004, 2009; akhavein et al,2005). the various studies have documented mixed findings especially studies that have tested the bright side view of financial innovation. one prominent and comprehensive study by beck, tao, chen and frank (2016) reported positive relationship between financial innovation and economic growth. most of the past studies failed to employ automated teller machine as product financial innovation which is one of the commonest financial innovation currently widely adopted in most developing countries that is expected to create financial access, services and credit opportunities that can spur economic growth. most of the past studies in the literature were carried out using samples of countries from developed and developing counties. very limited studies focused on africa or included samples of countries in africa. given the continuous active debate among practioners, policy makers and academics on the role of financial innovation in the growth process, there is a striking paucity of empirical studies linking financial innovation to growth. most past studies in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e effect of financial innovation on economic growth: evidence from african countries 131 emphasis technical, institutional and product innovations, financial development and financial inclusion as catalyst of economic growth. they overlooked the role of process financial innovation in the economic growth process. the motivation for assessing the nexus between financial innovation and economic growth stems from testing the validity and application of the two theoretical perspectives in a developing economy context with focus on process financial innovation specifically the role of automated teller machine as process financial innovation that can engender economic growth. the traditional innovation growth view see the bright side of financial innovation and posits that financial innovation may help to improve services of banks, facilitate risk sharing and aid allocative efficiency and the growth process. contrary to the traditional view is the financial innovation fragility theoretical perspective that focus on the dark side of financial innovation. in specific terms, financial innovation is perceived to be the causal factor that often lead to financial crisis because the innovation in the financial sector expand the credit opportunities and risk that catalyse the boom and burst in the economy ( brunnermeier,2009). in the light of the fact that financial innovation could have bright or dark sides, it is important to assess whether financial innovation can engender growth or not thereby necessitating a study of this kind. this study examines the impact of process financial innovation on economic growth in some selected africa countries. apart from the introduction, this paper is divided into four other parts. section two is the literature review. section three is the methodology while section four discusses the results and findings while section five concludes the paper. 2. literature review the theoretical literature has affirmed that there are two opposing hypotheses on financial innovation either the traditional innovation-growth or innovation-fragility view. literatures from (merton, 1992; berger, 2003) on traditional innovation-growth posited that financial innovation improves the quality and variety of banking services facilitates risk sharing, reduce agency cost completes the market and improves allocative efficiency and economic growth. while on the other hand innovation-fragility centred on the ‘dark’ side identified financial innovations as the major cause of global crisis 2007 to 2009 as a result of unprecedented credit expansion, likewise helping banks and investment banks design structured products taking advantages of investors’ misapprehension of financial markets. the introduction of new ideas, instruments, and solutions for the existing problems make innovation the key driver for economic growth since it changes business competitiveness and creates more value for enterprises. the traditional economic view of innovation growth stated that financial innovation improves the quality of financial products and services (schrieder and heidhues 1995; mcguire and conroy 2013) accelerate the financial development process for capital accumulation and allocation processes. however, institutional innovation, like various form of innovation, in the financial systems accelerate financial process with improvements on services provided, such as internet banking and mobile banking services (raffaelli and glynn 2013) thus enhancing efficiency of financial institutions through improved payment mechanisms (sabandi and noviani 2015). intently, idea of financial innovation is not a new one, but over the last decade, it has been theoretically reviewed in financial literature of wong, ho., and autio, (2005) as discussed in the theoretical models of (solow, 1956; romer, 1986), which emphasized the connection between technological innovation and economic growth, likewise the neoclassical model of economic growth is sustained by capital and labour force. however, nadiri (1993) used cobbdouglas function to highlight the link between innovation, output and productivity growth with a conclusion that economic growth is influenced by the growth rate of financial innovations, which are determined exogenously. on the other hand, in the endogenous growth model has developed by romer, (1986) concluded that economic growth is endogenously dogged and is predisposed by agents’ decisions to exploit profits, taking into consideration characteristics of entrepreneurship by modelling the innovation process based on microeconomic data with the aid of financial institutions. the empirical studies from financial literature have pointed out the relationship between financial innovation and economic growth using both macroeconomic and microeconomic data in references to developed and emerging markets. the classical economic view of innovation growth posited that financial innovation improves the quality of financial products and services (mcguire and conroy 2013), expedites the financial development process, improves capital accumulation and allocation processes (allen 2011), and increases the level of efficiency in financial institutions (ajide, 2016). the efficiency of financial institutions has an impact on financial development through better payment mechanisms that expedite both domestic and international trade (sabandi and noviani 2015). olusola enitan olowofela 132 chou (2007) model financial innovation and economic growth and evaluated why the financial sector matters to the real economy using conventional cobb-douglas production function. his finding revealed that financial innovation raises the efficiency of financial intermediation by increasing the variety of financial products and services, resulting in improved matching of the needs of individual savers with those of firms raising funds for expanding future production. the study should have examine a cross country and estimation techniques not only growth model. ang (2014) examined innovation and financial liberalization using error-correction model (ecm) and auto-regressive distributed lag in order to test the existence of a long-run relationship. the results lend some support to the argument that some form of financial sector reforms may help stimulate economic growth via increasing technological innovation. this study should have been a cross country studies. there is time lag between 2005 to 2014 especially global financial crises. galindo and méndez (2014) analyzed the relationships between entrepreneurship, innovation and economic growth, and to show the feedback effects in these relationships in 13 developed countries 2002 to 2007. gross domestic product was proxied as independent variables while dependent variables are gini index, money supply. method of estimation techniques: regression analysis. the analysis shows that several factors have positive impacts on innovation and entrepreneurship, including monetary policy and social climate. the study should have used dynamic ordinary least square for it estimation and likewise other techniques such ardl, granger causality to test the relationship on the variable. akinwunmi, muturi and ngumi (2016) considered the adoption of financial incentives and financial innovation in nigeria banking sector between (2005– 2010). financial incentives as an independent variable were captured by interest rate while financial innovation and deepening as the dependent variables were measured by customers and deposit base. the study revealed that in nigeria, financial incentive interest rates were effective for financial innovation adoption by increasing banks customers’ deposit base, but interest rate is not enough to draw more people to the bank (financial penetration), i.e. improving customer base. the literature should have been encompassed with status of financial innovation and incentives in nigeria banks because the introduction of recapitalization in december 2005 makes nigeria banks more markets orientated with financial innovative products and incentives. ajide (2016) investigated the effect of financial innovation augmented with bank competition on sustainable development in eight west african countries. his study reveals positive but insignificant impact. pradhana et al (2018) sampled 49 european countries between 1961 and 2014 using vector error-correction model panel unit root and panel co-integration tests to determine the interactions between innovation, financial development, and economic growth. their findings revealed that both innovation and financial development are key drivers of per capita economic growth in european countries in the long run. pradhana et.al (2018) should have used panel data, basically its allow for controlling for individual or time heterogeneity, which variables in the model are incapable of capturing. furthermore, as baltagi (2008) asserts, panel data give informative more data, more variability, less collinearity among the variables, more degrees of freedom and more efficiency. oseni (2018) examined the relationship between financial innovations and the sustainable economic development in nigeria between 2006 and 2016 using atm banking, web (internet) banking, pos banking and mobile banking as proxies of financial innovations and the gdp as the proxy for the nation’s economic growth and development. techniques: multiple linear regression model adapted from muiruri and ngari (2014). the study established that a positive and significant relationship exists between all the variables and gdp with the exception of mobile banking. however, variables used for this study does not include risk management. from the persistent of literature reviewed, it shows that efficient financial system is the outcome of continuous financial innovation that create more financial institutions and also develop financial service and instruments that can support economic growth ( jedidia, boujelbène., helalid 2014). bara and mudxingiri (2016) examined the relationship between financial innovation and economic growth in zimbabwe and positive impact was established. studies of qamruzzaman, & jianguo, (2017); ebubekir & burçay (2019) and ozurumba & onyeiwu (2019) revealed that financial innovation can engender economic growth. furthermore, mixture of positive and negative relationship between financial innovation and economic growth, therefore it is also necessary to further carried out this research and inculcate other variables which is not previously captured by previous authors especially for developing countries nigeria, kenya, south africa, bostwana and namibia. 3. methodology effect of financial innovation on economic growth: evidence from african countries 133 this study used annual panel data comprising of seventeen cross section (17 countries) covering the period of 2004 to 2018 (t=15,n=17) which covers theera of financial liberalization and development in many countries as well as output expansion, high level of compliance to information communication technology, money growth, and an increasing volume of investment. the 17 african countries were selected based on the availability of their data. the data used for this study were obtained from world development indicator (wdi). 3.1. model specification this study used annual panel data comprising of seventeen cross section (17 countries) covering the period of 2004 to 2018 (t=15,n=17) which covers the era of high level of compliance to information communication technology in many developing countries. the 17 african countries were selected based on the availability of their data. the data used for this study were obtained from world development indicator (wdi). 3.2. model specification the model of this study based on the endogenous growth model of solow (1950). the theory opines that growth in an economy is a function of capital, labour and technology. the solow model is expressed as: (1) where represent growth, represent capital, stand for labour and represent technology. based on the theory, financial innovation is represented by technology in the model. this simply means that technological advancement induces the growth rate in the economy. in order to attain the effect of financial innovation on economic growth in selected african countries, the model is modified and expressed as: (2) the solow model is premise on the assumption of cobb–douglas production function, the modified solow model in equation (2) is thus expressed in cobb–douglas form and expressed as: (3) where is the growth rate at time , is the capital stock at time which is proxied by gross capital formation (gcf), is the labour at time which is proxied by labour, is the proxy for technology in the growth model, is the money supply at time and is the inflation rate in the economy. in order to achieved the predetermined objectives of this study, the model is restated in panel form and expressed as: (4) where represent the coefficients of the explanatory variables represent automated teller machine for country at time represent gross fixed capital formation for country at time represent labour for country at time represent money supply for country at time represent inflation rate for country at time is the error term for country at time olusola enitan olowofela 134 this study uses gdp per capita as a proxy for economic growth as used by previous studies (qamruzzaman & jianguo, 2017; bara & mudxingiri 2016; ajide 2015). an economy is assumed to be improving if it experiences increases in its gdp per capita. financial innovation is expected to brings about growth in the economy as a result of innovation of the existing financial product as well as invention of new product which is expected to contribute positively to the economic growth of a nation (laeven, levine & michalopoulos, 2015 as cited in qamruzzaman and jianguo, 2017). previous studies have used different proxies for financial innovation. this study used one proxies for financial innovation which is automated teller machine based on availability of data and other four control variable in order to prevent endogeneity problem in the model. the control variables are labour, capital, money supply and inflation. this study also employed the panel estimation technique in order to estimate the impact of the independent variables on the dependent variable. it is to be noted that it is imperative to carry out unit root test in order to ascertain the order of integration of these variables. this study estimated the dynamic panel data system generalised method of moment (gmm) (arellano and bover, 1995; blundell and bond 1998) which was based on the prior model developed by (arellano and bond 1991) where differencing of all the regressors was introduced and called difference gmm. the model of arellano and bond was based on the following assumptions; that the observation is greater than the time (n>t), linearity in relationship, inclusion of lagged value of the dependent variable, regressors are not strictly exogeneous, fixed individual effects and problem of autocorrelation & heteroskedasticity within a variable (roodman, 2009). imposing the strict exogeneity assumption leading to violations and discrepancy in our fixedeffect model which leads to generation of a single equation dynamic gmm estimators by using a common factor representation (blundell and bond, 1998). the dynamic panel output model is expressed as: (5) is the constatnt parameter, and are the output elasticities the violation of the assumption of strict orthogonality led to the introduction of varying parameters by taking the semi-derivatives of the variables to account for variances in units and measurements. (6) the disturbance term comprise of two orthogonal components; the fixed effects that is time-invariant which is and the idiosyncratic shocks which is represented by which is assumed to be independent and normally distributed with zero (0) mean and constant variance. adjustment of the gdp is expected to be affected by factors such as the atm, capital, labour, money supply, and inflation. gdp adjustment to changes in these factors is dependent on two basic conditions, first is the passage of time which give rise to the introduction of the lagged values of the factors as independent variables, and second is on the difference between equilibrium of gdp and the previous year actual gdp which led to the introduction of the dynamic gmm in which lag of the dependent variable is also included as independent variable in the model. application of ols in our estimation could lead to “dynamic panel bias” which usually occur due to correlation between the lagged value of the dependent variable and the fixed effects in the error term which leads to the violation ols assumption which is necessary for attaining an unbiased estimate, leading to endogeneity problem. introduction of lagged variable as an instrument in the strict orthogonal assumption helps in solving this problem which is incorporated in the system gmm (blundell and bond, 1998; roodman, 2009). this study therefore estimated the impact of financial innovation on economic growth in selected african countries using the system gmm based on the satisfaction of some assumptions. the observation is greater than the time (n>t) which is 17 countries by 15 years, ability to solve endogeneity, heteroscedasticity and serial correlation problem and produce an estimate which reduces the correlation between the instrument and the disturbance term to zero. the dynamic gmm model is expressed as: (7) effect of financial innovation on economic growth: evidence from african countries 135 is represent growth represent the lagged value of growth represent the independent variables which are and represent the control variables which are and . (8) 3.3. a priori expectation the a priori expectation shows the expected signs and significance of the values of the coefficient of the parameter under review on the part of the empirical evidence and theoretical assertion. table 1: a priori expectation variable a cronym expect ed sigs automated teller machine a tm (+) commercial bank branches c bb (+) domestic credit provided by private sector d cp (+) gross capital formation g cf (+) labour l ab (+) money supply m os (+) inflation in f (-) 4. results and discussion 4.1. summary statistics for the data table 1: the descriptive statistics shows the list of variables used in the study. data were collected for the period of 2004 to 2018 from the world bank development indicator. economic growth is proxies by gdp per capita while the financial innovation variables are automated teller machines, commercial bank branches and domestic credit provided by financial sector. the control variables are gross capital formation, money supply, inflation and labour variables bs. mean std. dev. minimum maximum olusola enitan olowofela 136 lngdp 255 3.366381 0.376227 2.610444 4.081519 atm 255 12.84329 15.22297 0.000000 68.92636 cbb 255 7.070232 5.398077 0.000000 24.87064 dcp 255 32.28659 36.63898 -114.6937 119.6001 lngcf 255 8.470157 3.697725 0 11.01 mos 255 47.84626 34.98165 0 251.618 inf 255 7.648322 8.018531 -60.4964 43.54211 lnlab 255 6.860245 0.4807163 5.805922 7.766441 table 1 above depict the data used in the study alongside the mean, standard deviation, minimum and maximum values.the correlation matrix shows the list of variables used in the study. data were collected for the period of 2004 to 2018 from the world development indicator. table 2: correlation matrix table 2 depicts the correlation among the variables used in the study. this result shows that the level of correlation among the variable is good as evidenced by the correlation values. there is no tendency of multicollinearity among the variables as evidenced by the correlation values which is in line with theory. the result shows that , , and are positively correlated to , while and are negatively correlated with ., , and are positively correlated with while and . d and are positively correlated with while , and are negatively correlated with . , and are positively correlated with while is negatively correlated with . and are negatively correlated while is positively correlated with . and are negatively correlated with . is positively with . 1.0000 0.5591 .0000 0.5482 0.5341 1.0000 0.1190 0.4607 0.4507 1.0000 0.0911 0.1829 -0.0915 0.3109 1.0000 0.5268 0.3174 0.5994 0.4987 -0.0589 1.000 -0.2438 -0.1304 -0.2756 -0.0846 -0.0158 0.249 .0000 -0.2877 -0.0821 -0.1984 0.2905 0.3268 -0.015 0.115 1.000 effect of financial innovation on economic growth: evidence from african countries 137 table 3: regression result nb: the dependent variable is the gdp per capita, variables gdp per capita, gross fixed capital formation and labour are in natural log.standard errors in parentheses. *, ** and ***: significant at 1%, 5% and 10% respectively. table 3 shows the result using the system-gmm estimator. the two-step gmm estimation result is used for interpretation of result due to its superiority over the one-step gmm. the lagged value of the gdp is positive and statistically significant which means a unit increase in one period lag gdp increase the gdp by 0.910121. this means that there is persistence increase in the gdp per capita. the result also shows that automated teller machines variable one-step result two-step result 0.9740053* (0.0143946) 0.910121** (0.0396887) 0.0001771***(0.0002841) 0.0003587** (0.0006592) 0.0000495 (0.0008856) 0.0004296 (0.0040286) 0.0005468* (0.0001247) 0.0006869* (0.0002301) 0.0015401 (0.0010447) 0.0001719 (0.0017708) -.0005934***0.0003306) -0.0006792** (0.0002929) -0.0228479** 0.0097315) -0.0549377 (0.0460387) 0.0004836* (0.0001141) 0.0006411* (0.0001798) 0.2789741 (0.0097315) 0.3676026 (0.3249412) observation 238 238 number of countries 17 17 number of instruments 323 300 wald chi (2) pvalue (0.0000) (0.0000) ar (1) p-value (0.0000) (0.0000) ar (2) p-value (0.1980) (0.3584) sargan test of overidentifying restrictions p-value 0.8411 0.3034 olusola enitan olowofela 138 (atm) has a positive significant impact on economic growth which implies that a unit increase in atm will increase the economic growth by one 0.0003587. commercial bank branch has a positive insignificant impact on economic growth which implies that a unit increase in the commercial bank branch will increase economic growth by0.0004296. domestic credit has a positive significant impact on economic growth which implies that a percentage increases in the domestic credit will leads to 0.0006869 percent increase in economic growth. gross capital formation has a positive significant impact on economic growth which implies that a percentage increases in gross capital formation will leads to 0.0001719 percent increase in economic growth. inflation has a negative significant impact on economic growth which implies that a percentage increases in inflation leads to 0.0006792percent decrease in economic growth. labour has a negative insignificant impact on economic growth which implies that a percentage increases in labour leads to 0.0549377 percent decrease in economic growth. money supply has a positive significant impact on economic growth which implies that a percentage increases in money supply leads to 0.0006411percent increase in economic growth. the serial correlation tests & and sargan test indicate the instrument validity and reliability. the serial correlation test shows that there exists serial correlation at first order while the indicate no existence of serial correlation at second order which leads to the acceptance of the null hypothesis that error term of the differenced equation is not serially correlated at the second order . the sargan test of overidentifying restrictions result shows that all the instruments are exogenous which leads to the acceptance of the null hypothesis of overall exogeneity of the instruments used in the estimation. 5. research findings and discussion the discussion of the finding is based on the system-gmm result. the result indicated that atm has a positive significant impact on economic growth, this result is in line with theoretical expectation and the findings of (oseni, 2018) as well as the apriori expectation of the study. the gmm result shows that a unit increase in the number of atm will lead to an increase in the rate of economic growth by 0.0003587. the number of atm galleries in the selected african countries is very low compared to the economic advantage it has. most commercial banks have one or two atm galleries in their branches alone. they do not operate street banking where atm galleries can be assessed by the grassroots. most consider this to be too risky because of the level of insecurity in those countries. commercial bank branch has a positive insignificant impact on economic growth which conforms to the apriori expectation of the study. there is positive correlation between bank branches and atm operations. this confirms the fact that atm terminals are mostly found in the banking premises. domestic credit has a positive significant impact on economic growth which is also in line with theoretical expectation and the prior study of (qamruzzaman & jianguo, 2017) as well as the a priori expectation of the study. domestic credit should spur economic growth because in recent times, the involvement of agent banking operators in the provision of domestic credits has greatly assisted domestic credit disbursement. gross capital formation is positively related to economic growth which is in line with the theoretical expectation, the a priori expectation and the prior work of (qamruzzaman & jianguo, 2017). inflation is negatively related with economic growth which conforms with the theoretical expectation, the a priori expectation and the prior work of (qamruzzaman & jianguo, 2017). labour is negatively related with economic growth which is contrary with the theoretical expectation, the a priori expectation. the negative sign of labour could be due to the low level of utilisation of labour which has increased the level of unemployment in the economy. money supply is positively related to economic growth which is in line with with the theory, the a priori expectation and the prior work of (qamruzzaman & jianguo, 2017). 6. conclusion the study examined the impact of financial innovation on economic growth among selected african countries. panel data for this study include seventeen (17) countries for fifteen (15) years which was obtained from the world bank development indicator. this study carried out the paned estimation using the system-gmm estimation technique. the study found that financial innovation has significant impact on economic growth. it was also found that automated teller machine and domestic credit are the only financial innovation variables that has significant impact on economic growth. it is therefore recommended that the policy makers should encourage establishment of more effect of financial innovation on economic growth: evidence from african countries 139 automated teller machines terminal which will contribute to the growth of the economy. also, credit to private sector should also be encourage as this exert a huge contribution to the growth of every nation. however, the establishment of commercial bank branches was found to impact the economic growth positively but insignificantly. the insignificance of the commercial bank branches could be due to insufficient number of bank branches. the policy makers should therefore ensure that more commercial bank branches are establishes in order to cater for both rural and urban dweller. in a nutshell, this study therefore conclude that financial innovation has significant impact on economic growth in africa . 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(2001). applications of generalized method of moments estimation. journal of economic perspectives, 87-100. international journal of commerce and finance, vol. 9, issue 1, 2023,88-100 * * i̇stanbul ticaret university, turkey, eomodejesu.daviduyi@istanbulticaret.edu.tr ** i̇stanbul ticaret university, turkey, odemir@ticaret.edu.tr 88 investigating the effect of energy price on food price inflation in three asian countries ebi omodejesu david uyi* ahmet oğuz demir** submitted: 04.02.2023 accepted: 01.06.2023 published: 06.07.2023 abstract the rising of energy prices resulting from the turmoil in the middle east may be responsible for the recent food price inflation in the world, which may occur through transmission mechanism. this study investigates the effect of energy prices on food price inflation in three asian countries, namely, china, philippine, and vietnam using monthly data from 2002:m01 to 2020:m12. employing the panel vector autoregressive (pvar) model with impulse response functions (irfs), the results provided that shocks in energy prices and economic growth have a positive and significant effect on food price inflation while shocks in exchange rate and agricultural production have a negative but insignificant effect on food prices inflation. the pvar causality results revealed that economic growth is a predictor of food price inflation, energy prices, exchange rate, and agricultural production. also, a causality runs from economic growth and exchange rate to energy prices and again, from economic growth to exchange rate and agricultural production. this implies that a feedback effect is found between economic growth and exchange rate as well as economic growth and agricultural production. therefore, the study recommended the need to stabilize energy prices through effect energy policies in asian countries. keywords: food prices inflation, energy prices, food insecurity, economic growth jel classification: o15, m51 1. introduction due to the importance of energy and food commodities in our daily activities in an economy, it is considered as a valuable natural resource which enhance economic sustainability for human mailto:odemir@ticaret.edu.tr international journal of commerce and finance ebi omodejesu david uyi oğuz demir * i̇stanbul ticaret university, turkey, eomodejesu.daviduyi@istanbulticaret.edu.tr ** i̇stanbul ticaret university, turkey, odemir@ticaret.edu.tr 89 development. energy particularly crude oil, electricity, biofuel, ethanol, biomass, uranium, water and coal stand as the road map for economic transformation, promote factor of production in the area of agriculture, tourism, industry (infrastructure), and households. energy market and food security encompasses a resource that provide services for human capital sustainability, zero hunger in the world and growth to economy through efficiency (fao, 2010). let us recall from the crude oil embargo in 1970s that happened between iran, israel, and opec nations, which made some of the arab crude oil producing nations to put a banned on the supply of crude oil to u.s., netherlands and portugal, and due to the restriction of crude oil export to u.s. and other developed nations, it has resulted to a global challenges that create shock and irregularities in the prices of energy market (crude oil and electricity) and agricultural sector (food commodities), (taghizadeh-hesary et al. (2013). some studies have identified that sudden increase in the prices of crude oil and electricity may enhance to recession, food insecurity and economic transformation, yet still causes starvation or poverty through the rise in the prices of food commodities like maize, grain, wheat, rice, groundnut oil which may result to a decline in the aggregate demand and aggregate supply function of an economy. considering the study outcome of hamilton (1983), it is wrap up that all economic depression such as high unemployment rate, gdp contraction, poverty, food insecurity, hunger in some part of the developed nations and developing countries, like u.s. has occurred due to increase in prices of energy market (crude oil, electricity) and agricultural sector (food commodities). it is considered that crude oil price shocks possess a high significant reaction on agricultural products prices, which may enhance sudden increase in the prices of food system, and sometime result to sustainability, and food insecurity in an economy, using european economic as an illustration (cunado and gracia (2013). current studies identified that the prices of wti crude oil and brent crude oil have a stimulus on china economies and may enhanced to inflation significantly on the prices of staple foods using panel var model. in a current study, two economies were examined to conduct the sequel of crude oil prices movement with agricultural commodities prices over time at macroeconomy level on two parameters, such as gdp growth rate and food prices index (fcpi), and the result show a lessen stimulus on the gdp of a developing economy (the people of china), while the economic growth rate show a calmness on the developed economies (u.s. and japan) (taghizadeh-hesary and yoshino (2015). international journal of commerce and finance ebi omodejesu david uyi oğuz demir * i̇stanbul ticaret university, turkey, eomodejesu.daviduyi@istanbulticaret.edu.tr ** i̇stanbul ticaret university, turkey, odemir@ticaret.edu.tr 90 the indicator to hyperinflation of food commodities prices in the two economies, namely as developed nations and vulnerable nations can either be traced through natural disaster, error in population growth, climate change and inflation in energy market prices, like sudden hike in crude oil prices, electricity prices which may also be influence by agricultural products maize, sugarcane, starch and due to the role they contributed to both ethanol oil for tourism services and food crops for consumable foods, like rice, corn, wheat, grains. if the prices of purchasing energy market is high, it may result to a sudden increase in the price of agricultural market, because maize is a staple food commodity that is use for both energy market (biofuel, ethanol) and food market (maize for cereal and boil corn). purpose and the aim of the study the purpose of this research is to examine the effects of energy prices on food price inflation by controlling for economic growth, exchange rate, and agricultural production in three selected asian countries (china, philippine, and vietnam) over the period 2002:m01 to 2020:m12. the choice of the countries is based on the data availability. therefore, this study contributes to the existing literature in several ways: first, the study investigates the effect of energy prices on food price inflation in asian countries, which is the largest energy producer and consumer in the world. second, the study uses the panel var method, which can address the empirical issue of simultaneous bias by using impulse response functions to examine how other variables with the panel var system respond to the shocks in impulse variable over time. finally, the study uses panel var granger causality to examine the causal relationship between the variables, which can be used by policy makers to formulate appropriate policies to mitigate the energy price effect of food price inflation in the asian region. the remaining part of this study is structured as follows: section 2 categorically reviews the related literature. section 3 describes the data and methodology employed in this study. section 4 presents and analyses the empirical results as well as discussing these results. section 5 provides concluding remarks with policy recommendations. 2. literature review the interdependence of natural resources (crude oil, biofuel, ethanol) with agricultural products (maize, soybean, sugar cane) have played an essential role in our daily consumption, which result to a great necessity for every economy to focus their priority on it for sustainability. international journal of commerce and finance ebi omodejesu david uyi oğuz demir * i̇stanbul ticaret university, turkey, eomodejesu.daviduyi@istanbulticaret.edu.tr ** i̇stanbul ticaret university, turkey, odemir@ticaret.edu.tr 91 multiple scholars according to their finding and result, identified that sudden increase in the prices of natural resources (crude oil, biofuel) was among the major element that contributed a shocks occurrence in the agricultural sector in an economy (abbot, tyner, hurt 2008), (baffes 2007, balcombe and rapsomanikis 2008), (chang and su 2010), (yang et al. 2008) (mitchell 2008), (rosegrant et al. 2008). in comparison, a number of scholars has identified by their experiment and results, no straight correlation between crude oil prices and agricultural commodities prices (zang et al. 2010), and sudden increase in the prices of crude oil does not support increase to food commodities prices (maize or sugarcane). it was investigated using elasticity of demand and supply theory, that the correlation of cotton, wheat, gold, copper, petroleum oil, cocoa, and lumber prices result to zero, rotemberg and pindyck (1990). 2.1 starvation versus food security starvation is a demerit factor to good health. some scholars and fao report 2010s have identified a plan to resurface or recover the global economy from starvation, poverty, food insecurity, terrorism, and environmental crisis like climate change, flooding. besides, it is accounted by fao report that global food reserve is higher than the number of human being population in the world, yet poverty, starvation, and hyperinflation in the staple foods still high in the blink of the developing nations and developed nations (gustavsson et. al., 2011). the objective of food and agriculture organization (fao, 2022) with support from ifad, unicef, wfp is to enhance proper administration of food security and to end starvation in the world before 2030. due to the emergence of covid-19 in 2020 and other economy factor from global government institutions, it results to low level for fao to achieve food security, and end starvation in the world, which increase the number of people with starvation or hunger in the world from 7.9% to 8.93% in 2019 to 2020 and rise at a lower point in 2021 to 9.8%. 2.2 the volatility between energy prices and agricultural food prices according to this thesis, the volatility correlation between crude oil prices and staple food prices in some of the regions in asia. currently from 2015 to 2014, it was recorded that some parts of developing countries, like asia reduce inflation from 2.2% to 3.0%. during the process of fall in inflation in the asia region, it results to economic depression, and caused cost inflation on the demand side. in the supply side it caused decline to global crude oil market and food cost, and result to inflation. in 2015, brent crude oil prices drop to average which result to $52 per barrel in 2015 from 99$ per barrel in 2014. besides, agricultural products experienced a fall in international journal of commerce and finance ebi omodejesu david uyi oğuz demir * i̇stanbul ticaret university, turkey, eomodejesu.daviduyi@istanbulticaret.edu.tr ** i̇stanbul ticaret university, turkey, odemir@ticaret.edu.tr 92 total prices to 13%, which result to credit crunch economies and food costs 15.4% as an outcome from supply side effect due to volatility in energy prices. the supply side effect has contributed to a fall in prices, in connection to demand side assistance. 3. data and methodology 3.1 data for the purpose of this study, the study uses data based on five (5) variables, namely; food customer price inflation, energy price, gdp, exchange rate, agriculture crop production from 2002:m01 to 2020:m12. the asian countries selected are china, philippines, and vietnam based on data availability. the food price inflation is a new index computed by the world bank, which is obtained from the website of the world bank. all the remaining variables are obtained from the world development indicators. therefore, table 1 presents the variables used and their measurements, including their sources. table 1: variable measurement and source variable measurement source food price inflation fcpi food price index world bank energy price energy price index world development indicators gdp gross domestic product (constant 2002 in usd) world development indicators exchange rate official exchange rate in a domestic currency measured in current usd world development indicators agriculture crop production the crop production index (2004-2006=100) shows an index of all crops for each year relative to the base period 2004-2006 excluding fodder crops. world development indicators source: compilation from author’s international journal of commerce and finance ebi omodejesu david uyi oğuz demir * i̇stanbul ticaret university, turkey, eomodejesu.daviduyi@istanbulticaret.edu.tr ** i̇stanbul ticaret university, turkey, odemir@ticaret.edu.tr 93 3.2 panel var model specification in this study we identify the model function to examine the relationship between energy prices and food price inflation in asian countries by incorporating other control variables such as exchange rate and agricultural production as follows: fcpi= f (epr, gdp, exch, agpr) equation (1) epr= f (fcpi, gdp, exch, agpr) equation (2) gdp = f (fcpi, epr, exch, agpr) equation (3) exch = f (fcpi, epr, gdp, agpr) equation (4) agpr = f (fcpi, epr, gdp, exch) equation (5) fcpi = food inflation epr = energy price gdp = real output growth exch = exchange rate through interest rate agpr = crops production the short form to write panel var model in a mathematical language is  , , , i t i i t i ty l y    ɑ equation (6) where i(i=1, n) represent the country; t (t = 1, t) represent time; y represent the endogenous stationarity variable; γ(l) denotes the matrix polynomial sign in the lag operator l; ɑi represent the vector of country-fixed effects ɛi,t is a vector of error terms. 4. data analysis and discussion 4.1 descriptive statistics table 2 provides the descriptive statistics of all the variables used in this study in their natural logarithm form. the mean of gdp is the largest with a value of 8.051975. the second variable with the largest mean is exchange rate while the food cpi is the smallest with a value of 4.240954. the maximum value among the variables is that of exchange rate, which is 10.05280 while agricultural production has the smallest maximum value of 4.666802. for the minimum, exchange rate has the smallest minimum number while gdp has the largest minimum number. furthermore, the exchange rate seems to be the only most volatile series among all variables employed. while food cpi and epr variables are negatively skewed, the remaining variables international journal of commerce and finance ebi omodejesu david uyi oğuz demir * i̇stanbul ticaret university, turkey, eomodejesu.daviduyi@istanbulticaret.edu.tr ** i̇stanbul ticaret university, turkey, odemir@ticaret.edu.tr 94 have a positive skewness, and they are all close to zero. also, the kurtosis of the variables employed are all positive with evidence of excess kurtosis for the case of epr while exchange rate and agricultural production have values that are less than normal value. therefore, the jarque-bera statistic for all variables are large, rejecting the null hypothesis of normal distribution of series. table 2: descriptive statistics lnfcpi lnepr lngdp lnexh lnagpr mean 4.240954 4.410863 8.051975 5.226132 4.491251 median 4.357990 4.525586 7.938361 3.869783 4.544174 maximum 4.900076 4.750136 9.247053 10.05280 4.666802 minimum 3.153590 3.440418 7.142127 1.813824 4.171825 std. dev. 0.425671 0.316230 0.538635 3.367905 0.143347 skewness -0.803850 -1.477955 0.722375 0.537713 -0.622759 kurtosis 2.821911 4.499819 2.660630 1.506253 2.105807 jarque-bera 74.56788 313.1255 62.77045 96.55284 67.00062 probability 0.000000 0.000000 0.000000 0.000000 0.000000 sum 2900.813 3017.030 5507.551 3574.674 3072.015 sum sq. dev. 123.7570 68.30095 198.1570 7747.122 14.03455 observations 684 684 684 684 684 4.2 results of unit root tests in other to check the stationarity property of the series employed in this study, we apply a series of panel unit root tests such as levin-lin-chu unit root test, im-pesaran-shin w-stat unit root test, adf – fisher chi-square unit root test, and the pp – fisher chi-square unit root test. the results as shown in table 2. the results suggest that all the series are not stationary in their levels; however, after taking their first differences, it is observed that the variables are all stationary. these results imply that the variables are all integrated of order one, i (1). this means that the analysis of this study will be based on the first difference variables. international journal of commerce and finance ebi omodejesu david uyi oğuz demir * i̇stanbul ticaret university, turkey, eomodejesu.daviduyi@istanbulticaret.edu.tr ** i̇stanbul ticaret university, turkey, odemir@ticaret.edu.tr 95 table 3: panel var unit root result at level at first difference variable unit root tests statistic p-value statistic p-value lnfcpi levin-lin-chu -2.00585 0.0224 -5.19898** 0.0000 im-pesaran-shin wstat 0.72068 0.7644 -8.73083*** 0.0000 adf fisher chisquare 2.52764 0.8654 88.7963*** 0.0000 pp fisher chi-square 2.53470 0.8646 194.372*** 0.0000 levin-lin-chu 1.28462 0.9005 -7.58856*** 0.0000i inepr im-pesaran-shin wstat 2.71061 0.9966 -8.51288*** 0.0000 adf fisher chisquare 0.51571 0.9976 76.5367*** 0.0000 pp fisher chi-square 0.18606 0.9999 186.313*** 0.0000 ingdp levin-lin-chu 3.83171 0.9999 -12.3573*** 0.0000 im-pesaran-shin wstat 3.52280 0.9998 -14.0986*** 0.0000 adf fisher chisquare 0.82051 0.9915 172.511*** 0.0000 pp fisher chi-square 0.10449 1.0000 117.170*** 0.0000 lnexh levin-lin-chu -1.61042 0.0537 -0.81877*** 0.2065 im-pesaran-shin wstat -0.25702 0.3986 -1.32956*** 0.0918 adf fisher chisquare 5.15714 0.5238 9.53446*** 0.1457 pp fisher chi-square 2.55519 0.8622 152.050*** 0.0000 lnagpr levin-lin-chu 0.42947 0.6662 -4.14430*** 0.0000 international journal of commerce and finance ebi omodejesu david uyi oğuz demir * i̇stanbul ticaret university, turkey, eomodejesu.daviduyi@istanbulticaret.edu.tr ** i̇stanbul ticaret university, turkey, odemir@ticaret.edu.tr 96 note: and denote 1% and 4% is the significance levels. the result is compiled by the researcher from the eview 12 im-pesaran-shin wstat 1.44357 0.9256 -4.17529*** 0.0000 adf fisher chisquare 1.99208 0.9204 28.8862*** 0.0001 pp fisher chi-square 0.80143 0.9920 226.701*** 0.0000 international journal of commerce and finance, vol. 9, issue 1, 2023, 69-88 * * i̇stanbul ticaret university, turkey, taysabd2@gmail.com ** i̇stanbul ticaret university, turkey, oiyigun@ticaret.edu.tr 89 4.3 impulse-response functions (irfs) results due to the inaccurate estimation outputs of the panel var, sim (1980) suggested that the impulse-response function (irfs) have to be used.1 this is because, irfs provide adequate estimates of panel var model for policy analysis. therefore, figure 1 provides the responses of all the variables to a shock in food price inflation in the selected countries of asia. as can be seen, the response of lnfcpi to own shock is positive and statistically significant across the horizon. this means that a 1% standard deviation shock in food price inflation causes food price inflation to rise in the countries studied. the study also finds evidence of a positive response of energy prices to a shock in food prices, while a shock in food price causes a negative and significant response in economic growth. in addition, the response of exchange rate is positive and significant. this indicates that as food prices is increasing exchange rate is rising as well. note that a rise in exchange rate implies depreciation of domestic currency. finally, the response of agricultural production to a shock in food prices is positive and insignificant. this crosses to the negative region after the second horizon. figure 1: shock to food price inflation 1 for brevity, we did not report the results of the panel var estimates since it is inaccurate and unreliable .0 0 6 .0 0 8 .0 1 .0 1 2 .0 1 4 0 2 4 6 8 step response: lnfcpi .0 0 1 .0 0 1 5 .0 0 2 .0 0 2 5 .0 0 3 .0 0 3 5 0 2 4 6 8 step response: lnepr -. 0 0 2 -. 0 0 1 5 -. 0 0 1 -. 0 0 0 5 0 0 2 4 6 8 step response: lngdp 0 .0 0 1 .0 0 2 .0 0 3 0 2 4 6 8 step response: lnexh -. 0 0 0 6.0 0 0 4.0 0 0 2 0 .0 0 0 2 .0 0 0 4 0 2 4 6 8 step response: lnagpr 95% low er and upper bounds reported; percentile ci impulse: lnfcpi international journal of commerce and finance tays abderrahim öykü i̇yigün 90 figure 2 reports the responses of food prices, economic growth, exchange rate, agricultural productions, and own shock to the shock in energy prices. the result show that food prices is positively and significant related to a shock in energy prices. the effects of own shock and economic growth as well as agricultural production are positive and statistically significant. this implies that a shock in energy prices causes food prices, economic growth, and agricultural production to rise significantly. however, the effect of shock in energy price to exchange rate is negative and significant. this implies that as energy prices change, agricultural production would reduce significantly. figure 2: shock to energy prices figure 3 presents the graph of the impulse-response functions of the variables in the panel var model. as we can see, the response of food prices to a shock in gdp is positive and significant. equally, the response of gdp to own shock is also positive and significant. however, the effects of energy prices, exchange rate, and agricultural production are not significant with the effect of agricultural production having a negative sign. 0 .0 0 1 .0 0 2 .0 0 3 .0 0 4 0 2 4 6 8 step response: lnfcpi .0 0 5 .0 0 5 5 .0 0 6 .0 0 6 5 .0 0 7 .0 0 7 5 0 2 4 6 8 step response: lnepr 0 .0 0 0 5 .0 0 1 .0 0 1 5 .0 0 2 0 2 4 6 8 step response: lngdp -. 0 0 1 5 -. 0 0 1 -. 0 0 0 5 0 0 2 4 6 8 step response: lnexh 0 .0 0 0 5 .0 0 1 .0 0 1 5 0 2 4 6 8 step response: lnagpr 95% low er and upper bounds reported; percentile ci impulse: lnepr international journal of commerce and finance tays abderrahim öykü i̇yigün 91 figure 3: shock to gdp figure 4 presents the impulse-response graph of the variables in the panel var system. particularly, the figure show how a shock to exchange rate causes food prices, energy prices, economic growth, exchange rate itself, and agricultural production to change over time. the effect of food prices is negative and statistically insignificant. also, energy prices respond a small manner to the shock in exchange rate, which is insignificant. the response of economic growth captured by gdp is also negative and statistically insignificant. the response of agricultural production is negative but only significant after the 4th horizon. finally, the effect of own shock is positive and highly significant. this implies that exchange rate changes are determined mostly by own shock. 0 .0 0 0 2 .0 0 0 4 .0 0 0 6 .0 0 0 8 .0 0 1 0 2 4 6 8 step response: lnfcpi -. 0 0 0 2 0 .0 0 0 2 .0 0 0 4 .0 0 0 6 0 2 4 6 8 step response: lnepr .0 0 2 5 .0 0 3 .0 0 3 5 .0 0 4 0 2 4 6 8 step response: lngdp -. 0 0 1 -. 0 0 0 5 0 .0 0 0 5 .0 0 1 0 2 4 6 8 step response: lnexh -. 0 0 0 8.0 0 0 6.0 0 0 4.0 0 0 2 0 .0 0 0 2 0 2 4 6 8 step response: lnagpr 95% low er and upper bounds reported; percentile ci impulse: lngdp international journal of commerce and finance tays abderrahim öykü i̇yigün 92 figure 4: shock to exchange rate figure 5 reports the results of the effect of a change in agricultural production on food prices, energy prices, economic growth, exchange rate, and agricultural production itself. we observe that the effect of a shock in agricultural production causes food price inflation and energy prices to decrease but this decrease is not statistically significant over the study period. the response of economic growth is positive and equally not significant. for exchange rate, the effect is not noticeable and also insignificant. the effect of own shock is positive and statistically significant. this implies that agricultural production responds wholly to own shock than any other shock in the system. -. 0 0 1 5 -. 0 0 1 -. 0 0 0 5 0 .0 0 0 5 0 2 4 6 8 step response: lnfcpi -. 0 0 0 2 0 .0 0 0 2 .0 0 0 4 .0 0 0 6 .0 0 0 8 0 2 4 6 8 step response: lnepr -. 0 0 0 4.0 0 0 3.0 0 0 2.0 0 0 1 0 .0 0 0 1 0 2 4 6 8 step response: lngdp .0 0 3 .0 0 3 5 .0 0 4 .0 0 4 5 .0 0 5 0 2 4 6 8 step response: lnexh -. 0 0 1 -. 0 0 0 5 0 .0 0 0 5 0 2 4 6 8 step response: lnagpr 95% low er and upper bounds reported; percentile ci impulse: lnexh international journal of commerce and finance tays abderrahim öykü i̇yigün 93 figure 5: shock to agricultural production 4.4 results of panel granger causality test table 4 presents the results of the panel granger causality test. the results show that there is no granger causality running between food price inflation and energy price, economic growth, exchange rate, and agricultural production. in other words, energy prices, economic growth, exchange rate, and agricultural production are not a good predictor of food price inflation in the selected countries of vietnam, china and philippine. the results further show that food price, economic growth, exchange rate are predictors of energy prices. this implies that there is only a causality running from food prices and economic growth to energy prices in the selected countries. however, overall, the causal relationship is also significant. furthermore, the results reveal that food price inflation, economic growth, exchange rate, and agricultural production are a good predictor of economic growth. in other words, there is a causal relationship running from all the variables controlled for in the model to economic growth in the selected countries. table 4: results of panel var (1) granger causality test -. 0 0 2 -. 0 0 1 0 .0 0 1 .0 0 2 0 2 4 6 8 step response: lnfcpi -. 0 0 1 -. 0 0 0 5 0 .0 0 0 5 0 2 4 6 8 step response: lnepr -. 0 0 0 4.0 0 0 2 0 .0 0 0 2 .0 0 0 4 .0 0 0 6 0 2 4 6 8 step response: lngdp -. 0 0 0 6.0 0 0 4.0 0 0 2 0 .0 0 0 2 .0 0 0 4 0 2 4 6 8 step response: lnexh .0 0 1 5 .0 0 2 .0 0 2 5 .0 0 3 .0 0 3 5 0 2 4 6 8 step response: lnagpr 95% low er and upper bounds reported; percentile ci impulse: lnagpr international journal of commerce and finance tays abderrahim öykü i̇yigün 94 equation excluded test statistic df p-value lnfcpi. lnepr 0.820 1 0.365 lngdp 0.251 1 0.616 lnexh 0.021 1 0.804 lnagpr 1.432 1 0.231 all 6.798 4 0.147 lnepr lnfcpi 1.623 1 0.203 lngdp 3.231* 1 0.072 lnexh 7.419** 1 0.006 lnagpr 0.014 1 0.747 all 13.046** 4 0.011 lngdp lnfcpi 12.458*** 1 0.000 lnepr 6.405** 1 0.011 lnexh 24.522*** 1 0.000 lnagpr 13.542*** 1 0.000 all 57.350*** 4 0.000 lnexh lnfcpi 0.042 1 0.838 lnepr 0.000 1 1.000 lngdp 3.555* 1 0.059 lnagpr 1.211 1 0.271 all 64.660*** 4 0.000 lnagpr lnfcpi 1.338 1 0.247 lnepr 0.846 1 0.358 lngdp 3.077* 1 0.079 lnexh 1.686 1 0.194 all 9.730* 4 0.045 note: ***, ** and * signify rejection of the null hypothesis at 1%, 5%, and 10 % level of significance international journal of commerce and finance tays abderrahim öykü i̇yigün 95 4.5 conclusion and policy recommendations this study primarily aims to examine the effects of energy prices on food price inflation in three economies of asian countries, namely: vietnam, china, and philippines over the period 2002:m1 to 2020:m12. the study further incorporates the effects of other variables such as economic growth, exchange rates, and agricultural production on food price inflation. the results suggested that energy prices and economic growth increase food price inflation while exchange rate and agricultural production reduce food price inflation but such reduction is not statistically significant. on the basis of panel granger causality test, our result revealed that economic growth is a good predictor of energy prices, exchange rate, and agricultural production. also, the study found that exchange rate causes energy prices, food price inflation and energy prices cause economic growth, while exchange rate and agricultural production predict economic growth. based on the findings of this study, the following policy recommendations are carefully and adroitly made to address food price inflation in the selected countries: (i) there is the need to boost agricultural production in these countries to stabilize food prices and hence reduce inflation. this can be achieved by providing incentives such as tax rate reduction in agricultural sector for the famers to subsidize the agricultural outputs. (ii) government and policy makers should be encouraged to promote stable energy prices, particularly energy products that are used in the cultivation of food commodities. for example, the price of energy like crude oil, electricity should be regulated to achieve a low and affordable price by the consumers. this will help to boost agricultural production, which will enhance exports of the countries. (iii) given the increasing food price inflation, there is need to have a stable growing and accelerating economic growth as a panacea to regulate prices of food in the countries. once economic growth is achieved, it stimulates agricultural commodities and effective demand for these commodities. 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(2010). food versus fuel: what do prices tell us?. energy policy, 38(1), 445-451. international journal of commerce and finance, vol. 7, issue 2, 2021, 140-164 140 the impact of hofstede’s cultural dimensions on consumer behaviour intentions1 mehmet sağlam, istanbul commerce university, faculty of business, msaglam@ticaret.edu.tr, turkey. maryama dahir abdullahi istanbul commerce university, foreign trade institute, ficanfanax@gmail.com, turkey submitted: 20.09.2021 accepted: 27.10.2021 published: 02.12.2021 abstract the purpose of this research was to examine the impact of hofstede's culture dimensions (long-term/short term orientation, power distance index, masculinity/feminity index, uncertainty avoidance, and individualism/collectivism) on consumer behavior intentions (word of mouth, complaining behavior, purchase intention, price sensitivity) on two countries namely turkey and somalia. primary data was collected using a questionnaire sent electronically via google forms to the respondents’ emails. convenience sampling was used in the study. the sample size used here included 305 respondents–153 respondents from somalia and the other 152 respondents from turkey. spss 22 and lisrel 8.7 packages program was used for statistical analysis. as a result of the study, it was determined that hofstede culture dimensions did not have an effect on consumer behaviour intention for the somalia sample, while power distance and uncertainty avoidance had a positive effect on word-of-mouth communication and long term orientation had a positive effect on price sensitivity and complaining behavior intention for the turkish sample. 1 this study was derived from maryama dahir abdullahi's master's thesis titled " the impact of hofstede’s cultural dimensions on consumer behaviour intentions ", under the supervision of mehmet sağlam. mailto:msaglam@ticaret.edu.tr mailto:ficanfanax@gmail.com mehmet sağlam & maryama dahir abdullahi 141 key words: hofstede culture dimensions, consumer behavior intentions, somalia, turkey 1. introduction culture influences how humans respond to various stimuli and perceptions. hofstede (2001)’s cultural dimensions try to explain the impact of the societal culture on the values that the members of the society hold dear and how these values influence various behaviors of the members. according to hofstede's idea, culture is mental programming. the word culture, which comes from latin and means "tilling of the land," has several connotations. in most western languages, however, culture refers to civilisation or mental alteration. according to hofstede (2001) one's mental state affects one's physical state. the social environment in which the individual grew up and gathered life experience might be considered as a program. it begins in a person's home life and continues in their social environment, such as at work. he or she is involved in school, peer groups, work, and the community in which he or she lives. bagozzi (2010) defines intention as an individual’s decision, plan, or commitment to achieve a goal or carry out an action. in general, behavioral intention refers to a person's likelihood of engaging in a particular behavior. culture has a strong influence on human behavior. culture has such a normal and automatic effect on consumer behavior that it is often overlooked (schiffman & kanuk, 2000). we also don't know how culture has influenced our own actions until we are confronted with people who have different cultural values or customs. since it has the ability to form understanding culture is crucial when it comes to customer marketing because it affects actions. as a result of its significance, cross-cultural research has increased (sojka & tansuhaj, 1995). in this context, in this study, the effect of hofstede culture dimensions on consumer behavioral intentions was investigated for both somalia and turkey samples. it is thought that the comparison of the study in terms of 2 countries and being one of the first studies examining the impact of hofstede’s cultural dimensions on consumer behaviour intentions 142 the effect of culture on behavioral intentions will make significant contributions to the literature. 2. literature review 1.1 definition of culture mccracken (1990) believes that culture frames our existence in two unique manners: as the point of convergence through which we see and interpret the world and as a graph of human activity. he acknowledged that "to lay it out simply, culture builds up the world by furnishing it with connoting” (mccort & malhotra, 1993; manrai & manrai, 1996). culture, according to hofstede (2001)'s theory is psychological conditioning. the word culture has a number of connotations, the first of which comes from latin and refers to "plowing the ground." all things considered, culture in most western dialects denotes psychological progress or change. according to hofstede, it begins inside the person's day to day life, proceeds inside the social environmental factors, for example, at school, with peer gatherings, at work and inside the network the individual in question lives in. individuals who live or have lived in a comparable social milieu in which culture has been educated share only a portion of their culture. people are not born with culture in their qualities: it is an aftereffect of the impacts directing from the current social milieu, according to hofstede (2005). 1.2. hofstede’s dimensions of national culture geert hofstede established five aspects of public culture in 1973. the model is based on the underlying value directions of the countries studied as well as extensive quantitative research. for each measurement, the model of public culture provides scales ranging from 0 to 100 for 76 nations, giving each nation its own position on the scale (mooij & hofstede 2010:88). mehmet sağlam & maryama dahir abdullahi 143 hofstede’s dimensions of culture provide a way of contrasting and comparing different countries. this ability to compare one’s own country that has a concrete set of value with another one, about which he/she has little or nothing information, adds to the individuals understanding of other cultures and adds to his/her knowledge base (hofstede, 2001). 1.2.1. power distance index (pdi) power distance measurement can be communicated as how individuals with less force in a general public acknowledge and expect that power is dispersed among its individuals unevenly (mooij & hofstede 2011: 182). individuals in countries with better power distance scores have their own interpersonal order of things. individuals should make their economic wellbeing clear to others to pick up regard. for instance, individuals may purchase a costly vehicle or wear costly garments to show that they have power or that they are fruitful (mooij et al. 2010: 89.) 1.2.2. uncertainty avoidance index (uai) vulnerability evasion is the manner by which individuals in a general public endure vulnerability. vulnerability shirking recommends how much the way of life of the general public projects its individuals to feel great or awkward in surprising circumstances. societies which will in general dodge vulnerability attempt to decrease these sorts of circumstances with the utilization of stricter laws and wellbeing and safety efforts. nations with a low vulnerability shirking will in general acknowledge chances and these sorts of social orders are more creative (leng & botelho 2010: 263.) 1.2.3. individualism versus collectivism (idv) persons in individualistic civilizations are concerned with themselves and their immediate family, but individuals in collectivistic society are concerned with gatherings, where individuals care for one another in exchange for loyalty (mooij & hofstede, 2011). individuals in collectivist societies are "we"-conscious, and their personalities are shaped by the social the impact of hofstede’s cultural dimensions on consumer behaviour intentions 144 framework in which they live. self-accomplishment and meeting one's own needs are important in individualistic communities where people are "i"-conscious (mooij et al. 2011:182.). 1.2.4. masculinity versus femininity (mas) in general, social orders with male qualities will value attributes such as achievement, status, and abundance. female social orders are more concerned with personal fulfillment and individual care (leng et al. 2010:263). in macho nations, status is more important than in ladylike nations. individuals in macho social orders must demonstrate their wealth by purchasing high-status brands or diamonds (mooij et al. 2011:182183). 1.2.5. long-term versus short-term normative orientation (lto) the amount of time a general public demonstrates a sensible future oriented viewpoint rather than a typical remarkable or temporary perspective is known as long haul vs momentary direction. long-term oriented societies are characterized by assurance, financial planning, and a sense of shame. individual strength, the fear of losing face and going through cash now and tiny savings, and finally public pride and norms are all valued in nations that are on the move (mooij, et al. 2011:183.) 3. consumer behavioral intention consumer behavioral intention, in the context of marketing and retailing, is the consumer’s willingness to develop certain behaviors such as loyalty and word of mouth, complaining behavior, repurchase, price sensitivity, and referrals (solomon, 2004). 3.1. word of mouth communication this represents the product information that is transmitted to other customers by customers who have prior experience with a product. word of mouth communication is deemed to be mehmet sağlam & maryama dahir abdullahi 145 trustworthy and reliable in comparison to the formal marketing channels because the messages come from the people that the customers know (buttle & groeger, 2017). word of mouth communication is often triggered by an event that a customer experiences and is then shared. 3.2. purchase intention dimension lee, chen and shih (2017) see purchasing intention as a measure of the shopper’s propensity to purchase a service or product. though the concept might appear so simple, it is not as simple as it sounds because the intention cannot be looked at in terms of a yes/no answer to whether someone intends to purchase a product or service. dadwal, et.al (2020) define it as "the sum total of cognitive, affective, and behavioral factors that influence the adoption, purchase, and usage of a product, service, concept, or ha “ (p.5). 2.3. price sensitivity dimension price sensitivity is defined as the degree to which price influences a customer's decision to buy a certain service or product. the price elasticity of demand is another notion that is strongly related to and impacts price sensitivity (yue, et.al. 2020). méndez-carbajo and asarta (2017) describe price elasticity of demand as the effect of a percentage change in unit price on the quantity of product or service demanded by the customers. 2.4. complaining behaviour dimension customer complaining behavior is defined as an individual's response to poor product consumption characteristics. when a customer receives a product, it has either a positive or negative effect. expectations about the product, as well as the price and quality of the goods, all influence these reactions. there will be no complaints if the product meets the customer's expectations. however, when client expectations are not satisfied, complaints develop (alqahtani, 2011). it would be a dangerous path for the company because the consumer might the impact of hofstede’s cultural dimensions on consumer behaviour intentions 146 opt to protest about the product on social media sites like facebook or instagram by sharing negative user experiences or comments about it. 3. hypothesis development process and research model wom's impact on consumer behavior has been thoroughly documented in marketing literature (steffes & burgee, 2009). wom engagement is heavily influenced by consumers. consumers' wom activity pattern, type, and target receivers are all influenced by their cultural values (lam, lee & mizerski, 2009). microblogs are increasingly being used by businesses to communicate with their worldwide clients. this research study examines whether systematic disparities in microblogging wom content types reflect expected cultural differences. understanding how cultural factors influence consumer microblogging wom propagation should help managers design more proactive and targeted promotional activities using this new internet tool. based on this, the following hypothesis is proposed. h1: hofstede’s cultural dimensions (power distance, uncertainty avoidance, collectivism, long-term orientation, masculinity/feminity) have an effect on word of mouth communication social networking websites have grown in popularity as a virtual gathering place for consumers to converge and share information. at a vital stage in the sales cycle now have the ability to share their opinions about items and firms to other consumers "like themselves.". furthermore, social networking has progressed from the margins to the majority, impacting culture. even if cross-cultural variations exist and have an impact on how individuals use social media, at the end of the day, it's all about maintaining contact and sharing information (pookulangara & koesler, 2011). the fact that the shared information includes cultural elements is important in terms of directing the consumers to the purchasing decision. based on this, the following hypothesis is proposed mehmet sağlam & maryama dahir abdullahi 147 h2: hofstede’s cultural dimensions have an effect on purchase intention the proportionate change in consumers' purchasing likelihood or willingness to pay after a price adjustment is known as price sensitivity (wakefield & inman, 2003). persons in highpdb (power distance) society support inequality and hierarchy, whereas individuals in lowpdb civilizations believe in equal rights and the elimination of hierarchy. mexico, china, and indonesia are examples of high-pdb cultures, whereas new zealand, ireland, and the scandinavian countries are examples of low-pdb cultures (hofstede, 2001). the different level of power distance and other dimensions of culture are expected to affect the price sensitivity of consumers. based on this, the following hypothesis is proposed h3: hofstede’s cultural dimensions have an effect on price sensitivity consumer perceptions of service quality are influenced by culture, according to some recent research. clients from cultures with reduced individualism or higher uncertainty avoidance have a larger intention to praise if they obtain superior service, according to the researchers. on the other hand, even if they experience bad service quality, the same groups are less likely to switch or complain. if they experience bad service quality, customers from cultures with higher individualism or lesser uncertainty avoidance are more likely to switch or complain (reimann, luenemann & chase, 2011). based on this, the following hypothesis is proposed. h4: hofstede’s cultural dimensions have an effect on complaining behavior. the impact of hofstede’s cultural dimensions on consumer behaviour intentions 148 figure 1: research model 4. research methodology 4.1 population and sampling procedure the target population included respondents from two countries i.e. turkey and somalia. the population of the study included any individual from the two countries who is involved in making purchasing decisions and activities. convenience sampling, a non-probability method of population sampling, was used in the study. saunders, lewis and thornhill (2012) define convenience sampling as a method that focusses on members of the target population that are conveniently available to partake in the study. as a sample size due to the time constraints and covid19 restrictions, the sample size used here included 305 respondents – 153 respondents from somalia and the other 152 respondents from turkey. mehmet sağlam & maryama dahir abdullahi 149 4.2. data collection process primary data was collected using a questionnaire sent electronically via google forms to the respondents’ emails to achieve the objectives of the study. likert-type scales were used to collect the data on the independent and dependent variables. the questionnaire that was developed was divided into two parts with a total of 39 questions. the first part included demographics questions (questions 1–5). the second part focused on the hofstede’s cultural dimensions (yoo, donthu & lenartowicz, 2011) and consumer behavior intentions items (zeithaml, berry & parasuruman, 1996). the responses on the five point likert scale responses include 1–strongly disagree, 2–disagree, 3–neutral, 4–agree, and 5–strongly agree. 4.3. data analysis in this study, spss 22 and lisrel 8.7 packages program is used for statistical analysis. socio demographic features is examined about participants as descriptive statistics. scale validation and reliability is provided by confirmatory factor analysis (cfa), average variance extracted (ave), composite reliability (cr) and cronbach’s alpha coefficient. according to validation and reliability results, some items are dropped out from this study. afterwards hypotheses are tested for both somalia and turkish participants by structural equation modelling (sem). normality is tested with shapiro wilk (univariate) and henzezirkler (multivariate) test, so it is used non-normal estimation methods for models. results are evaluated in %90,%95, %99 confidence interval and p<0,10, p<0,05, p<0,01 significance levels. 4.4. hypotheses: h1: hofstede’s cultural dimensions ((a)power distance, (b)uncertainty avoidance, (c) collectivism, (d) long-term orientation, (e)masculinity/feminity) have an effect on word of mouth communication the impact of hofstede’s cultural dimensions on consumer behaviour intentions 150 h2: hofstede’s cultural dimensions ((a)power distance, (b)uncertainty avoidance, (c) collectivism, (d) long-term orientation, (e)masculinity/feminity) have an effect on purchase intention h3: hofstede’s cultural dimensions ((a)power distance, (b)uncertainty avoidance, (c) collectivism, (d) long-term orientation, (e)masculinity/feminity) have an effect on price sensitivity h4: hofstede’s cultural dimensions ((a)power distance, (b)uncertainty avoidance, (c) collectivism, (d) long-term orientation, (e)masculinity/feminity) have an effect on complaining behaviour 4.5. frequency analysis and descriptive statistics on socio demographic features socio-demographic data is comprised of five questions about age, gender, marital status, work experience, education level for both somalia and turkish participants in table 1. age of somalia participants are 53,59% 20-30, 33,33% 31-40, 13,07% 41above. gender of somalia participants are 58,82% male, 41,18% female. marital status of somalia participants are 61,44% single, 38,56% married. work experience of somalia participants are 53,59% less than 5 years, 32,03% 5-10 years, 14,38% 10 years and above. education of somalia participants are 27,45% diploma, 34,64% bachelor, 22,88% master, 15,03% phd. age of turkish participants are 43,42% 20-30, 43,42% 31-40, 13,16% 41above. gender of turkish participants are 48,68% male, 51,32% female. marital status of turkish participants are 57,89% single, 42,11% married. work experience of turkish participants are 40,13% less than 5 years, 38,82% 5-10 years, 21,05% 10 years and above. education of turkish participants are 23,68% diploma, 27,63% bachelor, 28,95% master, 19,74% phd. table 1. frequency analysis about socio demographic features of participants variables somalia turkish frequency (n=153) percent (%) frequency (n=152) percent (%) age 20-30 82 53,59 66 43,42 mehmet sağlam & maryama dahir abdullahi 151 31-40 51 33,33 66 43,42 41above 20 13,07 20 13,16 gender male 90 58,82 74 48,68 female 63 41,18 78 51,32 marital status single 94 61,44 88 57,89 married 59 38,56 64 42,11 work experience less than 5 years 82 53,59 61 40,13 5-10 years 49 32,03 59 38,82 10 years and above 22 14,38 32 21,05 educational level diploma 42 27,45 36 23,68 bachelor 53 34,64 42 27,63 master 35 22,88 44 28,95 phd 23 15,03 30 19,74 4.6. normality tests of datasets there is examined univariate and multivariate test results about dataset of both somalia and turkish participants. according to results, variables are tested with shapiro-wilk test and henze zirkler normality test. there was non-normal distribution(p<0,0000), so that rml(robust maximum likelihood) and dwls (diagonally weighted least squares) methods are used as non-normal estimation in all models (bandalos 2014). 4.7. confirmatory factor analysis and reliability analysis confirmatory factor analysis(cfa) tests hypotheses among relationships, and that aims confirmation of relationships. in this process, cfa examines relationships of factors among itself, before which was created with relations, therefore firstly researcher must be knowledge about structure of variables in model. so that the model provides strong structure as basis of theoretical and experimental (çokluk et. al). reliability, that is described stability of the measuring tool under the same conditional reproduced measurements to obtain values. an unreliable scale is useless and scale reliability is evaluated with alpha(cronbach) coefficient to developed by cronbach(1951). cronbach’s alpha coefficient provides a measure of the internal consistency of a test or scale, that is the impact of hofstede’s cultural dimensions on consumer behaviour intentions 152 expressed as a number between 0 and 1. if the cronbach alpha is 0.60≤α<0.80, reliability is pretty good reliable (tavakol & dennick, 2011). composite reliability(cr) values calculate with standardized coefficients in the cfa model. if cr≥.70, it provides reliability of composite (hair et.al, 2009). average variance extracted (ave) is indicator of concurrent validity. if ave≥0.50, it provides validity of of concurrent (fornell & larcker,1981). validity and reliability values of hofstede culture scale is examined into confirmatory factor analysis (cfa) for dataset of somalia participants in table 2. collectivism is dropped out from this study, because of there is not statistically significance both standardized beta and ave(<0,50), cr(<0,70) and cronbach’s alpha(<0,60). on the other hand, ave, cr, and cronbach's alpha values for other sub-dimensions were found to be appropriate. table 2. confirmatory factor analysis about hofstede culture scale for dataset of somalia participants sub dimension items b standard error t p ave cr cronbach’s alpha power distance po_1 0,55 0,071 7,63 0,000*** 0,575 0,868 0,836 po_2 0,72 0,069 10,84 0,000*** po_3 0,78 0,080 13 0,000*** po_4 0,82 0,051 17,95 0,000*** po_5 0,88 0,041 24,76 0,000*** uncertainty avoidance un_1 0,77 0,046 16,44 0,000*** 0,603 0,883 0,864 un_2 0,82 0,033 21,89 0,000*** un_3 0,80 0,052 21,03 0,000*** un_4 0,73 0,072 15,31 0,000*** un_5 0,76 0,065 14,38 0,000*** collectivism co_1 0,19 0,46 0,92 0,357 0,199 0,375 0,305 co_2 0,13 0,50 0,78 0,435 co_3 -0,13 0,39 -1,29 0,197 co_4 0,66 1,39 4,08 0,000*** co_5 0,02 0,98 0,12 0,904 co_6 0,83 1,00 5,00 0,000*** long-term lt_1 0,76 0,098 14,90 0,000*** 0,568 0,887 0,882 mehmet sağlam & maryama dahir abdullahi 153 lt_2 0,74 0,21 11,57 0,000*** lt_3 0,78 0,11 14,16 0,000*** lt_4 0,72 0,13 10,15 0,000*** lt_5 0,81 0,10 18,57 0,000*** lt_6 0,71 0,093 11,72 0,000*** masculinity ma_1 0,75 0,082 12,18 0,000*** 0,521 0,787 0,776 ma_2 0,66 0,12 8,24 0,000*** ma_3 0,70 0,11 10,68 0,000*** ma_4 0,66 0,10 9,38 0,000*** hofstede culture scale about cfa model fit indexes are examined for dataset of somalia participants in according to table 3. in cfa model, while rmr(0,80) is not acceptable fit, chi-square/df(cmin/df)(1,76)), gfi(0,95), cfi(0,95), nnfi(0,95), nfi(0,90), rmsea(0,071) are good and acceptable fit so that cfa model is provided the validation. table 3. cfa model fit index values fit indexes good fit* acceptable fit** 𝜒2/𝑑𝑓 0≤ 𝜒2/𝑑𝑓 ≤2 1-5 gfi 0,95≤gfi≤1 0,90≤gfi≤0,95 cfi 0,97≤cfi≤1 0,95≤cfi≤0,97 nnfi/tli 0,97≤nnfi≤1 0,95≤nnfi≤0,97 nfi 0,95≤nfi≤1 0,90≤nfi≤0,95 rmr 0≤rmr≤0,05 0,05≤rmr≤0,08 rmsea 0≤rmsea≤0,05 0,05≤rmsea≤0,08 resource: jöreskog ve sörbom, 1996; schermelleh-engel, moosbrugger ve müller, 2003; schumacker ve lomax, 2004. validity and reliability values of behaviour intention scale is examined into confirmatory factor analysis for dataset of somalia participants in table 4. purchase intention is dropped out from this study, because of there is not statistically significance ave(<0,50), cr(<0,70). on the other hand, ave, cr, and cronbach's alpha values for other sub-dimensions were found to be appropriate. the impact of hofstede’s cultural dimensions on consumer behaviour intentions 154 table 4. confirmatory factor analysis about behaviour intention scale for dataset of somalia participants sub dimension items b standard error t p ave cr cronbach’s alpha word of mouth com. cb_1 0,62 0,13 7,35 0,000*** 0,549 0,740 0,697 cb_2 0,69 0,11 10,28 0,000*** cb_3 0,78 0,12 10,04 0,000*** purchase intentions cb_4 0,64 0,13 8,95 0,000*** 0,453 0,613 0,705 cb_5 0,69 0,10 14,09 0,000*** cb_6 0,69 0,059 15,15 0,000*** price sensitivity cb_7 0,72 0,069 12,93 0,000*** 0,523 0,767 0,731 cb_8 0,70 0,095 12,51 0,000*** cb_9 0,75 0,057 15,86 0,000*** complaining behaviour cb_10 0,76 0,079 15,46 0,000*** 0,569 0,840 0,816 cb_11 0,75 0,077 13,44 0,000*** cb_12 0,67 0,11 11,10 0,000*** cb_13 0,83 0,069 19,77 0,000*** behaviour intention scale about cfa model fit indexes are examined for dataset of somalia participants. in cfa model, while rmr(0,16) is not acceptable fit, chisquare/df(cmin/df)(1,70)), gfi(0,99), cfi(0,98), nnfi(0,98), nfi(0,96), rmsea(0,068) are good and acceptable fit so that cfa model is provided the validation. validity and reliability values of hofstede culture scale is examined into confirmatory factor analysis for dataset of turkish participants in table 5. collectivism is again dropped out from this study, because of there is not statistically significance both standardized beta and ave(<0,50), cr(<0,70) and cronbach’s alpha(<0,60). on the other hand, ave, cr, and cronbach's alpha values for other sub-dimensions were found to be appropriate. table 5. confirmatory factor analysis about hofstede culture scale for dataset of turkish participants sub dimension items b standard error t p ave cr cronbach’s alpha power distance po_1 0,83 0,029 23,23 0,000*** 0,724 0,929 0,905 po_2 0,87 0,038 28,48 0,000*** po_3 0,88 0,041 30,09 0,000*** po_4 0,89 0,033 29,57 0,000*** po_5 0,78 0,037 22,38 0,000*** uncertainty un_1 0,81 0,042 17,37 0,000*** 0,600 0,882 0,854 mehmet sağlam & maryama dahir abdullahi 155 avoidance un_2 0,81 0,044 17,70 0,000*** un_3 0,78 0,043 16,58 0,000*** un_4 0,75 0,069 13,42 0,000*** un_5 0,72 0,047 12,92 0,000*** collectivism co_1 0,31 0,32 1,74 0,081 0,220 0,583 0,500 co_2 0,31 0,57 1,01 0,312 co_3 0,32 0,60 1,35 0,177 co_4 0,59 0,56 2,73 0,006*** co_5 0,24 0,61 1,38 0,167 co_6 0,79 0,53 4,13 0,000*** long-term lt_1 0,73 0,073 12,10 0,000*** 0,459 0,835 0,795 lt_2 0,72 0,16 10,72 0,000*** lt_3 0,68 0,091 8,85 0,000*** lt_4 0,66 0,080 8,93 0,000*** lt_5 0,62 0,12 7,26 0,000*** lt_6 0,65 0,13 8,19 0,000*** masculinity ma_1 0,80 0,028 17,50 0,000*** 0,597 0,855 0,828 ma_2 0,77 0,051 14,61 0,000*** ma_3 0,80 0,041 17,67 0,000*** ma_4 0,72 0,056 10,64 0,000*** hofstedes cultural scales about cfa model fit indexes are examined for dataset of turkish participants. in cfa model, while rmr(0,26) is not acceptable fit, chisquare/df(cmin/df)(1,18)), gfi(0,96), cfi(0,98), nnfi(0,98), nfi(0,90), rmsea(0,035) are good and acceptable fit so that cfa model is provided the validation. validity and reliability values of behaviour intention scale is examined into confirmatory factor analysis for dataset of turkish participants in table 6. purchase intention is dropped out from this study, because of there is not statistically significance ave(<0,50), cr(<0,70) and cronbach’s alpha(<0,60). on the other hand, ave, cr, and cronbach's alpha values for other sub-dimensions were found to be appropriate. the impact of hofstede’s cultural dimensions on consumer behaviour intentions 156 table 6. confirmatory factor analysis about behaviour intention scale for dataset of turkish participants sub dimension items b standard error t p ave cr cronbach’s alpha word of mouth communication cb_1 0,53 0,070 5,48 0,000*** 0,423 0,682 0,607 cb_2 0,63 0,081 7,69 0,000*** cb_3 0,77 0,097 10,46 0,000*** purchase intentions cb_4 0,52 0,15 5,59 0,000*** 0,260 0,513 0,491 cb_5 0,54 0,17 6,09 0,000*** cb_6 0,47 0,19 4,66 0,000*** price sensitivity cb_7 0,63 0,058 8,37 0,000*** 0,410 0,675 0,622 cb_8 0,67 0,076 10,95 0,000*** cb_9 0,62 0,087 8,12 0,000** complaining behavior cb_10 0,75 0,067 11,89 0,000*** 0,469 0,778 0,738 cb_11 0,60 0,10 7,45 0,000*** cb_12 0,72 0,047 14,29 0,000*** cb_13 0,66 0,068 9,91 0,000*** behaviour intention scales about cfa model fit indexes are examined for dataset of turkish participants. in cfa model, while rmr(0,12) is not acceptable fit, chisquare/df(cmin/df)(1,63)), gfi(0,98), cfi(0,97), nnfi(0,96), nfi(0,93), rmsea(0,065) are good and acceptable fit so that cfa model is provided the validation. 4.8. structural equation modelling structural equation modelling (sem) uses various types of models to depict relationships among observed variables, with the same basic goal of providing a quantitative test of theoretical model hypothesized by the researcher (schumacker and lomax, 2004). mehmet sağlam & maryama dahir abdullahi 157 figure 2. structural equation model for participants of somalia participants the equations for the coefficients in table 7 are given below. as it is seen in the table, it was concluded that the hypotheses were not accepted for the somali sample because the p statistical significance values were not significant. the impact of hofstede’s cultural dimensions on consumer behaviour intentions 158 table 7. structural equation modelling for dataset of somalia participants b standard error t p po womc -0,64 1,96 -0,33 0,741 un womc 3,13 5,78 0,54 0,589 lt womc -10,13 17,65 -0,57 0,568 ma womc 8,87 14,64 0,61 0,541 po ps -1,85 4,53 -0,41 0,681 un ps 7,34 13,27 0,55 0,582 lt ps -23,42 40,52 -0,58 0,561 ma ps 19,48 33,61 0,58 0,561 po cb -1,60 4,14 -0,39 0,696 un cb 6,64 12,26 0,54 0,589 lt cb -21,33 37,43 -0,57 0,568 ma cb 17,71 31,01 0,57 0,568 **p<0,01, *p<0,05 figure 3. structural equation model for participants of turkish the equations for the coefficients in table 8 are given below. in this case; power distance, uncertainty avoidance have statistically effect on word of mouth communication (p<0,05). mehmet sağlam & maryama dahir abdullahi 159 on the other hand, long-term orientation have statistically effect on price sensitivity (p<0,10) and complaining behaviour (p<0,10). consequently, h1a, h1b, h3d and h4d hypotheses was supported. other hypotheses were not supported. table 8. structural equation modelling for dataset of turkish participants b standard error t p po womc 0,20 0,10 2,01 0,044** un womc 0,24 0,11 2,13 0,033** lt womc -0,031 0,20 -0,16 0,872 ma womc 0,32 0,21 1,50 0,133 po ps -0,026 0,13 -0,20 0,841 un ps 0,021 0,12 0,17 0,865 lt ps 0,31 0,17 1,86 0,062* ma ps 0,13 0,16 0,79 0,429 po cb -0,080 0,11 -0,74 0,459 un cb 0,14 0,12 1,18 0,238 lt cb 0,31 0,16 1,90 0,057* ma cb 0,28 0,17 1,62 0,105 ***p<0,01, **p<0,05, *p<0,10 fit indexes are examined for sem of turkish participants in table16. in sem, while rmr(0,12), gfi(0,70), nfi(0,86), are not acceptable fit, chi-square/df(cmin/df)(1,37)), cfi(0,97), nnfi(0,96), rmsea(0,050) are good and acceptable fit for sem of turkish participants. 5. conclusion this study sought to investigate the impact of hofstede’s cultural dimensions on consumer behavior intentions among the somalia and turkish cultures. it was guided by two objectives: what are the key cultural dimensions that affect the consumer behavior intentions between somalia and turkish consumers; and what are the most important cultural dimensions for somalia and turkish consumers behavior intentions. the impact of hofstede’s cultural dimensions on consumer behaviour intentions 160 as a result of the study, it was determined that hofstede culture dimensions did not have an effect on consumer behavior intention for the somali sample. for the turkish sample, it was found that power distance and uncertainty avoidance had a positive effect on word of mouth communication, and long-term orientation had a positive effect on price sensitivity and complaining behavior. the fact that hofstede culture dimensions do not have an effect on behavioral intention dimensions for the somali sample can be explained by the fact that due to the somali society structure, consumers do not have the opportunity to exhibit behaviorally word-of-mouth communication, purchasing, price sensitivity and complaining behavior. although cultural dimensions scores are not calculated for somalia on hofstede's website, it can be mentioned that they are a short-term oriented society with a high power distance, and a collectivist society structure in which the masculine structure is dominant. when hofstede's website is examined, it is seen that power distance and uncertainty avoidance are high in turkey, they are collectivist and they are feminine and short-term oriented with close ratios. when associated with the results of the research, it can be said that if power distance and uncertainty avoidance increase, word-of-mouth communication activities of the society increase, in case of long-term orientation, consumers are more sensitive to price and more complain. this will of course differ depending on the product group purchased. while price sensitivity is an important factor for products where there is uncertainty and which are planned to be used in the long term, it can be said that in case of negativity, complaints will be made and this will be expressed through word of mouth communication. according to these results, it can be interpreted that it would be good for business managers to examine the situation of the market in terms of this or other similar cultural dimensions, and that it is necessary to develop good customer relations in the market and to purchase the product. it is important for businesses that want to enter these markets to pay attention to these factors and develop marketing strategies accordingly. in future studies, the model can be mehmet sağlam & maryama dahir abdullahi 161 expanded by adding different variables to the research model. the study can be repeated by increasing the number of samples. references alqahtani, m. 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(1996), “the behavioral consequences of service quality”, journal of marketing, 60, 31-46. international journal of commerce and finance, vol. 8, issue 1, 2022, 1-25 *istanbul commerce university, graduate school of finance, istanbul, turkey. orcid: 0000-0001-5103-7645, email: anm_naeem@yahoo.com. **istanbul commerce university, department of finance and banking, istanbul, turkey. orcid: 0000-00033010-0697, email: scankaya@ticaret.edu.tr. 1 the impact of esg performance over financial performance: a study on global energy and power generation companies nasruzzaman naeem* serkan çankaya** submitted: 30.11.2021 accepted: 10.05.2022 published: 24.06.2022 abstract this study aims to analyze the impact of environmental, social and governance (esg) performance of global energy and power generation corporations over their corporate financial performance. the study explores the impact of the environmental, social and governance (esg) operations and performance over profitability and market value of the corporations operating business in sensitive industries such as energy and power generation corporations using panel data regression. the esg performance data and financial data of 192 energy and power generation firms from 2008 to 2019 were collected from the thomson reuters eikon database for the statistical analyses. according to the results, esg performance is correlated in a significant way with the financial performance of the energy and power generation corporations. the findings suggest that esg performance has both positive and significant impacts over the profitability of the corporations but a negative impact over the market value of the corporations. this study adds value and importance to the esg literature, sustainable business practice and sustainability reporting for the energy and power generation companies worldwide. moreover, the findings of the study would assist the relevant investors, business analysts, industry regulators, policymakers, and decision-makers all other stakeholders who are interested in esg and sustainability to take noteworthy decisions. keywords: esg performance, energy & power generation industry, financial performance, corporate social responsibility. mailto:anm_naeem@yahoo.com mailto:scankaya@ticaret.edu.tr international journal of commerce and finance nasruzzaman naeem & serkan çankaya 2 1.introduction environmental, social and governance, broadly familiar as esg factors are one of the fastestgrowing trends and most discussed among investors, creditors, sri analysts and managers over the last few years. nowadays, sustainable, and responsible investments are one of the major concerns of investors and creditors recognizing the significance of environmental sustainability and socio-economic stability of countries. corporations around the world are focusing more long-term sustainability goals such as esg goals now rather than just profit maximization or the traditional short-term goals. studies have demonstrated that esg performance can mitigate risks and generate sustainable returns for investors by strengthening the financial performance of the firm, which may vary from industries to countries. corporations from around the globe are also giving more priority to the esg strategies and investments because of the rising demand of transparency and sustainability in the business world. esg practices have become popular after the formation of principals for responsible investing (pri) in 2006 by un where the necessity and significance of activities related to environmental, social and governance were emphasized by the reports. esg operation and reporting is getting popularity day by day as it is believed that these operations can foster the value and financial performance of the corporations. esg activities are carried out by the companies not only to maximize the value of the financial stakeholders but also for wellbeing of all the stakeholders of a particular corporation. as the global moto suggests sustainability in every aspect, the practice of environmental, social and governance (esg) efficiently and effectively became so important to the investors, policy makers and to the general public as well. the growing threat of global warming and climate change is one of the major threats in the 21st century. business organizations are expected to retain the ecological balance as well as the common socio-cultural balance. governments and regulators from different parts of the have imposed laws and regulations to ensure the environmental sustainability. companies from environmentally sensitive industries such energy and power generation companies plan and implement various environmental where most of the environmental strategies aims to reduce the ecological cost made by the business operation of energy and power generation companies. the growing concern on the sustainability of climate worldwide has put pressure on the energy and power generation corporations to operate their business by including the sustainability and social responsibility related operations beside their regular operations. nevertheless, the energy and power generation corporations also report their socially responsible initiatives and sustainability strategies according to the laws and regulation in order to legitimate their international journal of commerce and finance nasruzzaman naeem & serkan çankaya 3 presence in the market and to gain more acceptance from the investors and creditors. the corporations including the esg report in their annual financial report as a tool of reporting their operations and strategies regarding sustainability and social responsibilities. from the owner’s or shareholders point of view, it is essential to know whether investment in expenditure in operations like environmental, social and governance (esg) can bring any financial benefit for the shareholders of corporation as well as for all the stakeholders of the corporation. this study aims to examine how the esg strategies and activities of the energy and power generation corporations from around the world affect their corporate financial performance. there are a good number of studies on the effect of esg activities on the financial performances of the companies from different industries which report both negative, positive and insignificant results. it would be a value-adding analysis to find the financial value and effects of the esg activities and strategies of the companies which belong to environmentally sensitive industries specially the companies in energy and power generation industry. therefore, the purpose of the study is to examine how the esg performances and initiatives of the energy and power generation companies affect their market valuation and financial performances. the esg performance scores of listed energy and power generation companies from around the world has been collected from the thomson reuters database and the financial and market data have also been collected from the thomson reuters database in order to examine the interrelation of esg operation and financial performance. according to the findings, esg performance is correlated in a significant way with the financial performance of the energy and power generation corporations. the results of the regression analysis shows that the esg performance has both positive and significant impacts over the profitability of the firms but negative impact over the market value of the firms. the paper has been designed as follows, a brief introduction and discussion on esg and theoretical background, followed by literature review on the relationship of esg performance with the corporate financial performance, the gap in the literature and hypothesis development, data and methodology, empirical tests and regression analysis results with discussion followed and concluded with conclusion. international journal of commerce and finance nasruzzaman naeem & serkan çankaya 4 2. literature review esg indicates the environmental, social, and governance activities of corporations. basically, esg is the set of environmental, social, and governance related operations by any corporation with the purpose of ensuring the sustainability of the corporation as well as to serve all the stakeholders by maintaining and increasing the financial value of the firm. each pillar of esg practices has different types of operations and criteria accordingly. the practices and operations of environment pillar of esg explains how responsible the firm is while running the production and business activities by protecting the environment and sustainability of natural resources at the same time. the criteria and operations under environment pillar include 𝐶𝑂2 and other toxic emissions to the environment by the company, how efficiently the firm uses the natural resources, waste management by the company, policies and innovations made by the company to fight global warming and to save the environment from pollutions, etc. the social pillar of the esg activities represent the relationship between the firm and the society as a whole. business firms have certain responsibilities towards both internal stakeholders (employees, suppliers, customers) and external stakeholders (society, government), hence all the activities to fulfil these responsibilities are considered as the social performance of the corporation. the operations included under the social pillar are often known as the csr activities as well. the criteria and operations of the social pillar of the esg are mostly activities of a corporation related to labor management and workforce welfare, human rights activities, serving and fulfilling the responsibility to the local community and to the overall society, product responsibility and so on. the governance pillar of the esg activities is about decision making as well as leadership structure of the company, internal and external audit, and overall governance of the company. generally, investors are more interested to learn the issues regarding governance of a company. the criteria and of operations of the governance pillar includes information related to the governing and management board of the company, structure and decision-making process of the board members, accounting and audit strategies, shareholders rights and responsibilities, other csr strategies, etc. esg practices are increasing worldwide along with esg minded businesses. a large number of stock markets from different parts of the world have introduced regulations and guidelines for company esg disclosure such as usa, germany, united kingdom, canada, norway, malaysia, turkey, south africa, brazil, singapore, sri lanka, the philippines, poland, thailand, india, and some others more (china esg development index). international journal of commerce and finance nasruzzaman naeem & serkan çankaya 5 the term esg can be better understood by stakeholder theory (freeman et al., 2010) that summarizes, the corporation does not belong to one party (owner or stockholder) alone, but must be considered taking into account the diversity of entities involved in it and, thus, those make it possible. the company's goal therefore should not only be to maximize financial gain for the shareholder, but rather to generate value for all stakeholders like workers, customers, surrounding societies, and all other resources. the main principal of the esg activities is to ensure sustainability of the firm. investors are more interested in the sustainability of the business and how responsible the firm is to the society is important factor to the young investors now. stakeholder theory sates that a firm is driven by its ties with its various stakeholders to create sustainable wealth. in this line of thought, the organization would publish information on financial and non-financial activities publicly. the disclosure of such information reduces the stakeholder’s information asymmetry leading to greater investors' confidence. additionally, higher transparency levels reduce the crookedness of information among the company and investors, thereby decreasing realized risks (cheng et al., 2014). the non-commercial activities like environmental, social and governance related activities is carried out by the firm to maximize the value of both company and all stakeholders. (fatemi et al., 2018) reported in the support statement that esg activities and reports improves the value of the firms positively when other factors stay constant. despite of being a comparatively new concept of esg, there are lots of studies focusing the relations between esg or csr and firm value or performance (malik, 2015). earlier research works have been carried out mostly on the impact of corporate social responsibility also known as csr activities over financial performances of corporations as csr activities are known and more widely practiced by corporations all over the world. the association between csr and environmental activities of the firms had been investigated in abundant academic works quantitatively, where there is proof of significantly positive, negative as well as insignificant, neutral relationship, many of these are because of different empirical methodology being used (chang & kuo, 2008). for instance, (s. lo et al., 2007), studied the us market to explore the correlation among corporate sustainability as well as the market value of firms by taking tobin’s q as a measurement of corporation’s market value where authors reported that sustainability driven firms show positive relationship with making market value of the firm. (margolis & walsh, 2003) studied the studies carried out from 1972 to 2002 which investigated the association between csr initiatives of corporations and their effects financial performance quantitively and reported a positive linkage between corporation’s social and the financial international journal of commerce and finance nasruzzaman naeem & serkan çankaya 6 performance parameters whereas there are not so many studies yet showed of a negative association. among some more empirical which studied the effect of overall csr performances over the performance of the companies. the findings of the study of (s. lo et al., 2007) and (artiach & walker, 2010) showed positive relationship as well. similarly, (ashraf et al., 2017), (laskar et al., 2017), (dincel & gungor, 2018), (lourenço et al., 2012) in their respective studies found positive correlation with significance among csr activities and financial performance of the companies. whereas, (lópez et al., 2007), (ho & taylor, 2007) reported negative relationship among them. interestingly, (taskin, 2015) and (akben selcuk & kiymaz, 2017) both studies from turkey reported that in their empirical studies they could not find any positive or significant relation between the corporate financial performance and disclosure or performances related to csr. besides that, (ullmann, 1985), (mcwilliams & siegel, 2000), and (wagner & wehrmeyer, 2002) have reported insignificant relationship in their studies. in the current business world researchers are evaluating and focusing more on firm’s esg value and performance than of csr performances alone as esg reflects the environmental, social, and corporate governance activities together to achieve more accurate evaluation of the activities of a company. moreover, esg reports shows the sustainability trend of the firm’s operation which attracts the investors who focus on socially responsible investment (sri) and (yu & zhao, 2015) found that firms practicing sustainability gets better shareholder and market valuation. researchers analyzed not only csr but also how esg performances are affecting financial achievement and market value of the corporations. (dalal & thaker, 2019) investigated the impact of esg factors on the profitability as well as the firm valuation of indian public limited companies indexed in the nse 100 esg database and found that higher esg performances are associated with better financial performance. (velte, 2017) analyzed the association of esg performance and financial performance of selected corporations from germany which concludes that esg performances have significantly positive relation with profitability of the german firms, but esg performances do that affect the market of value of the companies. similarly, (rami & andr, 2019) in their study, examined the relationship of esg performance and financial performance of selected corporations worldwide and found that esg performances have significantly positive impact over the profitability of the firms but no significant impact over creating market value. contrarily, (atan et al., 2018) studied the linkage of esg performances and financial performances of the malaysian firms where they found that esg performances have no significant relationship with the financial performance of malaysian international journal of commerce and finance nasruzzaman naeem & serkan çankaya 7 firms. likewise, (landi & sciarelli, 2019) investigated the relationship of esg performance and market return of listed companies from italian stock exchange market and found no positive and significant impact of esg performances over the market return of the companies in italy. in same line, (aouadi & marsat, 2018), (chelawat & trivedi, 2016a), (k. y. lo & kwan, 2017) in their study also examined and reported significantly positive relation of esg performance with profitability as well as market value of the firm.(buallay, 2019) analyzed the correlation of financial performance and esg operations of banks and found that esg performances affect the financial and operational performances of banks positively and significantly. (card & krueger, 2018) studied the effect of esg performance of the corporations on the month-based stock market return in the usa, uk and switzerland market where they found that esg scores of the companies only have significant impact on the uk market. some studies have inconclusive results like (ionescu et al., 2019) examined the association of esg performance and market valuation of the corporations operating business in travel and tourism industry and reported that there is a frail link between the esg performance and corporation’s financial performance except for the corporations in the usa. some researchers argue that not all the initiatives have impact of the financial performance of the firm while some of activities influences financial and market value of the company such as (miralles-quirós et al., 2019) in their research work distinguished the relationship between esg initiatives and creation of market value of 166 banks from different countries and found a positive significant association of the environmental and corporate governance initiative with maximizing financial value for shareholders but a reverse relation among value creation of banks and their social performances. nevertheless, (siew & balatbat, 2013) who investigated the australian constructions did not found any close relation of financial performance and esg operations of the firms. the relationship between firm’s risk and esg performances have also been examined. (sassen et al., 2016) investigated the statistical relation among esg performance and different types of risks faced by companies in different situation. they analyzed a 12-year data set having financial data of 8752 listed companies in european market and concluded that company’s risk could be minimized significantly by improving the environmental performances, whereas corporate governance performances do not affect these kinds of risks significantly. nevertheless, esg performance and sustainability in now one of the topmost priorities for the energy or power generation industries. specially the environmental aspect is very important for the sensitive industries like energy or power generation industry. (garcia et al., 2017a) studied the relationship of esg performance and company’s performance for the companies listed international journal of commerce and finance nasruzzaman naeem & serkan çankaya 8 within the bric countries and found that environmentally sensitive firms have better environmental performance and the relation between firm’s systematic risk and esg performance shows maximization of value for esg performance. likewise, (yoon et al., 2018) the value creation of esg performance depends and varies on environmentally sensitive industries. (kengkathran, 2018) did a conceptual study to examine and investigate the longterm effect esg reports over the financial performance of the energy sector corporations in asian countries and reported that esg information effects firm’s financial performance both positively and negatively. in a same way, (zhao et al., 2018a) studied power energy market of china and examined the relationship of esg performance with related corporation’s financial performance and reported that satisfactory esg performances help to achieve greater corporate financial benefits as its positively related and esg performance is also helpful to get positive recognition and profitability for longer period of time. in addition, (pätäri et al., 2012) studied the relationship of sustainable development initiatives with financial performance of corporations in the energy sector worldwide. they have compared the listed companies in dow jones sustainability indexes (djsi) with other renowned companies operating in the energy sector and found that sustainable development positively related with creating market value of the corporation. furthermore, the corporations driven by sustainability has faster growth rate, better profitability and cost controlling as well. 2.1 hypotheses as discussed earlier, esg performance and practices in the power generation and energy sector and how it creates value to firm and to the stakeholder is very important question to be answered as the investor are looking forward more to socially responsible investment (sri) with the world looking forward to sustainability in every sector. mostly, research findings indicated a positively significant association of esg and cfp (friede et al., 2015). whereas, some researchers claim that there are not enough studies on sustainable performances of firm focusing on particular industries (barnett, 2007). additionally, there is lack of consensus that sensitive industries (e.g. environmentally sensitive) have always had comparatively low esg performance scores (statman, m., glushkov, d., 2009), (hong et al., 2009). besides, there are insufficient studies on esg issues and their impact over the financial performance in the emerging economics (yoon et al., 2018). although there are studies conducted regarding the association of esg and financial performance of energy and power generation company in some different economies, despite of huge investments prevailed, there is inadequacy of evidence of such kind of research work just for global energy and power generation companies international journal of commerce and finance nasruzzaman naeem & serkan çankaya 9 whereas environmental issue and sustainability, social responsibilities and controversial corporate governance are prominent issues throughout the world. therefore, the objective of this study is how esg activities and esg performance of a firm effect the profitability and the value of firm specially the firms operating business in energy and power sectors. a firm with better esg performance specially in the energy and power generation sector has more acceptance in the society with a positive impact but how these esg activities affect the financial gains of corporations has been analyzed in this study. with a view to analyzing the effect of esg performances over the financial performances of energy and power generation firms this study has been hypothesized in the following way in the light of precious studies: 𝐻𝑦𝑝𝑜𝑡ℎ𝑒𝑠𝑖𝑠1: esg performances have positive impact with significance on the profitability of the energy and power generation companies. 𝐻𝑦𝑝𝑜𝑡ℎ𝑒𝑠𝑖𝑠2: esg performances have positive impact with significance on the operational profitability of the energy and power generation companies. 𝐻𝑦𝑝𝑜𝑡ℎ𝑒𝑠𝑖𝑠3: esg performances have positive impact with significance on company market value of the energy and power generation companies. 3. data and methodology 3.1 data in this study, the data of esg performance of energy and power generation companies has been extracted and downloaded from thomson reuters eikon’s asset4 database. esg scores of total 192 firms operating business in energy and power generation sector have been taken from the thomson reuters as esg performance data of the companies. the sample companies include oil, natural gas, renewable energy, electricity generation companies and oil, natural gas, electric, water and other regulated utility related equipment and service providing companies. esg score by thomson reuters (also known asset4 esg data) is a combined score according to the statements of the corporations regarding the environmental, social and governance activities of a corporation. for analyzing financial performance of the energy and power generation corporations, financial data such as related company balance sheet, different ratios were extracted from the thomson reuters eikon’s financial fundamental section. panel data of the companies have been used for analyzing the relation among the esg performances and firm’s financial performances under this study. the combined esg scores of 192 different companies international journal of commerce and finance nasruzzaman naeem & serkan çankaya 10 ranged from 2008 to 2018 have been used as esg performance data in the panel data. however, as the esg performances might not affect the financial value of performances right way in the same year (choi and wang, 2009), to analyze the actual effect of esg performances over the financial performance, one-year lagged variables of financial performance measurements and one-year lagged control variables have been applied in the regression calculation in the light of previous studies (saleh et al., 2011), (velte, 2017). therefore, financial performance data from 2009 to 2019 of 192 companies have been used in the data panel for the analysis. 3.2 dependent variables in the previous studies, different kinds of variables such as roa, roe, eps, roic, roce, eps, rona etc. had been used to analyze the impact of esg performance over the financial gain or loss of the firm. in this study roe, pretax roa and tobin’s q are used as dependent variable to find out the relationship of profitability or firm performance with esg performance of the firm. 3.2.1 return on equity (roe) return on equity of roe is a widely used accounting-based method to find out the financial performances of the corporations as well as managerial performance (griffin & mahon, 1997). roe had been used by (atan, alam, said, & zamri, 2018), (zhao et al., 2018), (rami & andr, 2019) to investigate how esg performance affects firm’s financial performance. roe is calculated as: roe= (net income available for common stockholders) / (total common equity) ×100 3.2.2 return on assets (roa) another dependent variable we used is pretax return of assets (roa) which is one of the most popular and widely used measurements which is based on accounting basics and broadly used to report corporation’s operating performance and operational profitability. many researchers have used roa in similar kinds of studies such as (aouadi & marsat, 2018), (ionescu, firoiu, pirvu, & vilag, 2019), (velte, 2017), (dalal & thaker, 2019), xie et al., 2018). as the sample of the energy and power generation companies are from different part of the world in this study, pretax roa will be used considering the different tax structure of different countries. pretax roa is calculated as: international journal of commerce and finance nasruzzaman naeem & serkan çankaya 11 pretax roa= (ebt (earnings before taxes)) / (total assets) ×100 3.2.3 tobin’s q tobin’s q is widely used and popular market-based measurement which is used to find out the current market value of the farm which will be used as a dependent variable in this study. generally, tobin's q is expressed as the ratio of the market capitalization of the corporation over the total physical asset value of that corporation (kim et al., 2013). it shows financial position of the physical assets of the corporation in today’s market. tobin’s q had been used in similar studies by (velte, 2017), (atan, alam, said, & zamri, 2018), (zhao et al., 2018), (rami & andr, 2019) with a view to studying how esg performances are affecting firm’s market value creation. tobin’s q has been calculated as below: tobin’s q = (𝑇𝑜𝑡𝑎𝑙 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑖𝑟𝑚) / (𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑖𝑟𝑚) in our study, we will use tobin’s q of the corporations as the representative of the market value of those corporations. 3.3 independent variable combined esg score has been taken from the thomson reuters (asset4) esg database which will be used as independent variable. the breakdown of thomson reuters esg score (100%) is as following:  environmental score (34%), emissions (12%), resource use (11%), and innovation (11%)  social score (35.5%): workforce (16%), community (8%), product responsibility (7%) and human rights (4.5%).  governance score (30.5%): management (19%), csr strategy (8%) and shareholders (7%). it should be noted that the range of the esg scores is from 0 to 100, where 0 is the lowest possible and 100 is the highest achievable score (refinitiv, 2019, p. 8). international journal of commerce and finance nasruzzaman naeem & serkan çankaya 12 3.4 control variables two control variables will be used in the study as encountered in the literature. control variables have been taken from the financial statements of the energy and power generation companies. 3.4.1 leverage leverage is calculated as total debt by total equity. it has been used as a control variable, as managers usually provide more information about esg when leverage rises because of extra monitoring from auditing institutions (lanis & richardson, 2013). also, the debt ratio might affect the results positively since debt must be refunded at regular intervals, it becomes a useful way for maintaining the executives disciplined (rami & andr, 2019). the leverage of the corporations is calculated as: leverage= (total debt) / (total equity) 3.4.2 size as per the previous studies, firm size influences financial returns. larger firms might achieve higher returns because of having the advantage of economies of scale. natural log of total assets of firm is used as a measurement for size of the firm in this study. the size of the corporations is calculated as: size=ln (total assets) the methodology followed in this study is as discussed in the next section. 3.5 methodology the study follows the stakeholder theory which says that esg activities of a firm are considered as the firm’s efforts to satisfy both interior and exterior demands of the stakeholders as well as to attain better firm performance. this study investigates the relationship of the financial performance with esg performance of energy and power generation firms from around the world. the regression analysis and all other statistical analysis under this study has been carried out using the statistical software “stata 13”. international journal of commerce and finance nasruzzaman naeem & serkan çankaya 13 regression model: regression model adopted and modified consistent with other studies of (atan, alam, said, & zamri, 2018), (chelawat & trivedi, 2016), (dalal & thaker, 2019), (saleh et al., 2011) has been used in the study. 𝑅𝑂𝐸𝑖𝑡= 𝛽0+𝛽1𝐸𝑆𝐺𝑖𝑡 + 𝛽2𝑆𝑖𝑧𝑒𝑖𝑡+𝛽3𝐿𝐸𝑉𝑖𝑡 + 𝜀𝑖𝑡…………………………………………... (1) 𝑅𝑂𝐴𝑖𝑡= 𝛽0+𝛽1𝐸𝑆𝐺𝑖𝑡 + 𝛽2𝑆𝑖𝑧𝑒𝑖𝑡+𝛽3𝐿𝐸𝑉𝑖𝑡 + 𝜀𝑖𝑡…………………………………………... (2) 𝑇𝑜𝑏𝑖𝑛𝑠𝑄𝑖𝑡= 𝛽0+𝛽1𝐸𝑆𝐺𝑖𝑡 + 𝛽2𝑆𝑖𝑧𝑒𝑖𝑡+𝛽3𝐿𝐸𝑉𝑖𝑡 + 𝜀𝑖𝑡…………………………..……………(3) where; 𝑅𝑂𝐸𝑖𝑡 is return on equity of firm i during period t; 𝑅𝑂𝐴𝑖𝑡 is pretax return on asset of firm i during period t; 𝑇𝑜𝑏𝑖𝑛𝑠𝑄𝑖𝑡 is tobin’s q of firm i during period t; 𝐸𝑆𝐺𝑖𝑡 is esg score of firms i during period t; 𝑆𝑖𝑧𝑒𝑖𝑡 is log of total assets for firm i during period t; (control variable) 𝐿𝐸𝑉𝑖𝑡 is leverage for firm i during period t; (control variable) 𝜀𝑖𝑡 is error term. following section of the study discusses the empirical findings of the study. 4. empirical findings and discussion the empirical analyses and the findings are discussed below with necessary explanations. the overview of the descriptive statistics of data is as presented in the table below. international journal of commerce and finance nasruzzaman naeem & serkan çankaya 14 4.1 descriptive statistics following table 1 presents the descriptive statistics of the panel data. table 1: descriptive statistics variable no. of observations mean median stan. deviation minimum maximum independent variable esg score 2112 53.29588 55.65131 20.43624 4.064902 91.83833 dependent variables tobin’s q 2112 0.682222 0.538616 0.678257 0.000117 9.431718 roe 2112 0.097206 0.096 0.461422 -1.652 19.42 pretax roa 2112 0.052178 0.047 0.07172 -0.604 0.506 control variables leverage (debt/equity) 2112 1.232525 0.895 1.755014 0.01 50.02 size (log_total assets) 2112 10.39319 10.33778 0.555827 8.518514 14.13177 as the descriptive statistics results suggests, the esg score in the panel range from 4.064 to 91.838 with mean of 53.296 and 55.651 median. for the dependent variables, the means and medians are 0.682 and 0.538, 0.0972 and 0.096, 0.0522 and 0.047 of tobin’s q, roe and pretax roa sequentially. the means and medians for the control variables are 1.233 and 0.895 and 10.393 and 10.338 respectively for leverage and size (log of assets) of the companies. the debt-to-equity ratio or the leverage if the companies range from 0.01 to 50.02. 4.2 correlation results table 2. below represents the pearson correlation matrix for the independent, dependent and control variables of this study. firstly, it can be noted that, esg score is correlated with tobin’s q in a negative way (-0.229***) and pretax roa (-0.0444*) with different level of significance whereas roe has insignificant correlation with esg scores. tobin’s q referring to the market value of the corporations has strongly positive correlation with roe (0.0649**) and pretax roa (0.282***). international journal of commerce and finance nasruzzaman naeem & serkan çankaya 15 table 2: pearson correlation results esg score tobin’s q roe pretax roa leverage (debt/equity) size (total assets) esg score 1 tobin’s q -0.229*** 1 roe 0.0212 0.0649** 1 pretax roa -0.0444* 0.282*** 0.263** * 1 leverage (debt/equity) -0.0527* -0.158*** 0.0275 -0.204*** 1 size (logtotalasset) 0.376*** -0.264*** -0.0135 0.0288 0.00705 1 note: * indicates correlation significance at the 5% level (p < 0.05), ** shows correlation significance at the 1% level (p < 0.01), *** shows correlation significance at the 0.1% level (p < 0.001). it is not surprising that the accounting measurement indicators roe and pretax roa are strongly correlated with significance level at 0.1%. interestingly, leverage has significantly negative correlation with the esg score which means indebted firms have lower esg score. the higher the firms are indebted with corporate debts the lower the esg scores. leverage is negatively correlated with tobin’s q in a significant way (-0.158***) and with pretax roa (0.204***) not surprisingly but it is noteworthy that leverage does not show any significant correlation with roe. it is also interesting that, variable expressing size of the firms are strongly and positively correlated with esg score (0.376***) which represents that bigger firms have higher esg score. surprisingly, size of the firms is negatively correlated with tobin’s q with significance (-0.264***) which suggest that in the market, smaller companies are valued better than the larger companies. international journal of commerce and finance nasruzzaman naeem & serkan çankaya 16 4.3 variance inflation factor (vif) variance inflation factors (vif) has been calculated next to test for multicollinearity in the correlation of the variables. variance inflation factor quantifies the effect of collinearity between multiple regression model's predictor variables. the minimum possible vif should be 1 and vif more 10 suggests that serious multicollinearity might happen. in the case of this study, there is no vif value less than 1 or higher than 10. thus, multicollinearity is not supposed to affect our analysis. the results of the vif test is presented in the table 3 below. table 3: variance inflation factor (vif) test score test esg score leverage (debt/equity) size (logtotalasset) variance inflation factor 1.18 1.17 1.00 note: minimum possible value = 1.0. if values are greater than 10.0 then multicollinearity problems might occur. 4.4 hausman test hausman test is used to select effective regression model for panel data regression. mainly, three types of regression model namely random effect model, fixed effect model and pooled ols model are used in panel data regression. at this stage, hausman test has been done to choose whether random effect model or fixed effect model is applicable for the regression analysis. according to hausman test, if the p>5% we cannot reject null hypothesis which says random effect model is appropriate and if the p<5% we need to reject the null hypothesis and accept alternative hypothesis which explains that fixed effect model is appropriate for the panel data regression. the following table 4 represents the results of the hausman test performed. table 4: hausman test variable chi-squared statistics p value tobin’s q 88.96 0.0000 roe 20.22 0.0002 pretax roa 25.25 0.0000 so, here as the p values suggest we must reject the null hypothesis and accept alternative hypothesis which is fixed effect model is applicable and appropriate for the panel data regression of this study. international journal of commerce and finance nasruzzaman naeem & serkan çankaya 17 4.5 regression results and discussion results of the regression analysis are shown in the following table. the table 5 below represents the effect of esg as an independent variable on the dependent variables roe, pretax roa, and tobin’s q respectively as measurement of the financial performances of global energy and power generation companies. table 5: results of the regression analysis dependent variable roe roa tobin’s q coef. std. err p value coef. std. err. p value coef. std. err. p value esg score 0.00314 53 0.00130 39 0.016* * .000899 7 0.00017 5 0.000** * 0.00368 83 0.00104 03 0.000* ** leverage (debt/equity) 0.00314 53 0.00782 98 0.498 .005194 3 0.00104 89 0.000* ** 0.02174 23 0.00621 43 0.000* ** size (logoftotala sset) 0.44646 29 0.09727 71 0.000* ** .012736 1 0.01303 33 0.329 0.98563 1 0.07740 11 0.000* ** constant 4.56366 1 0.99330 91 0.000* ** 0.23885 96 0.13305 72 0.073* 11.1502 5 0.79008 0.000* ** r squared value 0.012 0.031 0.113 f statistics 7.63 19.19 77.16 model used fixed effect regression model. fixed effect regression model. fixed effect regression model. note: * represents significance at the 10% level (p<0.1), ** represents significance at the 5% level(p<0.05), *** represents significance at the 1% level(p<0.01). esg score has a positive impact over roe. it explains that esg scores have positive influence on the overall profitability of energy and power generation firms specially esg scores have positive influence over roe. besides, the effect of leverage or corporate debt on the profitability of the firm is insignificant here. it is striking that the size of the firms has negative impact over profitability of the firms with significance which is very surprising as it goes against the theory of economies of scale. as the economies of scale theory suggests that larger and bigger corporations usually attain more profitability than comparatively small corporations as the achieve economies of scale earlier but results here are opposite of the theory. esg score has a negative impact over pretax roa in a significant way. it explains that esg performances affect how firm use or manage its assets to get profit or higher returns from it in international journal of commerce and finance nasruzzaman naeem & serkan çankaya 18 a negative way. it is also notable that, the variable leverage has significantly negative effect on pretax roa, which suggest that firms with higher debt will not record greater profitability. however, interestingly here the effect of the size of the firms on the pretax roa is insignificant. the esg effect has negative impact over tobin’s q in a significant way and it suggests, firms with better esg scores do not have greater market valuation and it rejects the hypothesis that esg performance has positive association with tobin’s q of firm which reflect market valuation of the firm. additionally, leverage which describes the corporate debt of firm also significantly effect on tobin’s q in a negative way which explains that indebted firms are not rated good by the market. this result explains that firms with larger leverage may fail to get better market valuation. it is surprising that variable representing the size of the corporations has significantly negative impact on the market valuation of corporations which contradicts the theory of economies of scale. bigger firms are supposed to get greater returns and benefits as are much likely to achieve economies of scale. as discussed above the esg performance of the energy and power generation corporations has mixed impact over their financial performance. the findings of this study are in line with the previous study of (dufwa & hammarström, 2015; duque-grisales, 2019; garcia et al., 2017; langeland & ugland, 2019; marsat & williams, 2011) who found negative association of esg performance with the return on assets (roa) and tobin’s q or market valuation of corporations from different industries and regions. however, the findings of the study also partially supports the findings of (chelawat & trivedi, 2016; ramić, 2019; shakil et al., 2019; ting et al., 2019; zhao et al., 2018) who also reported positive interrelation of corporation’s esg performance with their return on equity (roe). 5. conclusion according to the stakeholder theory, strategies, and operations like esg are supposed to bring competitive advantages for the companies. for industries like energy and power generation whose nature of businesses are environmentally sensitive, esg performances and activities might play an important role in the financial performance and valuation. in this study, the impact of esg performance over the valuation and corporate financial performance of the global power and energy companies has been analyzed. the esg scores provided by thomson reuters (asset4) have been taken as sample for the esg performance of the listed energy and power generation companies from the different markets of the world. for, perceiving the longinternational journal of commerce and finance nasruzzaman naeem & serkan çankaya 19 term impact of esg performances over the corporate financial performance measurements from the view of both accounting and market oriented have been implemented. the findings explain that esg performances only have significantly positive impact on the roe which reflects the overall profitability of the firms. on the other hand, esg performances affect pretax roa or operational profitability of the corporations negatively with significance. the results explain that the esg expenditures and operation could contribute to the return of the shareholders in a positive way, but the esg expenses could not save the production or operational cost of these energy and power generation companies. furthermore, the market values of the corporations which is expressed as tobin’s are also correlated negatively with the esg performances in significant way. this could be because the esg strategies and initiatives taken by the energy and power generation companies could not attract the investors as being sustainable or socially responsible investments. the outcomes of the study suggest that the companies operating business in energy and power generation industry should review and restructure their esg operation plans and procedure more carefully to make the esg performances effective and efficient much to be beneficial for all stakeholders. the corporate managerial bodies should adopt and implement necessary esg strategies as per the requirements by keeping in mind esg operations not only as expenditures but also as sustainable investment for ecological and sociocultural sustainability. the findings and outcomes of this study have practical implications and relevant to the researchers who are working on esg or stakeholder management, to decision makers of the sensitive industries, to investors specially sri investors, to policy makers, to government regulation authorities and to the energy and power generation companies. this study has some limitations such as the locations and market of the energy and power generation companies have not taken into consideration for the analysis which can dominate the relationship of the esg and financial performances. further, esg performance scores of these companies from any other data provider other than thomson reuters and more extended period of sample time can be taken into consideration in further study for more biasness free result. future studies could also be done on how the performances of every particular pillar of the esg which are environmental, social and governance affect the corporate financial gains and loss of the global energy and power generation companies. furthermore, why esg performances of the energy and power generation 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(2018). esg and corporate financial performance: empirical evidence from china’s listed power generation companies. sustainability (switzerland), 10(8), 1–18. https://doi.org/10.3390/su10082607 international journal of commerce and finance, vol. 2, issue 1, 2016, 113-123 the effect of corporation reputation on organizational citizenship behaviour abdülkadir akturan, (ph.d.), turkish land forces command neslihan sevik, (res asst.) kocaeli university abstract: there is a growing interest of academicians and practitioners for corporate reputation since it is an important factor, which creates beneficial outcomes for the firms. in the literature, corporate reputation is studied on the ground of external stakeholders. however, employees as internal stakeholders are also as important as the external ones, and we know little about how corporate reputation affects employees’ organizational behaviors. this study purposes to fulfill that gap and aims to identify the effect of corporate reputation an organizational citizenship behavior (ocb). as a result of the study, it was found that corporation reputation positively affects altruism, courtesy, civic virtue and consciousness while does not have any influence on sportsmanship keywords: corporate reputation, organizational citizenship behavior, sem 1. introduction there are various definitions and core concepts identified as basis of corporation reputation. whetten and mackey (2002) discuss that corporation reputation is a particular type of feedback, received by an organization from its stakeholders, concerning the credibility of the organization’s identity claims (p. 401). fombrun (1996) emphasizes that corporate reputation represents the net affective or emotional reaction. on that ground, it is an overall estimation derived from the extent to which the firm is well known; such as good or bad, reliable, trustworthy, reputable and believable (brown, 1995; levitt, 1965). weigelt and camerer (1988) group these attributes as economic and non-economic variables and besides that define a third attribute as firms’ past actions. there are differing approaches for corporation reputation. economists look at reputation as either traits or signals. according to game theorists, reputation is a character trait, which helps firms to distinguish themselves form other firms. for signaling theorists, reputation has an informational content. on that ground both, game theorists and signaling theorists, acknowledge that reputations are actually perceptions held by external stakeholders (fombrun and van riel, 1997). corporation reputation is a multidimensional concept. firm size positively affects corporation reputation such as bigger firms possess higher reputation (fombrun and shanley, 1990). accounting performance and the firms’s risk profile positively influence reputation (roberts and dowling, 2002). besides media exposure, advertising, corporate social responsibility and community involvement are found to affect reputation (bromley, 1993; fombrun and shanley, 1990; garbett, 1988; (sabate and puente, 2003). corporation reputation creates several consequences for firms. if it is a positive perception then it yields to beneficial outcomes (caruana and chipcop, 2000). corporation reputation positively influences the attitude of buyers (brown, 1995), and the intention to purchase a service (yoon et al., 1993). firms with positive reputation attract investors, have a low cost of capital and a strong competitive ability (fombrun and shanley, 1990). moreover, it positively affects perceived product quality and creates a barrier in the industry for competitor entry (weigelt and camerer, in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 114 abdülkadir akturan, neslihan şevi̇k http://ijcf.ticaret.edu.tr 1988). it has also been related to organization identification of employees. since it provides a structure for attracting quality personnel, it is also linked to the inter-organizational co-operation or ocb (dutton et al., 1994). 2. theoretical framework 2.1. corporation reputation there are various definitions and core concepts identified as basis of corporation reputation. whetten and mackey (2002) discuss that corporation reputation is a particular type of feedback, received by an organization from its stakeholders, concerning the credibility of the organization’s identity claims (p. 401). fombrun (1996) emphasizes that corporate reputation represents the net affective or emotional reaction. on that ground, it is an overall estimation derived from the extent to which the firm is well known; such as good or bad, reliable, trustworthy, reputable and believable (brown, 1995; levitt, 1965). weigelt and camerer (1988) group these attributes as economic and non-economic variables and besides that define a third attribute as firms’ past actions. there are differing approaches for corporation reputation. economists look at reputation as either traits or signals. according to game theorists, reputation is a character trait, which helps firms to distinguish themselves form other firms. for signaling theorists, reputation has an informational content. on that ground both, game theorists and signaling theorists, acknowledge that reputations are actually perceptions held by external stakeholders (fombrun and van riel, 1997). corporation reputation is a multidimensional concept. firm size positively affects corporation reputation such as bigger firms possess higher reputation (fombrun and shanley, 1990). accounting performance and the firms’s risk profile positively influence reputation (roberts and dowling, 2002). besides media exposure, advertising, corporate social responsibility and community involvement are found to affect reputation (bromley, 1993; fombrun and shanley, 1990; garbett, 1988; (sabate and puente, 2003). 2.2. organizational citizenship behaviour (ocb) ocb is defined as “individual behavior that is discretionary, not directly or explicitly recognized by the formal reward system, and that in the aggregate promotes the effective functioning of the organization” (organ 1988, p4). in the case of ocb, it is important that the employees believe their manager will fairly reward and recognize ocbs. the employees display and sustain ocbs (allen and rush 1998; haworth and levy 2001). ocb is a multidimensional concept including five dimensions (organ 1988). these are altruism, courtesy, conscientiousness, sportsmanship, and civic virtue. alturism means voluntarily helping other members of the organization to accomplish relevant tasks and solve problems in the organization. conscientiousness involves the least amount of duties required by the contracted role such as not wasting time or organizational resources, staying late to help with a project, or volunteering to coordinate activities. civic virtue is the willingness of employees to engage with the organization and show an interest in improving organizational processes and efficiency. sportsmanship is demonstrating tolerance and abstaining from complaining or creating injustice in the organizational working environment. finally, courtesy includes preventing work-related problems with other members by taking action. in that sense employees try to avoid conflicts among decisions and employees. ocb is a personal choice (chiu and chen, 2005), but is is important since it have a positive effect on organizations. there are three main motives underlining ocb (rioux and penner 2001). these are (1) pro-social values, (2) organizational concern, and (3) impression management. pro-social values constitute desire to help other and gain acceptance. organizational concern is the pride in and care for the organization. and finally impression management is the desire to create and maintain a positive image. employees who have a positive corporate reputation perception are positively motivated to display pro-social behaviors (çekmecelioğlu ve dinçel, 2014: 83). corporation reputation provides organizational commitment the effect of corporation reputation on organizational citizenship behaviour 115 http://ijcf.ticaret.edu.tr especially for the employees and thus the employees adopt organizational identity while becoming integrated with the firm (romenti, 2010). the reputation that the corporation has in the society is also projected to the employees as a positive outcome (çekmecelioğlu ve dinçel, 2014). when employees recognize a favorable reputation to their organization, they are more prone to generate belief-consistent feelings of identification, such as continuing to work at the company and support various voluntary, extra-role behaviors to improve service delivery or provide valuable suggestions to the firm (morhart et al., 2009). on that ground the research model is as seen in figure 1. figure 1: research model and the research hypothesis are formulated as follows h1: corporate reputation positively affects civic virtue. h2: corporate reputation positively affects altruism. h3: corporate reputation positively affects consciousness. h4: corporate reputation positively affects sportsmanship. h5: corporate reputation positively affects courtesy. 3. research methodology sampling and measurement the data was collected from kocaeli university students via face-to-face survey. a total of 458 valid and complete responses were included in the final analysis. the demographic and socio-economic variables of the respondents indicate that they are from both gender (with 38.7 % being female while 61.3 % being male), and they have an age range of 19-33. the constructs were measured by using established scales. corporate reputation was measured by walker’s (2010) scale, and ocb was measured by padsakoff et al. (1990) scale. corporate reputation was measured via eigth items while ocb was measured via 24 items. the research hypothesis was tested via structural equation modeling by using spss 13.0 ve amos 6.0. structural equation modelling combines the casual relationship among the variables in regression model with the factor structures obtained from the factor analysis (babin et al., 1999). yet all, sem techniques are distinguished by two characteristics: (1) estimation of multiple and interrelated dependence organizational repuation organizational citizenship behaviour altruism courtesy sportsmanship civic virtue consciousness 116 abdülkadir akturan, neslihan şevi̇k http://ijcf.ticaret.edu.tr relationships and (2) the ability to represent unobserved concepts in these relationships and account for measurement error in the estimation process (hair et al., 1998). 4. research findings in the study, before testing the hypothesized relationships, the reliability of the scales was evaluated by cronbach’s alpha coeffficient. in table 1 the results of the reliability analysis were given and as it is seen that cronbach’s alpha coefficient is 0.901 for corporate reputation and 0,843 for ocb. both value are found as above the minimum required level of 0.70. table 1: reliability analysis ölçekler değişken sayısı alfa katsayısı (güvenilirlik analizi) corporation reputation 8 0,901 ocb 24 0,843 after determining the internal consistency of the scales used in the research, the ocb is tested via confirmatory factor analysis. as a result of the confirmatory factor analysis, seven items were deleted from ocb scale. the final measurement model is presented in figure 2. figure 2: model for confirmatory factor analysis of ocb in table 2, the variables used in the confirmatory factor analysis were given. as it is seen in table 2, in total 39 variables were used in the study. 17 of these variables are observed variables, while 22 of them are unobserved variables. the exogenous variables are 22 and consist observed variable and hidden. the endogenous variables are 17 and consist of error terms. the effect of corporation reputation on organizational citizenship behaviour 117 http://ijcf.ticaret.edu.tr table 2: the variables included in the confirmatory factor analysis total variables 39 observed variables 17 unobserved variables 22 exogenous variables 22 endogenous variables 17 the goodness of fit measures found in the confirmatory factor analysis was presented in table 3. table 3: goodness of fit measures for confirmatory factor analysis fit measures measurement model ideal model 2) 198,207 0.000 cmin degrees of freedom 153 0 df p 0,000 p 2/sd) 1,888 cmindf goodness of fit 0,923 gfi adjusted goodness of fit 0,887 agfi normed fit index 0,910 1.000 nfi relative fit index 0,983 rfi incremental fit index 0,988 1.000 ifi tucker-lewis index 0,941 tli comparative fit index 0,955 1.000 cfi rmsea 0,055 0,05<rmsea<0,08 rmsea hoelter ,05 index 191 hfive hoelter ,01 index 208 hone as can be seen from table 3, in evaluating the goodness-of-fit between the model and the data the first measure is the likelihood ratio chi-square statistics. this value has a statistical significance (p=0.000). but, the chi-square statistics alone is not an enough measurement. it is recommended that when the sample size is over 200, because the chi-square value is sensitive to the sample size, some other values also should be taken into consideration in the evaluation process (sweeny et al., 1999). therefore, other fitness measures also checked. first, we looked at the x2/sd ratio, which is calculated by dividing chi-square value by the degrees of freedom. closeness of this value to the zero means that there is goodness-of-fit between the data and the model (yoon et al., 2001). in our research it was found 2/sd = 1,888. so it can be said that there is a fitness between the data obtained and the research model. another criteria in the evaluation of the data and the model fitness is the goodness of fit value (gfi) which was found as 0,923. in addition to that, the other criterias nfi (0.857), rfi (0,983), ifi (0,988), tli (0,941) and cfi (0,955) also indicate the fitness. the closeness of this value to the one (1) represents the validity of the model. besides, the rmsea value of the model is 0.068. this falls well within the recommended levels of 0.05 and 0.08 (garretson et al. 2002). at last, in order to determine the required minimum sample size to test the research hypothesis at the stated level of confidence interval hoelter .05 and hoelter .01 indexes were used. to test the hypothesis at %95 confidence interval level and 0.05 significance level, the required minimum sample size was determined as 191 and to test the hypothesis at %99 confidence interval level and 0.01 significance level, the required minimum sample size was determined as 208. as it can be seen from the table 3, the sample size is much more than the required minimum sample sizes determined by hoelter .05 and hoelter .01 indexes. 118 abdülkadir akturan, neslihan şevi̇k http://ijcf.ticaret.edu.tr table 4: factor loadings estimate dig5 <--altr. ,754 dig4 <--altr. ,825 dig3 <--altr. ,817 dig2 <--altr. ,795 dig1 <--altr. ,650 nez4 <--cour. ,794 nez3 <--cour. ,865 cen5 <--spms. ,631 cen4 <--spms. ,619 cen3 <--spms. ,659 vic3 <--consc. ,668 vic2 <--consc. ,702 vic1 <--consc. ,563 se4 <--cv. ,619 se3 <--cv. ,648 se2 <--cv. ,832 se1 <--cv. ,717 the factor weights were given in table 4. all of the factor weights are above 0,50 and the construct reliability was found as 0, 59 construct reliability measures the internal consistency of the construct indicators and it is used to assess the measurement model (hair et al., 1998). it is computed from the squared sum of factor loadings for each construct and the sum of the error variance terms for a construct and the explained variance was found as 0,52. after determining the reliability and the validity of the scales, the research hypotheses were tested via structural equation modeling (sem). the measurement model of the hypothesized relationships was presented in figure 5. the effect of corporation reputation on organizational citizenship behaviour 119 http://ijcf.ticaret.edu.tr figure 3: model of hypothesized relationships in table 5, the variables used in the measurement model were given. as it is seen in table 4, in total 61 variables were used in the study. 25 of these variables are observed variables, while 36 of them are unobserved variables. the exogenous variables are 31 and consist observed variable and hidden. the endogenous variables are 30 and consist of error terms. table 5: the variables included in the measurement model total variables 61 observed variables 25 unobserved variables 36 exogenous variables 31 endogenous variables 30 table 6 displays the goodness of fit measures for the measurement model. and as it can be seen there is fitness between the model and the data. 120 abdülkadir akturan, neslihan şevi̇k http://ijcf.ticaret.edu.tr table 6: the goodness of fit measures for measurement model fit measures measurement model ideal model discrepancy (x2) 592,114 0.000 cmin degrees of freedom 265 0 df p 0,000 p discrepancy / df (x2/sd) 2,234 cmindf goodness of fit 0,848 gfi adjusted goodness of fit 0,814 agfi normed fit index 0,842 1.000 nfi relative fit index 0,821 rfi incremental fit index 0,906 1.000 ifi tucker-lewis index 0,892 tli comparative fit index 0,905 1.000 cfi rmsea 0,065 0,05<rmsea<0,08 rmsea hoelter ,05 index 149 hfive hoelter ,01 index 158 hone the regression weights and the result of the hypothesis tests were given in table 7. as a result of the study h1, h2, h4, and h5 is supported while h3 is unsupported. in that sense, corporation reputation positively affects altruism, courtesy, civic virtue and consciousness while does not have any influence on sportsmanship. table 7: regression weights estimate s.e t value p standardized regration weights result of the hypothesis test altruism <--cr ,608 ,095 6,392 *** ,467 h1 supported courtesy <--cr ,464 ,090 5,177 *** ,366 h2 supported spmship <--cr -,021 ,105 -,203 ,839 -,014 h3 not supported cons. <--cr ,399 ,087 4,598 *** ,380 h4 supported c. virtue <--cr ,466 ,086 5,418 *** -405 h5 supported standardized regression weights present the possible change that will occur in dependent variable when there is one unit change in independent variable. on that ground, one unit change in corporate reputation will create an increase of 0,467 in altruism; 0,366 in courtesy; 0,380 in consciousness, and 0,405 in civic virtue. besides table 8 displays the r2 values of the model. r2 values were used to identify the explanatory power of the model. it displays the explained percentage of endogenous latent construct by exogenous latent variables (sirohi, et al., 1998). in that study, it was found that corporate reputation explains 28% of altruism behavior, 13% of courtesy behavior, 14% of consciousness behavior and 16% of civic virtue behavior. table 8: r2 values of measurement model estimate altruism ,281 courtesy ,134 sportmanship ,000 consciousness ,144 civic virtue ,164 the effect of corporation reputation on organizational citizenship behaviour 121 http://ijcf.ticaret.edu.tr 5. conclusion: as an inevitable result of today's world; survival of companies working in the work environment located in a great development and changes, are obliged to keep their hands competitiveness and to expend a lot of effort in order to continue to develop it. this effort forms in the long term, for all stakeholders in the company a sharing positive / negative reputation perception. for stakeholders, especially for the employees perceived corporate reputation represents much more. corporate reputation providing significant benefits to the company in terms of customer employees, partners, suppliers and organizations as a critical (cravens et al. 2003) and strategic (dierick and cool, 1989; barney, 1986; weigelt and camerer, 1988) element influences largely the attitude of the employee towards the institution where they work, as such ties ; behavior, confidence, loyalty and citizenship. studies conducted in the near term, on the one hand while trying to expand definitional framework for corporate reputation (dowling, et al., 2013), on the other hand the concept relations with different concepts have been investigated. corporations with a positive corporate reputation, benefits in today's competitive environment because they have the potential to attract to customers and employees (walsh et al., 2009; karaköse, 2007). these corporations also have potential to attract investors. a good corporate reputation influences their buying decisions of customers increased the influence of advertising. a good corporate reputation, but also allows businesses to leave less damage from the crisis. (chun, 2005). it is examined how to be influenced organizational citizenship behavior by corporate reputation and whether the relationship between them is remarkable in this study. when other conducted studies examined it is seen that the relationship between corporate reputation and ocb didnt adresse all dimensions. therefore, it is expected that this study will provide a positive contribution to the literature. referred as institutions’ stakeholders; buyers, partners, employees and other interested parties , workers are in it stands out as one of the most important stakeholder of organizations. (dolatabadi, et al., 2012). organizational citizenship behavior is a form of prosocial behavior; altruism, courtesy, conscientiousness, sportsmanship and civic virtue of which consists of five dimensions, including employees of the institution and the work consists of attitudes and behaviors exhibited voluntarily. organizational citizenship behavior, is defined by organ (1988: 8) as; "businesses that are not covered explicitly by the formal reward system, but to help the company fulfill its functions in an efficient manner, discretionary individual behavior". organizational citizenship behavior is voluntary, as this behavior is not a requirement in the individual role definitions. corporate reputation perceived by employees influence them to exhibit prosocial behavior working in referral and causes employee to show behavior beyond the determined the size of the standard in favor of corporate behavior. in other words, this behavior is a personal choice. compared to others to have a certain corporate reputation makes it more attractive in the eyes of corporate employees and their behavior to provide more benefits in this direction. (fombrun and shanley, 1990). likewise, business with a particular corporate reputation, is becoming more attractive for employees, it gives direction to the trust and loyalty to their institution (fombrun, 1996). it is also possible that there is the existence of qualitative research that is the assessment of the corporate reputation and sense of dimension in terms of the managers (reddiar, et al., 2012). in this context, the conducted studies show that the managers accepted the corporation reputation as financial asset try to develope it (walsh et al., 2014). senior managers and ceos, they are aware that there is a major extent result of corporate reputation, in all their decisions they take into account that how their decisions effect to corporate reputation. it will not be wrong to say that, a corporation with a good reputation is also among successful enterprises in the industry. the success of the business is a total success of their employees. considering that the success is a product of team working, demonstrating organizational citizenship behavior of employees is a key element of business success that emerges. hence, creating a positive corporate reputation for a successful business, organizational citizenship behavior of employees to be nominated is an integral part. in the field of business management, one of the most popular concepts in recent years is corporate reputation. business managers should be aware that there is a measurable and manageable concept of corporate reputation. with results obtained by the study, corporate reputation affects the organizational citizenship behavior in a positive way, it was revealed that a significant relationship with all other dimensions except sportsmanship. this supports the theory 122 abdülkadir akturan, neslihan şevi̇k http://ijcf.ticaret.edu.tr on the subject. corporate reputation is intangible and invisible, but it is an asset that adds value to the company. at the same time, it can not be imitated by others, and instead is a very important strategic resource that could not be anything else. 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(2002). a social actor conception of organizational identity and its implications for the study of organizational reputation. business & society, 41(4), 393-414. yoon, e., guffey, h. j., & kijewski, v. (1993). the effects of information and company reputation on intentions to buy a business service. journal of business research, 27(3), 215-228. yoon, y., gürsoy, d. and chen, js (2001), “validating a tourism development theory with structural equation modeling”, tourism management, 22(2), 363-372. international journal of commerce and finance, vol. 3, issue 1, 2017, 27-40 the effect of organizatonal learning on organizational commitment in accommodation sector özlem yenidoğan, (mba student) istanbul commerce university, turkey hüner şencan, (prof.dr.) istanbul commerce university, turkey abstract: the research was done with the purpose of identifying the relationship between two conceptual structures which were organizational learning and organizational commitment. main hypothesis was identified as “there is a positive correlation between employees’ organizational learning inclination and organizational commitment.” in order to identify the relation between two conceptual structures, likert type scale was used by using the literature. stated likert type scales were applied for 279 people including managers’ and employees’ and statistical analysis on gathered datas from 260 questionnaires was done. in the research, both the correlation between organizational learning and sub-dimensions of organizational commitment which classified as emotional, normative, continuance commitment and the correlation between employees’ age, level of education, position and working period variables and organizational commitment were examined. regression analysis was used in order to identify the correlation between organizational learning and organizational commitment which was the main hypothesis. other hypotheses were tested by one way analysis of variance. it was found that that there was a positive correlation between organizational learning and organizational commitment. result of the analysis indicates that in order to increase organizational learning inclination of managers and employees for developing their organizational commitment, applications for organizational learning should be given importance in companies. keywords: organizational learning, organizational commitment, hospitality sector 1. introduction global challenge, technological developments and innovations that have come up recently made companies compulsory to adapt all these changes. there has been a widespread thought that it may be possible to adapt all these changes only with the existence of organizational learning in the organizations that consist of indivuduals gathered together for a common purpose and vision. it is seen that in the organizations where learning in the level of organization is realized, employees are more committed to their organizations. especially in hospitality sector which development of human resources plays critical role for adapting the changes occurring, the importance of organizational learning is increasingly being understood. in the case of not identifying the relation between organizational learning and organizational commitment in a true way, companies may give less importance to organizational learning than they should give or they may ignore organizational learning totally. the fact that organizational learning may affect organizational commitment may be ignored. it is necessary to lay out the degree of relationship between organizational learning and organizational commitment with clear lines and elimination of uncertainty regarding the relationship of two constructural structures should be enabled with future researches. 2. literature and hypotheses the existence of many researches regarding organizational learning in literature takes attention. according to çakmakyapan, (2009) organizational learning was defined as “the development of organizational effectiveness through gaining better information and comprehension”. uğurlu and kızıldağ, (2014) mentioned about organizational learning that “organizational learning is the transformation of experiences coming from the past into routines that leads behaviours” (p. 97). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 28 özlem yenidoğan & hüner şencan http://ijcf.ticaret.edu.tr scales devoloped to measure organizational learning inclination and dimensions related to this conceptual structure are like these: avcı, (2009) in his research called “the effect of organizational learning inclination on innovation performance: an application in muğla marble sector” used learning inclination scale. in this scale, four dimensions called “(a) determinity, (b) shared vision, (c) open mindness, (d) information sharing in company are used in order to measure organizational learning inclination (pp. 121-138). naktiyok and i̇şcan (2014) used a scale consisting of three dimensions called “(a) open mindness, (b) learning dedication and (c) vision sharing”. this scale included 11 scale items (pp. 19-37). avcı and küçükusta (2009) in their research about the relationship among organizational learning, organizational commitment and inclination of leaving work, used “learning organization dimensions questionnaire” that includes 43 scale items (pp. 34-44). celep (2004) in his research called turkey’s universities in terms of organizational learning used “organizational learning dimension questionnaire” in order to measure organizational learning. organizational learning scale took its final shape with the addings of scale items developed by the researcher. scale developed by celep includes four dimensions which are; “(a) leadership of organizational learning, (b) continuous learning, (c) information performance and (d) team learning. atak, (2009) developed a scale in order to measure organizational learning. in the scale developed by the researcher, “(a) flexible organizational structure, (b) empowerment, (c) individual learning, (d) learning in teams, (e) shared vision, (f) system understanding, (g) organizational learning” dimensions exist (pp. 1215). in the research conducted by turan and others, (2011) organizational learning scale was used to measure organizational learning. organizational learning was examined in five dimensions in the research. stated dimensions are: “(a) individual competence, (b) shared vision, (c) team learning, (d) mental models and (e) organizational structure” (pp. 627-638). krishna, (2008) used organizational action question form including 17 scale items in order to measure organizational learning in her research. in this scale, environmental interface, action-thought, meaning and memory and spread-diffusion dimensions exist (pp. 1-206). lim, (2003) in his research used organizational learning capability dimensions scale including seven factors and 21 scale items. the dimensions of this scale are; “(a) continuous learning facilities, (b) investigation and dialogue, (c) team learning and association (d) system approach, (e) learning together, (f) common vision, (g) employees’ powerment in the framework of a common vision, (g) associating the organization with its environment, (h) providing strategical leadership for learning” (pp. 1143). problems faced by companies require companies changing into a learning organization. if learning capability of organizations doesn’t respond to these developments -parallel to the rapid emergence and dissemination of informationit poses a threat for the development of organization. the reason why an organization stand behind in a competitive environment is due to failing of being a fully learning organization (çam, 2002, p. 56). individual learning is the trigger of organizational learning. individual learning is pre-condition for the existence of organizational learning. what occurs a learning organization is an organization that places learning into their organizational culture. organizational learning is a building block of an organization that learns (türkay, 2007, p. 17). organizational learning plays a role in the formulation and advancement of human relations in companies (altındağ, 2006, s. 10-11). according to yıldırım, (2006) if learning is desired to be realized in the level of organization, all members of organization should be provided access to information. by doing so, learning turns into a holistic way and gathers all members with great force and synergy (p. 21). existence of dialogue in organizations is necessary in terms of spreading the information. all individuals reflect their perspectives and personal comments related organizational actions and activities on others. so individuals explore each others’ informations and the way of interpreting informations. learning occurs this way. while having dialogue, complete and inaccurate knowledge sharing, giving information about professional field, understanding each others’ way of thinking are important (biçkes, 2011, p. 47). if employees know the ways of gaining information and learning, organizational goal is reached by obtaining competitive advantage. in an organization including employees that know how to learn, better performance output occurs (alanoğlu, 2014, p. 19). employees in learning organizations that are sensitive to each others’ opinions by means of team learning, contributes the formation of useful information stack for organizations, increasing opinions and information richness on a topic. individuals that have different competences give reason information to grow like an avalanche (tepeci ve koçak, 2005, pp. 389-390). the effect of organizatonal learning on organizational commitment in accommodation sector 29 http://ijcf.ticaret.edu.tr second conceptual structure of the research is organizational commitment. according to örücü and kışlalıoğlu, (2014), “organizational commitment wasfor the first timeexamined by whyte in 1956 ” (p. 46). when organizational commitment of individuals was associated with financial interest in 1960; an emotional point of view was added to conceptual structure in 1970. organizational commitment is defined as emotional connection between indivuduals who work and organization (öztürk, 2013, pp. 8-9). according to ergen, (2015) “organizational commitment is to establish identification with organization’s aims and values profitlessly, by only being ambitious to stay in an organization which they belong to” (p. 10). organizational commitment takes place in three stages which are; obeying, being included and identity acquisition. obeying is the process that an individual is proud of being a member of the organization. being integrated is to be included in organization and identity acquisition is that individuls’ values should be overlapping with the institution (gürkan, 2006, pp. 5-6). meyer and allen's organizational commitment model is one of the most popular model in the field. according to meyer and allen, (1990) organizational commitment model includes three dimensions that are “emotional commitment, normative commitment and continuance commitment” (pp. 118). buğra, (2014) in his research mentioned about the factors that may affect emotional commitment in a way either negative or positive. these factors are: “(a) significance of goals, (b) openness to new ideas, (c) friend affliation, (d) organizational commitment, (e) equality, (f) personal importance, (g) feedback, (h) attendance” (p. 43). formulation of sentimental connection with the organization and ambition of continuing the membership of organization by indiviuals indicate the existence of emotional commitment on members of organization. compulsory commitment caused from both employees’ failing to abondon financial investment of long-period working and due to the lack of much work alternatives is called as continuance commitment (mart, 2014, p. 34). if individual believe that staying in an organization is morally right and feel obligations to continue her/his existance in the company, commitment way that occurs is called as normative commitment (davran, 2014 , p. 88). naktiyok and i̇şcan, (2014) in their research, used organizational commitment scale developed by meyer and allen that aims to measure emotional, normative and continuance commitment consisting of 23 scale items (pp. 21-38). bozkurt and yurt, (2013) used organizational commitment scale developed by allen and meyer in 1990 to measure organizational commitment (pp. 121-139). arslan and demirci, (2015) used organizational commitment scale developed by allen and meyer to measure organizational commitment in their research (pp. 24-38). guliyev, (2010) used organizational commitment scale including three dimensions that are “(a) emotional commitment, (b) normative commitment, (c) continuance commitment ” to measure organizational commitment. this question form contains 18 scale items. according to guliyev, (2010) even if all these commitment types are associated with eachother, they are not semantically the same and are subjected to statistical analyses as seperately in empirical studies (pp. 1-87). organizational commitment is a popular concept that researches study on. it express the level of organizational commitment that an employee has. indivuals who have high level of dedication to their organization are not willing to leave their companies. they keep their own goals and personal values in the same level with organization’s goals and values. researches identify that job satisfaction is the cause of commitment. being connected with an organization in a sentimental sense is the determinant component of commitment (jha ve pandey, 2015, p. 68). people having weak emotional connections with their company are defined as “employees lack of emotion”. in the case of low organizational commitment of workers, company performance is affected by gossip and rumors. low level commitment causes customers’ loyalty to company to demolish and employees’ having adaptation difficulty to external changes (çatır, 2014, p. 41). when researches about organizational commitment are examined; shared vision, open mindness, information sharing within company, team learning, system approach, training and empowerment of employees dimensions seem coming into prominence. in organizational commitment; emotional commitment, normative commitment and continuance commitment dimensions seem coming into prominence. 30 özlem yenidoğan & hüner şencan http://ijcf.ticaret.edu.tr the purpose of this study is to identify the relation between employees’ organizational learning inclination and organizational commitment. research question was tried to be answered by using avcı ‘s question form to measure organizatonal learning inclination in 2005 and sezgin’s data collection tool to measure and evaluate organizational commitment in 2010. research builds a value in terms of contribution to literature. in spite of the existence of researches to identify the relation and the level of relation between two structural concept, number of researches including application on hospitality sector is relatively less. the research that aims to identify the relation between organizational learning and commitment particularly on hospitality sector of i̇stanbul city, may contribute to scientific information collection related to this field. 3. the methodology and model in the research, responds of survey participants regarding two conceptual structures were subjected to statistical analyses and evaluated. using this method, relationship of organizational learning inclination and organizational commitment were tried to identify. both conceptual structures were tried to explain by using hypothesis tests to identify the relation between two conceptual structures that are the relation between organizational learning and organizational commitment’s sub dimensions (emotional, normative and continuance commitment) and relationship between independent demographic variables and both conceptual structures. 4. population, sample and research application the study is a quantitative research that aims to identify the relation between employees’ organizational learning inclination and organizational commitment behaviours. questionnaire method was used to gather datas from employees working in four and five star hotel chains located in i̇stanbul city. the research’s population consist of 33800 people working in hotel chains. a sample of 380 people was identified with a 95% confidence level and 5% failure tolerance. taking into account the possibility of the questionnaires not returning, number of questionnaires were increased % 30 and was reached to 494 sample size. for the application of questionnaire, multistage sampling method was applied. in the first stage, it was aimed to reach 5 managers and 20 workers for each hotel. in this direction, 25 questionnaire were planned to be filled in a hotel. 20 hotels were selected among 169 hotels by randomly and subjected 25 questionnaire were distributed to managers and workers randomly. so, 500 questionnaires were distributed and 279 questionnaires were obtained. survey’s response rate is % 56. for the representation of population of the sample, data gathering was fullfilled in different geographical parts of i̇stanbul city, so data collection from a wide geographical area was enabled. at the same time, questionnaire form was distributed to different departments of the hotels. thefore, it may be said that the sample has representative characteristics of the population. questionnaires were applied with three different methods. in first method, questionnaires were reached to departments’ managers, taking permissions of top level managers in the hotels. questionnaires were answered by workers under supervision of managers. the purpose of the research, content of the survey and importance of the research were mentioned to all participants before filling the survey forms in every stage of gathering datas. in second method, datas were gathered by using face to face interview method. during replying process of questionnaire forms, participants’ all questions about survey were answered. in third method, questionnaire form was distributed to workers of hospitality sector in i̇stanbul by email. in all data collection methods; the information of company’s name, participants’ names and responds given to questionnaires would be hidden is given to all participants. participants were assured that all responds would be used just with the scientific aims and answers wouldn’t be the effect of organizatonal learning on organizational commitment in accommodation sector 31 http://ijcf.ticaret.edu.tr shared with the authorities of the companies. all participants were requested to fill in the questionnaires completely and inaccurately, taking organizational activities into account. at the end of two weeks period, 19 questionnaires were regarded as invalid due to including missing datas and excluded from analyses and evaluation. 260 questionnaire forms were analysed and evaluated for the research. 5. measurement in the research, two measurement instruments were used seperately in order to measure organizational learning and organizational commitment. questionnaire form used in the research consist of three parts. in the first part, demographical questions (age, position, education level, working period); in the second part, questionnaire form used by avcı in his research called “relation between organizational learning and organizational performance” in 2005 to measure organizational learning inclination scores were used. organizational learning inclination scale was developed using the criteria of yeo, calantone vd. , chan vd. , jaspara, baker and sinkula’s studies to measure organizational learning. in this scale, 41 scale items exist and scale items were searched with 5point likert type. in the scale; (1) strongly disagree, (2) partly disagree, (3) neutral, (4) partly agree, (5) strongly agree options took place. organizational learning inclination scale consists of 7 sub-dimensions which are common vision, training and education, open mindness, knowledge sharing within company, behaviour of top management, communication and collective working environment, information gaining and resource use. in third part of questionnaire, organizational commitment scale firstly developed by allen and meyer and used by sezgin in his research called “an application on the impact of the in-service training of kitchen staff on organizational commitment and job satisfaction " to measure organizational commitment scores of employees’ in 2010 was used. in this scale, 17 scale items exist and scale items were searched with 5point likert type. in the scale; (1) strongly disagree, (2) partly disagree, (3) neutral, (4) partly agree, (5) strongly agree options took place. organizational commitment scale consist of emotional commitment, normative commitment and continuance commitment sub-dimensions. the dependent variable of the research is organizational commitment and the sub-dimensions of organizational commitment concept which are “emotional, normative and continuance commitment”. independent variable of the research is organizatinal learning inclination. 41 scale items in organizational learning inclination scale reduced to 22 scale items after the explanatory factor analysis was applied for formulating the factorial structure and eliminate the scale items. 17 scale items in organizational commitment scale reduced to 14 scale items after the explanatory factor analysis. the reseach analysis continued with factorial structures that identified for both scales. 6. hypotheses of the research organizational learning inclination is defined as the predictor variable. organizational commitment is defined as the result variable in the research. main hypothesis of the research is identified as “there is a positive meaningful correlation statistically between employees’ organizational learning inclination and organizationel commitment”. managers and employees whose organizatitional learning inclination scale scores are in a high level will have higher level of organizational commitment scale scores. the organizational learning inclination and organizational commitment scale scores were found by calculating the arithmetic mean of the items in question. the hypotheses of the research which try to identify the relations between organizational learning inclination and the dimensions of organizational commitment were tested with linear regression analysis. one way analysis of variance was used in order to identify the relations between independent demographic variables (age, position, level of education, working period) and organizational commitment. when there was statistically significant difference between the groups of variables, duncan test was applied to explore between which groups there was statistically significant difference. 7. findings findings of the research came up under the headings of demographic findings regarding participants, reliability, validity of scales and findings of hypothesis tests. 32 özlem yenidoğan & hüner şencan http://ijcf.ticaret.edu.tr 8. descriptive statistics the frequency distributions of demographic data related to participants’ age, position, education level and working period were calculated. the findings obtained are like below: according to the results, % 25 of participants are between the ages of 18-25. % 29 of them are between the ages 2630. %40 of participants are in 31-40 age group. %5,8 of participants are 40 years old or over 40 years. it is seen that approximately % 54 of participants are below the ages of 31. this result indicates that participants have a higher average age of younger participants. in accordance with education level variable; %4,6 of participants had primary school degree; % 29,6 of them had high school degree, %14,6 of them had associate degree; % 43,8 of participators joining the survey had bachelors degree and %7,3 of them had master’s degree. the fact that 7,3 % of those who have worked at a graduate level of education indicates the lack of highly educated employees’ in hospitality sector. when working period variable is examined, % 43,5 of participants are found to have 0-2 years working period; % 21,2 of them had working period between 3-5 years. % 21,5 of participants had 6-10 years working period. %13, 8 of them are found to have 11 years or over 11 years working experience. this finding may be due to the fact that hotel business has a high turnover rate. 31.5% of the participants appear to have worked in positions linked to the front office department. even in each company, name of the positions, number of employees working in positions and staging of positions change, front office department generally includes receptionist, belboy, doorman, guest relations executive and operator positions. % 43,1 of participants are identified to have worked in the positions of other departments. other departments have included production and service departments in which hospitality sector is widely employed by more workers. just as food and beverage department kitchen and restaurant managers and employees, housekeeping and room maintenance. according to task variable, % 24,6 of participants consist of managers; %75,4 of them consist of non-executive employees. this finding in the framework of the study reveals that the vast majority of the participants in the hospitality industry are not in managerial status. 9. analyses of dimensionality, reliability and validity explanatory factor analysis (efa) related to both conceptual structure was used for the determination of factorial structure and to exclude inappropriate scale items from analysis. “factor 10.3.01” programme was used for efa analysis. as a result of factor analysis, variables’ correlation values were found to be over 0.20. policoric correlation analysis was applied for identifying the certain number of factors and determination of factorial structure. parallel analysis was also used to determine the factor size. in the analysis, the scale items with a factor load of less than 0.40 were removed from the scale and items with a factor load over 0.40 were included to the scale. the fact that the test result of kaiser meyer olkin is greater than 0.60 and the significance of the barlett measurement output indicate that pre-conditions of factor analysis are met (yıldırım, 2015, p. 36). after the efa analysis conducted to organizational learning scale, barlett statistical test result’s value was found as 1404,6 (df = 231; p = 0.00 ) as the significance value in barlett sphericity test was p <0.05, the sample for the scale was found to be suitable for factor analysis. kmo test result related to organizational learning inclination scale was found as 0.76 when kmo test result value was found as 0.87 related to organizational commitment. barlett statistical test result related organizational commitment was found as 1487,1 (df = 91; p= 0,000010). these findings indicates that the sample for the scale is suitable for factor analysis. as a result of efa analysis related to organizational learning the effect of organizatonal learning on organizational commitment in accommodation sector 33 http://ijcf.ticaret.edu.tr inclination, 7 factorial structure consisting of 41 variables turned into 4 factorial structure consisting of 22 variables. as a result of efa analysis related to organizational commitment, 3 factorial structure consisting of 17 variables turned into 3 factorial structure consisting of 14 variables. after the identification of factorial structure, reliability analysis regarding measurement datas was conducted. since the aim of developing a scale in the study was not carried out, only "internal consistency reliability" method was used to measure reliability. cronbach alpha values were calculated for scales and for each sub-dimension of concepts. at the same time, correlation values between the scale items were calculated and examined. items with a correlation value of less than 0.30 are removed from the scale (şencan, 2005, p. 242). according to literature, scale items with a negative correlation value should be removed from the scale and should not be included in the analysis. tablo 1. internal consistency reliability values related te o. l. i scale number of items cronbach alpha values organizational learning inclination scale 22 0.759 oli. scale: shared vision (first subdimension) 5 0.629 oli. scale: information acquisition and resource use (second dimension) 5 0.656 oli. scale: information sharing (third subdimension) 7 0.683 oli. scale: open mindness (fourth sub-dimension) 5 0.503 tablo 2. internal consistency values related to o.c. scale number of items cronbach alpha values organizational commitment scale 14 0.846 oc: emotional commitment ( first subdimension) 8 0.876 oc: normative commitment (second subdimensions) 3 0.677 oc: continuance commitment (third sub-dimension) 3 0.505 the findings of general reliability of both scales and the alpha values calculated for each dimension of these conceptual structures were given in table 1 and table 2 taking alpha reliability coefficient values into account. reliability of the scales for measuring two conceptual structures seems to be at a good level. since the cronbach alpha value was 0.759 and the alpha coefficient value between 0.60 ≤ a <0.80 indicated that the scale was reliable, 34 özlem yenidoğan & hüner şencan http://ijcf.ticaret.edu.tr the organizational learning inclination scale was found to be reliable. since the cronbach alpha coefficient value between 0.40≤a<0.60 indicated that the scale was reliable, sub-dimensions of organizational learning scale were reliable ( table 1.). when the reliability of the organizational commitment scale was examined, the cronbach alpha value was 0.846. as the cronbach alpha coefficient value of 0.60 ≤ a <0.80 indicates that the scale is reliable, and the organizational commitment scale was found to be reliable at a good level. as the cronbach alpha value between 40 <a <0.60 is reliable, sub-dimensions of the scale are also reliable (table 2). after reliability analysis, validity analysis was used for measurement instruments and datas. as validity analysis is conducted on the obtained data, it should be repeated in each research (şencan, thesis writing guide, 2016). appropriateness of the scale to the conceptual structure can be assesed by the inclusion of experts and researchers in the evaluation (bannigan ve watson, 2009, p. 3240). as a result of the evaluation of 5 experts in related field by using this superficial technic not based on statistical measures, scales were found to have face validity. lawshe’s igo formula is used for identifying the content validity of scales. 5 expert academicians examined the scale items in terms of relevance and understandability. since the rate of content validity is found approximately close to 1 (i̇go→ 5/5:2-1= 1), the result indicates that scale items in both scales contain the scale items related to conceptual structure and have content validity. as well as being a component of structural validity (westen ve rosenthal, 2003, pp. 608-609), confirmatory factor analysis (cfa) was used for contruct validity in the scope of the study and its findings were given in table 3. table 3. confirmatory factor analysis finding related to oli. scale chi-square value/ degree of freedom (χ 2 /df) 3.509 comparative fit index (cfi) 0.586 goodness of fit index (gfi) 0.889 adjusted goodness of fit index (agfi) 0.866 root mean square (rms) 0.087 root mean residual (rmr) 0.097 according to cfa analysis finding related to organizational learning inclination shown in table 3. , since chi-square value/ degree of freedom is (χ 2 /df = 3.509), it is an acceptable value. root mean square value was found as 0.087. root mean square values between 0.05<rmr<0.10 are accepted as appropriate. the result of goodness of fit index is 0.889. since the values of gfi between 0.90<gfi<0.95 are appreciated as appropriate, this value is rather low. comperative fit index values are acceptable as long as equal to 0.90 or over 0.90. the result of the analysis indicates that cfi value is also low ( cfi= 0.586). it is an acceptable value if root mean residual value is 0.08 (erdoğan and others., 2007, pp. 10-11). the rmr value was found as 0.09 as the result of the analysis. the result of adjusted goodness of fit index is 0.866. agfi values between 0.90 <agfi<1.00 indicate good fit when agfi values between 0.85<agfi<0.90 indicate acceptable values. table 4. confirmatory factor analysis finding related to oc. chi-square value/ degree of freedom (χ 2 /df) 5.214 comparative fit index (cfi) 0.536 goodness of fit index (gfi) 0.929 adjusted goodness of fit index (agfi) 0.904 the effect of organizatonal learning on organizational commitment in accommodation sector 35 http://ijcf.ticaret.edu.tr root mean square (rms) 0.176 root mean residual (rmr) 0.160 according to cfa analysis finding regarding oc. scale shown in table 4. , the result of chi-square value/ degree of freedom is found as 5.214. if the result of chi-square value/ degree of freedom is χ 2 /df <2, it reflects the perfect fit. if the value is lower than 3, the result reflects an appropriate fit. root mean square value is 0.176. according to literature, rms values between 0.05<rms<0.10 are acceptable. the result of goodness of fit index is 0.929. since the gfi values beteeen 0.90<gfi<0.95 are appropriate, this value is acceptable. when comperative fit index value of 0.90 or greater, it indicates acceptable compliance. the analysis show that cfi value is also low (cfi=0,536). it is an acceptable value if root mean residual value is 0.08 (erdoğan and others, 2007, pp. 10-11). the analysis result shows that rmr value is 0.160. adjusted goodness of fit index value is 0.904. agfi values between 0.90 <agfi<1.00 indicate good fit when agfi values between 0.85<agfi<0.90 indicate acceptable values. agfi values of oc. scale are acceptable. 10. main hypothesis test finding the main hypothesis of the research which aims to identify the relation between organizational learning and organizational commitment was tested with linear regression analysis. h2, h3 ve h4 hypotheses relatively which aim to identify relations between organizational learning inclination and the dimensions of organizational commitment (emotional, normative and continuance commitment) were tested with linear regression analysis. hypothesis which are h5 h6 h7 ve h8 relatively trying to identify relations between organizational commitment and independent demographic variables( age, position, education level and working period) were tested with oneway anaysis of variance. before the analysis was conducted, it was examined whether the pre-conditions for linear analysis were met or not. accordingly, pre-conditions which are (a) linearity, (b)normality, (c) independence of errors and (d) homogenity of variances were examined. as the results from regression analysis were fair, the pre-conditions were met. therefore, it may be admitted that the results from regression analysis are the true reflection of the truth. depending on the results of regression analysis to test the relation between general scores of o.l scale and general scores of o.c. , the relation of two conceptual structures was found statictically meaningful (f=6.134; p<0.05; r2=0.023). organizational learning inclination factor explained 0.023% (r2 =0.023) of the variance. accordingly main hypothesis of the research was verified with the meaningful statictical correlation between concepts. in reject of null hypothesis, alternative hypothesis was approved. incease in organizational learning inclination of employees is supposed to affect organizational commitment of them positively. findings of confidence interval predictor value indicate that 1-point increase in the organizational learning inclination variable would result in a point change of between 0.053 and 0.461 in organizational commitment scores. 11. conclusion and recommendation main hypothesis of the research is to identify whether a statistically meaningful correlation between organizational learning inclination of employees’ and their organizational commitment exist or not. subhypotheses are to identify the relationship between organizational learning and organizational commitments’s subdimensions. also, the relationship between independent demographic variables just as age, position, education level, working period and organizational commitment were tried to identify. main hypothesis finding shows that organization learning concept explains 0.023 % of organizational commitment concept (r2 =0.023). main hypothesis was approved with the meaningful statistical correlation between two concepts. in other words, increase in employees’ organizational learning inclination is supposed to increase their organizational commitment positively. in a company where learning in the level of organization occurs, “the thought 36 özlem yenidoğan & hüner şencan http://ijcf.ticaret.edu.tr of employees are appreciated” is dominant. employees that are aware of the actions and practises regarding organizational learning in the company feel more appreciated and committed to their organization. pleasure of employees who are internal customers of organization ensure indiviuals’ development of organizational commitment. increasing the organizational commitment of employees goes through the establishment of a learning environment where continuity of learning can be ensured. kyoo and shim, (2010) in their research admited that when employees have a perception of the existence of learning culture at a high level, their commitment to their organization increase (pp. 425-441). bhatnagar, (2007) found a remarkable correlation between organization learning capability and organizational commitment’s sub dimensions in his research (bhatnagar, 2007, pp. 1782-1811). yeniçeri and yücel, (2009) specified “the existence of a positive relation between guest relations, organizational learning, adaptive behaviour and organizational commitment” in their research (yeniçeri and yücel, 2009, pp. 138154). second hypothesis of the research is to identify the relation between “organizational learning inclination and emotional commitment”. finding of the analysis indicates that organizational learning explains 0.046 % of emotional commitment (r2=0.046; f=12.574; p=0.000). the hypothesis is verified as there is a statistically significant relationship between organizational learning inclination of employees and their emotional commitment. in reject of null hypothesis, alternative hypothesis was approved. employees’ emotional commitment increase depending on the increase of their inclination to organizational learning activity. employees having higher emotional attachment to their organizations make additional efforts in favor of the organization. therefore, such employees have continuously learning motivation (akpınar, 2007, pp. 104105). the importance given to the learning in the level of organization within the companies creates positive impact on the commitment of employees. in the hospitality sector which is known to have a very high turnover rateproviding appropriate environment for learning and allocation of the resources to this activity is an element that enhances employees’ organizational commitment. third hypothesis of the study is to identify whether a statistically meaningful correlation between “organizational learning inclination and normative commitment” exist or not. it is identified that organizational learning (r2= 0.000; f=0.042; p=0.839) doesn’t provide the opportunity to explain normative commitment significantly (p =0.839; p >0.001). according to finding, there is no statistically significant relationship between organizational learning and normative commitment. the organizational learning activity inclination of employees have no affect on the normative commitment of employees. the increase in organizational learning inclination of employees does not have an impact on moral commitment development of them. fourth hypothesis of the research is to identify whether a statistically positive relation between “organizational learning inclination and continuance commitment” exist or not. it is identified that organizational learning (r2= 0.000; f=0.059; p=0.809) doesn’t provide the opportunity to explain continuance commitment significantly (p =0.809; p >0.001). h0 ( there is no a statistically meaningful correlation between organizational learning inclination of employees and their continuance commitment) was approved in the reject of alternative hypothesis. organizational learning inclination of employees has no influence on the continuance commitment of them. akpınar, (2007) obtained a similiar finding in his research that aimed to identify the relation between organizational learning and organizational commitment dimensions. according to research findings, compulsory attachment has no relation with organizational learning factors (p. 147). fifth hypothesis of the research is to identify whether there is a statistically meaningful correlation between “the ages of employees and organizational commitment” scores or not. according to the findings of the analysis, age groups have a significant effect on organizational commitment (p<0.05). also, organizational commitment scores (m = 4. 1000) for participants aged 40 years and over were higher than other age groups. this situation may be explained by the fact that the employees aged 40 and older are not willing to move away from their work due to the investments and savings they have made during their working period. lack of much work options may also cause continuance commitment on the employees. the effect of organizatonal learning on organizational commitment in accommodation sector 37 http://ijcf.ticaret.edu.tr sixth hypothesis of the research aims to identify whether a statictically meaningful correlation between “employees’ positions and organizational commitment ” exist or not. the analysis concluded that there was no significant relationship between positional groups and organizational commitment (p= 0.192>0,05). it was determined that the organizational commitment scores (m = 3.7744) of the employees in the purchasing department positions were higher than the other positional groups. seventh hypothesis of the research is to identify whether a meaningful correlation between “employees’ education levels and organizational commitment” scores exist or not. as a result of the analysis, it is found that "there is statistically significant difference between the groups in terms of organizational commitment" (p=0.016<0,05). the organizational commitment scores (m =3.808) of the employees at the graduate level are significantly higher than those of the other education groups. employees at the graduate level seem to be more committed and loyal to their company and less inclined to leave the workplace. eighth hypothesis of the study is to identify whether there is a meaningful correlation between “employees’ working period and organizational commitment” scores or not. the analysis concluded that there was significant difference between working period groups in terms of organizational commitment (p= 0,000 <0,05). it is seen that the organizational commitment scores (m = 4,0635) of the employees over 11 years working period are higher than the other groups. this situation may be explained by the fact that it gets more difficult to give up the investments made by the employee when there is a long working period. working period of the employees in their workplace may influence their continuance commitment. 5.1. recommendation for future researches the findings of the research indicate that organizational learning is related to organizational commitment. increasing organizational learning inclination of employees cause the development of their commitment to their organization. for this reason, the organization should include practises to increase the organizational learning inclination of the employees. number of researches regarding hospitality sector to determine the relation between two concepts are less in quantity and many of them are not based on practise. the research will shed light on future researches in this regard. it will be a compass for other researches that will develop scientific information accumulation. the research conducted on this topic was at a time period when external conditions directly affecting the hospitality sector were predominant. dismissals from workplaces noticeably increased in the term when number of tourists prominently decreased. the research should be assesed by considering that these conditions may have influenced companies’ organizational learning practises, employees’ organizational learning 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(thesis no. 189444). international journal of commerce and finance, vol. 9, issue 1, 2023, 101-122 * * university of south africa, south africa, innocent.bayai@nust.ac.zw ** university of south africa, south africa, koppezr@unisa.ac.za *** university of south africa, south africa, ealukot@unisa.ac.za **** national university of science and technology, zimbabwe, mecuryv@gmail.com 101 surviving the threat of covid-19: a review of smes’ adaptive strategies innocent bayai* koppeschaar zanne** timothy aluko*** mecury chimutanda**** submitted: 14.01.2023 accepted: 24.05.2023 published: 06.07.2023 abstract this study seeks to explore and assess the feasibility of smes’ adaptive strategies considering the limiting stimulus and peculiarity of smes in developing economies. noting evidence paucity and fragmentation in relation to smes’ adaptive strategies during the pandemic (covid-19), this study collates evidence related to the settings of developing economies as a way of augmenting the realities of the sme sector. the study assumes a literature review approach inclined on tracking available evidence on how smes maneuvered the challenges introduced by the covid-19. the intuition presents to smes an opportunity to weigh the plausibility of alternative strategies to navigate the business now and for referral purposes in case of another crisis. online trading, change in business models, remote work, reconfiguring budgets and reducing overheads, and re-negotiating debt obligations emerged as popular strategies adopted by smes. however, the efficacy of these strategies in developing countries remains a concern on account of inadequate stimulus packages, smes’ low management capacity to handle the changing business environment, operating losses, poor uptake of technology and technological literacy, the limiting costs linked to the adoption of technology amongst many. policy imperatives designed to undo these limitations can prop the sme sector post the pandemic. keywords: surviving, covid-19, smes, adaptive strategies mailto:koppezr@unisa.ac.za mailto:ealukot@unisa.ac.za international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 102 jel classification: l1, l22 1. introduction despite the immediate manifestation of the effects of covid-19 on global stock markets, the property industry (real estate), tourism and unemployment; the pandemic’s effect on small and medium enterprises (smes) was not timeously established owing to data limitations given the informality of smes especially in developing economies (fairlie, 2020). this evidence lag explains the likely ill-timed sme intervention mechanisms in developing countries – a policy error concomitant with poorly-developed sme sector. regardless of the evidence lag, the pandemic’s effects were independent of enterprises’ size, and smes were disproportionately shaken by the pandemic (hasanat et al., 2020; engidaw, 2022). the unctad (2022) records that at the height of covid-19 induced instabilities, many smes ceased operations, and many were at the verge of closure or were increasingly vulnerable. but, why smes in particular? smes contend with a dynamic external environment and the pandemic pronounced new hitches on smes – adding to the plethora of challenges they already navigate on a daily basis. the pandemic’s impact on small businesses was particularly acute, mostly on account of worsening vulnerability and inferior capacity to manage the pandemic given smes’ size. the vulnerability of smes exceeded that of large firms on account of poor “financial capacity, a weak supply chain capability, and a lower level of mastery of digital tools and technologies” (oecd, 2021: p 2). whilst financing is an aged limitation for the growth and development of smes (abraham, schmukler & abraham, 2017), it persisted as the domineering cause of smes’ failure during the pandemic (cowling, 2020). the financial position of small businesses was worsened by prolonged lockdowns, translating to closed and inaccessible markets – in turn leading to suppressed volume of sales against an accumulation of costs. also, cash was tied up in stock leading to financial illiquidity. although the cost structure1 for smes remained unaltered, smes were not making money, leading to losses and headwinds related to business and capital losses. consequently, many smes were forced to operate below capacity, thereby introducing a financial strain. 1 an aggregate of fixed and variable costs. international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 103 suppressed access to finance for smes during the pandemic widened the financing gap for smes as banks became stingier, outside state-sponsored covid-19 relief packages. as much as most governments took measures to address economic impacts of the pandemic, responses varied from country to country. stimulus packages, expressed as a proportion of the gdp were better in developed countries thus, smes in rich economies received superior support than those in developing countries (unctad, 2022). the ifc (2020) estimated that 65m businesses – translating to 40% of formally registered small businesses in developing economies got an annual financing gap amounting to $5.2 trillion. this amount is equal to 1.4 times of the present scale of global lending to small businesses. globally, east asia and the pacific stands outs with the largest share of sme financing gap (46%), trailed by latin america and the caribbean (23%) and europe and central asia (15%). conventionally, small businesses find it tough to access finance from banks as they struggle to prove their credit-worthiness and fail to avail assets to secure loans. given the stifled access to finance situation during the pandemic, smes in developing countries had to consider other financing options as stimulus packages and most traditional sources of finance were not tenable. another challenge small businesses faced was the inability to reorder stock or inputs timeously. lockdowns, travel restrictions as well as covid-19 tests resulted in inefficient movement of goods and services. smes operating in logistics and the moving of goods faced significant hurdles compared to large businesses (unctad, 2022). businesses especially dependent on logistics as well as imports had snags in moving their wares across borders. as a result, many businesses could not operate at full capacity and this was evident in developing countries whose economies are highly dependent on imports. two out of three african businesses are said to have experienced reduction in sales by a magnitude between 54% and 75% owing to their inability to access inputs (itc, 2020). the pandemic-induced challenges led to loss of business viability, eroded balance sheets, and insufficient working capital and for some smes, rental arrears accumulated. these innumerable challenges aggravated smes’ risks and consequently led to business closures in some instances. a couple of weeks into the pandemic saw smes laying off a large number of workers and in worst cases closures ensued (bartik et al. 2020). this affected smes’ vital role of driving economic development (muriithi, 2021), job creation, poverty alleviation, as well as supporting the attainment of sdgs (puriwat & tripopsakul, 2021). the actual count of sme closures international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 104 globally remains unconfirmed although unctad (2022) projected 2.6 million sme closures in the latin america and the caribbean (lac) region whereas 80% of chinese small businesses temporarily shut their doors in february of 2020 (dai et al., 2021). whilst the pandemic at its zenith led to the closure and insolvency of businesses (amankwah-amoah et al., 2020), it also pressed the surviving small businesses to adopt new and changed operating strategies to guarantee their survival and growth (verma & gustafsson, 2020). the ‘changed ways’ of operating are referred to as adaptive strategies in this study. whereas a multiplicity of adaptive strategies were employed by smes to avert the challenges posed by the pandemic, the evidence remains not only sparse, but fragmented (country/region/sector-specific) (see engidaw, 2022; adam & alarifi, 2021; arslan et al., 2022; dzingirai, tshuma & sikomwe, 2021; hossain, akther & sultan, 2022; murithi, 2021 and pu et al., 2021). notable also is the emerging nature of the subject as new evidence is slowly showing up and the pandemic’s oscillating nature implies that smes might be in the doldrums for long. as such, small businesses are still reconnoitering ways to forestall the challenges that befell them due to covid-19. despite the foregoing, research has shied away from not only consolidating smes’ adaptive strategies to the pandemic, but is delinquent of a review of the collective effectiveness of the same. a review of smes adaptive strategies is a policy imperative in the event of another pandemic as much as it edifies scholarly appreciation of the varied coping mechanisms adopted in different economic environments. accordingly, this study is structured to assess the feasibility of diverse adaptive strategies whilst considering the peculiar case of smes in developing countries as they were overly affected by the pandemic. the understanding is that smes contribute significantly to global economies and post the pandemic, smes are still exploring further copying mechanisms. therefore, this paper details adaptive strategies to prop smes survival and growth. to the best of our knowledge, we are the first to channel effort towards aggregating and reviewing the disjointed evidence on smes’ adaptive strategies to mitigate covid-19 challenges. as a way of methodology, the paper resorts to a desktop review of literature on smes’ covid19 adaptive strategies from the year 2019 to 2022.2 whereas the paper presents evidence on 2 this is the period covid-19 manifested across the world and effected unforeseen damage to the economies and the sme sector in particular. https://www.tandfonline.com/doi/full/10.1080/13215906.2021.1989626 https://www.tandfonline.com/doi/full/10.1080/13215906.2021.1989626 international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 105 various smes’ adaptive strategies, care is taken to align the feasibility of such strategies to the context of smes in developing countries.3 although this research area is nascent, this study benefits from the budding literature and provides insights for smes’ innovative or practical options to strengthen their business models. to accomplish this, the second section presents the strategies adopted by smes to circumvent the pandemic’s challenges whilst a discussion of the feasibility of the strategies to smes in developing countries is detailed in section three. to end the study, the fourth section proffers policy conclusions. 2. smes’ covid-19 adaptive strategies literature upholds that whilst the unfamiliar circumstances introduced by crises potentially modifies the business stimulus, the effect of the crises on businesses is a function of management’s competency (mandják, wimmer & durrieu, 2017). accordingly, smes embraced several practices and strategies to defy the difficulties introduced by the pandemic (thorgren & williams, 2020). despite the sparse evidence, this section relies on studies that focused on smes’ covid-19 adaptive strategies as a way of creating a knowledge portal on the same. online trading migration to digital platforms has been viewed by many as an inescapable strategy that businesses had to make use of to access or reach markets. the move to digitalization brought relief to many businesses that were stuck owing to lockdown and restriction in movement. digital platforms enabled smes to reach more clients, in foreign, local and remote locations as well as source resources and inputs worldwide. by realization, the covid-19 crisis had plenty imbedded business opportunities capable of instilling growth. e-commerce during the pandemic appealed to resident and confined clients owing to movement restrictions, and it also enabled digitalization of markets thereby ‘forcing’ businesses (smes in particular) to adopt online trading and scale their internet infrastructure. the covid-19 pandemic is reportedly responsible for a 30% boost in retail smes operating e-commerce services. in conjunction with social media, e-services enabled retail smes to market their businesses online (beckers et al, 2021). this for many businesses was viewed as the covid-19 silver lining as it created 3 msmes in developing countries faced the worst covid-19 brunt and were not adequately cushioned by the state-sponsored stimulus packages. international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 106 awareness and allowed businesses to tap into opportunities, they were oblivious of. most businesses were stretched towards growth. in the united states, about 51% of smes were said to have scaled online interfacing with their customers, 36% of personally operated businesses reportedly conducted all sales online; whilst 35% of entities that altered their operations during the pandemic extended the use of digital payments (sandberg, stanford & buttle, 2020). many firms quickly embraced online trading, especially those in the food delivery business, entertainment, and clothing sectors. the inadequate, if not the absence of digital readiness amongst most smes came into the limelight during covid-19. most smes, especially micro businesses embraced digital technology slowly as they lacked funding for the transition. in developing countries smes faced particular challenges owing to illiteracy, power shortages and the quality of available infrastructure (prakash, kumar, & verma, 2021). there is mounting confirmation that smes that failed to adopt online means of doing business faced higher chances of failure compared to their digitalized counterparts (oecd, 2021). change of strategy and business models confronted with sudden unpredictability which for some included the threat of extinction, some small businesses had to quickly counteract covid-19 challenges by innovating or altering the model of the business as an initial reaction to the pandemic’s challenges. small businesses were compelled to change their business models either temporarily or permanently. a study featuring 32 startups in australia concluded that the pandemic-induced adversities and opportunities instigated changes in business models for most start-ups (guckenbiehl & zubielqui, 2022). the crisis also induced the practicing of novel management styles aligned to a quick understanding of the changing business environment, restructuring and transforming operations as well as managing the human resources. this was confirmed by a survey of 259 sme managers in saudi arabia with results showing better performance and improved prospects of endurance and continuity (survival) for the smes (adam & alarifi, 2021). small businesses are noted to have employed a wide range of business model innovations. omar et al. (2020), states that sme managers also altered their financing and marketing models to enhance their relevancy in the face of covid-19-enduced crisis. international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 107 australian exclusive eateries started offering boxed deliveries accompanied with do it yourself instructions to enable clients to cook at home whilst breweries transformed their unique selling propositions to deliver groceries with sit-in only diners switching to delivery of food to clients’ homes (cruz, 2022). clauss et al. (2021) on their case study of 5 smes in austria, germany and liechtenstein, also noted small business to have temporarily changed models. businesses either switched product lines or switched to another industry that was covid insensitive. a case is mentioned of a cooking oil producer switching to retail (including selling masks, toilet paper and delivery services). business model innovations during covid-19 appear to be endless. in developing countries, businesses in the tourism industry especially lodges and hotels had to temporarily give up their facilities as covid-19 quarantine or isolation centers. the 2020 botswana covid-19 report informs that the botswana tourism organization (bto) and the hotel and tourism association of botswana (hatab) discussed a possibility to partner with hotels to offer accommodation for all covid-19 quarantined individuals. these partnerships were done in the bid to generate revenue for businesses that were not sustainable during the pandemic. a hungarian survey suggests that whereas 24% of small businesses intended to go back to their pre-pandemic business models, 41% opted to carry on with the business models established during the crisis (oecd, 2020). however, cruz (2022) notes that sme owners were unsure of the effect of changed business models and value proposition on their brands after the pandemic. from that viewpoint, effecting brand innovation was uncommon with most small businesses as they sort to evade probable losses post the pandemic. changing business strategies was also affected by regulatory requirements to enter controlled sectors. there was need to be licensed especially to enter certain sectors that were buoyant during the pandemic, for example shifting to pharmaceuticals. while the south-east asian report by oecd (2021a) showed that the effect of the crisis warranted modifications and adjustments to prevailing regulatory frameworks such as easing or flexible application, african smes lacked government backing and readiness to offer financial support and assurance to ease the situation of affected smes (muriithi, 2021). that coupled with lockdowns, and social distancing made it difficult for change in industry to be seamless. according the finmark trust (2020) legal compliance and the political and economic environment led to more business closures post covid-19 lockdowns. international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 108 identification of new entrepreneurial opportunities although covid-19 prompted some businesses to temporarily close down due to unsustainability of businesses, exceptional businesspersons were creative enough to identify and commercialize new opportunities. a survey done by stephan et al. (2021) on 5206 entrepreneurs in 23 countries shows that 66.1%, 54.2% and 54.2% entrepreneurs in australia, chile and japan recognized new business opportunities inclusive of digitalization, health and beatitude, resident and foreign, sustainability and novel business models and restructuring of business operations. for example, efforts were on course to backshore production processes to local markets in place of relying on foreign and offshore traders. opportunities relating to backshoring production processes included new local farmer collaborations in selling their produce to local consumers. however, of the sampled entrepreneurs; bangladesh, china and pakistan recorded the lowest count of new recognized business prospects at 9.5%, 18.7% and 19% respectively. the business formation statistics (bfs) from the u.s. shows that the total tally of applications to register new businesses rose by 20.6% from 2020 to 2021 indicating a surge in entrepreneurial activity. industries that experienced more growth than others included retail, professional services, construction, transportation and warehousing (betterton, 2022). this was pinned to the mandatory reformation of companies for the duration of covid-19. cloud-based accounting was mentioned to have experienced a melodramatic surge in usage, just like other internet-based services. establishing extra sources of finance available literature (orem, 2021; bell, 2020; tong, xie & xiao, 2021) indicates that crowdfunding4, rotating savings and credit associations (roscas) as well as prepayments by customers are some of the adaptive business financing options that small business embraced. as covid-19 disrupted most traditional funding sources for smes, small businesses started to consider innovative financing options such as crowdfunding and blended financing to better manage their financing needs. however, the downside of crowdfunding was that the process was involving and consequently not good for small business owners that didn’t have time and energy to undergo the process. precisely, crowdfunding gained momentum in developed 4 crowdfunding is the process of raising money from a group of individuals via online platforms. crowd funders frequently raise considerable amounts of money without getting loans, using all of their savings, or becoming dependent on venture capitalists or banks international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 109 countries like the united states. in many developing countries especially africa (chao et al, 2020) and india (raveena & sunayana, 2022) the crowdfunding phenomenon was somewhat lagging as it was still at its infancy5. bell (2020) also noted that smes in countries with underdeveloped banking systems, underprivileged people, and secluded societies inclusive of people of color bridged their financing challenges making use of the innovation in microfinance such as microloans such as rotating savings and credit associations (roscas) and innovations such as collateral free microloans supported by social capital. roscas involve a group of people who pool funds on a weekly or monthly basis from their personal savings and retained profits and give to members on a rotational basis. the downside of roscas though is their failure to meet all the financing needs for businesses as subscriptions are typically small. in china, as the covid 19 impact caused revenues to plummet, many companies in the hospitality industry responded by launching prepayment products hoping to realize instant cash flows. the idea of prepayment was hinged on the advantage of financing services and costs prior to delivery. networking a study by fougesatto et al. (2020) on the role of sme networking capabilities in brazil during the pandemic concluded that creating partnerships amongst unlocked inter-company communication, strengthened linkages with former business partners, fostered emotional support as well as scaling smes’ capabilities for lessening the impact of covid-19 and smoothening inter-company affairs during the crisis. a survey of nearly 50 libraries conducted by the american library association ala (2022) exposed that libraries were collaborating and helping small businesses in need of their assistance during the peak of covid-19. these services were sought by the worst covid-affected businesses dealing in food and accommodation, buying and selling of wares, education, shows and performance. the majority of the libraries confessed cooperating with communities through representative groups such as sme associations, ngos, tertiary institutions of learning and chambers of commerce in an effort to assist business entities. bullough and renko (2018) are imperative of small business owners’ partaking in trainings that edify business and corporate development and participate in collaborative workshops that 5 crowdfunding especially in developed countries gained momentum during the pandemic. initially it has raised many doubts and still has many critics as many people are still familiarizing with it. international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 110 enable learning ways of overcoming business challenges. the core idea behind networking capabilities in times of crisis is that relationships between organizations amplify the generation of not only strategies but resourcesing businesses during crises (dyer & singh, 1998). remote work (working from home) the state of remote work by buffer (2021) states that almost 98% of the workforce prefer to work remotely even for the rest of their careers. internet based platforms like zoom, microsoft teams as well as other interactive tools such as whatsapp amongst many digital tools ensured the continuity of collaborative work amongst workers. the collaboration of workers was critical during covid-19 as it heightened morale to workmates separated by travel restrictions and quarantine regulations (the southern bank company, 2022). remote working countered the movement restrictions which affected the mobility of workers during lockdowns. remote work however was not an option for all smes. smes involved in construction and production in need of actual attendance of workers did not benefit much from remote working. the effectiveness of remote work thus depended on the type of small business, the infrastructure available as well as the economic environment. the harvard business review (2020) notes that the us, europe and china were ready for remote work while most nations in asia and africa seemed ill prepared. some small businesses did not have the requisite infrastructure in place to successfully shift to remote work. the same challenges were also identified by the oecd (2021) in a policy note which stated that shifting to remote work was not easy for developing economies as most jobs are not designed to be remotely executed or the skills and resources to ensure remote working were lacking. reconfiguring budgets and reducing overheads when the pandemic took its toll, many smes’ financial well-being decreased thereby curtailing their growth potential. many of them were compelled to perform business budgets analysis, cut unnecessary expenses, as well as make room to grow their revenues. an arlington research commissioned by kaspersky (2021) based on a survey of small businesses employing less than 250 workers in 22 countries inclusive of latin america, russia, africa, middle east, north america and europe, and asia-pacific questioned 3,150 managers participating in company budget setting found that 38% of small businesses had to cut their budgets in order to survive. another 35% scaled down salaries for hours worked; and 34% shut their physical https://altline.sobanco.com/how-to-do-a-budget-analysis-for-your-business/ international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 111 premises; 24% had to cut spending on information technology and tech-support, 19% for online security while 12% laid off workers permanently (see figure 1). what is eminent is that smes had to reduce costs and survive on a lean budget and in dire circumstances, some costs were neglected despite them falling due. owing to reduced business viability, some smes neglected bill payment (11%), reduced employment costs or stopped employing as well as diverting/stopping new investments. the gist in all this was to remain afloat despite the reduced earnings. figure 1: small businesses’ response to the covid-19 crisis source: kaspersky (2021) re-negotiating debt obligations covid-19 related challenges interrupted many small businesses, leading to reduced revenues and consequently making smes unable to service loans as they fell due (world bank, 2022). this prompted small businesses to renegotiate their loans. as an example, some smes adopted international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 112 the debt snowball method where smaller debts were paid quickly6. during the pith of the pandemic, dore et al. (2020) suggested ways of emotionally supporting customers as well as small businesses. one of these includes small businesses’ ability to negotiate flexible solutions when dealing with financial challenges. some smes negotiated penalty waivers from financial institutions, grace periods for service termination from utility providers as well as lenience on enforcing late-payment fees for small businesses experiencing hardships. in america, companies were advised to scrutinize every cost as every dollar mattered. companies hanging by a thread were being advised to try to renegotiate contracts with suppliers and landlords, and refinance debt (kost, 2020). however, the ncrc (2021) points out that there is evidence of discrimination whereby white-owned smes had higher bank loan modification approval rate compared to latino and black-owned smes. strengthening customer relationships on account of pandemic-imposed limitations on businesses, it became tough for small businesses whose customer base is usually thin to communicate as well as maintain customer relations in the same way they used to. small business had to reassess and embrace new ways of reaching customers as well as attract new ones. according to kays (2020), close to 45% smes sought alternative means of communicating with clients as customer demand and communication are companies’ biggest priorities. some businesses embraced online trading thereby creating a huge social media presence while others engaged personalized email marketing. turner (2022) added that there were also efforts on the part of small businesses to educate customers to embrace technology, making up for order delays that were unavoidable during the pandemic (examples of which include calling customers and notifying them of delays) as well as relaying covid-19 protocols and updates on to customers on their social media channels. it should be noted however that customer service had its own snags as both small business owners and customers were navigating the use of technology. kays (2020) added that the effectiveness of technological channels depended on the resources that small businesses had at their disposal. 6snowball method involves paying off the smallest of all loans as quickly as possible. once that debt is paid, funds are rolled onto the bigger debt owed. ideally, this process would continue until all accounts are paid off. international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 113 resilience culture in the face of adversity, smes first had to ascertain their survival, invest in continuity and then seek sustainability of operations into the future. accordingly, smes had to embrace resilience capabilities and plans. resilience goes beyond only adaptive capacity. instead, it meant learning to counter the new, yet challenging settings to overcome crisis-induced business disruption (martinelli, tagliazucchi & marchi, 2018). hossain, akter and sultana (2022) also affirm this from a small business viewpoint. they highlight that to subsist during the covid-19 crisis, some smes embraced “organizational resilience view” implying that small businesses had imbedded capacity to quickly master the challenges introduced by the pandemic, invent own and case specific solutions and eventually roll out strategies meant to capitalize on the opportunities presented by the pandemic. smes adopted a resilience culture whereby they engaged various strategies to go over the challenges and these include “reconfiguration, leveraging, sensing and interpreting, learning and knowledge integration, as well as encourage positive employee relationships to enhance resilience” (hossain, akter and sultana, 2022). 3.the feasibility of adaptive strategies for smes in developing countries whilst literature suggests the above-mentioned covid-19 adaptive strategies for smes, it is important to consider the feasibility of these strategies in the context of smes’ operating environment in developing/emerging economies. the success of the adaptive strategies is a function of the obtaining circumstances in developing economies, which in turn determines not only the recovery of the smes but the growth and development of the sector. of note is that smes in developing countries had a limited scope of options in mitigating challenges posed by covid -19. a survey of 17 african countries executed by the african management institute (ami) shows that 87% of entrepreneurs were unsure of the survival chances of their businesses during covid-19 crisis (harrison, 2020). the uncertainty was largely attributable to structural problems inherent in many developing countries. extant literature (comesa, 2020; oecd, 2020; hossain, akther & sultana 2022; the graca machel trust (2021) reveals that developing countries’ smes’ ability to mitigate covid-19 challenges is inhibited by stunted financing, delinquent managing, graft, limited exposure and lack of relevant business training, infrastructure challenges, and deficient profits, challenges linked to the hosting of social media, faulty and lagging technologies, as well as the cost associated with digital media literacy. jolevski, et al (2021) also posit that firms that endured the pandemic managed because they international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 114 were bigger and more productive, were innovative and used digital technologies and had the advantage of operating in less burdensome environments. strategies like online trading, networking as well as remote work where dependent on the possession of digital infrastructure that sometimes demanded substantial investment. in african countries, the digital divide discriminates against rural smes thus technology based interventions remained an urban trend and a privilege for big and stable firms. most smes did not have the resources to seamlessly migrate to digital platforms. instead, they got a sudden call to shift to digital platforms at the zenith of the pandemic. unfortunately, most smes did not have time and capacity to pull together resources to prepare themselves for such sudden and unplanned shifts. a survey of smes in singapore confirms that digitalization is unfordable as supported by 56% of the respondents (baharudin, 2020). effectively, smes in developing countries could not capitalize on the benefits of online trading. developing countries’ smes’ ability to tap into advantages of digital platforms was also hampered largely by the fact that work depended on physical production and markets. online platforms were not a reprieve for all smes in developing economies. many smes function by way of providing physical touch to clients and such businesses serve specific geographical locations, a feature of most informal small businesses in developing countries (oecd, 2020). businesses in developing countries are largely skewed towards manual work (construction, small scale mining, manufacturing, farming, hairdressing, street vending, mechanics, events, and catering) and as such cannot happen online. concurrently, consumers had bounded access to the internet, thus the actual digital reach of smes to the local market was stifled. a study by nyanga and zirima (2020) revealed a drop in sme activity as the effect of lockdowns hindered productivity because small businesses could not shift to the use of digital technologies as their work was dependent on physical presence. gottlieb et al. (2021) asserts that less than 10% of town jobs in developing economies can be executed remotely and this is characteristic of lowly paid jobs and self-employed individuals whose remote working opportunities are limited. on another note, those that managed to embrace digital technologies had to compensate by either laying off workers or reducing salaries. a comparison of wages pitying pre and post covid-19 shows that workers got 22% less than their pre-covid-19 wages. this was affirmed by a survey executed by islam et al. (2021) based on 2300 cottage and smes in international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 115 bangladesh. as much as some smes recorded a steady rise in business returns, they continued paying workers below the pre-covid-19 levels 6 months post the pandemic. the ability to tap into other entrepreneurial activities, adopt innovative business models and establishing new sources of finance required that businesses be sufficiently liquid to do so. inopportunely, smes in developing economies especially in africa have no guaranteed financing sources, and the owners and managers are not only deficient of sufficient business training, but they lack innovative problem solving abilities and they are not financially stable to sponsor their enterprises. approximately 65 million enterprises constituting 40% of small businesses in developing economies got an annual financing gap of $5.2 trillion. this amount is equal to 1.4 times the present worldwide loaning to smes. why is it so? most developing countries financial markets are shallow and thus cannot meet business financing needs. moreover, the effect of the pandemic also affected financial markets – triggering a further reduction in access to finance (oecd, 2020). limited access to financial markets, scarcity of resources, unpreparedness and limited managers’ tactical options in managing the covid-19 crisis (eggers, 2020). additionally, the support rendered to smes by governments in developing countries was minimal and stimulus packages were inadequate to assist smes’ recovery. this is opposed to the circumstances of smes in rich countries where business support schemes and financial access is enhanced (muriithi, 2021). developing countries smes had a limited choice of mitigatory strategies save for aligning budgets and reducing overheads, strengthening customer relationships as well as establishing extra sources of finance. pu et al. (2021) confirm that due to covid-19 many companies in developing countries downsized and scores of workers were either dismissed or their salaries were reduced. for smes in south africa, the majority cut back on business spending to survive (kalidas et al, 2020). businesses also had to maximize on the avenues of strengthening customer relationships by being transparent about their circumstances and engaging customers to support them buy buying local. smith (2020) suggested that customers can help some businesses during covid-19 by buying local and buying extra. on the financing side, smes had to depend on roscas (bell, 2020), personal savings and loans from friends and relatives (world bank, 2020). these could not however meet all their financing needs. summarily, smes in developing countries got to build again post the pandemic as most of them barely managed to survive, scaled down operations or closed operations. https://onlinelibrary.wiley.com/doi/full/10.1111/radm.12498#radm12498-bib-0026 international journal of commerce and finance innocent bayai & koppeschaar zanne timothy aluko & mecury chimutanda 116 4.conclusion the evidence on smes’ adaptive strategies during the covid-19 pandemic is still developing and remains not only sparse by fragmented. this study explored and collated the adaptive strategies adopted by smes to avert the effects of covid-19 on the operations and survival of small businesses. existing literature documents smes’ response to these challenges to include online trading, business models innovations, remote work strategy, establishing extra sources of finance, among others. however, in as much as adaptive strategies have been employed globally, inopportunely, smes in developing countries had a limited choice of these. the effectiveness of the adaptive strategies in developing economies was hampered by structural problems characterizing developing countries. whereas policy ought to better support smes post the pandemic, it remains the responsibility of smes to try the broad array of alternative strategies and increase the survival chances and growth post the pandemic. references abraham, f., & schmukler, s. l. 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(2020). investigating the emerging covid-19 research trends in the field of business and management: a bibliometric analysis approach. journal of business research, 118, 253-261. international journal of commerce and finance, vol. 9, issue 1, 2023, 149-171 * * mzumbe university, tanzania; romwandu17@mustudent.ac.tz ** mzumbe university, tanzania; epkihanga@mzumbe.ac.tz *** mzumbe university, tanzania; gkomba@mzumbe.ac.tz 149 determinants of corporate social responsibility spending: a study of public sector organizations in tanzania rosemary peter mwandu* ernest pascal kihanga** gabriel vitus komba*** submitted: 03.02.2023 accepted: 24.04.2023 published: 06.07.2023 abstract corporate social responsibility (csr) has today become an important phenomenon and most organizations spends substantial amount of funds on csr activities. however, empirical evidence on what determine the amount spent on csr activities by public water sector organizations in tanzania is lacking. thus, the current study focus on determining factors that influences csr spending by public water supply and sanitation authorities in tanzania. quantitative data were collected from 2015 to 2019, and a fixed effect estimation technique with instrument variable was employed in the analysis. the study revealed that; the approved csr budget size, revenue collection efficiency, financial leverage, and organization size significantly influence csr spending. the study contributes to the existing csr literature in the public sector, and provides inputs on policies formulation that aims to enhance csr investment public sector organizations. key words: corporate social responsibility, spending, public water sector, tanzania jel classification: l21, l25 1. introduction recently, there have been an increasing number of organizations that spend their financial resources on csr activities (manisha, 2019; pandya & zalavadia, 2020). according to the european commission (2001), csr refers to organization voluntarily actions of incorporating international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 150 social and environmental concerns into their operations and in their interactions with stakeholders. the integration of social and environmental concerns has various advantages to the organization such as; to improve organization reputation (graafland, 2017; kucharska, 2020; ruiz & garcía, 2021), reduce operational costs through recycling of materials (hariyani et al., 2022), retain and improve working moral of employees (chiemeke et al., 2018; kucharska, 2020). other studies e.g. dibin and karthik (2021), menezes (2019), kao et al. (2018), nair and battacharyya (2019) argued that csr should be regarded as an important activity within the organization, just like other activities that are taken to improve performance of the organization. also, it is argues that other organizations pay attention to csr activities because the costs associated with non-consideration of csr in their operation is too high such cost includes; losing reputation, paying fines in case of any environmental destruction, and losing customers (sprinkle & maines, 2010). recognizing the importance of csr and the associated cost of not paying attention to it, csr is now increasingly being integrated into both public and private sector organizations (ates & büttgen, 2011). it is important for public sector organizations to spend on csr activities because they serve the general public and accountable to various groups of stakeholders (crowther & seifi, 2020). therefore, by spending on csr, organizations may enhance their reputation and relationships with stakeholders (jain et al., 2021;ruiz & garcía, 2021). in tanzania, spending on csr activities is more evident in the water supply and sanitation authorities also here referred to as water authorities. these authorities are required by the water supply and sanitation act, 2019 and the national water policy 2002 to take social and environment concerns into their operations to enhance stakeholders engagement (urt, 2002). the extents to which authorities spend on csr activities are manifested in their annual budget and financial statements reports. the authorities spent their funds on csr in the form of donation to; education, health, community development projects, special needing group in the community and disaster and emergencies. there are various type of csr activities from which an organization can decide to spend their funds (arsic et al., 2017). however, the pressing issue with regards to csr activities is that the choice of csr activities and amount spent on each of the selected csr activities differs among international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 151 organizations, even with organizations in the same industry (musah, 2020). it is also hardly ever that organizations spend on all type of csr activities at once or spend equal amount of fund to all selected csr activities. the difference on the amount spent on csr activities by water authorities in tanzania raises the question what factors influences the amount spent on csr activities? unfortunately, studies determining the csr sending are lacking in tanzania public water sector organizations. most of the previous related studies e.g. mokuolu and oladele (2018), oyerinde (2019), rai and bansal (2015) and musah (2020) have determined factors influences csr spending in the private sector, and conducted outside tanzania. departing from previous studies, the current study focus on determining factors influencing the amount spent on csr activities by public water supply and sanitation authorities in tanzania. it also takes into account the endogenous relationship between csr spending and the approved budget for csr activities which had remained unexplored by previous studies. this study also employed fixed effect estimation with instrumental variable (fe-iv). the study contributes to the existing body of literature in various ways. first, the growing csr literature focuses on private sector leaving behind the public sector. the current study provides the empirical evidence on the determinants of csr spending by public water supply and sanitation authorities in tanzania. second, most of the previous studies on csr spending did not address the variable approved csr budget. this may be caused by the fact that most of the previous related studies used annual reports as only source of secondary data where the approved csr budget is not disclosed. the current study, considered the approved csr budget and employed fe-iv estimation techniques which address the presence of heterogeneity and endogeneity in the study (baltagi, 2021). lastly, the findings from the study provide inputs for the authorities’ management, regulators and policymakers to formulate csr strategies and policy in the context of public sector organizations. the reminder of this article is organized as follows; the following section presents literature review and hypotheses formulation. research methodology is presented in section 3. section 4 presents results and discussions. lastly, conclusions and recommendations are presented in section 5. international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 152 2. literature review and hypotheses in determining factor influences csr spending, the slack resource theory and legitimacy theory were adopted. the slack resource theory is founded on the view that an organization is able to pursuit activities that goes beyond firms’ legal requirement or firms’ main strategy due to the slack resources owned, which are normally dedicated to predefined activities (bourgeois, 1981; onuoha & nkwor, 2021). in the organization, slack resource may exist at different discretionary levels however the financial slack has the greatest degree of discretion compared to other type of slack resources (lin et al., 2019). financial slack may exist in the form of unutilized cash, cash equivalents, and receivables that are not currently committed to any particular use (onuoha & nkwor, 2021). stan et al. (2014) argue that, many of the public sector organizations are faced with inefficiently utilization of financial resources because of the expectation to receive subsidies and other forms of financial incentives from the government. consequently organization experience soft budget constrain by being bailed out to ensure their survival, which may generate low or no slack resource (premono & danarsari, 2022). further, the water authorities in tanzania have cash inflow in the form of revenue collections form their customers. the efficiency in revenue collection increases the availability of financial resources to the authority (namaliya, 2017). therefore, it is expected that water authorities with higher revenue collection efficiency are more liquid and likely to spend more on csr activities because csr require the use of authority’s financial resources to be undertaken. therefore, on this basis we hypothesize that; hypothesis 1: revenue collection efficiency positively has positive influence on csr spending by water authorities in tanzania moreover, the availability of financial resources enables firms to budget for csr activities. approved csr budget assists in planning and control firm’s spending on the following financial year (chatterjee, 2015). studies e.g. rabea et al. (2020) suggest that spending on a particular csr activity will depend on the general approved budget for csr. in fact, ponce et al. (2018) argue that spending on each csr activity is expected to be higher if the approved budget for csr is higher. in tanzania water authorities, budgeting for csr activities is done on ad hoc basis. with this in mind, we resonate to the slack resource theory to determine the influence of the approved csr budget size on csr spending. thus, it was hypothesized that: international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 153 hypothesis 2: the approved csr budget size has positive influence on csr spending by water authorities in tanzania also, financial ability of the firm signals the extent to which they can finance their operating activities (olusola, 2022). financial ability can be indicated by the financial leverage which is the use of debt to finance their operating activities or acquire additional assets (harjoto, 2017). studies e.g. bobinaite (2015) argue that most organizations uses debts as source of finance compared to preferred capital as such leverage is an important factor in establishing organizations’ financial ability. studies e.g. asamoah (2019) argues that, organizations that are heavily financed by debts are more likely to spend more economic activities to repay their interests than spending of csr activities. in examining the relationship between csr expenditure and leverage, mokuolu and oladele (2018) and musa et al. (2019) found positive relationship while, olusola (2022) reported a negative relationship. further, chauhan (2014), jahid et al. (2022) concluded no relationship between leverage and csr spending. based on this observation, it was hypothesised that: hypothesis 3: leverage has negative influence on csr spending by water authorities in tanzania several studies, including jahid et al.(2022), mokuolu and oladele (2018) have found a link between organization size and csr spending. mattingly and olsen (2018) associate ogsize with the availability of financial resources to finance firms' activities arguing that, large-size firms are well-established and have sufficient financial resources to spend on csr activities compared to small sized firms. as such, small-sized firm tend to spend on csr activities that legitimize their existence and attract customers to increase cash inflows (raza et al., 2020). while, large-sized firms likely to focus on large scope of csr activities that will lead into maintaining their status and reputation (badulescu et al., 2018; karyawati et al., 2019). on examining the relationship between organization size and csr spending, jahid et al.(2022), johan (2021), mokuolu and oladele (2018) found positive relationship while yekini (2014) found no relationship. therefore, we hypothesis that; hypothesis 4: organization size has positive influence on csr spending by water authorities in tanzania international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 154 the amount spent on csr activities can also be influenced by the age of the organization (musa et al., 2019). in various studies e.g. amato and falivena (2019) organization age indicate the extent to which firm has been in existence and its acceptability within the community in which it operates. according to the legitimacy theory, society has expectations from the firms on how they should operate within the boundaries of social norms and conducts to be viewed legitimate (aguinis & glavas, 2012). thus, through interaction with the community firms might establish legitimacy which is very important for survival and existence of any firm (olateju et al., 2021). for older firms, it is viewed that they have been in existence for a long time thus, they have already established acceptability and legitimacy within the community they operate (raza et al., 2020). therefore, older firms are more likely to spend less on csr activities just to strengthen their reputations, compared to newly established firms that will be seeking to establish legitimacy and viable customer base. empirical findings on the relationship between csr spending and organization age provide mixed findings. for instance, jahid et al.(2022) found that organization age is negatively and significant related to csr expenditure. while, musa et al. (2019) found that organization age positively and significant influences csr expenditure. thus, we hypothesized that; hypothesis 5: organization age has positive influence on csr spending by water authorities in tanzania another possible determinate of csr spending is gender influence of the managing director. according to ardito et al. (2021), male and female directors have different career paths, with women having more experience and being more concerned with social issues compared to male. issa and fang (2019) argue that females are more social oriented and concern on the needs of other stakeholders than male. also female and male have different career trajectories, where male are more experienced in large organization with more focus on economic aspect than social aspect of the organization, while female are more into community and service aspect of the organization (prudêncio et al., 2021). as such organizations with female managing directors are more likely to be more investing in csr activities (bernardi & threadgill, 2011; prudêncio et al., 2021). again, konrad et al. (2008) pointed out that female directors are more likely to be concern on the issue of organization reputation, health and safety issues that may affect the community. previous studies e.g. calabrese et al. (2018), cullinan et al. (2019), cruz et al. (2019) found positive relationship between gender of the managing director and csr international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 155 investment. while, lu et al.(2020) found negative relationship between female top managers and csr investment hence, we hypothesized that: hypothesis 6: a female managing director has a positive influence on csr spending by water authorities in tanzania location is another possible determinant of csr spending, where it is expected that firms located in cities are more visible to the state, media, and interest groups putting them under higher pressure to conform to societal expectations (xiao et al., 2018). as a result, it may be even more important for them to gain legitimacy through csr activities for their survivor and existence (patten, 2019). in tanzania, water authorities are locations in either; regional, district or township authorities (ewura, 2022). studies e.g. zamir and saeed (2020), and husted et al.(2016) argues that firms located in major cities engage more on csr compared to firms allocated in remote areas. also, chintrakarn et al.(2017) examine how geographic location affected the level of csr activities of us public companies, and they discovered that the average level of csr of the nearby firms had a significant impact on the level of csr of a given company. it is from this setting, we hypothesise that: hypothesis 7: firms geographical location positively influences the budget size for csr activities 3. methodology 3.1 sample and data the sample contained panel data from water supply and sanitation authorities in tanzania between 2015 and 2019. initially, we intended to collect information from 120 authorities. six water authorities, on the other hand, were ignored because we could not get the information we needed from them. as a result, 570 observations were made. further, quantitative information were collected from the water authorities’ annual reports, budget reports and water utilities performance review reports. in particular; the total amount spent on csr activities, leverage, organization age, gender of managing director, and geographical location were collected from the annual reports. from the budget reports the information on the size of csr budget was obtained. also, from the water utilities performance review reports information on revenue collection efficiency and size of the organization was collected. international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 156 3.2 measures of variables dependent variable: the total amounts spend on csr activities by the water authorities is a dependent variable denoted by csrsp was measured by the natural log of the actual total amount spent on csr activities in a given financial year. the measure has also been applied by dibin and karthik (2021), musah (2020) and rabea et al. (2020). independent variables: the csr budget size denoted by csrb was measured by the natural log of the total annual budget for csr activities. a natural log is used in order to normalize lager absolute numbers and hence remove outliers in the data (hair et al., 2015). we measure the cash flow by revenue collection efficiency (rce) which is the percentage of bills collected during the financial year. this measure have also been used in several studies such as namaliya (2017). another independent variable is financial leverage we measured financial leverage by dividing total debt to total assets (oware & mallikarjunappa, 2019; oyewumi et al., 2018). organization age was measured by the natural log of the total number of years the organization has been in existence. the measure is adopted from the study of odeh et al. (2020). further, the size of organization is denoted by ogsize and measured by number of water connections as shown in table 1. this measure was also applied by lostorto (2022) on “performance evaluation of water services in italy: a meta-frontier approach accounting for regional heterogeneities”. we also considered the influence of the gender of the managing director (femalemd) on the csr spending. this variable was measured by a dummy variable whereby 1 was given if the managing director was female and 0 otherwise. lastly, the variable geographical location (location) of the authority was measured categorically where; 1 for regional wssas, 2 for district wssas, and 3 for township wssas, the measure was also applied by lostorto (2022). table 1: wssas cluster according to size cluster description number of water connection 1 large >20,000 2 medium 5,000 to 20,0000 3 small <5,000 source: ewura (2022) international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 157 the instrumental variable: in the current study, the approved csr budget was an endogenous variable, which means it collate with error term in the model and may cause endogenous problem in our analysis (baltagi, 2021). thus we introduced the use of instrumental variables, according to ullah et al.(2021) identifying valid and purely exogenous instruments in the study is practically difficulty therefore the use of lagged value of the identified endogenous variable as an instrument is preferred in most cases. therefore, the lag value of csrb was the instrumental variable where the sargan-basmann test confirmed the instrument to be valid and not weak. 3.3 empirical model fixed effect with instrument variable (fe-iv) was applied to determine factors influences csr spending. the use of fe-iv was influenced by the fact that the study uses panel data, where the breusch-pagan lagrange multiplier (lm) test indicated the presence of panel effect. also the significant results of hausman test in table 3 support the use of the fixed effect estimation technique. therefore, the empirical model was specified as follows: ln(𝐶𝑆𝑅𝑆𝑃) = 𝛼 + 𝛽1𝐶𝑆𝑅𝐵 + 𝛽2𝑅𝐶𝐸 + 𝛽3𝐿𝑒𝑣 + 𝛽4𝑂𝑔𝑠𝑖𝑧𝑒 + 𝛽5𝑂𝑔𝑎𝑔𝑒 + 𝛽6𝐹𝑒𝑚𝑎𝑙𝑒𝑀𝐷 + 𝛽7𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 + 𝜀 where; ln (csrsp) presents natural logarithm of the total amount spent on csr activities; represents coefficients for the independent variables, rce represent revenue collection efficiency, lev means financial leverage, ogsize represent organization size, ogage represent organization age, represent female managing director, location represent authority’s geographical location and 𝜀 means error term. 4. results and discussions this section presents results and discussion on the descriptive analysis and the empirical findings based on the information gathered about the variables in the study. 4.1 descriptive analysis from table 2, csr spending slightly increased during the period of five years from 2015 to 2019, and on average water authorities spends tzs 10,360,764 on csr activities. also, it was indicates that the amount allocated for csr activities during the period under this study slightly increased. on average csr budget was tzs 11,459,000. this implies that, water authorities i  international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 158 invest in csr activities. also, rce appears to be nearly effective, rce reflects the effective in revenue collection by water authorities which on was 86.70 per cent. this percentage is lower than required acceptable boundaries of rce of 90% 95% pre-set performance measure by ewura. the fact that most wssas were unable to collect adequate revenue from the sale of water and sanitation service may be the reason why most of the wssas have higher leverage ratio. from table 2, the average leverage ratio was 1.20, indicating that most authorities have more debts than assets. this could have a negative impact on the amount spent on csr activities. authorities, in particular, may be tempted to reduce csr spending in order to finance their debts. from table 2, the authorities involved in this study had an average of 16 years since establishment, with the youngest established authority having 3 years on 2015. moreover the study was dominated by small sized water authorities by 80.35 per cent which means that they have less than 5,000 number of water connections. followed by medium sized wssas by 12.11 per cent which means they have number of water connection between 5,000 to 20,000, and the large sized wssa means they have number of water connection greater than 20,000 and were the lowest with only 7.54 per cent. the size of the organization could have an impact to the amount spend on csr as large sized organization are expected to have more financial ability to invest in csr. also table 2 shows that only 18 per cent of the managing directors in wssas were female, which implies that majority of managing directors in the authorities, were male. lastly, the study involved wssas from different locations within tanzania mainland. in particular 57.02 per cent of water authorities was from district, 22.80 per cent from regions and 20.18 per cent from township. this indicates that majority of water authorities were from districts. table 2: descriptive statistics csr spending year 2015 2016 2017 2018 2019 overall mean 8,915,690 10,966,19 0 10,725,93 0 11,175,18 0 10,020,83 0 10,360,76 0 std.dev. 4,326,333 4,685,041 5,097,998 5,491,938 5,801,260 5,163,315 international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 159 max. 42,700,000 44,000,00 0 46,600,00 0 49,500,00 0 45,800,00 0 49,500,00 0 min 6,071,713 6,117,000 5,662,832 5,981,000 4,579,400 4,579,400 obs. 570 570 570 570 570 570 csr budget mean 14,700,000 9,436,370 9,995,407 10,800,00 0 12,363,20 0 11,459,00 0 std.dev 9,407,068 2,725,254 2,783,796 2,952,780 1,296,545 5343814 max 55,800,000 15,600,00 0 17,300,00 0 17,000,00 0 11,500,00 0 55,800,00 0 min 5,705,000 4,579,400 5,825,800 5,848,100 4,739,000 4,579,400 obs. 570 570 570 570 570 570 variable obs. mean std. dev. min max rce 570 0.867 0.234 0.050 1.49 lev 570 1.20 1.02 0.10 2.01 ogage 570 16 4.051 3 35 ogsize frequenc y per cent cum. 1-large 43 7.54 7.54 2-medium 69 12.11 19.65 3-small 458 80.35 100.00 femalem d 0 467 81.93 81.93 1 103 18.07 100.00 total 570 100.00 location 1-region wssa 130 22.80 22.81 2-district wssa 325 57.02 79.82 international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 160 3township wssa 115 20.18 100.00 source: researchers’ construct (2022) 4.2 estimated results on factors influences csr spending this section presents findings on the determinants of csr spending by water authorities in tanzania. the results are presented in table 3 using a stepwise regression to test the stability of the model by considering significant variables with different model specifications (brooks, 2002). table 3: fixed effect instrumental variable regression on csr spending variable [1] [2] [3] csrb 0.827 0.827 0.827 (0.000)*** (0.000) (0.000)*** rce 0.036 0.035 0.341 (0.034)** (0.039) (0.045)** lev -0.072 -0.006 -0.007 (0.074)* (0.078) (0.063)* ogsize -0.021 -0.025 -0.022 (0.001)*** (0.000) (0.000)*** ogage -0.020 -0.017 (0.340) (0.420) femalemd 0.003 (0.640) location -0.002 (0.579) constant 1.329 1.322 1.300 (0.000)*** (0.000)*** (0.000) observation 569 569 569 number of authorities 114 114 114 adj. r-squire 0.616 0.617 0.618 international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 161 breusch-pagan lm-test 39.98*** 39.98*** 39.98*** pesaran’s cd test (prob.) 0.221 0.221 0.221 f-statistic test 28.50*** 28.50*** 26.78*** hausman test 307.53*** 307.53*** 307.53*** durbin-wu-hausman test 9.157*** 9.157*** 9.157*** sargan-basmann(prob.) 2.270 2.271 2.271 source: researchers’ survey data (2022). robust standard errors are reported in parentheses. *p˂0.10, **p˂0.05 and ***p˂0.01 from table 3, it was revealed that four variables; csrb, rce, lev, and ogsize significantly influence the amount spent on csr activities as follows; it was found that the approved csr budget has positive and significant influence on the amount spent of csr activities. the result implies that, authorities spend more on csr activities whenever there is an increase in the approved csr budget size. this is because, spending on csr activities require the use of organization financial resources (julian & ofori-dankwa, 2013). therefore, approved csr budget guarantee the availability of financial resource to be spent on csr activities. further, this result is consistent with the slack resource theory which suggest that, firms invest on social activities because of the of the availability slack resources owned by the firm (onuoha & nkwor, 2021). according to onuoha and nkwor (2021) availability of financial resource to the firm may create slack resources in terms of cash or cash equivalent which can be easily spent into other than economic activities off the firm. the result is also directly in line with previous results of baatwah et al. (2022). another finding was on revenue collection efficiency (rce). from table 2, rce positively and significantly influences the amount spends on csr activities. this result implies that water authorities actual csr spending increases as revenue collections efficiency increases. the finding also suggests that, increases in revenues collection efficiency indicate cash in flow to the organization (mattingly & olsen, 2018) that is availability of financial resources to the organization (julian & ofori-dankwa, 2013).thus, authorities with higher financial resources have more financial ability to spend on csr activities. this suggestion agrees with sun and gunia (2018) who suggested that firms with enough financial resources consider csr as a discretionary expense they can afford. also our finding is consistent with the slack resource international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 162 theory which suggest that organizations are able to engage in social activities because of the slack resources they own (islam et al., 2021). we also found that, leverage (lev) has negative and significantly influence on the amount spent on csr activities with the coefficient of -0.007. this implies that 1 per cent increase in the authority’ debt financing results into a decrease of 0.7 per cent on the amount spent in csr activities. further, the results obtained implies that, water authorities with higher amount of loans spend less on csr activities as authority will prefers to settle their interest obligations than spending on csr activities. this result confirms to the finding of olusola (2022), but negate the findings of mokuolu and oladele (2018) that leverage has a positive influence on csr after assessing the determinants of csr expenditure of quoted firms in nigeria. the difference on the results may be influenced by different focus area where this study focused on not for profit public organization in the water sector. also the use of different methodology especially on the use of instrumental variable after confirming that the variable csrb was an endogeneity which allowed us to use fixed effect estimation technique with instrumental variable. lastly, from table 3 organization size (ogsize) indicates negative and significant relationship with the amount spent on csr activities. the result means that as the size of water authorities increases spend on csr activities decreases. in addition, since the size of water authority indicate the number of water connections it has (ewura, 2022). the small sized authority spend more on csr activities to obtain recognition and legitimacy to operate within the community which will attract more customers to increase their cash flow. in fact, large sized authorities are the ones with number of water connection greater than 20,000. the medium sized water authorities has number of connection between 5,000 and 20,000, and small sized water authorities has less than 5,000 number of water connection. it was observed that, the water sector was dominated by the small sized authority at 80.35per cent. this finding confirms to the conclusion of jahid et al. (2022), mokuolu & oladele (2018), johan (2021). but different to udayasankar (2008) the difference in results may be influenced by differences in measurement of organization size where udayasankar (2008) measured organization size by the natural log of total assets. international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 163 4.3 post estimation tests: determinants of csr spending we applied breusch-pagan lagrange multiplier (lm) test to check the presence of panel effect. the rejection of null hypothesis indicated that pooled ordinary least squares (ols) was not an appropriate model to estimate determinates of csr spending. thus the hausman test was performed to enable selection between the random effect (re) and fixed effect (fe) estimation. the significant hausman test results in table 3 support the use of the fixed effect estimation technique. further, the durbin and wu–hausman test through the use of the 2sls approach indicated that the csrb was an endogenous variable which necessitated the use of instrumental variables (semykina & wooldridge, 2010). therefore, we applied lagged csrb as an instrument variable which were confirmed by sargan-basmann test result in table 3 to be valid and not weak. the normality assumption was checked by skewness and kurtosis, to establish whether to use parametric or non-parametric test in the study (creswell, 2012). the result in table 4 indicates that data were normally distributed. further, the variance inflation factor (vif) was performed to check the correlation between variables. the findings in table 4 indicates that there was no multicollinearity problem because vif was below 10 (hair et al., 2015). we applied pesaran test to determine whether the residual are not correlated. rejecting of the null hypothesis means there was a serial correlation which would result in inefficient estimates and biased standard errors (wursten, 2018). we corrected for serial correlation by using the first difference method in the analysis (wu et al., 2017) where the results in table 3 indicated that the residual were not as correlated. in the current study, we did not test for stationarity which means time series data whose mean and variance do not change over time (baltagi, 2021). according to sarafidis and wansbeek (2012) stationarity is an issue to consider in long panels that is when number of unit observed are less than time observed (t>n), in our case, we had 114 unit to observe for the period of five years. for this reason stationarity was not tested. table 4: correlation and normality test variable observation vif kurtosis skewness csrb 570 1.49 0.0000 0.0006 rce 570 1.02 0.0000 0.0000 international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 164 lev 570 1.02 0.0000 0.0000 ogsize 570 2.39 0.0049 0.0000 ogage 570 1.39 0.0000 0.0000 femalemd 570 1.02 0.0000 0.0000 location 570 2.01 0.0000 0.0000 source: researchers’ construct (2022) 5. conclusions and recommendations the current study focused on the determinants of csr spending by not for profit public sector organizations, specifically water supply and sanitation authorities in tanzania. the findings reveal that; the approved csr budget size, revenue collection efficiency, leverage and organization size are significant determinants in explaining csr spending. our study did not find any significant relationship on the following variable; organization age, gender of the managing director and authorities geographical location. therefore, the current study recommends that, water authorities should strengthen their revenue collection efficiency to have enough cash inflows to finance their activities including csr activities as from the study the rce was lower than the set target of 90% 95%. also, large sized authorities should increase spending on csr activities, and authorities should and authorities should reduce their debt obligations in order to spend more on csr activities. further, the estimated panel data indicate that the model for determine csr spending was statistically significant. that is the independent variables in the model were relevant to explain the changes in the dependent variable. like other studies, the current study has some limitations. first, this study only focused on public water supply and sanitation authorities in tanzania and employed quantitative research design. future studies may conduct a comparative study on csr spending between public sectors in tanzania, also may focus on cross sectional data and can employ both mixed research design. international journal of commerce and finance rosemary peter mwandu & ernest pascal kihanga & gabriel vitus komba 165 references aguinis, h., & glavas, a. 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(2012). what we know and don’t know about corporate social responsibility: a review and research agenda. journal of management, 38(4), 932-968. international journal of commerce and finance, vol. 8, issue 2, 2022, 99-129 * *istanbul commerce university, business faculty, istanbul, turkey, orcid id: 0000-0001-6414-8029, tkarabulut@ticaret.edu.tr. **istanbul commerce university, business faculty, istanbul, turkey orcid id:0000-0002-2847-5126, ecivelek@ticaret.edu.tr. ***istanbul commerce university, business faculty, istanbul, turkey orcid id: 0000-0003-1737-2559, mcelik@ticaret.edu.tr the roles of unique product development and global technological competence in the effect of international entrepreneurial orientation on company performance in international markets: a study on born global companies ahu tuğba karabulut* mustafa emre civelek** merve çelik*** submitted: 29.07.2022 accepted: 06.10.2022 published: 01.11.2022 abstract the purpose of this study is to search the mediator roles of unique product development and global technological competence in the effect of international entrepreneurial orientation on company performance in international markets for born global companies. the study was conducted on born global companies which started its international activities in its first 7 years and operate in technoparks in turkey. data was collected by a questionnaire from 158 born global companies. according to the method proposed by baron and kenny, three models were created and compared with each other. the structural equation modeling (sem) method was applied because it is more appropriate for complex models. according to the findings of the study, unique product development and global technological competence do not have mediator roles in the effect of international entrepreneurial orientation on company performance in international markets. however, there is a direct effect of international entrepreneurial orientation on company performance in international markets. global technological competence has a direct effect on performance in international markets. on the other hand, unique product development does not have a direct effect on performance in international markets but unique product development has a direct effect on global technological competence. keywords: unique product development, global technological competence, international entrepreneurial orientation, performance in international markets. mailto:tkarabulut@ticaret.edu.tr mailto:ecivelek@ticaret.edu.tr international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 100 1. introduction companies can expand in international markets in the first couple years of their operations via traditional and digital international expansion methods. they can export by sending sales people to potential customers, attending to tradeshows, meeting with potential customers in b2b meetings organized by chambers, consulates, trade associations. nowadays, there are more born global companies due to digital market expansion potentials such as making e-commerce via company e-commerce platform or global electronic market places such as amazon, e-bay, alibaba, etc. logistic opportunities, government incentives, eximbank opportunities, digital platforms accelerate international expansion and facilitate the birth of born global companies. the purpose of this study is to search the mediator roles of global technological competence and unique product development in the effect of international entrepreneurial orientation on company performance in international markets for born global companies. this study shades light to the foreign expansion process of born global companies with 4 major variables in turkey. the scale of knight and çavuşgil (2004) was translated into turkish with the feedback of çavuşgil. the scale could be used in the further studies by other researchers. the research findings could be used by new born global companies and academicians. unique product development and global technological competence variables are expected to encourage entrepreneurs to make investment to r&d and be more innovative in international markets. thus, technological changes could be accelerated in different industries. there isn’t any other empirical study which collected data for these variables and with these scales in turkey in the existing literature. therefore, the findings of this study are important as it aims to contribute to the existing literature. the first 4 sections will explain four variables in this study. then, research section will explain the methodology of the research and present its findings. the last section will wrap up the paper with conclusion and recommendations. according to researchers, companies have internal capabilities to expand to and succeed in international markets (mcdougall et al., 1994; autio et al., 2000; zahra et al., 2000). the evolutionary economics view explains that companies can have superior abilities to make innovation and create knowledge leads to develop organizational capabilities such as embedded routines and critical competences. these resources lead to superior performance especially in turbulent and competitive environments (nelson and winter, 1982). companies can make international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 101 innovations by making investment to randd to accumulate knowledge and expand in new markets (schumpeter, 1934; nelson and winter, 1982; lewin and massini, 2003; massini et al., 2003). expansion in international markets is an innovative act (schumpeter, 1939; simmonds and smith, 1968; casson, 2000) for born global companies. the resource-based view (rbv) (penrose, 1959; rumelt, 1984; wernerfelt, 1984; teece and pisano, 1994; grant, 1996) highlights how companies develop and leverage knowledge and organizational capabilities. companies neeed resources to develop appropriate strategies in turbulent environments (grant, 1996; prahalad and hamel, 1990). since, knowledge is the most important resource, the integration of specialized knowledge of employees is the foundation of organizational capabilities (solow, 1957; nelson and winter, 1982; dierickx and cool, 1989; leonard-barton, 1992; conner and prahalad, 1996; grant, 1996). knowledge creates advantages facilitating international market expansion (kogut and zander, 1993). organizational performance and output increase organizational knowledge (solow, 1957; nelson and winter, 1982). the integration of knowledge of employees converts tacit knowledge (polanyi, 1966) into organizational activities to create customer value. the most important knowledge resources are inimitable, unique, and immobile and reflect organizational styles (dierickx and cool, 1989; grant, 1991, 1996; nonaka, 1994; teece et al., 1997) which reflect organizational abilities to do tasks related to organizational capacities to create value of born global companies (knight and cavusgil, 2004, pp. 125-126) through influencing transformation of inputs into outputs (nelson and winter, 1982; teece and pisano, 1994). when employees combine their specialist knowledge, organizational capabilities emerge related to development of organizational routines and competences (grant, 1991; teece and pisano, 1994). competences are performance-enhancing, knowledge-intensive activities where the company is skilled (teece et al., 1997). routines are consistently practiced, regular patterns of behaviors of an organization and employees which institutionalize organizational and individual knowledge about profit creating activities (nelson and winter, 1982; dosi, 1988; teece and pisano, 1994). organizational activity routinization implants capabilities into organizational memory to form a distinctive configuration of organizational resources. organizational capabilities are the source of performance advantages of companies (grant, 1991). capabilities have two features: (1) the shifting nature of the business environment; and (2) strategic management to adapt, integrate, and re-configure knowledgebased capabilities international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 102 toward the turbulent environment. capabilities are ‘dynamic’, and reflect managerial abilities to renew organizational competences to be congruent with the turbulent environment (teece et al., 1997). replication of organizational capabilities transfer capabilities between organizational settings to improve organizational performance in new ways of doing business, product categories, and markets (nelson and winter, 1982; teece et al., 1997) (knight and cavusgil, 2004, p. 127). there are two approaches called as stages models for internationalization: one of them is uppsala internationalization model (johanson and wiedersheim-paul, 1975; johanson and vahlne, 1977) and the innovation model (cavusgil, 1980). they view internationalization by incremental stages. on the other hand, born-global approach focuses on fast internationalization of companies (jolly, alahuhta, and jeannet, 1992; mckinsey and co., 1993; oviatt and mcdougall, 1994; knight and cavusgil, 1996). oviatt and mcdougall (1994, p. 49) define a born global company as “a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries.” knight and cavusgil (1996, p. 11) define a born global company as “small, technologyoriented companies that operate in international markets from the earliest days of their establishment.” they view a born-global company as a small company with a leadingedge technology, less than 500 employees, and an annual turnover of us$100 million. it produces high-tech products for a niche market (knight and cavusgil, 1996). born global companies are entrepreneurial, see the world as one market, do not restrict themselves to one country and consider international markets as opportunity provider (madsen and servais, 1997). they grow through international sales by producing highly specialized customized products for international niche markets, access to international financial markets and networks (mckinsey and co., 1993; knight and cavusgil, 1996; madsen and servais, 1997) (chetty and campbellhunt, 2004, pp. 59-61). mckinsey and company (1993) coined born global companies which participate in the hightechnology knowledge-intensive sectors, focus lead markets, and operate through first-mover advantage (bell, 1995). born global companies target countries based on their specialized industries. according to kuivalainen et al. (2012, p. 4) born global companies recieve 25% of their sales revenues from international markets but knight and cavusgil (1996) do not agree international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 103 with this measure (freeman et al. 2013, p. 160). born global companies can operate regionally by limiting their activities to few lead markets and relying on collaborative partnership. however, they can be global start-ups or focus on different regions (oviatt and mcdougall, 1994) (freeman et al., 2013, p. 161). the born global is used as a name for newly established companies which engage in international markets by several researchers (rennie, 1993; knight and cavusgil, 1996; madsen and servais, 1997). knight and cavusgil (1996) state trends which accelerate the birth of born global companies: increasing importance of niche markets, global alliances and networks, development of process technology and advvanced communication technology, and faster technology diffusion (moen, 2000, pp. 156-157). born global companies offer value-added innovative, unique and differentiated products from technology, design and science advances. born global companies have change agent entrepreneurs and employees who accelerate exports and internationalization, have entrepreneurial orientation and mental models to decrease an internationalization risk. born global companies have larger innovation capacity and innovative customer service ability (leonidou and samiee, 2012; eurofound, 2012) (cavusgil and knight, 2015, p. 10). 1.1. international entrepreneurial orientation born global companies have a high degree of international entrepreneurial orientation. their emergence and growth are supported by distinctive entrepreneurial prowess championed by entrepreneurs or managers. born global companies are endowed with distinctive intangible resources and capabilities although they are small and have limited tangible resources. they allocate their resources under asset parsimony and prefer exporting as an international market entry mode. early and fast internationalization is a novel form of international expansion. born global companies have strong international orientation and view the world as their marketplace (cavusgil and knight, 2015, p. 4). companies which have international entrepreneurial orientation can expand into international markets due to their unique entrepreneurial competences and perspectives (mcdougall et al., 1994; autio et al., 2000). international entrepreneurial orientation which is related to vision, innovativeness and competitive position shows overall innovativeness and proactiveness of international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 104 companies for expanding in international markets (miller and friesen, 1984; covin and slevin, 1989; lumpkin and dess, 1996; dess et al., 1997). thus, companies can be proactive to decrease uncertainity and risks which they will face in turbulent markets and get the advantage of opportunities. entrepreneurial orientation improves practices, processes, and decisionmaking to enter into new markets successfully. international entrepreneurial orientation develops and enacts key organizational routines of born global companies (knight and cavusgil, 2004, p. 129). international entrepreneurial orientation is associated with managerial vision, innovativeness, and pro-active competitive position in international markets (khandwalla, 1977; miller and friesen, 1984; covin and slevin, 1989; lumpkin and dess, 1996). this position is important to strategic innovation (lumpkin and dess, 1996; matsuno, mentzer and özsomer, 2002). entrepreneurial orientation triggers "processes, practices, and decision-making activities" to enter into new markets successfuly (lumpkin and dess, 1996). born globals companies are younger and smaller companies which are lack of substantial resources of mnes but they implement strategies with a vision to improve international performance (knight and cavusgil, 2005, p. 19). international entrepreneurial orientation is the behavioral elements of a global orientation and captures managerial propensity for innovativeness, risk taking, and proactiveness. international orientation has several psychological and demographic characteristics; managers with an international orientation are well educated, internationally experienced, less risk averse and resistant to change. they have high tolerance for psychic distance, a positive attitude toward internationalization and speak foreign languages (nummela, saarenketo, and puumalainen, 2004) (freeman and cavusgil, 2007, p. 3). international entrepreneurial orientation facilitates a proactive approach to deal with risky environments (knight and cavusgil, 2005, p. 32). international entrepreneurial orientation reveals an innovation focused managerial mindset of born global companies to implement strategies to maximize international performance. international entrepreneurial orientation is important for born global companies to develop technologically advanced, distinctive, high quality products to succeed internationally (knight and cavusgil, 2004, p. 136). international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 105 1.2. unique product development born global companies have unique products and target market segments which mncs can’t serve due to emerging nature of these segments and not having flexibility to gain market share quickly within these segments (mcdougall and oviatt, 2000; autio et al., 2000). born global companies are smaller companies which offer innovative products due to their flexibility to serve emerging market segments (knight and cavusgil, 2004) (kim et al., 2011, p. 879). born global companies can develop unique products by the help of their innovative and knowledge-intensive capabilities. creating distinctive products and implementing a differentiation strategy requires customer loyalty by meeting certain needs uniquely. marketing scholars recognized the value in providing unique offerings to differentiate the company from its competitors (smith, 1956; cavusgil et al., 1993). born global companies which have specialized resources and valuable unique products can enter niche foreign markets easier. this approach is related to factors such as patented know-how, innovative product features, excellent customer service which distinguish companies from their rivals (miles and snow, 1978; porter, 1980; miller and friesen, 1984). knowledge developed within innovative processes provides capabilities for developing new technologies and is the key resource used by born global companies to overcome advantages of local companies and develop unique products (oviatt and mcdougall, 1994). if the knowledge to develop a unique product is imperfectly imitable or tacit (barney, 1991; grant, 1996; autio et al., 2000), a company can keep it proprietary. the knowledge intensity of young, entrepreneurial companies is positively related to their international sales growth (autio et al., 2000; zahra et al., 2000). companies with technological competence and knowledge can develop unique products easier. born global companies which have knowledge fostering to develop unique products can serve specific markets, increase their market shares and sales. when companies offer unique products to satisfy special needs of customers, they can decrease the competition and increase their performances in international markets. internationally entrepreneurial companies proactively try to be successful in international markets whereas young and small born global companies minimize direct competition with more established or larger competitors. born global companies develop differentiated products and sell them in niche international markets to succeed. thus, they can maximize their market shares and other performances in international markets dominated by resource-endowed, larger companies. unique product development creates benefits of international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 106 differentiation strategy (smith, 1956; porter, 1980) which allow born global companies to serve niche markets more effectively, defeat competitors, and increase their sales and profits (rosson and ford, 1982; bowersox and cooper, 1992) (knight and cavusgil, 2004, pp. 131-132). differentiation strategy brings uniqueness through developing new products and using marketing communication to create awareness (menguc, auh, and shih, 2007) (martin et al., 2016, p. 3). 1.3. global technological competence innovation is decisive when markets are more globally integrated and new competition and technology types emerge. managers should adapt to and exploit environmental changes while they are searching opportunities to create change through strategic innovation. companies can expand into international markets with lower costs due to globalization and contemporary technology advances. the rise of born global companies is a trend in the world (martin et al., 2016, p. 1). global technological competence is the technological ability of a company it improves effectiveness and efficiency in production processes, and existing products, and to create superior products. advances in production technologies facilitate low-cost, small scale production enabling smaller-scale companies to serve special needs of market niches efficiently in the world. global technological leaders leverage ict to interact with stakeholders more efficiently and have benefits (clark, 1987; zahra et al., 2000). according to researchers, innovative entrepreneurial companies focus on developing new technologies (schumpeter, 1934; nelson and winter, 1982). small companies leverage their resources and transform their markets through innovation (steensma et al., 2000, p. 951). innovativeness increases new ideas and creative processes for departing from current technologies (lumpkin and dess, 1996). entrepreneurial companies create products and operating methods to improve their organizational performances (mintzberg, 1973; miller and friesen, 1984; lumpkin and dess, 1996; zahra et al., 2000). innovation is an essential entrepreneurial process for organizational performance in competitive international markets (miller and friesen, 1984; kotabe, 1990; zahra et al., 2000; steensma et al., 2000) (knight and cavusgil, 2004, p. 130). global technological competence of born global companies is an essential source of new business methods and products to improve e-commerce and information technology proficiency to affect international performance (kotabe, 1990; zahra et al., 2000) (rosson and ford, 1982; international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 107 bowersox and cooper, 1992) (knight and cavusgil, 2004, p. 132). companies which do innovation strongly internationalize earlier than other companies. innovation facilitates knowledge acquisition leading to capabilities increasing international performance. companies which internationalize earlier have deeper innovation capacity (knight, 2015) (martin et al., 2016, p. 4). technological capabilities of born global companies are positively related to organizational innovativeness (kim et al., 2011, p. 882). 1.4. company performance in international markets performance is a unidimensional measure related to the economic value of companies captured from commercialization of their capabilities in international business (hult et al., 2008). companies gain positional advantages to reach superior performance (day and wensley, 1988; hunt and morgan, 1995) (martin et al., 2016, p. 2). born global companies can overcome their asset-constrained conditions to improve their performances (martin et al., 2016, s. 1). they leverage innovation to enhance performance (oviatt and mcdougall, 1995; dimitratos, johnson, slow, and young, 2003) (martin et al., 2016, p. 2). born global companies have international entrepreneurial orientation and technological orientation which lead them to their superior international performance (knight and cavusgil, 2005, p. 32). the global reach of emerging-market global challengers and other competitors pressure young companies to reach superior performances faster (cavusgil and knight, 2015, p. 12). the knowledge acquisition process increases organizational capabilities (dierickx and cool, 1989; teece, pisano, and shuen, 1997) causing superior organizational performance (grant, 1996) (cavusgil and knight, 2015, p. 7). superior performance is an outcome of managerial and entrepreneurial knowledge (penrose, 1959; autio et al., 2000). knowledge about international operations and markets is a determinant of superior international performance of companies (autio et al., 2000). lewin and massini (2003) state that companies with superior innovation and knowledge-creation processes have highly developed, more elaborated and sophisticated knowledge-creation processes (knight and cavusgil, 2004, p. 127). calantone et al. (2002) revealed that innovativeness is positively related to organizational performance. making innovation ability help companies to meet customer needs to improve performance (soni et al., 1993; matsuo, 2006; avlonitis and salavou, 2007). innovativeness of born global companies has a positive effect on their financial performances (kim et al., 2011, p. 882). international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 108 superior international performance of born global companies are gained by entrepreneurial orientation, technological leadership and differentiation and focus strategies (knight and cavusgil, 2005, p. 15). international performance and survival of born global companies are considered as strategic variables. international entrepreneurial orientation is important to born global companies. since they have limited resources, they can not make mistakes in their international expansion process. global technological competence and unique products development are significant drivers of international superior performance. technological excellence helps born global companies to succeed in niche markets in the world. rennie (1993) found out that born global companies grow by leveraging proprietary technologies (knight and cavusgil, 2004, p. 136). global technological competence and unique products development show that randd, innovation, knowledge management play crucial roles for positioning born global companies to succeed in international markets. born global companies can gain monopolistic advantage (hymer, 1976) by producing unique products to support their further international success (knight and cavusgil, 2004, p. 137). 2. research 2.1. the purpose of this study the purpose of this study is to search the mediator roles of unique product development and global technological competence in the effect of international entrepreneurial orientation on company performance in international markets for born global companies. 2.2. the importance of this study this study shades light to the foreign expansion process of born global companies with 4 major variables in turkey. the scale of knight and çavuşgil (2004) was translated into turkish with the feedback of çavuşgil. the scale could be used in the further studies by other researchers. the research findings could be used by new born global companies and academicians. unique product development and global technological competence variables are expected to encourage entrepreneurs to make investment to randd and be more innovative in international markets. thus, technological changes could be accelerated in different industries. international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 109 2.3.the research model in light of existing literature the theoretical model is as follows in figure 1. figure 1. theoretical model 2.4.hypotheses of this study h1: unique product development and global technological competence have mediator roles in the effect of international entrepreneurial orientation on performance in international markets h2: international entrepreneurial orientation has a direct effect on unique product development h3: international entrepreneurial orientation has a direct effect on global technological competence h4: global technological competence has a direct effect on performance in international markets h5: unique product development has a direct effect on performance in international markets h6: unique product development has a direct effect on global technological competence 2.5.sampling and data collection method international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 110 the study was conducted on born global companies which started its international activities in its first 7 years and operate in 72 technoparks in turkey namely teknopark i̇stanbul, i̇stanbul technical university arıkent, yıldız technical university technopark, boğaziçi university technopark etc. data was collected by a questionnaire. the questionnaires were given and emailed to the respondents who are middle level managers, top level managers, owners or partners of these born global companies. 1000 questionnaires were given and e-mailed and 158 valid questionnaires were collected back. 2.6.scales of this study the scales of this study was developed by knight and çavuşgil (2004). there were seven variables in their study, four of them was used considering the purpose of this paper namely international entrepreneurial orientation, unique products development, global technological competence, and performance in international markets. 2.7.research method quantitative data has been provided by a questionnaire designed in a five-point likert scale. structural equation modeling method was applied due to the fact that it is a useful method to analyze highly complex multiple variable models and indicate direct and indirect relationships among variables. initially, confirmatory factor analyses were applied to verify the convergent validity. composite reliability and ave values are obtained to verify reliability and discriminant validity of each construct. the hypotheses were tested by using structural equation modeling method in amos statistics program. structural equation modeling which is a multi variable statistical technique has been used to test the hypotheses of the theoretical model (meydan and şeşen, 2011). this technique is used in order to decrease measurement errors (byrne, 2010). the main purpose of this method to reveal the indirect and direct effects in a structural model (civelek, 2018). the analyses have been conducted in spss and amos statistics programs. 2.8.limitations of this study most of the questionnaires were sent and collected back by e-mail due to covid-19. the study is limited with respondent companies. the data can be collected by personal visits from all international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 111 technoparks in the following studies. in-depth interviews can be conducted to support the findings of questionnaires. 2.9. frequency distributions of the data table 1. sectoral distribution of companies sectors number of companies agriculture 3 logistics 3 game 5 finance 3 environment-energy 5 information technologies 65 advanced material technologies 8 e-commerce 5 engineering-architecture 7 chemical 4 industrial automation 24 health 14 food 3 automotive 3 defense industry 6 total 158 table 2. foundation year of companies foundation year number of companies international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 112 before 2000 3 between 2000 and 2009 32 between 2010 and 2019 115 2020 and onwards 8 total 158 table 3. internationalization period from establishment of companies internationalization period from establishment number of companies within the first year of establishment 66 from 2 year to 4 years 71 from 5 years to 7 years 21 total 158 table 4. operating period of companies in international markets operating period in international markets number of companies up to 1 year 24 between 1 and 9 years 104 10 years and more 30 total 158 table 5. type of activity in international markets type of activity in international markets number of companies export only 106 international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 113 co-investment only 5 direct investment only 1 merger only 1 export and co-investment 28 export and direct investment 2 export and merger 1 co-investment and acquisition 1 direct investment and co-investment 1 export, co-investment and direct investment 5 others 7 total 158 table 6. specific information about companies number of companies older than 7 years old 70 profit percentage of companies from international markets number of companies 25%-50% 46 51%-100% 24 number of companies younger than 7 years old 88 profit percentage of companies from international markets number of companies 25%-50% 44 50%-100% 44 number of companies which planned to operate in international markets at the time of their establishments. 140 international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 114 number of companies which did not plan to operate in international markets at the time of their establishments. 18 number of expanded countries of companies which were established at least 7 years ago number of companies 1-10 countries 59 11-50 countries 7 more than 50 countries 4 number of expanded countries of companies which were established less than 7 years ago number of companies 1-10 countries 74 11-50 countries 12 more than 50 countries 2 company ranking in international markets number of companies market leader 3 2nd or 3rd company 40 others 115 percentage of sales growth in the 8th year compared to the previous year (for companies older than 7 years old) number of companies 0%-10% 31 11%-50% 22 more than 50% 16 downsize 1 percentage of sales growth compared to previous year (for companies younger than 7 years old) number of companies 0%-10% 25 international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 115 11%-50% 31 more than 50% 30 downsizing 2 number of employees now number of companies 1 to 9 47 10 to 49 79 50 to 249 29 250 and more 3 number of employees in the 7th year (for companies which were establihed at least 7 years ago) number of companies 1 to 9 17 10 to 49 43 50 to 249 10 availability of separate departments for activities in international markets (eg. export department) number of companies yes 56 no 102 position of the person participating to this research number of person junior administrative officer 1 mid-level manager 14 senior manager 63 owner/partner 77 others 3 2.9.construct validity and reliability international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 116 first, exploratory factor analysis (efa) was applied to purify the data and make the data ready for confirmatory factor analysis (cfa) (anderson & gerbing, 1988). 24 items remained after principle component analysis. then convergent validity was determined by applying cfa. fit indices values of the cfa was found satisfactory (i.e. χ2/df = 1.663, cfi=0.935, ifi=0.936, rmsea= 0.065) (civelek, 2018). table 7 shows the factor loads in cfa results. as shown in table 8, average variance extracted values were close to or above than the recommended limit point of 0.5 (byrne, 2010). the results showed that validity of the constructs were convergent. the square roots of average values of each variable were obtained to find out the discriminant validity. the square root of ave values is indicated by the diagonals in table 8. all square roots of ave values are greater than correlation values. this indicates determination of the discriminant validity (civelek, 2018). reliabilities of structures were found out independently. cronbach α and composite reliability values are close to or above the recommended limit point of 0.7 (fornell & larcker, 1981). table 7. confirmatory factor analysis results variables items standardized factor loads unstandardized factor loads international entrepreneurial orientation (ieo) ieo0101 0.606 1 ieo0909 0.641 1.261 ieo1111 0.659 1.138 ieo0202 0.692 1.333 ieo0404 0.641 1.222 ieo1212 0.770 1.118 ieo0303 0.797 1.367 unique product development (upd) upd0119 0.738 1 upd0220 0.759 0.963 upd0321 0.852 1.177 upd0523 0.864 1.199 upd0422 0.831 1.089 global technological competence gtc0214 0.487 1 gtc0315 0.487 0.734 international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 117 (gtc) gtc0416 0.814 1.439 gtc0618 0.656 0.964 gtc0517 0.893 1.281 performance in international markets (pim) pim0531 0.600 1 pim0430 0.681 0.993 pim0329 0.814 1.306 pim0127 0.910 1.340 pim0228 0.928 1.475 p<0.01 for all items descriptive statistics, cronbach α, composite reliabilities, average variance extracted values and pearson correlations among dimensions are indicated in table 8. before testing roles of mediator variables, correlations among variables is checked. the prerequisite for this analysis is having significant relationships among all variables (baron & kenny, 1986). table 8 shows that there is a significant relationship among all variables in the conceptual model. table 8. construct descriptives, reliability and correlation variables 1 2 3 4 1. international entrepreneurial orientation (0.690) 2. unique product development 0.506* (0.810) 3 global technological competence 0.402* 0.675* (0.687) 4. performance in international markets 0.398* 0.373* 0.544* (0.797) composite reliability 0.863 0.905 0.809 0.895 average variance ext. 0.476 0.657 0.473 0.635 cronbach α 0.860 0.905 0.802 0.898 *p < 0.05 note: values in diagonals are the square root of aves international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 118 2.10. test of the hypotheses in the structural equation modeling method, three different models are developed simultaneously to reveal roles of mediating variables in the the effect of the independent variable on the dependent variable. they are developed to decompose expected effects among independent, dependent, and mediator variables. in the first model, the direct effect between the independent and dependent variables is measured. in the second model, effects between the independent variable and mediator variables are measured. in the third model, effects among all variables are measured simultaneously. in all models, good fit values are taken into account. the standardized values of the available path analysis coefficients in three different models derived from the conceptual model are compared with each other. while making the comparison, it is checked whether the significant relationship between the independent variable and the dependent variable turns into insignificant when mediator variables are included in the model (civelek, 2018). according to this method, the analyses were carried out as follows: three models used to test mediator roles can be seen in figure 2, figure 3 and figure 4 respectively. figure 2 shows the path analysis results of model 1. in model 1, the direct relationship between the independent variable and the dependent variable was tested. the relationship is significant and positive. the fit indices of the model are within the limits accepted in the literature. values of fit indices of the model were found as χ2/df = 2.171, cfi = 0.943, ifi = 0.944, rmsea = 0.087 respectively. note: χ2/df = 2.171, cfi = 0.943, ifi = 0.944, rmsea= 0.087 figure 2. results of the model 1 international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 119 note: χ2/df = 1.749, cfi = 0.939, ifi = 0.940, rmsea= 0.070 figure 3. results of the model 2 figure 3 shows the path analysis results of model 2. in model 2, direct relationships between independent variable and mediator variables were tested. the relationship between international entrepreneurial orientation and global technological competence is not significant. other relations are found significant. the fit indices of the model are within the limits accepted in the literature. values of fit indices were found as χ2/df = 1.749, cfi = 0.939, ifi = 0.940, rmsea = 0.070 respectively. international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 120 note: χ2/df = 1.663, cfi = 0.935, ifi = 0.936, rmsea= 0.065 figure 4. results of the model 3 figure 4 shows the path analysis results of model 3. the conceptual model was tested in model 3. the fit indices are within limits recommended in the literature. values of fit indices were found as χ2/df = 1.663, cfi = 0.935, ifi = 0.936, rmsea = 0.065 respectively. test results of hypotheses in the conceptual model in three models are summarized in table 9. table 9. hypotheses test results relationships model 1 model 2 model 3 ieo → pim (h1) 0.399* 0.240* international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 121 ieo → upd (h2) 0.503* 0.506* ieo → gtc (h3) 0.084 0.402* gtc → pim (h4) 0.510* upd → pim (h5) -0.093 upd → gtc (h6) 0.633* model fit indices χ2/df=2.171, cfi=0.943, ifi=0.944, rmsea=0.087 χ2/df=1.749, cfi=0.939, ifi=0.940, rmsea=0.070 χ2/df=1.663, cfi=0.935, ifi=0.936, rmsea=0.065 note: path analysis coefficients are standardized. *p<0.01 h1 hypothesis is not supported because the relationship did not become insignificant after involving mediators. as a result of the analyses, there was not any finding that unique product development and global technological competence play mediator roles in the effect of international entrepreneurial orientation on performance in international markets. therefore, h1 hypothesis is not supported. according to the results of model 1 and model 3, the direct effect of international entrepreneurial orientation on company performance in international markets continues. h2 hypothesis is supported. this means international entrepreneurial orientation has a direct effect on unique product development. h3 hypothesis is not supported in model 2 but supported in model 3. this indicates that unique product development can play a mediator role in the effect of international entrepreneurial orientation on global technological competence. this effect should be investigated in a future research. h4 hypothesis is supported. this indicates that global technological competence has a direct effect on performance in international markets. h5 hypothesis is not supported. this indicates that unique product development does not a direct effect on performance in international markets. h6 hypothesis is supported. this indicates that unique product development has a direct effect on global technological competence. international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 122 3. discussion and conclusion born global companies gain international experience and knowledge faster than traditional mnes. thus, they create an important challenge to traditional views on internationalization. the volume of global business activity has increased drastically since the millenium and is related to the emergence of infrastructures and mechanisms facilitating the internationalization of born global companies. this trend is accelerated by developing technologies allowing companies to internationalize and do global business more efficiently. digitilization is driving a borderless global economy. internet and information technology are liberating factors altering the international trade’s landscape (knight and cavusgil, 2004, p. 137). one of the remarkable result of this study is that unique product development and global technological competence did not play mediator roles in the effect of international entrepreneurial orientation on company performance in international markets. some studies in the existing literature have concluded that network relationships affect unique product development ability of born global companies in international markets (e.g. coviello and munro, 1995, 1997). in our study, network relationships of the companies were not taken into account. therefore, respondent companies can have different levels of networking relationships which can lead them to have different levels of product development capabilities. therefore, network relationship of companies could be investigated in future research. according to knight and cavusgil (2004) unique products development and global technological competence have mediator roles in the effect of international entrepreneurial orientation on company performance in international markets of born globals. innovation orientations of born globals facilitate their activities in international markets (shane, 2003; meliá et al., 2010). the ability to innovate supports discovery of new markets and improvement of the company's operations. high level of innovation orientation leads to high unique product development capabilities. therefore, companies can not be sufficiently innovative in technoparks in turkey. also, research and development infrastructure can not be developed enough to innovate in technoparks in turkey. the mediator role of unique product development in the effect of international entrepreneurial orientation and global technological competence could be searched in future researh as well. if this mediator role is found, it will be one of the major contribution of this research as well. international journal of commerce and finance ahu tuğba karabulut & mustafa emre civelek & merve çelik 123 there isn’t any other empirical study which collected data for these variables and with these scales in turkey in the existing literature. therefore, the findings of this study are important as it aims to contribute to the existing literature. the research findings could be used by new born global companies and academicians. they will encourage entrepreneurs to establish born global companies, expand in international markets, make investment to r&d and become more innovative. academicians can conduct future researches to explore the current positions, international expansion and innovation potentials of born global companies both in turkey and in the world. references anderson, j.c. and gerbing, d.w. 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(2000) international expansion by new venture firms: international diversity, mode of market entry, technological learning, and performance. academy of management journal, 43(5), 925-950. international journal of commerce and finance, vol. 2, issue 2, 2016, 41-59 selectivity skills of mutual fund managers in india: an analysis bilal ahmad pandow, (senior lecture) middle east college, oman abstract: stock selection is the nucleus in the investment management process. it involves identifying and selecting undervalued securities which among other things requires the successful forecasting of the company specific events or an ability to predict the general behavior of security prices in the future. if the fund manager is able to identify and select the undervalued securities for the portfolio, then it will be possible for the fund manager to increase the returns of the schemes and vice versa. in practice fund managers are expected to earn superior returns for unit holders consistently as being professionals therefore possess superior skills to collect and analyze the data with the purpose to select the right type of securities for the portfolio. the present work is based on the review of tens of studies both foreign and indian studies relating to mutual funds. the mutual fund industry in india consists of public sector, private sector and foreign funds. all the three sectors were studied to compare the selectivity and timing performance on the basis of sponsorship of funds. however, from these only active funds belongings to growth, income, balanced and tax-saving schemes were selected for the study. in this paper stock selectivity skills of sample fund managers were tested by using jensen’s alpha and fama’s net selectivity measure. keywords: stock selection, mutual funds, growth, income, balanced and tax-saving schemes 1. introduction the mutual fund industry in india consists of public sector, private sector and foreign funds. all the three sectors were studied to compare the selectivity and timing performance on the basis of sponsorship of funds. however, from these only active funds belongings to growth, income, balanced and tax-saving schemes were selected for the study. the period of study is five years from april 2007 to 31st march 2011. the rationale for selecting the study period of 5-years from 1st april 2007 to 31st march 2011 stems from two reasons. firstly, during this period, the stock market experienced higher volatility, as such chosen to find-out whether the funds have succeeded in surpassing the market performance even under depressed market conditions. secondly, the five years were long enough to capture different market phases and to draw meaningful conclusions. since large number of schemes were in existence during the period of the study, as such due to time and other constraints, it was not possible to study all the schemes. it is in view of this fact, an adequate and representative sample was drawn from the universe using convenience sampling method. initially, the study viewed 76 schemes out of 587 schemes existing as on 1st april 2007, however, the availability of consistent data during the study period (april 2007 to march 2011) was available for 40 schemes only, as such the final sample size for the present study was reduced to 40 schemes, accounting for around 7 percent of the total schemes. these schemes belonged to 19 fund houses consisting of all the three sectors viz. public sector, private sector foreign funds, of the total sample size of 40 schemes, 33 schemes belonged to the private sector and 7 to the public sector including uti. further, 37 schemes are openended and 3 schemes are close-ended in nature. aim wise, the sample consisted of 28 growth schemes, 3 income schemes, 3 balanced funds and 6 tax-saving schemes. stock selectivity skills of sample fund managers were tested by using jensen’s alpha and fama’s net selectivity measure. jensen (1968) developed an absolute measure based on capital asset pricing model (capm) to regress the excess returns of a portfolio on the market factor. assuming that market beta or slope co-efficient is constant then the unconditional alpha is a measure of average performance as in jensen (1968). the absolute regression equation in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 42 bilal ahmad pandow http://ijcf.ticaret.edu.tr is based on the assumption that the funds systematic risk is stationary over time. owing to this assumption, jensen’s measurement model attributes funds overall performance to manager’s selectivity performance exclusively. as such mutual funds are expected to perform better than the market, therefore calls for a continuous evaluation of the performance of funds. the assessment of fund manager’s performance is important for two reasons: one it enables investors to allocate investible funds into different funds efficiently second it influences the compensation of fund managers. from an academic perspective, the goal of identifying superior fund managers is interesting because it challenges the efficient market hypothesis. the present study analyses stock selectivity skills of mutual fund managers in india. the remainder of this article is organized as follows. in section 2, we form our hypotheses. we present our methodology and the research model in section 3 and discuss the sample selection in section 4. we highlight the results in section 5 and document our conclusions in section 6. 2. literature review, objective, and hypotheses with the growing popularity of mutual funds, performance evaluation of fund managers has become a fundamental issue for both practitioners and academicians. studies have been conducted world over to examine the investment performance of managed portfolio. from an academic perspective, the goal of identifying superior fund managers is interesting because it challenges the efficient market hypothesis. the ability of mutual fund managers to time the market, that is, to increase a fund’s exposure to the market index prior to market advances and to decrease exposure prior to market declines has remained the subject matter for researchers. the other important aspect which attracted the attention of researcher’s world-over is stock selection skills of fund managers. numbers of studies have been conducted on these two skills of fund managers. a critical review of the studies on these two aspects of mutual funds has been undertaken which becomes essential to know what the existing literature has to say about the stock selectivity skills of fund managers. an extensive and systematic study was made by friend, et al., (1962) of 152 mutual funds and found that mutual fund schemes earned an average annual return of 12.4 percent, while their composite benchmark earned a return of 12.6 percent. their alpha was negative with 20 basis points. overall results did not suggest widespread inefficiency in the industry. further comparison of fund returns with turnover and expense categories did not reveal a strong relationship. irwin, brown, fe (1965) analyzed issues relating to investment policy, portfolio turnover rate, performance of mutual funds and its impact on the stock markets. the study has revealed that mutual funds had a significant impact on the price movement in the stock market. also concludes that, on an average, funds did not perform better than the composite markets and there was no persistent relationship between portfolio turnover and fund performance. the performance of 57 fund managers was evaluated by treynor and mazuy (1966) in terms of their market timing abilities and have found that fund managers had not successfully outguessed the market. the results suggested that, investors were completely dependent on fluctuations in the market. further found that the improvement in the rates of return was due to the fund managers’ ability to identify under-priced industries and companies. the study adopted treynor’s (1965) methodology for reviewing the performance of mutual funds. a composite portfolio evaluation technique concerning risk-adjusted returns was developed by jensen (1968). he evaluated the ability of 115 fund managers in selecting securities during the period 1945-66. analysis of net returns indicated that, 39 funds had above average returns, while 76 funds yielded abnormally poor returns. using gross returns, 48 funds showed above average results and 67 funds below average results. on the basis of this study jensen has concluded that, there was very little evidence that funds were able to perform significantly better than expected as fund managers were not able to forecast securities price movements. selectivity skills of mutual fund managers iin india: an analysis 43 http://ijcf.ticaret.edu.tr the methods to distinguish observed return due to the ability to pick up the best securities at a given level of risk from that of predictions of price movements in the market was developed by fama (1972). he introduced a multiperiod model allowing evaluation on a period-by-period and on a cumulative basis. he branded that, return on a portfolio constitutes return for security selection and return for bearing risk. his contributions combined the concepts from modern theories of portfolio selection and capital market equilibrium with more traditional concepts of good portfolio management. the investment performance of 40 funds was analyzed by klemosky (1973) based on quarterly returns during the period 1966-71. he acknowledged that, biases in sharpe, treynor, and jensen’s measures, could be removed by using mean absolute deviation and semi-standard deviation as risk surrogates compared to the composite measures derived from the capm. gupta ramesh (1989) evaluated fund performance in india comparing the returns earned by schemes of similar risk and similar constraints. an explicit risk-return relationship was developed to make comparison across funds with different risk levels. his study decomposed total return into return from investors risk, return from managers’ risk and target risk. mutual fund return due to selectivity was decomposed into return due to selection of securities and timing of investment in a particular class of securities. the present work is based on the review of tens of studies both foreign and indian studies relating to mutual funds. the review of foreign studies ensures that, mutual funds have a significant impact on the price movement in the stock market, the average return from the schemes were below that of their benchmark, all the three models provided identical results, good performance were associated with low expense ratio and not with the size. the aforementioned studies indicate that the evaluation of mutual funds has been a matter of concern in india for the researchers, academicians, fund managers and financial analysts to a greater extent after 1985. the reviews bring to light the importance of mutual funds in the indian financial scenario; highlight the need for adequate investor protection, single regulatory authority, higher return for a given risk as per investors’ expectation, greater convenience and liquidity, and the expectations that mutual funds should act as a catalytic agent of economic growth and foster investors’ interest. objective of the study the study is aimed to achieve the following specific objectives:  to assess whether the indian fund managers possess the stock selection ability.  to study the consistency in the selectivity of fund managers.  to examine whether the selectivity varies with the fund characteristics.  to find out whether there exists relationship between different evaluation criterions. hypotheses in line with the above stated objectives, the following hypotheses are laid in order to provide a direction to the study: h1: there is no positive selectivity performance among indian fund managers across measurement criteria h2: there is short term persistence in the selectivity performance of fund managers across the various measurement criteria, but in the long run no such persistence exists across the two measurement criteria h3: there is no significant difference in the selectivity performance across different fund characteristics h4: there exists significant relationship between different selectivity evaluation criterions 3. the methodology and model to test the above hypothesis, the data set used is secondary in nature which was collected from the database of amfi for net asset value (nav), national stock exchange (nse) for s&p cnx nifty and rbi for risk free rate. fund returns were calculated on the basis of daily navs rather than monthly navs for the reason that research has revealed that the high frequency data such as daily navs have more revealing power than less frequency data. further, the daily returns so obtained were annualized using geometric averaging to obtain average annual fund return. 44 bilal ahmad pandow http://ijcf.ticaret.edu.tr the yields on 91-day treasury bills issued by reserve bank of india (rbi) have been used as a proxy for risk-free return. besides, s&p cnx nifty is used as surrogate for the market portfolio/return as well as for bench-mark variability. data analysis initially we have assessed the overall performance of the sample funds by analyzing their excess return, (rp-rf), abnormal excess return, (rp-rm), and riskiness of funds viz. a viz. market portfolio. then the poor or superior performance was decomposed by assessing whether the fund performance is due to the stock selectivity skills or market timing abilities of fund managers. the daily returns for each of the sample schemes and the market portfolio have been calculated after making proper adjustments for the dividend, if any, paid by the schemes, as follows: fund return (rpt) = (nav_t nav_(t-1))/nav_(t-1) where: rpt = return of a scheme at the end of day t navt = net assets value of the scheme at the end of day ‘t’ navt-1 = net assets value of the scheme at the beginning of day ‘t’ similarly the daily returns for the market index i.e. for s&p cnx nifty have been calculated using the following formula: market index return (rmt)= (mi_t mi_(t-1))/〖s&p cnx niftyt〗_(t-1) where: rmt = return of the market index for the day ‘t’ mit = market value of the market index i.e. s&p cnx nifty at the end of day ‘t’ mit-1= market value of the market index i.e. s&p cnx nifty in the beginning of day ’t’ the daily returns are then annualized to obtain mean annual daily returns of each sample scheme and the market index as follows: mean annual daily portfolio return (rpt-a) = (rp1+rp2+rp3+……….rpn)/n mean annual daily market return (rmt-a) = (rm1+rm2+ rm3…….rmn)/n selectivity performance measurement models stock selectivity skills of sample fund managers were tested by using jensen’s alpha and fama’s net selectivity measure. jensen (1968) developed an absolute measure based on capital asset pricing model (capm) to regress the excess returns of a portfolio on the market factor. assuming that market beta or slope co-efficient is constant then the unconditional alpha is a measure of average performance as in jensen (1968). the absolute regression equation is based on the assumption that the funds systematic risk is stationary over time. owing to this assumption, jensen’s measurement model attributes funds overall performance to manager’s selectivity performance exclusively. this model is shown by the following regression specifications: rpt-rft= α + β (rmt– rft) +et where: rpt= the average return of the fund at time ‘t’ rft= the risk-free return at time ‘t’ selectivity skills of mutual fund managers iin india: an analysis 45 http://ijcf.ticaret.edu.tr α = the jensen performance co-efficient β = the estimate co-efficient for the systematic risk level of the fund rmt = average return on the market portfolio et = an error term here, the intercept α in the above equation is the jensen’s performance co-efficient indicating risk-adjusted selectivity performance of the fund. a positive and significant alpha (α) indicates average extra return yielded by a scheme over the benchmark market portfolio return after considering the level of systematic risk of the scheme, thus reflecting the superior performance of the scheme due to the fund manager’s selectivity abilities. fama’s decomposition measure eugene f. fama (1972) developed another selectivity performance measurement criterion which decomposes the fund’s performance into three components viz: risk free return, compensation for systematic risk, and the return due to the stock selectivity performance of the fund manager as revealed by the fama’s decomposition model. the model further segregates the selectivity performance into two parts viz. compensation for diversification and net selectivity. greater the diversification of the fund less would be the compensation for inadequate diversification and vice versa. as such for a well-diversified portfolio, the compensation for inadequate diversification would be close to zero and will always take a non-negative value otherwise. therefore, net selectivity which is the difference between the compensation for selectivity and compensation for inadequate diversification can always be less than or equal to that of selectivity fama’s (1972) decomposition measure is expressed as: rpt= rft+ β (rmt– rft) + (rmt– rft) (σp/ σmβ) + (rpt– rft)-(σp/ σm) (rmt– rft) where rpt = the average return of the fund at time ‘t’ rft = the risk free return at time ‘t’ β = the estimate co-efficient for the systematic risk level of the fund rmt = average return on the market portfolio β (rmt– rft) = compensation for systematic risk (rmt– rft) (σp/ σmβ) = compensation for inadequate diversification (rpt– rft) (σp/ σm) (rmt– rft) = net selectivity or excess return after adjusting for all risks. here, selectivity is equal to the net selectivity plus compensation for systematic risk and for compensation for inadequate diversification. however, the selectivity performance is measured on the basis of net selectivity rather than the total selectivity. a positive net selectivity is indicates that the fund has been able to earn extra return even after taking into account the compensation required for inadequate diversification, thus better selectivity performance of the fund manager. conversely, a negative net selectivity indicates that the fund has not been able to earn even a part of the compensation required for inadequate diversification, thus reflects poor selectivity on the part of fund managers. hypotheses testing to provide a direction to the study, hypotheses were set which were tested by using relevant statistical tools. to test whether jensen alpha (a), fama’s net selectivity and henrickson and merton’s ‘γ’ co-efficient (gamma) are statistically significant for each of the sample individual funds, paired two-tailed t-test has been used. for the sample as a whole, whose size was 40 schemes, z-test has been used to test the statistical significance of jensen’s alpha, fama’s net selectivity and hm’s ‘γ’ co-efficient to know whether the sample fund managers have superior selectivity and 46 bilal ahmad pandow http://ijcf.ticaret.edu.tr timing performance. besides, spearman’s rank corelation co-efficient technique has been used to assess the association between two selectivity performance measurement models viz. jensen alpha and fama’s selectivity and between two selectivity and one timing models. to assess the riskiness of the sample funds and bench mark market index, standard deviation and beta co-efficient has been used. standard deviation has been used to assess the total risk while as beta co-efficient has been used to determine the component of systematic risk. 4. sample selection and descriptive statistics since large number of schemes were in existence during the period of the study, as such due to time and other constraints, it was not possible to study all the schemes. it is in view of this fact, an adequate and representative sample was drawn from the universe using convenience sampling method. initially, the study viewed 76 schemes out of 587 schemes existing as on 1st april 2007, however, the availability of consistent data during the study period (april 2007 to march 2011) was available for 40 schemes only, as such the final sample size for the present study was reduced to 40 schemes, accounting for around 70 percent of the total schemes. these schemes belonged to 19 fund houses consisting of all the three sectors viz. public sector, private sector foreign funds, of the total sample size of 40 schemes, 33 schemes belonged to the private sector and 7 to the public sector including uti. further, 37 schemes are open-ended and 3 schemes are close-ended in nature. aim wise, the sample consisted of 28 growth schemes, 3 income schemes, 3 balanced funds and 6 tax-saving schemes. 5. results and analysis stock selection is the nucleus in the investment management process. it involves identifying and selecting undervalued securities which among other things requires the successful forecasting of the company specific events or an ability to predict the general behavior of security prices in the future. if the fund manager is able to identify and select the undervalued securities for the portfolio, then it will be possible for the fund manager to increase the returns of the schemes and vice versa. in practice fund managers are expected to earn superior returns for unit holders consistently as being professionals therefore possess superior skills to collect and analyze the data with the purpose to select the right type of securities for the portfolio. as already stated earlier that to measure stock selection performance of fund managers, jensen (1968) and fama (1972) criterion has been used. jensen (1968) developed an absolute measure based on capm to find out the selectivity performance of fund managers by regressing excess fund returns with the excess market returns. the superior return earned due to the ability of superior stock selection is known from jensen’s alpha (α) which is an intercept of the equation it indicates a fund return when the return on the market portfolio is zero. therefore, a positive and significant alpha (α) value indicates average extra return earned over the bench mark return after considering the level of systematic risk assumed by the fund. thus, reflects the superior selectivity performance of the fund manager. conversely negative alpha (α) indicates to poor stock selectivity skills on the part of the fund manager. in order to comment on the stock selectivity performance of the fund managers of the sample schemes during the period under study (2007-2011). alpha’s (α) using the jensen’s measure have been calculated which have been presented in table 4.3. besides, ranks were assigned to the sample funds on the basis of their alphas with the purpose to classify the funds into best and worst ranking funds. alpha values of the sample funds so obtained were also tested for one percent significance level in order to know whether positive stock picking performance of the fund manager is statistically significant or not. selectivity skills of mutual fund managers iin india: an analysis 47 http://ijcf.ticaret.edu.tr table 4.3: stock selectivity performance of fund managers using jensen model scheme jensen alpha (α) sd t-stat p-value ranking icici prudential discovery fund – growth 0.3553 0.8314 0.9556 0.3934 1 hdfc equity fund 0.3023 0.6015 1.1238 0.324 2 icici pru tax plan 0.2964 0.6828 0.9707 0.3867 3 reliance growth fund 0.2928 0.6651 0.9844 0.3807 4 franklin india bluechip fund 0.2813 0.5789 1.0866 0.3383 5 baroda pioneer growth 0.2744 0.5978 1.0264 0.3627 6 reliance regular savings fund 0.2735 0.6043 1.012 0.3688 7 birla sun life frontline equity 0.2663 0.5819 1.0233 0.364 8 hdfc tax saver fund 0.2622 0.6086 0.9634 0.3899 9 tata pure equity fund 0.2451 0.5687 0.9637 0.3898 10 tata tax advantage fund 0.2441 0.5220 1.0456 0.3548 11 principal index fund 0.2409 0.5409 0.9959 0.3757 12 quantum long-term equity fund 0.2391 0.4931 1.0843 0.3392 13 sundaram growth fund 0.2358 0.5519 0.9554 0.3935 14 uti opportunities fund 0.2354 0.5305 0.9922 0.3773 15 fidelity equity fund 0.2326 0.5444 0.9554 0.3935 16 l&t growth fund 0.2324 0.5477 0.9488 0.3964 17 ing core equity fund –growth 0.2238 0.5381 0.93 0.405 18 birla sun life top 100 fund – growth 0.2110 0.5284 0.8929 0.4224 19 sundaram select focus 0.2098 0.5332 0.8798 0.4286 20 morgan stanley growth fund 0.2063 0.5955 0.7746 0.4818 21 ing tax savings fund 0.2048 0.6025 0.7601 0.4895 22 baroda pioneer elss 0.2033 0.5806 0.783 0.4774 23 uti growth retail 0.2016 0.5071 0.889 0.4243 24 hsbc equity fund 0.1924 0.4943 0.8704 0.4332 25 lic nomura mf equity fund 0.1821 0.5388 0.7719 0.4832 26 sahara growth fund 0.1674 0.5299 0.7064 0.5189 27 ing balanced fund (d) 0.1606 0.4803 0.7477 0.4962 28 lic nomura mf india vision fund (d) 0.1502 0.4643 0.7234 0.5095 29 sbi magnum nri investment fund-flexi asset (d) balanced 0.1406 0.4823 0.6519 0.5501 30 sbi one india fund 0.1067 0.5275 0.4523 0.6745 31 kotak 50 growth 0.1009 0.6075 0.3714 0.7292 32 jm balanced fund (d) 0.0529 0.4141 0.2857 0.7893 33 principal personal tax saver fund 0.0118 0.6967 0.0379 0.9716 34 48 bilal ahmad pandow http://ijcf.ticaret.edu.tr quantum liquid fund – growth -0.0012 0.3455 0.0078 0.9942 35 kotak equity arbitrage growth -0.0019 0.3394 0.0125 0.9906 36 templeton india tma -0.0034 0.3467 0.0219 0.9836 37 sbi arbitrage opportunities fund -0.0036 0.3405 0.0236 0.9823 38 hsbc cash fund -0.0131 0.3451 0.0849 0.9364 39 sahara growth fund – div -0.0199 0.6382 0.0697 0.9478 40 note: •sd: standard deviation source: amc reports, nse historical data and rbi reports table 4.3.a: z-value of jensen alpha p value and statistical significance: the two-tailed p value is less than 0.0001 by conventional criteria, this difference is considered to be extremely statistically significant. confidence interval: the hypothetical mean is 0.000000 the actual mean is 0.179825 the difference between these two values is 0.179825 the 95 percent confidence interval of this difference: from 0.146750 to 0.212900 intermediate values used in calculations: t = 10.9971 df = 39 standard error of difference = 0.016 perusal of the data presented in table 4.3 brings to fore that out of the total sample of 40 schemes, majority of the schemes i.e. 34 schemes accounting for 85 percent of the sample size have positive alpha values, which indicates superior stock selectivity performance of their fund managers at their respective levels of systematic risk. on the other hand fund managers of six schemes namely quantum liquid fund growth, kotak equity arbitrage growth, templeton india tma, sbi arbitrage opportunities fund, hsbc cash fund, and sahara growth fund – div accounting for 15 percent of the sample size have demonstrated poor selectivity performance as these schemes are having negative alpha’s which means that their returns were negative when the returns on the market portfolio were zero. compared to these schemes, the alpha’s of other funds reveals positive abnormal returns (excess return over the market portfolio) ranging between 1.18 percent to 35.53 percent. it can also be seen from the table that from the sample schemes with positive alphas, only two schemes viz. jm balanced fund and principal personal tax saver fund have recorded alphas less than 5 percent, whereas the alphas of all other schemes has ranged between 10.09 percent to 35.53 percent which is indicative of the fact that these funds have earned abnormal returns ranging between 10.09 percent to 35.53 percent which is more than sufficient by all standards. but, it is difficult to infer whether this is due to random chance or superior stock selectivity skills of the sample fund managers. to resolve this, the statistical significance of the estimated performance measure (alpha) has been assessed using ‘t’ test and ‘z’ test, the details of which have been shown in the above referred table. a closer look into the tvalues and their corresponding p values presented in table 4.3.a reveals that although 34 funds or 85 percent of sample funds have positive alphas, but looking at their t-ratio and their corresponding p-values, it is found that the alphas of all the sample funds are not statistically significant even at 1 percent level. this is indicative of the poor selectivity skills of mutual fund managers iin india: an analysis 49 http://ijcf.ticaret.edu.tr stock selection performance of sample fund managers. but when testing significance for all the funds taken together using z-test, the two tailed p-value is found less than 0.0001 which by conventional criteria implies extremely statistically significant difference even at 5 percent level. this is in total contrast to the significance of alpha when found on individual basis, this can be attributed to the significant difference in the standard deviations of two data sets. as such, it can be concluded that either the sample fund managers have contributed a very insignificant amount to the extra return of 8.356 percent or have failed to contribute to abnormal excess return (8.3566 percent) by their active selection exercise. since the study reveals lack of stock selection skills among the sample fund managers as such the hypothesis laid down about selectivity/performance is accepted. this finding accords with that of jensen (1968), shah and thomas (1994), gupta and gupta (2004), tripathy (2004), anand and murugaiah (2006) and abhijt khundn (2009). however, there are other studies like goggin et.al (1993), debatal (2005), barua and verma (1991), chander (2005), sehgal and jhanwar (2008) anggrinblatt and titman (1994) which have found superior or better selectivity performance of fund managers. the failure of the sample indian fund manager to use selectivity skills to earn superior returns perhaps can be attributed to the recession conditions in the capital market due to the global financial crisis which not only affected indian equity market but to the equity markets world-over for quite some period particularly in the years 2008-2010. the markets also witnessed very high volatility which is reflected in the higher standard deviation of sample funds. in statistical terms, more the standard deviation less will be the t-ratio. the similar situation happened with the t-ratios of the funds under study while accessing the significance of alpha. fama’s decomposition model eugene f. fama (1972) has developed another stock selectivity performance evaluation framework, which however, finer breakdown of the fund’s performance. it decomposes the total performance into risk-free return (rf), premium for systematic risk and return due to stock selection ability of the fund manager at a given level of risk. fama (1972) has further decomposed the stock selection ability of the fund managers into two parts, viz. compensation for diversification and net selectivity. in fact, greater the diversification achieved by a fund, lesser would be the compensation for inadequate diversification and vice versa. as such, the compensation for inadequate diversification may be close to zero for a well-diversified fund and will always take a non-negative value otherwise. as such, net selectivity, which is the difference between the selectivity and the compensation for inadequate diversification can always be less than or equal to that of the selectivity. therefore, a positive net selectivity represents superior return even after the extra return required for inadequate diversification. on the other hand, negative net selectivity denotes that the fund manager has failed to earn even a part of the return required for inadequate diversification thus implies poor net selectivity performance. table 4.4: fama’s selectivity & net selectivity of sample funds schemes compensation for systematic riskβ (rmt rft) portfolio sd (σp) market sd (σm) compensation for inadequate diversification (rmt-rft) (σp/σm-β) net selectivity (rp-rf)(σp/σm) (rmt-rft) fams’s selectivity baroda pioneer elss -0.0124 0.0165 0.0202 0.0329 0.0800 0.1006 baroda pioneer growth -0.0129 0.0172 0.0202 0.0343 0.1374 0.1588 birla sun life frontline equity -0.0122 0.0162 0.0202 0.0324 0.1446 0.1648 birla sun life top 100 fund – growth -0.0119 0.0158 0.0202 0.0315 0.1046 0.1242 fidelity equity fund -0.0113 0.0145 0.0202 0.0294 0.1191 0.1372 franklin india bluechip fund -0.0119 0.0153 0.0202 0.0309 0.1524 0.1714 hdfc equity fund -0.0123 0.0156 0.0202 0.0318 0.2040 0.2235 hdfc tax saver fund -0.0115 0.0141 0.0202 0.0291 0.1657 0.1833 hsbc cash fund 0.0000 0.0003 0.0202 0.0004 -0.0135 -0.0131 hsbc equity fund -0.0112 0.0147 0.0202 0.0296 0.0840 0.1023 icici pru tax plan -0.0105 0.0142 0.0202 0.0281 0.1821 0.1997 icici prudential discovery fund – -0.0099 0.0142 0.0202 0.0276 0.2507 0.2684 50 bilal ahmad pandow http://ijcf.ticaret.edu.tr growth ing balanced fund (d) -0.0091 0.0119 0.0202 0.0238 0.0639 0.0787 ing core equity fund –growth -0.0126 0.0162 0.0202 0.0328 0.0841 0.1043 ing tax savings fund -0.0114 0.0162 0.0202 0.0315 0.0794 0.0996 jm balanced fund (d) -0.0099 0.0139 0.0202 0.0272 -0.0374 -0.0201 kotak 50 growth -0.0130 0.0154 0.0202 0.0321 0.0866 0.1057 kotak equity arbitrage growth 0.0003 0.0012 0.0202 0.0012 0.0005 0.0019 l&t growth fund -0.0135 0.0177 0.0202 0.0356 0.0935 0.1155 lic nomura mf equity fund -0.0136 0.0183 0.0202 0.0364 0.0451 0.0678 lic nomura mf india vision fund (d) -0.0125 0.0174 0.0202 0.0341 0.0260 0.0477 morgan stanley growth fund -0.0122 0.0164 0.0202 0.0326 0.0824 0.1028 principal index fund -0.0139 0.0180 0.0202 0.0362 0.0925 0.1149 principal personal tax saver fund -0.0124 0.0181 0.0202 0.0349 -0.0103 0.0122 quantum liquid fund – growth 0.0000 0.0002 0.0202 0.0002 -0.0013 -0.0011 quantum long-term equity fund -0.0114 0.0144 0.0202 0.0293 0.1345 0.1524 reliance growth fund -0.0110 0.0152 0.0202 0.0300 0.1943 0.2132 reliance regular savings fund -0.0090 0.0122 0.0202 0.0242 0.1804 0.1956 sahara growth fund -0.0119 0.0187 0.0202 0.0352 0.0880 0.1113 sahara growth fund – div -0.0107 0.0354 0.0202 0.0548 -0.1231 -0.0790 sbi arbitrage opportunities fund 0.0003 0.0011 0.0202 0.0010 -0.0015 -0.0002 sbi magnum nri investment fund-flexi asset (d) balanced -0.0108 0.0134 0.0202 0.0275 0.0570 0.0737 sbi one india fund -0.0124 0.0149 0.0202 0.0309 0.0123 0.0308 sundaram growth fund -0.0133 0.0175 0.0202 0.0351 0.1255 0.1474 sundaram select focus -0.0130 0.0173 0.0202 0.0345 0.1184 0.1400 tata pure equity fund -0.0116 0.0154 0.0202 0.0308 0.1423 0.1614 tata tax advantage fund -0.0103 0.0140 0.0202 0.0278 0.1511 0.1686 templeton india tma 0.0000 0.0002 0.0202 0.0002 -0.0036 -0.0034 uti growth retail -0.0100 0.0135 0.0202 0.0268 0.1135 0.1303 uti opportunities fund -0.0051 0.0154 0.0202 0.0243 0.2343 0.2534 note: • rpt: mean daily annual fund return • rft : risk free return • rmt: mean daily annual market return • σp: standard deviation portfolio • σm: standard deviation market • β: portfolio beta source: amc reports, nse historical data and rbi reports results of fama’s decomposition measure have been detailed out in table 4.4 which among other things presents market risk premium, compensation for inadequate diversification and net selectivity. it is evident from the table that out of 40 sample schemes, 35 schemes which account for 87.5 percent of the sample size have negative risk premium which implies that the systematic risk to which these schemes were exposed was less than the average market portfolio risk. the risk premium for other three sample schemes was zero and for the remaining two schemes very negligible, i.e. 0.0003. as such it becomes quite clear from the above that the sample schemes were having less than the market risk which is also evident from their beta values which for most of the schemes was either negative or very low. negative are very insignificant market risk for the sample schemes implies that no portion of actual return will be eatenup by the market risk premium. while looking at the compensation for inadequate diversification (rm-rf) (σp/σm-β), it become clear from the data presented in the above referred table that no sample scheme has been found to be well diversified as none of their schemes have scored zero value for compensation for inadequate diversification. however, compensation for inadeselectivity skills of mutual fund managers iin india: an analysis 51 http://ijcf.ticaret.edu.tr quate diversification on five sample schemes is very low, ranging between 0.0002 to 0.0012 which implies that these schemes were almost well diversified. it can be also seen from the table that the average compensation for inadequate diversification for all the sample schemes has been 2.77 percent which in no way is more given the mean return of 18.39 percent for all the schemes during the reference period. as such it can be concluded that though the majority of the sample schemes were not well diversified yet their level of their inadequate diversification was not significant. table 4.4 also presents the data on net selectivity. according to fama, selectivity as revealed by (alpha) also includes compensation for inadequate diversification. therefore, to conclude about the stock selection skills of fund managers, the need is to look into the selectivity net of compensation for inadequate diversification. given this fact, the net selectivity co-efficient of the sample funds has been calculated using fama’s metric and the details of which have been presented in the above referred table. perusal of the data about net selectivity reveals that 33 schemes out of the total sample of 40 schemes i.e. 82.5 percent of the sample schemes have reported positive net selectivity there by indicating superior stock selection performance. however seven sample schemes i.e. 17.5 percent of the sample size have shown poor selectivity performance as these have reported negative values for net selectivity ranging between 0.0013 to -0.0374. it can also be observed from the above table that 16 sample schemes namely baroda pioneer growth, birla sun life frontline equity, birla sun life top 100 fund–growth, fidelity equity fund, franklin india bluechip fund, hdfc equity fund, hdfc tax saver fund, icici pru tax plan, icici prudential discovery fund–growth, quantum long-term equity fund, reliance growth fund, reliance regular savings fund, sundaram growth fund, sundaram select focus, principal index fund and l&t growth fund have reported better selectivity performance than the average selectivity performance of the sample as a whole as these have scored more than the average value of 9.10 percent of all schemes. while looking at the ranking of different funds as shown in table 4.4, it can be observed that among the funds which have reported positive selectivity performance, icici prudential discovery fund is at the top followed by uti-opportunities fund and hdfc equity fund. the schemes that rank at the bottom with positive selectivity performance includes kotak equity arbitage growth, sbi one indian fund, lic nomura mf, india vision fund, lic nomura mf equity fund and sbi magnum nri invest fund. it can also be observed that though kotak equity arbitrage growth, sbi one indian fund and lic nomura mf india vision fund have scored positive scores for net selectivity yet these scores are very low ranging between 0.0005 to 0.0256 only. further to state that among the sample seven funds namely hsbc cash fund, jm balanced fund-(d), principal personal tax saver fund, quantum liquid fund–growth, sahara growth fund-div, sbi arbitrage opportunities fund, and templeton india tma , which have reported negative selectivity performance, sahara growth funds-div. with -12.31 percent was the worst performing fund among all funds followed by j.m balanced fund, hsbc cash fund, principal personal tax saver fund, templeton india tma, sbi arbitrage opportunities fund and quantum liquid fund-growth. while comparing with the jensen criterion, it can be observed from table 4.4 and 4.3 that all those schemes which have reported positive selectivity performance under jensen criterion have shown similar results except with respect to three schemes viz. jm balanced fund (d), kotak equity arbitrage growth and principal personal tax saver fund. as such it can be inferred that the result as shown by the fama’s net selectivity metric can be different from that of jensen criterion. this in other words means that the selectivity performance as revealed by jensen metric cannot be a final word on selectivity performance. given the superiority of the fama’s criterion, in order to conclude about the selectivity performance, it would be appropriate to use fama’s net selectivity criterion, which decomposes selectivity into compensation for inadequate diversification and net selectivity. table 4.5: z value for fama’s alpha p value and statistical significance: the two-tailed p value is less than 0.0001 by conventional criteria, this difference is considered to be extremely statistically significant. confidence interval: the hypothetical mean is 0.000000 52 bilal ahmad pandow http://ijcf.ticaret.edu.tr the actual mean is 0.108663 the difference between these two values is 0.108663 the 95 percent confidence interval of this difference: from 0.082976 to 0.134349 intermediate values used in calculations: t = 8.5565 df = 39 standard error of difference =0.013 presence of positive alpha or net selectivity only hints at better selectivity performance. but to conclude about the superior selectivity performance, there is a need to test the statistical significance of fama’s net selectivity. for this purpose t-test has been used to test the significance of individual funds and z-test for assessing the significance of all the funds taken together. the results of these two tests of significance have been presented in table 4.5 which reveals that fama alpha for none of the funds has been found statistically significant even at 5 percent level which becomes clear from their t-ratios and their corresponding p-values. this in other words means that the managers of the sample funds have failed to identify and pick-up under-valued stocks. so the excess abnormal return of the sample funds cannot be attributed to the selectivity performance of sample fund managers but may be either due to timing performance or by chance. but when significance has been assessed for all the sample funds together using ztest, fama’s alpha (net selectivity) has been found statistically significant. as can be seen from table 4.5 the two tailed p-value is found less than 0.0001 which by conventional criteria implies extremely statistically significant difference even at 5 percent level. the difference in result is perhaps due to the difference in standard deviations of two data sets. using jensen alpha & fama’s net selectivity it has been found that the fund managers of sample schemes lack selectivity performance across the two measurement criterions, thus the null hypothesis laid down for selectivity skills of fund managers in india is accepted. this finding corresponds with the finding of jensen (1968) chen, lee, rahman and chan (1992), coggin, fabozzi and rehman (1993), lee and rahman (1990), irissapaneetal (2000), sehgal and jhanwar (2008), barua and verma(1991) chander (2005), sehgal and jhanwar (2008), abhijit kundu(2009) and zabiulla (2013), there are equal number of studies whose results are contrary to the findings of the present study. the important such studies includes; grinblatt and titman (1994) shah and thomas (1994), jaydev (1996), gupta (2004), tripathy (2004), and anand and murugaiah (2006). differences in the findings of various studies are bound to exist for the reasons that the studies differ on various parameters like sample size, period of study etc. it is also that the sample fund managers perhaps have shown no selectivity performance for the reason that during the 3 years of reference period i.e. 2008-2010, the equity market in india had witnessed deep recession due to global financial crisis. under deep recession it is unlikely even for the best managers to perform well or outperform the market. the same is perhaps true about the fund managers of sample schemes studied in the present study. stock selection performance across the measurement criteria in addition to the study of stock selection performance of indian fund managers during the period under study (2007-11) using different measurement criterion, an effort has also been made to study the extent of relationship that exists between jensen’s and fama’s selectivity performance measurement criterions. for this purpose, spearman’s rank correlation coefficients between the ranks under each selectivity measurement criteria have been calculated, the details of which have been presented in table 4.6. selectivity skills of mutual fund managers iin india: an analysis 53 http://ijcf.ticaret.edu.tr table 4.6: spearman’s rank correlation between the ranks under selectivity measurement models jenson alpha fama selectivity net selectivity s p e ar m an 's r h o jenson alpha correlation coefficient sig. (2-tailed) 1.000 .939** .937** . .000 .000 fama selectivity correlation coefficient sig. (2-tailed) 1.000 .998** .000 net selectivity correlation coefficient sig. (2-tailed) 1.000 note: ** stands for correlation is significant at the 0.01 level (2-tailed) perusal of the data contained in the table 4.6 reveals significant level of association between the rankings assigned under the two measurement criterion across all possible combinations viz. rs(1,3), rs(1,2) and rs(2,3) respectively. it can be observed that the correlation coefficients between the rankings under jensen (1968) and fama’s (1972) selectivity criterion [rs(1,2)], and between the rankings under jensen (1968) and fama’s (1972) net selectivity criterion [rs(1,3)] are 0.939 and 0.937 respectively which are high by all standards thus indicating significant correlation between the results of the two criterions. similarly under fama’s (1972) net selectivity criterion and fama’s (1972) selectivity criterion [rs(2,3)] is 0.998 which again signifies higher degree of correlation between the two criterion. it can also be seen from the data contained in table that the degree of correlation between the rankings under the two measurement criterion is statistically significant even at 0.01 level of significance. it implies fund manager’s uniform stock selection performance across the measurement criteria. at the same time, highly significant correlation between the two criteria’s i.e. [rs(1,2)] and [rs(2,3)] denotes that the compensation for inadequate diversification has not impacted selectivity performance anyway. the presence of significant correlation between the ranks under each measurement criteria used the hypothesis that there is positive relationship between the two measurement criterions but statistically insignificant is rejected. this finding across with the findings of many other studies like: odean (1999); barber, lee, liu, and odean (2009); and markowitz (1952). persistence in selectivity performance to comment about the selectivity performance of fund managers using mean jensen alpha or mean fama’s net selectivity for the study period as a whole is meaningful. but more important issue is the persistence in manager’s ability to select stocks and to time risk factors. a fund manager who comes out successful today, whether he/she will be able to repeat the same performance in future consistently, is a matter of concern to the fund investors and other stake holders. rather to conclude about the stock picking ability of fund managers, one would be interested in knowing whether there is consistency in selectivity performance or not. if a fund manager is able to deliver better performance consistently i.e. quarter-after-quarter or year-after-year, then his or her performance in selecting the right type of stocks for the portfolio would be considered satisfactory. conversely if the fund manager’s performance varies significantly from period to period, then it would be an indication that there is something wrong with his/her stock selection skills or market timing ability. as per the standard practice, a fund manager is expected to perform better than the market and more importantly perform consistently. hence it is imperative to analyze the persistence in the stock selection performance of fund managers. 54 bilal ahmad pandow http://ijcf.ticaret.edu.tr table 4.7: persistence in selectivity performance of sample fund managers jensen model scheme 2007 2008 2009 2010 2011 icici prudential discovery fund – growth 0.0653 0.5510 1.8581 -0.5527 -0.1452 hdfc equity fund 0.2832 0.6752 1.2158 -0.4587 -0.2041 icici pru tax plan 0.1790 0.6133 1.4186 -0.5690 -0.1600 reliance growth fund 0.3920 0.5733 1.3139 -0.6307 -0.1846 franklin india bluechip fund 0.2566 0.8182 1.0142 -0.5342 -0.1483 baroda pioneer growth 0.4731 0.8285 0.9159 -0.5911 -0.2545 reliance regular savings fund 0.2963 0.7375 1.0888 -0.5985 -0.1567 birla sun life frontline equity 0.2520 0.7401 1.0576 -0.5324 -0.1855 hdfc tax saver fund 0.2202 0.6212 1.1964 -0.5451 -0.1816 tata pure equity fund 0.3556 0.6783 0.9619 -0.6182 -0.1522 tata tax advantage fund 0.3562 0.5946 0.9392 -0.5268 -0.1428 principal index fund 0.3243 0.8755 0.7372 -0.5528 -0.1794 quantum long-term equity fund 0.1459 0.4503 1.0377 -0.4478 0.0095 sundaram growth fund 0.3984 0.6005 0.9542 -0.5768 -0.1970 uti opportunities fund 0.4719 0.1874 1.0678 -0.5344 -0.0160 fidelity equity fund 0.1644 0.7111 0.9713 -0.4881 -0.1955 l&t growth fund 0.2107 0.7761 0.8958 -0.5355 -0.1850 ing core equity fund –growth 0.2148 0.7515 0.8770 -0.5294 -0.1947 birla sun life top 100 fund – growth 0.1131 0.6959 0.9134 -0.5134 -0.1540 sundaram select focus 0.4836 0.6001 0.7937 -0.6077 -0.2206 morgan stanley growth fund 0.1657 0.7097 1.0100 -0.6142 -0.2399 ing tax savings fund 0.0028 0.5740 1.1793 -0.5002 -0.2322 baroda pioneer elss 0.3099 0.6164 0.9686 -0.6539 -0.2245 uti growth retail 0.2348 0.5806 0.8917 -0.5186 -0.1805 hsbc equity fund 0.4195 0.6708 0.6449 -0.5682 -0.2050 lic nomura mf equity fund 0.1117 0.8036 0.7742 -0.5572 -0.2220 sahara growth fund 0.2827 0.6151 0.7923 -0.6433 -0.2101 ing balanced fund (d) 0.2667 0.6385 0.6575 -0.5827 -0.1773 lic nomura mf india vision fund (d) 0.4904 0.5047 0.5528 -0.5890 -0.2078 sbi magnum nri investment fund-flexi asset (d) balanced 0.2205 0.5622 0.7168 -0.5802 -0.2162 sbi one india fund -0.0542 0.5556 0.8404 -0.6320 -0.1764 kotak 50 growth 0.3298 0.6074 0.7128 -0.9292 -0.2164 jm balanced fund (d) 0.0896 0.4635 0.4940 -0.6130 -0.1695 principal personal tax saver fund -0.1842 0.4525 1.0608 -0.9938 -0.2761 quantum liquid fund – growth 0.1687 0.4055 0.1604 -0.5981 -0.1425 kotak equity arbitrage growth 0.1867 0.3730 0.1698 -0.5934 -0.1454 templeton india tma 0.1712 0.4012 0.1586 -0.6040 -0.1440 sbi arbitrage opportunities fund 0.1845 0.3694 0.1692 -0.6007 -0.1403 selectivity skills of mutual fund managers iin india: an analysis 55 http://ijcf.ticaret.edu.tr hsbc cash fund 0.1705 0.3893 0.1392 -0.6104 -0.1540 sahara growth fund div -0.3704 0.6038 0.7926 -0.9336 -0.1917 average 0.2213 0.5994 0.8529 -0.5965 -0.1780 source: amc reports, nse historical data and rbi reports table 4.8: persistence in selectivity performance of sample fund managers fama model scheme 2007 2008 2009 2010 2011 uti opportunities fund 0.5519 -0.507 1.5996 -0.1627 -0.2395 icici prudential discovery fund – growth 0.184 -0.6616 2.2403 -0.2033 -0.3746 reliance growth fund 0.52 -0.6086 1.7914 -0.2323 -0.438 hdfc equity fund 0.4054 -0.6668 1.7858 -0.1051 -0.4684 reliance regular savings fund 0.3939 -0.3728 1.452 -0.2858 -0.3453 tata tax advantage fund 0.4765 -0.5346 1.4165 -0.1965 -0.3529 icici pru tax plan 0.2923 -0.6847 1.8179 -0.2298 -0.3999 sundaram select focus 0.6439 -0.6298 1.4416 -0.2 -0.4665 tata pure equity fund 0.4922 -0.6007 1.4748 -0.2313 -0.3654 hdfc tax saver fund 0.3382 -0.6693 1.7004 -0.2233 -0.3942 birla sun life frontline equity 0.3868 -0.6835 1.5855 -0.1603 -0.4347 sundaram growth fund 0.557 -0.7981 1.5515 -0.1627 -0.456 franklin india bluechip fund 0.383 -0.6495 1.4801 -0.193 -0.3852 baroda pioneer growth 0.6088 -0.7254 1.4646 -0.1836 -0.5313 uti growth retail 0.3507 -0.5018 1.3163 -0.1547 -0.3961 sahara growth fund 0.4919 -0.5262 1.3115 -0.2403 -0.4355 fidelity equity fund 0.2846 -0.6111 1.4443 -0.1405 -0.4219 birla sun life top 100 fund – growth 0.2491 -0.5996 1.4276 -0.1267 -0.4018 quantum long-term equity fund 0.2547 -0.9189 1.5115 -0.1203 -0.2351 hsbc equity fund 0.5447 -0.5864 1.0873 -0.1812 -0.4518 kotak 50 growth 0.4239 -0.6696 1.2299 -0.1888 -0.3934 baroda pioneer elss 0.4289 -0.8203 1.5164 -0.2193 -0.5126 morgan stanley growth fund 0.2967 -0.7946 1.5467 -0.2028 -0.4685 l&t growth fund 0.3625 -0.8747 1.4664 -0.1492 -0.4325 principal index fund 0.4675 -0.8154 1.3121 -0.1351 -0.4645 ing tax savings fund 0.1339 -0.9205 1.6704 -0.1207 -0.4468 ing core equity fund -growth 0.3523 -0.8214 1.3472 -0.1413 -0.4433 sbi magnum nri investment fund-flexi asset (d) balanced 0.3281 -0.7255 1.2858 -0.2642 -0.3416 sahara growth fund div 0.1003 -0.5236 1.3108 -0.2118 -0.4211 ing balanced fund (d) 0.3678 -0.4882 1.0184 -0.325 -0.351 lic nomura mf equity fund 0.2766 -0.8012 1.3256 -0.1457 -0.4881 lic nomura mf india vision fund (d) 0.6523 -0.8912 1.0179 -0.1696 -0.4951 sbi one india fund 0.0598 -0.797 1.4278 -0.2464 -0.396 equity arbitrage growth 0.1899 0.3506 0.184 -0.5557 -0.1608 sbi arbitrage opportunities fund 0.1872 0.3505 0.1786 -0.5602 -0.1534 56 bilal ahmad pandow http://ijcf.ticaret.edu.tr quantum liquid fund – growth 0.1694 0.3992 0.1625 -0.5928 -0.1449 templeton india tma 0.1719 0.3952 0.1607 -0.5988 -0.1465 principal personal tax saver fund -0.0377 -0.794 1.4852 -0.2181 -0.4756 hsbc cash fund 0.1719 0.3778 0.1431 -0.5994 -0.158 jm balanced fund (d) 0.1928 -0.7073 0.985 -0.2569 -0.3668 average 0.34264 -0.55269 1.291875 -0.24088 -0.38137 source: amc reports, nse historical data and rbi reports the issue of persistence in fund manager’s ability to select undervalued stocks has two dimensions. first, one can ask if some managers who did particularly well or poorly in the past quarter/year continues to do so in the next, that is, one can examine if there is persistence in general. the second question is if managers exhibit persistence in general, that is, no matter what the performance over the previous quarter/year was, it remains unchanged or is better in the next. in this study we check persistence by addressing both of these questions. to test for persistence in the stock selectivity performance of sample fund managers, across the two measurement criterion namely jensen (1968) and fama (1972), we have calculated yearly alpha’s and also assigned ranks to each fund on the basis of the excess return (alpha). the said data is presented in table 4.7, the perusal of which reveals short term persistence (i.e. in the first three years) in terms of first question defined above i.e. whether the managers repeat the past performance with positive selectivity performance, in case of all the sample 40 funds except three funds namely: sbi one india, principal personal tax saver fund and sahara growth fund-div. however, with respect to the long term persistence i.e. for all the five years, none of the sample funds have shown persistence in their performance as during the first three years most of the sample funds have reported positive alpha’s and in the last two years of the period under study i.e. for 2010 and 2011, all the sample funds have reported negative alpha’s. as such it can be inferred that fund managers have failed to perform well consistently in the long run. as already stated that the other way to look into the persistence in performance is that if managers exhibit persistence in performance in general i.e. no matter what the performance over the previous year was, it improves or remains unchanged in the next, in terms of this question, during the short run i.e. first 3years of the period under study 30 sample funds i.e. 75 percent of the sample fund have exhibited persistence in general. but in the long run i.e. during the entire study period, none of the sample funds have exhibited persistence in general as in case of all the sample funds the alpha’s were positive in the first three years then negative in the last two years. what emerges from the above is that 75 percent of the sample funds have exhibited persistence in general in first three years of the time series but no such persistence for the entire time series. table 4.8 presents year-wise fama’s net selectivity along with the ranks occupied by each fund. it can be observed from the data contained in the above referred table that all the sample 40 funds except four funds namely: sbi arbitrage opportunity fund, hsbc cash fund, templeton india tma and quantum liquid fundgrowth have reported neither short term (2007-09) nor long run i.e. for the entire study period persistence in stock selectivity performance based on fama’s net selectivity. the above mentioned four sample funds have reported persistence only for the first three years of the study period (2006-2011). but when one looks into the entire period of study, these four funds have also exhibited either little or no persistence. with respect to the persistence in general terms; none of the funds have exhibited persistence in general terms (i.e. no matter what the performance over the previous year was, it remains unchanged in the next). it can also be seen from the above referred table that on the basis of fama’s net selectivity, none of the sample funds have shown persistence in selectivity performance but during the last two years of time series, all the sample funds have consistently reported negative net selectivity performance. what emerges from the above discussion on persistence of selectivity performance is that on the basis of jensen alpha majority of the funds reported persistence in selectivity performance in the short run. but in the longer run i.e. for the entire time series (2006-2011) no such persistence in selectivity performance has been observed for the sample funds. however, on the basis of fama’s net selectivity, no persistence neither in the short run nor in the long selectivity skills of mutual fund managers iin india: an analysis 57 http://ijcf.ticaret.edu.tr run in the selectivity of performance of fund managers of sample funds has been observed. lack of persistence is indicative of the fact that the fund managers have failed in picking up under -valued stocks consistently which in turn implies poor selectivity performance on the part of sample fund managers during the period under study. short run persistence was observed on the basis of jensen alpha but no such persistence has been found with respect to fama’s net selectivity, as such the hypothesis set in this regard for the study is rejected. besides, no relative persistence over the longer run has been observed across both the measurement criterion, therefore the hypothesis that there is no persistence in the selectivity performance of fund managers across both the criterion is accepted. the finding about the existence of short term persistence in selectivity performance based on jensen alpha corresponds with the findings of benjamini and hochberg 1995; benjamini and yekutieli 2001; and storey 2002 there seems to be more evidence for relative short term persistence in selectivity performance (evangeloselal, 2009). a common conclusion in the literature, however, is that expect for the very best fund managers, persistence primarily exists among poor performers grinber (1996); carhart (1997), bolhen and busse (2004). the similar finding emerges from the present study i.e. poor performers namely hsbc cash, quantum liquid fund-growth, sbi arbitrage opportunity fund and templeton india. tna which have performed poorly compared to other sample funds, have been found to report persistence in selectivity performance, however, in the short run only. with regard to the long run persistence, the finding of the absence of relative long term persistence in selectivity performance of 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2021, 184-205 184 the relationship between mindfulness and self-efficacy çiğdem şükran cede istanbul commerce university, turkey aylin gözen istanbul commerce university, turkey submitted: 30.04.2021 accepted: 28.10.2021 published: 02.12.2021 abstract this study was written to contribute to the literature regarding the relationship between mindfulness and self-efficacy. mindfulness is a way of directing attention that is rooted in the eastern meditation tradition. it has started to be discussed and applied more and more in western culture. it is aimed to direct the mind's attention with a specific method in mindfulness meditation. on the other hand, self-efficacy as the sub dimension of positive psychological capital focuses on the belief that a person will perform successfully in a specific area. self efficancy considers the feeling of believing individual's self and abilities in a work or a situation. in this regard, the aim of this study is to examine the relationship between mindfulness and self-efficacy by conducting a literature review regarding those two concepts. as a result of the research, it is concluded that there is a positive and significant relationship between mindfulness and self-efficacy. keywords: mindfulness, self-efficacy, focusing, awareness the relationship between mindfulness and self-efficacy 185 1. introduction nowadays, the concepts of mindfulness and self-efficacy have started to attract attention throughout the world. when we review the literature, it has been observed that more research on mindfulness and self-efficacy have been started to be analyzed much more recently. it is seen that the concepts are being studied basically in the fields of educational sciences and psychology. kabat-zinn, the pioneering researcher of mindfulness, defines awareness as the state of mindfulness resulting from living in the present moment. in recent years, scientists have stated that mindfulness benefits people both physically and psychologically (valanciene et al., 2020, p. 909). in order for the mindfulness process to occur, individuals need to have some specific features like self-efficacy. in this sense self-efficacy is the decision and belief of people in achieving the goal that they want to get. these decisions and beliefs are the skills that is determined as the success in dealing with adversity (akçakanat and köse, 2018, p. 19). in this regard the purpose of this study is to examine the relationship between mindfulness and self-efficacy by reviewing the literature since 1990s till today. first, the concepts related to mindfulness will be analysed and then the concepts related to self-efficacy will be considered and finally the studies considering those two concepts together will be discussed to understand the relation between them. 2. literature review 2.1. the conceptual framework of mindfulness mindfulness is defined as focusing on one’s attention to what is happening now, in a non judgmental and accepting way (kabat-zinn, 1994). for many years, the concept of mindfulness has attracted attention and has been researched by many philosophers and scientists. the conceptual framework of mindfulness will be reviewed in this section. çiğdem şükran cede & aylin gözen 186 2.1.1. definition of mindfulness mindfulness defined as paying attention to the present, is highly regarded for its usefulness from non-judgmental and deliberate experiences to create determination and unresponsiveness. mindfulness is characterized by dispassionate, nonevaluative and sustained moment-to-moment awareness of perceptible mental states and processes. this includes continuous, immediate awareness of physical sensations, perceptions, affective states, thoughts, and imagery. clinical settings are also accepted that mindfullness is crucially important for reducing stress and anxiety and at the same time increasing peace and well-being (grossman et al., 2004, p.36). mindfulness is not trying to do things, not striving to be a good person, not trying to control our actions, not trying to be kind and calm. “mindfulness is our observation and witnessing every moment we live while continuing our ordinary life. it is defined as being able to say "i am happy now" if we are happy or "i am in discussion with my colleague right now" if we are discussing with someone” (korkmaz, 2013, pp. 18-19). the three main characteristics of mindfulness as following (jang et al., 2020, p. 813); i. awareness of the actual situation. ii. being aware of individualistic feelings and opinions. iii. avoiding judgments about yourself and paying attention to the current situation without being distracted. mindfulness can provide employees with physical, psychological and emotional resources and can help them cope with stress in the workplace. working place mindfulness is a situation of intellect, a state where workers focus on what is happening while performing their duties (zivnuska et al., 2015) (jang et al., 2020, p. 813). mindfulness is one of the necessary factors for the continuation of job performance at the desired level. also, mindfulness has been defined as a psychological status in which one focuses to attention on incidents happening in the present moment (karavardar, 2015). in a study, it was investigated the relationship between mindfulness and work-family balance and job performance in a manufacturing company operating in istanbul. at the end of the study, it was found that there is a positive the relationship between mindfulness and self-efficacy 187 relationship between mindfulness and job performance (karavardar, 2015). in another study, employees of a call center working for a financial institution took part in a brief mindfulnessbased reserach (mbi). each day, during five consecutive weeks, they listened to two short guided meditation sessions using a headset at their workstation (10 min in the morning and 5 min after lunch). the result of this study was showed that mindfulness increased while psychological distress (stress, anxiety/depression, fatigue, and negative affect) decreased for all employees throughout the research, especially among those with low mindfulness scores at baseline (gregoire and lachance, 2015). 2.1.2. ancient history of mindfulness the construct of mindfulness originated in earliest buddhist documents, it is neither religious nor esoteric in nature. several buddhist treatises detail an elaborate psychological theory of mind, in which mindfulness consistently plays a central role (grossman et al., 2004, p. 36). buddha is known as the teacher of the buddhism since he lived in north india in the 6th century b.c. his teachings have been spread to all around the world. buddha’s doctrines depend on four “noble truths”. according to the buddha's teaching, the four noble truths are dukkha, samudaya, nirodha, magga (rahula, 1959; as cited in kalafatoğlu, 2017, p. 3). these are as below; i. dukkha: the first noble truth is dukkha (the noble truth of suffering). suffering is a part of life and existence. in addition, dukkha also includes ideas such as 'imperfection', 'impermanence', 'emptiness', 'insubstantiality'. ii. samudaya: the second noble truth is the arising of dukkha. the source of sufferings are desire and requests. iii. nirodha: the third noble truth is the cessation of dukkha. suffering can be ended if request and desires are left. iv. magga: the fourth noble truth is the way leading to the cessation of dukkha. the way to end suffering is through the noble eightfold path. these are; 1. right çiğdem şükran cede & aylin gözen 188 understanding, 2. right thought, 3. right speech, 4. right action 5. right livelihood, 6. right effort, 7. right mindfulness (samma sati), 8. right concentration. mindfulness as a technical term has its historical origins in the ancient pali word sati used by the buddha in his teaching on mindfulness over 2600 years ago (levey and levey, 2018, p. 23). the term mindfulness derives from the pali language word sati meaning “to remember” but as a mode of consciousness it commonly signifies presence of mind (brown et al, 200, p. 212). first, this concept was translated as mindfulness to english by the english translator rhys davids in 1881, and by 1910 mindfulness had become the generally accepted norm (levey and levey, 2018, p. 24). in a life and thought governed by the buddha’s teaching too, mindfulness (sati) has been mostly linked with clear comprehension of the right purpose or suitability of an action, and other considerations (thera, 2008). the revolution of mindfulness from a traditional and religious-based structure to a more secular and universal dimension have been occurred as a result of specific processes (aktepe and tolan, 2020, p. 535). one of the important names in developing processes of mindfulness-based practice is nyanaponika thera. thera was a german-born buddhist monk who actively spread the teachings and practices of buddhism until his death in 1994. the buddhist monk mostly has focused on the influence of mindfulness on mental health and well-being, physical health, self-regulation, and interpersonal behavior (moniz et al, 2015, p. 2). another key person in roots of the modern mindfulness revolution in the west has been the dalai lama. he helped to bring the mind and life institute, based in hadley, massachusetts in 1987. mind and life institute has played an important role in spreading mindfulness and contemplative exercise throughout the world (moniz et al, 2015, pp. 3-4). the pioneer researcher of mindfulness, dr. jon kabat-zinn established the center for mindfulness in 1979 at the university of massachusetts medical school to treat chronic conditions for which the relationship between mindfulness and self-efficacy 189 physicians could offer no further help. on the other hand, mindfulnessbased stress reduction (mbsr) program became a popular concept in the west by jon kabbat-zinn with religious teachings of the east. jon kabat-zinn has brought the concept of mindfulness to social sciences, medicine and the daily life. mindfulness has been a main direction of buddhist inner training for ages. mindfulness practice has started to attract interest in the 1970s as a herapeutic appliance to help medical patients managing chronic illnesses. about twenty years later, weick and roberts have presented mindfulness into the management literature (they have been inspired by langer and co-workers’ research) but their conception of mindfulness is completely different from buddhist conceptions. as weick and roberts explained mindfulness is connected to preferable working place function by positively affecting overall employee functioning, such as “attention, cognition, emotions, behaviors and physiology” (good et al., 2016, pp. 115-116). within the research, there are two main movements of mindfulness literature which are the eastern movement and the western movement. the eastern movement, popularized by jon kabat-zinn and colleagues in the 1970s, emphasizes experiential processing of information supported by meditation. the western movement, popularized by ellen langer and coworkers in the 1970s, analyzes mindfulness as a mental manner, in a cognitive mission, wellbeing, and health and also it is not connected with meditation (hart et al., 2013, p. 453). the research literature does not typically combine the western and eastern versions of mindfulness. the western stream is more prominent in psychology and organizational science and the eastern movement is more prominent in clinical and medical research. the research on mindfulness in organization science began with langer’s conceptualization in the 1990s (weick et al, 1999). as the research in the eastern movement gained in popularity, organizational researchers began considering both of them (bowers, 2018). çiğdem şükran cede & aylin gözen 190 2.1.3. features of mindfulness features of mindfulness are stated in the literature as observation, identification, conscious action and accepting without judgment (baer et al., 2004, p. 193). i. observation: it is defined as feeling the body and emotions, awareness of stimuli such as smell and hearing and being able to pay attention to them. ii. identification: it is the direct verbal expression of experiences without any judgment. iii. conscious action: it is explained as focusing on the current situation by completely entering into a movement or thought. iv. accepting without judgment: it is stated as accepting without criticism such as good and evil, righteousness and wrongness, worthiness, and worthlessness. 2.1.4. fundamental attributes of mindfulnes practices it is the state of being aware of mindfulness practices that not evaluated as good or bad, right or wrong (hayes and wilson, 2003, p. 164). the main characteristics of the mindfulness moments are as follows (germer, 2004, p. 27); i. non-conceptual: mindfulness is the state of being conscious, which consists of non-locking processes related to thought. ii. the focus on present moment: mindfulness is the state of present moment. iii. non-judgemental: mindfulness is defined as accepting our experiences without criticism. iv. purposive: the purpose of mindfulness is to direct consciousness to a sound, an object, a thought at the present moment. v. participatory observation: mindfulness is to witness that moment and watch it with spiritually, physically and thought. vi. non-verbal: mindfulness does not need any words. a state of awareness arises before words are formed in mind. the relationship between mindfulness and self-efficacy 191 vii. exploration: it expresses, what is to realize and to discover at the moment. viii. liberation: it expresses the state of freedom of feelings such as sorrow, happiness and fear in every minute of the mindfulness moment. the mindfulness features mentioned above appear in moments of mindfulness. these are expressed as the basic characteristics of mindfulness practices (germer, 2004, p. 28). mindfulness become aware of situations that are happening now. it is aimed to increase awareness with mindfulness exercises (germer, 2004, p. 25). 2.1.5. fundamental attitudes of mindfulness the concepts and practices of mindfulness reveal the fundamental attitudes of awareness. the basic behaviors of mindfulness are defined in seven categories. these are as follows (kabatzinn, 1990): i. non-judging: humans are able to see that they are in constant criticism and judgment when they look at their life. these judgments can be for everything; it can be an emotion, an observation, a situation and friends. people can make bad judgments about what they do not like and feel unwell while they judge well for the things they like. however, persons can be acted ineffective in non-emotion state. if they judge anything, they should become aware of immediately. instead of stopping this with mindfulness exercises, they need to understand that they are aware of this. ii. acceptance: mindfulness based acceptance means understanding the negativities in the life. for example, it can be a negative emotion like losing one of family member. most of the time, people can go through processes such as denial and anger before accepting it. these situations cause unnecessary power loss. acceptance is an important part of well-being. iii. patience: patience can be defined that timed situation and acceptance of it. untimely actions keep their impatient. for this reason, people need to be patient çiğdem şükran cede & aylin gözen 192 on mindfulness. tolerant person is being clear to the minute of every hour and seeing it as an experience. iv. beginner's mind: the beginner’s mind allows people to be open and clear about new situations. every process has a different moment and all of experiences are different and unique. the beginner’s mind helps to remember this fact. v. trust: self-confidence is important in the exercise process while applying mindfulness exercises. while practicing mindfulness, emphasis is placed on being one's self, listening to and trusting one's own existence. the person develops this confidence in his own existence so it will be easier to trust other people and see their goodness. vi. non-striving: individuals generally live to achieve a goal in their life. it is not quite right to apply them in mindfulness exercises. they need to allow watching theirselves more clearly while they meditate and they can only achieve this by being non-striving. if persons focus on doing the good while practicing mindfulness, they think that they are not doing something well and they try to be good. in this sense, it prevents attention at present moment. vii. letting go: the letting go approach forms the basis of mindfulness meditation. when one's individual begins to pay attention to inner experiences, it is understood that there are certain thoughts and emotional states that the mind wants to control. if it is pleasant, an effort is made to maintain these thoughts, feelings, or situations and to live them over and over again. on the contrary, there are many thoughts, feelings and experiences that are trying to protected. in such cases, person need to live in the moment and leave everything while doing this exercise. the relationship between mindfulness and self-efficacy 193 2.2. the conceptual framework of self-efficacy 2.2.1. definition of self-efficacy as albert bandura explains that self-efficacy is human’s beliefs and decisions about their abilities. on the other hand, it considers the feeling of believing individual's self and abilities in a work or a situation (sığrı and gürbüz, 2019, p. 107). self-efficacy has defined as people’s belief in own abilities to cope with difficult processes and complicated jobs. in other words, self-efficacy is people’s beliefs in their capabilities to perform a specific action required to attain a desired outcome (luszczynska et al., 2005, p. 439). people with low self-efficacy feel desperate and this leads to decrease in their performance. however, it is stated that people with high self-efficacy tend to be future orientated, take effective course of action, and in turn selfefficacy is enhanced. in addition, this situation is positively affected in people with high selfefficacy and strengthens motivation. for this reason, the degree of self-efficacy influences mental situation either positively or negatively (marat, 2003, p. 2). as bandura stated that self-efficacy refers to people’s judgment of their capabilities to mobilize the motivation, cognitive resources, and courses of action needed to meet given situational demands. it has been a strong and consistent relationship between self-efficacy and performance in areas such as sales, proactive behavior and work-related performance (carter et al., 2018, pp. 2483-2484). a study has been conducted to evaluate the effects of employee engagement and self-efficacy on job performance within an australian financial services firm by carter, et al. as a result of the research, it is stated that there is a positive and strong relationship between self-efficacy and employee engagement with job performance (carter et al., 2018, p. 2499). 2.2.2. the processes of self-efficacy self-efficacy is at the central of social cognitive theory. in other words, as bandura defines that self-efficacy is what people thinking, belief and feel affects on their behavior (bandura, çiğdem şükran cede & aylin gözen 194 1994, p. 1). according to albert bandura; self-efficacy beliefs affect human behaviors through four processes which are cognitive, motivational, emotional and selection. these are as below; i. cognitive processes: self-efficacy impresses cognitive processes both positively and negatively. strong and poor self-efficacy beliefs play an important role in setting personal goals. people with high self-efficacy beliefs determine high targets and committed to them, also their performance has been high because of believing that they are successful. people with low self-efficacy believe the tasks to be more difficult than they actually are and impair their performance with failed scenarios. it can be said that cognitive processes are related to mind and thinking (bandura, 1997, pp. 116-118). ii. motivational processes: the self-efficacy of beliefs play an important role in motivation. humans with high self-efficacy choose the difficult ones while making a task selection and to believe that they will successfully fulfill their duties because of their high motivation (tarakcı, 2019, p. 73). on the other hand, people with high self-efficacy spend more effort when faced with difficulties, while people with low self-efficacy give up instead of struggling (kyzy, 2016, p. 8). iii. emotional processes: the self efficacy plays a key role in the affective processes. it can be said that there is a relationship between emotional states and self-efficacy. while people's negative emotions decrease their self-efficacy perceptions, on the contrary having positive emotions increases their selfefficacy levels (bandura, 1994, p. 3). people with high levels of self-efficacy are in positive emotions because of their anxiety and fear levels are low. however, individuals with low levels of self-efficacy have been in negative thoughts and stress (bandura, 1997, p. 137). iv. selection processes: people form their social environment with their selections, they have positive results if their preferences are positive and they reach negative the relationship between mindfulness and self-efficacy 195 results if their preferences are negative. individuals with high levels of selfefficacy have positive choices while person with low self-efficacy have negative choices. for example, high self-efficacy in profession-related choices have provided the right choices (bandura, 1994, p. 78). 2.2.3. the sources of self-efficacy as it is mentioned in the literature the main sources of self-efficacy are mastery experience, vicarious experience, verbal persuasion, physiological and emotional states as mentioned below (bandura, 1994, p. 3; as cited in kemp, 2011, p. 134); i. mastery experience: individuals might have achieved successful or unsuccessful results in their past experiences. if they are successful, they think that they will achieve the same success again when they encounter similar situations related to the jobs they have accomplished, which increases their selfefficacy. on the other hand, they feel unsuccessful because of having negative experiences in the jobs they failed. this causes a decrease in the self-efficacy of the people when they encounter a similar situation. ii. vicarious experience: individuals think that they will be successful in those tasks by being affected the processes the people who are successful. these situations enable people to be brave and having high self-efficacy. similiarly, if anybody has a failure, it causes a decrease in self-efficacy beliefs (pajares, 2002, p. 123). vicarious experience is not as influential as are personal experience (bandura, 1997). however, in some situations the observation of a sample person can override the effect of mastery experiences. iii. verbal persuasion: verbal persuasion is a weak source of self-efficacy. it is a skill that is used to encourage an individual to do things that he or she believes, for whatever reason, that he or she cannot do. also, it can be defined as appraisal or evaluative feedback from others. people could be motivated that they have the çiğdem şükran cede & aylin gözen 196 skills and capabilities to succeed. if individuals are successful, their self-efficacy increases. if they fail, it causes them to be unhappy and to have a decrease in their self-efficacy level (bandura, 1994, p. 3; as cited in gruber, 2011, p. 31). bandura has explained that people can be persuaded to believe that they have skills and abilities necessary to succeed in tasks given to them. these are often tasks that people want to do but they fear that they do not possess the required skills (bandura, 1994). iv. physiological and emotional states: physiological and emotional states play an important role in self-efficacy. moods, emotional states, physical reactions and stress levels can all impact on how a person feels about their personal capabilities to a particular situation. negative emotions (anxiety, fear, stress, excitement, etc.) can negatively affect the self-efficacy level of that person which was higher before the situation they would experience. in a negative experience, generally the people think that their self-efficacy level is low instead of thinking that these negative emotions are the main reasons. this can lead to a further decrease in the self-efficacy of the person (bandura, 1997, p. 5). as bandura defines that “it is not the sheer intensity of emotional and physical reactions that is important but rather how they are perceived and interpreted” (bandura, 1994, p. 80). unfortunately, individuals often equate their physiological state with poor performance, incompetence, and failure. people can be improved their sense of self-efficacy by learning how to minimise stress and elevate mood when facing difficult or challenging situations. 3. the relationship between mindfulness and self-efficacy in eastern philosophy, where mindfulness originated, mindfulness is thought to promote insight into the notion that emotions are transitory and constantly changing, which naturally the relationship between mindfulness and self-efficacy 197 yields courage, fearlessness, and a sense of freedom and power in the ability to shape one’s own life (luberto et al., 2013, p. 374). self-efficacy is thought to be particularly salient with respect to sustained performance following adversity or failure. however, mindfulness may inhibit the tendency to extend failure or adversity into the future as reflective of a broader conceptualization of the self. similarly, mindfulness may promote resilience by fostering positive coping strategies, such as positive reappraisal. positive reappraisal has been defined as "an adaptive process by which stressful events are reinterpreted as benign, valuable or beneficial" and is a cognitive coping strategy that is regularly used to steer negative events such as traumatic exposure (hanley et al., 2015, p. 333). mindfulness is related with feelings of empowerment and confidence. people with high level of mindfulness might be generally anticipated to help gain better control of their thoughts and feelings and improve their self-efficacy (hosseinzadeh et al., 2019, p. 2). there is a positive relationship between self-efficacy and mindfulness outcomes. furthermore, mindfulness plays a mediating role in the relationship between self-efficacy and emss (hosseinzadeh et al., 2019, p. 3). as keil has documented the major relationship between mindfulness and self-efficacy within clinical supervisors. in addition, keil defended that anxiety and self-efficacy are two elements that alone have a positive influence on supervisor content, and that the supervisor’s level of mindfulness effects these elements and leads to the positive performance of the supervisors with regard to their clients (keil, 2016, p. 4). greason and cashwell have analyzed the impact of mindfulness on the self-efficacy of counseling. counselors’ self-efficacy is an significant integral of counselor improving. the çiğdem şükran cede & aylin gözen 198 results of their research found that mindfulness influences counselors’ attention, empathy and stress reduction and also raises their self-efficacy importantly. furthermore, as a result of the research, a significant positive correlation was found between counseling self-efficacy, awareness, attention and empathy (greason and cashwell, 2009, pp. 1;10). in the same way, many researchers have detected the effects of mindfulness and self-efficacy. mindfulness is one way to increase one’s sense of self-efficacy. however, mindfulness is not the only way to improve levels of stress and sense of self-efficacy. on the other hand researchers have examined the effect of professional learning on self-efficacy. overall, the literature has showed that mindfulness increases of self-efficacy (gardner, 2018, pp. 28-29). as a result, assorted researchers have founded that mindfulness has a positive relationship with self-efficacy. there is a relationship between mindfulness and with self-efficacy, and also increasing mindfulness has affected the increase of self-efficacy. as a matter of fact, it has been documented in many studies that there is a direct relationship between mindfulness and self-efficacy. 3.1. researches on mindfulness and self-efficacy this part includes researches on the relationship between mindfulness and self-efficacy. it is seen that many studies have been conducted when studies on mindfulness and self-efficacy are examined. it has been observed that these studies are especially investigated on educational sciences and psychology. those are as below, in a study conducted with graduate students in 2009, it was investigated whether mindfulness is a tool between anxiety and counseling self-efficacy. in the study, it was concluded that the relationship between mindfulness and counseling self-efficacy was positive. however, mindfulness was found to be a tool in finding the relationship between counselor anxiety and self-efficacy (hall, 2009, pp. 90-91). the relationship between mindfulness and self-efficacy 199 participants were 180 undergraduate psychology students. participants included 147 selfidentified caucasians (82 %), 21 african-americans (12 %), 8 asians (5 %), and 3 others (2 %). eight participants (5 %) reported hispanic ethnicity. relationships between mindfulness, self-efficacy and emotion regulation difficulties were examined in the study conducted on the students. as a result, it was observed that progress with mindfulness is a relation with selfefficacy (luberto et al., 2013, pp. 375-376). the relationship between mindfulness, positive re-evaluation and self-efficacy was examined with 243 university students (average age of participants was 20 and mainly female (85%). majority white/caucasian (75%), black/african american (10%) or latino 10%). as a result; it has been stated that acting with mindfulness affects self-efficacy positively and significantly (hanley et al., 2015, pp. 333-335). in this study involving 22 students, the relationship between mindfulness experiential small groups (mesg), mindfulness skills, empathy, self-efficacy counseling and stress reduction was investigated. as a result of the experiment, it was found that there is a significant positive relationship between mesg, mindfulness skills, empathy and self-efficacy counseling (bohecker and horn, 2016, pp. 314;329). as mentioned above, many studies have documented a direct relationship between mindfulness and self-efficacy. moreover, they concluded that there is positive and significant relationship between the concepts of mindfulness and self-efficacy. 4. conclusion mindfulness is defined as a mental state based on appreciating present inner experiences, paying attention to what is happening now, recognizing the quality of this attention and accepting what is distinguished without judgment (kabatzinn, 2009). mindfulness is çiğdem şükran cede & aylin gözen 200 described as “the awareness that emerges through paying attention, on purpose, in the present moment and non-judgmentally to the unfolding of the experience moment by moment” (kabatzinn, 2003b, pp. 145). on the other hand, self-efficacy is a belief in achieving any desired outcome and the ability to cope with them, particularly person's confidence in ability to deal effectively with difficult events. according to the self-efficacy theory, one's beliefs about the ability to successfully perform a behavior whether the individual will participate in it and how much effort will be make into it (luberto et al., 2013, p. 374). it has been stated that developing mindfulness of one's own self and environment in order to regulate thoughts and emotions is related to self-efficacy (greason and cashwell, 2009). the motivation of people with high levels of mindfulness and self-efficacy is considerd to be higher than the others. highly motivated individuals think that they will complete all tasks successfully and they have high self-efficacy. it is concluded that these people are successful in their daily life. self-efficacy plays an important role as having a positive correlation with performance attainment in achievements. in this study, the concepts of mindfulness and self-efficacy have been theoretically investigated and also the scientific studies have been examined. as a result, in accordance with the literature review it can be stated that there is positive and significant relationship between mindfulness and self-efficacy. in addition, future 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(2019), ‘‘örgütsel davranış’’ (5. baskı). i̇stanbul: beta yayıncılık. tarakcı, u. a. (2019), ‘‘örgütlerde öz yeterlilik algısı ve performans ilişkisinde kişilik profillerinin düzenleyici rolü ve koçluk hizmeti alan çalışanlar üzerine bir araştırma’’. thera, n. (2008), ‘‘the power of mindfulness’’. wheel publication. 1-75 (accessed 21 april 2021). weick, k. e., sutcliffe, k. m., & obstfeld, d. (1999), ‘‘organizing for high reliability: processes of collective mindfulness. research in organizational behavior: an annual series of analytical essays and critical reviews’’. valanciene, d., saulius, t., majauskiene, d., skurvydas, a. & delibasic, m. 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(2015), ‘‘mindfulness at work: resource accumulation, well-being, and attitudes’’ career development international, 21(2), 106–124, available at: https://doi:10.1108/cdi-06-2015-0086 (accessed 14 january 2021). international journal of commerce and finance, vol. 7, issue 1, 2021, 166-180 166 the impact of covid-19 on the firms: results of the thematic survey conducted by cscpa of istanbul nazım ekren istanbul commerce university, turkey elçin aykaç alp istanbul commerce university, turkey mefule findikçi erdoğan istanbul commerce university, turkey yeliz güner istanbul commerce university, turkey received: april 08, 2021 accepted: april 28, 2021 published: may 01, 2021 abstract traditionally, while economic policymakers do their policy decisions using macroeconomic indicators like the unemployment rate, inflation rate, growth rate etc. and also business activity data collected from national surveys on households and businesses. above all, the quality of data and information obtained during crisis periods are particularly important in terms of handle the crisis and the policies and precaution to be formed by the economic management to solve the crisis. identifying the problems of firms that have become vulnerable to the uncertainty that arises with crises will be a roadmap for the policy decision duration of policymakers. in this study, the effects of the covid-19 pandemic have analysed with the special thematic survey in april 2020 which applied by the chamber of sworn-in certified public accountants (cscpa) of istanbul. thus, it was ensured that the problems that occurred during the pandemic period and came back to the agenda were evaluated. eventually, the impact of the pandemic on the business world has been revealed through the consideration of sworn-in cpa that dominate the financial statements of the firms. keywords: covid-19 pandemic, effects of the pandemic, business problems by firm scales 1. introduction in the new type of coronavirus (covid-19) pandemic, which started in china in november 2019 and quickly spread to the whole world and turned into a pandemic, the number of cases was 46.5 million and the number of deaths was 1.2 million as of october. with the effect of the pandemic, the sudden lockdown of production in china caused the global supply chain to break. in this period, with global supply and demand shock, social and economic life has brought to a standstill with the precautions that governments have tightened day by day. the supply and demand shock created by pandemic has been shown to make a significant impact on turkey's economy. economic activity, which has significantly stagnated in many sectors, such as tourism, transportation, energy, construction, production, catering, clothing, entertainment has caused sharp declines in consumption and investment expenditures. it has been inevitable that this decline will negatively affect the unemployment rates which are already high, and the growth rate figures that began this year with an expectation of recovery. especially, the fact that the contraction in demand may continue for a long time due to the permanent changes caused by the process in consumer behaviors may limit the positive effects of support and stimulus package for continuing production, preventing dismissal ofworkers and providing new employment in the public and may cause an increase in unemployment. traditionally, while policy makers on economy do their policy decisions takes into account employment and business activity data collected from national surveys on households and businesses. above all, the quality of data and in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the impact of covid-19 on the firms: results of the thematic survey conducted by cscpa of istanbul 167 information obtained during crisis periods are particularly important in terms of handling the crisis and the policies and precaution to be formed by the economy management to solve the crisis. the uncertainty processes that occur with the crises make the real and financial sectors more vulnerable to risks. that is why it is very important to identify the problems of the firms that the backbone of the economies during the pandemic process that has become on the world agenda as of the end of 2019 and rapidly affects the decision and operation mechanisms of all governments. especially the determining the priority problems of firms will be a roadmap to prevent greater losses that the real sector may experience in emerging market economies, which are more sensitive to vulnerability. in this context the effects of the covid-19 pandemic have examined in april 2020 with the surveys carried out within the scope of the "chamber of sworn-in certified public accountants of istanbul economic expectation index project” which preparations and studies started in 2017. it was ensured that the problems that occurred during the pandemic period and came back to the agenda were evaluated. eventually, the impact of the pandemic on the business world has been revealed and evaluated by the sworn in cpa who dominate the financial statements of the firms. 2. literature there is a rapidly growing literature analysing the relationship between covid-19 and the economy. when consideration of the literature, it is generally discussed how the economy will be affected by this health crisis. in the studies, especially the direction of growth figures and in what way much the real/financial sectors indicators may be negatively affected have analyzed. the general opinion of the studies is that covid-19 caused an economic crisis due to demand and supply shocks (ayittey vd., 2020; brinca, duarte&faria-e-castro, 2020; eichenbaum vd., 2020; makridlis&hartley, 2020; correia, luck&verner, 2020). in the literature, studies investigating the sector-specific effects of covid-19 generally analyze which sectors are affected more (buchheim, krolage&link, 2020; gu vd., 2020; nicola vd., 2020; brinca, duarte and faria-e-castro, 2020; shen et al.. , 2020; bartik et al.. , 2020; akbaba, 2020;, öztürk et al. , 2020), but on the contrary, studies investigating the problems and expectations of the sectors are very few (nakiboğlu and işık, 2020; i̇nce; 2020). these studies contributed to the literature in terms of identifying the problems of firms. buchheim, krolage & link (2020) aims to determine the time point when german firms become aware of the negative economic effects of the covid-19 pandemic. in this context, the authors used ifo business survey data, which is applied monthly to firms in germany. the study was tried to determine whether firms took precautions by forecasting the possibility of crisis or whether they were unexpectedly impacted when the crisis reached their domestic markets. the results show that when the coronavirus crisis reached europe, firms were not ready. despite spreading of the covid-19 outbreak in asia before the europe, the dimensions of the crisis in the business world were not understood until march, when italy's first regional curfew and germany's primary schools were closed. as the crisis reached their domestic markets, the commercial outlook of firms gets worse sharply throughout march, with the strongest decline after the german government announced the nationwide school closure on 13 march. the study shows that these two events led to an unprecedented decrease in the commercial outlook of six standard deviations and a large increase in commercial uncertainty. besides, while the commercial outlook of the firms decreased in the wide majority of the sectors, a small part (4.9%) of the companies benefited from the covid-19 crisis. gu et al. (2020) analyzed how companies in china are affected by covid-19. the analysis is based on daily data from three sources showing activities affected by covid-19 in china over the period 2019-2020. first, it consists of original electricity usage data covering 34,040 firms in suzhou, second, some variables such as industry information, ownership and firm scale (registered capital), and lastly the number of covid-19 cases. according to the results, it was determined that while the manufacturing industry was exposed to the greatest negative impact, industries such as software, healthcare and social services were positively affected by covid-19. in addition, it was stated that private firms suffer more from state-owned enterprises and foreign-owned firms and determined that small firms experienced an additional 30% decrease compared to large-scaled firms. nicola et al. (2020) tested the relationship between the agricultural sector and the covid-19 pandemic. as a result of this study, it was specified that the global demand collapse in hotels and restaurants reduced the prices of agricultural commodities by 20%. on the other hand, it has been specified that there has been a recession of more nazım ekren & elçin aykaç alp & mefule findikçi erdoğan & yeliz güner 168 than 50% in sectors such as tourism, energy, education and finance. therefore, it was underlined that the agricultural sector will be less affected by the global pandemic. brinca, duarte & faria-e-castro (2020) analysed the sector-level labour demand and supply shocks of the covid-19 pandemic with the bayesian svar method on monthly statistics of working hours and worker wages. it seems possible that two-thirds of the decline in the growth rate of working hours in march and april 2020 will be due to negative labor supply shocks. most of the naics -2 sectors are subjected to negative labour supply and demand shocks, and especially the leisure and hospitality sector is subjected to major negative supply and demand shocks. it has also been determined that other sectors such as information and retail trade experienced insignificant supply shocks and in some cases even positive demand shocks. shen et al. (2020) analyzed the impact of covid-19 on corporate performance using financial data from chinese companies. the results showed that covid-19 has a negative impact on firm performance. the negative impact of covid-19 on firm performance is more pronounced when a firm's investment scale or sales revenue is small. these findings are among the first empirical evidence of the relationship between the pandemic and firm performance. for sectors affected by the pandemic such as tourism, catering and transportation, it has been revealed that there is a significant decrease in corporate performance in the first quarter of 2020. the negative impact of the pandemic on the production, operation and sales of these sectors was identified and it was shown that this was reflected in the negative rate of return. bartik et al. (2020) aim to determine the impact of the coronavirus on small firms. in this context, the study conducted a survey with more than 5,800 small firms between march 28 april 4, 2020. the results show that both the financial fragility of many small firms and the significant impact of covid-19 on firms. it is specified in the study that small businesses constitute 50% of employment in america and are deeply affected by the crisis. especially, it was determined that 43% of the firms in the retail sector closed down, so this situation causes 40% employment loss because of the multiplier effect of the sector. in the study, firms were asked about the expectation of continuing to operate until the end of 2020 according to different crisis scenarios. firms' expectation of remaining to continue operating in a 1-month crisis was above 68% in all sectors except arts and entertainment, personal services, tourism and accommodation, while the rate in a 6-month crisis situation declined to 39%. besides, the study includes results, the expectations of firms regarding the long-term impact of covid-19, as well as their perceptions of aid programs offered by the public authority. akbaba (2020) investigated the effects of the covid-19 pandemic on tourists. the study was done by applying a questionnaire to 495 people. according to the results, it was specified that tourists experience motivational exhaustion in participating in tourism activities. also, it was specified that this exhaustion experienced by tourists negatively affected their intention to buy, recommend and pay more. öztürk et al. (2020) investigated the impact of the covid-19 pandemic on the real and financial sectors using data on borsa istanbul sector indexes. as a result of the study, it was found that the pandemic had a negative impact on nearly all sectors. generally, the three main sectors (industry, services and finance) are nearly equally affected, while differences at the level of sectors are specified. metal products, machinery, sports, tourism, transportation, banking and insurance sectors are the most affected sectors. on the other hand, food, beverage, wholesale and retail trade were identified as less affected sectors. şen (2020) aimed to analyse the degree to which catering firms operating in the marmara region were affected by the covid-19 pandemic and the precautions that they took if any. as a result of the data obtained from 14 participants in the study, the capacity decrease rates of the firms were determined. it has been observed that the long period of time the firms have been in the sector is not a factor in taking measures against the decrease in capacity. also, it has been specified that all firms have taken the precaution to protect human health in their services due to the pandemic. tayar et al. (2020) has examined the relationship between the covid-19 and turkey economy. the study was used 10 different borsa istanbul sector index (electricity, transportation, finance, industry, technology, food-beverage, trade, textile, tourism and services) and the total number of cases disclosed daily between 17 march to 28 april 2020. according to the findings, it has been specified that the electricity, transportation, financial, industrial and technology sectors were economically affected by the covid-19 pandemic. in addition, it was specified that all sectors except the trade sector were economically negatively affected by the pandemic. the biggest cause of this negative impact has been shown as the precautions taken against the pandemic and the decreasing demand and supply. the reason for the impact of covid-19 on the firms: results of the thematic survey conducted by cscpa of istanbul 169 the positive coefficient of the trade sector was evaluated as the increase in online shopping and the continuity of activities in the sector. kılıç (2020) analysed the effects of the covid-19 pandemic on sectors in terms of financial markets. in the study, the returns of bist sector index were analyzed using the event analysis method. it has been determined that the covid19 pandemic, which has caused many negative effects in the economy, also has a generally negative effect on the bist sector index returns. while it was specified that the textile and tourism sectors were exposed to the highest negative impact, it was concluded that the trade sector provided positive returns during the pandemic process. ince (2020) aimed to determine the effects of covid-19 on firms which are operating in bitlis. in this context, semistructured interviews were done with 16 firms' owner. according to the results, it was determined that firms' owner had more problems in paying rent and salaries of employees during the coronavirus process. also, it has been specified that firms which generally consist of small and medium enterprises didn't sufficiently benefit from the policies and stimulus packages. nakiboğlu & işık (2020) aimed to specified covid-19 impact on the economy. in this study, authors applied survey to 894 firms' owners, and as a result, it was determined that there is a consensus that the covid-19 pandemic has impacts on the economy. firms' owners stated that "economic stimulus given are insufficient", "small firms face to the risk of closing down" and "unemployment will increase". the views of firms’ owners did not differ according to the legal status of their firms and firms structure such as family business. however, the views of firms’ owners differ according to women firms' owners, a monthly income of 5000 tl below, the turnover of less than 100,000 tl, undergraduate education level and those with 15 years or less activity. generally, it was specified that their views on the effects of the covid-19 pandemic on the economy were more negative. 3. methodology and results 3.1. data this study is an extended part of the chamber of sworn-in certified public accountants (cscpa) of istanbul economic expectation index project, which has been published since 2017, for the pandemic period. the economic expectation index of the istanbul chamber of certified public accountants is a survey of sworn-in cpa registered in the chamber, a study that collects data and information through these surveys, and has started to appear in the press since 2019. the effects of the covid-19 pandemic were investigated with the surveys applied in april 2020. during the pandemic period, the problems that occurred and / or came back to the agenda were evaluated, and the impact they created in the business world was evaluated by scpa, which has a first-hand command of the financial statements of the enterprises. the study aims to provide a road map of the measures to be taken during and after the covid-19 pandemic. a part of this study has been previously published in ekren, alp and güner (2020) book. while the book is investigated by putting forward the first 5 most important impact in each category, this study includes all problems and solution suggestions for the relevant categories. the open-ended questionnaires were processed to assign categories in suitable to numerically analyzed. while reporting the problems and solution suggestions received from the sworn-in cpa who replied to the questionnaire at these stages, they were not changed but standardized while classifying. within the scope of the study, firms are investigated by classifying them as large, medium and small in as much as expectations for economic indicators and sensitivity to economic indicators differ depending on the scale of the firm. while calculating the economic expectation index, two measures are used for the scale of the firm: the turnover and the number of employees in the firm. although both groups provided information on the scale of the firm, their views on the economic course were investigated separately. three basic separations are made in the financial turnover grouping. the separation is as “0-10 million tl” smallscaled firms, “10-50 million tl” mediumscaled firms and “50 million tl over” large-scaled firms. firms are separated into three basic groups according to "number of employees". grouping is “less than 50 employees” smallscaled, “50-250 employees” medium-scaled and “more than 250 employees” large-scaled firms. in this survey, which was conducted in april 2020, the question of “the 3 most important problems encountered and solution suggestions” was asked open-ended. the applied questionnaire was approved by the ethics committee. we obtained permission from cscpa of istanbul to use the survey data in the study. the process was continued until the number of surveys ensure the minimum number of survey sample scale. while the number of questionnaires collected is 266, the total number of problems and solution suggestions reported is nazım ekren & elçin aykaç alp & mefule findikçi erdoğan & yeliz güner 170 805. the process was continued until the number of surveys ensure the minimum number of survey sample size. it has known that there are many sworn in cpa in istanbul. however, taking into account that there are approxim ately 5000 sworn in cpa are active on this job, 266 usable survey results were got in the study. this number shows are valid for 95% confidence and 5.85% level of statistical error. especially, the surveys organized in this process are intended to reveal the impact on firms due to the covid-19 pandemic and the precautions taken in this process. the evaluation made as a result of the analyses of the questionnaires were collected in 20 main groups. the categories used in categorizing open-ended questions are given in the annexes. 3.2.results 3.2.1.problems encountered in firms and solution suggestions the results are collected under 20 subtitles; the rates of the subtitles are given in the table below. in this context, contraction of demand and financing problems have the highest share with 21.81% and 20.92% in general results. these two problems are followed increasing costs (9,57%), lack of qualified employee (9,31%), collection and legislation problems (8,31%) by close percentages. the problem with the highest rate in the covid-19 period is contraction of demand. the coronavirus caused changes in consumer behaviour and spending trends, so the domestic and foreign markets were negatively affected. these trend is expected to continue in course of the pandemic period. by opening new markets and taking precaution to facilitate international trade, it can be made possible for firms to overcome this difficult period more easily. financing problems have the second-highest share among the problems seen during the pandemic period. problems that are experienced in economic activities during the period cause problems in the firms' access to financing resources. facilitation in loan contracts and debt restructuring of the firms should be offered as a solution for firms to overcome this difficult period more easily. the incremental costs (increase in cost) is the third-highest share with 9.57%. the decrease in spending rates due to the curfew negatively affected the turnover of firms. the precautions taken to protect the health of the employees cause additional costs for firms. fluctuations in exchange rates also caused the fixed costs of firms to increase. costs of firms can be reduced with solutions such as extending the content of short-time working pay and duration and tax reduction. figure 1 problem categories ranking during the covid-19 period in this period, the problem of qualified employee has become different for companies and has appeared as the fourth most important problem with a rate of 9.31%. firms are taking various precautions to protect employee the impact of covid-19 on the firms: results of the thematic survey conducted by cscpa of istanbul 171 health. some firms have adjusted their working hours, while others have modified to working from home. it has been observed that productivity is affected by these conditions. it is predicted that firms generally have difficulties in maintaining employment and if precautions are not taken to reduce their complaints, there will be a serious unemployment problem in turkey with the effect of the virus. the solution suggestions for the main problems obtained in the study are shown in table 1. according to the results, the following solution suggestions are presented for the first three most important results for decrease in demand, financing problems and increase in costs, respectively:  supporting promotional and marketing activities, new markets studies were requested to be found.  providing more affordable loans from banks.  improvement in price and tax policy table 1 main problems and the solution suggestions decrease in demand supporting promotional and marketing activities, new markets studies were requested to be found. financing problems providing more affordable loans from banks. increase in costs improvement in price and tax policy lack of qualified employee/stuff it has been suggested to reduce labor costs and increase education options in order to reduce the shortage of qualified stuff. collection problems making improvements to eliminate non-payment problems in laws legislation/regulations making it easy to follow the legislation. economic and political uncertainty shortening of uncertainty before and after elections or economic fluctuations. production problems problems encountered due to legislation and bureaucratic obstacles in the production process should be eliminated. exchange rate volatility eliminating excessive fluctuations and uncertainties in the exchange rate global uncertainty problems arising from recession and instability in neighboring countries bureaucratic obstacles simplifying legislation and making it fast applicable providing raw materials problems encountered due to legislation and bureaucratic obstacles in the production process should be eliminated. tax burden compliance with eu norms, eliminating the difference between tax rates competition regulating the competition conditions in the market. incentive programmes informing studies about existing opportunities should be increased. promotion and marketing enhancing product and country image through marketing and advertising campaigns. informal and unregistered activity increasing supervision, imposing sanctions, regulating tax burdens. among the problems of the pandemic period, firms have had problems with collection in the domestic and foreign markets. therefore, the necessity of commercial receivable insurance has become a current issue. in addition, there was a decrease in the production capacity of firms during this period. as it should be, there are problems in production input supply due to pandemic. with the effect of the fluctuations in foreign exchange rates, raw material supply from domestic and abroad has still less become difficult. another problem that appears as a result of the negativities experienced is the difficulty in result a sufficient amount of products for sale. the reason is that some firms caused unreasonable increases in prices by doing stocking. it causes the companies to have future anxiety that the uncertainties of economic problems and scales the pandemic will reach both in turkey and in the world in the future. on the other hand, it is observed that there are disruptions in the implementation of the precautions taken during the period. for instance; it is underlined by the respondents that the scope of force majeure is not comprehensive enough and should be expanded. the solutions offered to get out of the difficult days; by providing the support required by the social state perceptive to both the employer and the employee, it is to create payment nazım ekren & elçin aykaç alp & mefule findikçi erdoğan & yeliz güner 172 facilities in the taxes and ssi obligations. the pandemic attitude of turkey's should be described in detail. in this way, the clarity of the country's attitudes is also expected to provide a positive impact on the image of the country. 3.2.1.1.firms scaled by turnover level 3.2.1.1.1.small-scaled firms small-scaled companies with a financial turnover of "0-10" million tl" came up against with three problems in the covid-19 period: financing problems, demand shrinking and collection problems. a serious loss of financial turnover was experienced with the contraction in demand. then, problems occurred in collections, firms offered to need net working capital and cash. facilitating the bureaucracy of accessing funding sources and defer loan payments without interest is an important solution proposal for small-scaled companies. figure 2. problems encountered in small-scaled firms by financial turnover level in the covid-19 period on days when staff are worried about coming to work due to the high risk of infection, it is observed that sterilization and labour supply is difficult and support applications such as short work allowance is not sufficient. the conditions under which the production should continue must determine in this period in which there are difficulties in raw material supply and production. also, providing the necessary working conditions for the health of the employees is necessary. in this period, the firms that make stock negatively affected the market and increased competition. in addition, the fact that workplaces and customs are closed also creates a negative effect on small-scaled firms. a gradual return to normal should be achieved by allowing customs entry and exit at certain times. 3.2.1.1.2.medium-scaled firms during the covid-19 pandemic, the highest rate two problems in medium-scaled firms which have a financial turnover of "10-50 million tl" are financing problems and decrease in demand, just like small-scaled firms. the market has come to a standstill due to the contraction in demand and that firms have problems in repaying loans. both delays in salary and premium support and difficulties in accessing financing cause problems for firms. the desired effect could not be achieved within the scope of force majeure. by expanding the scope of force majeure, it is necessary to provide stimulus until firms reach a sufficient financial turnover level. workplaces that had the impact of covid-19 on the firms: results of the thematic survey conducted by cscpa of istanbul 173 to stop operation and the borders that were closed also had a negative effect during this period. in addition, firms with anxiety about the future have uncertainty about continuing to employ workers. the increase in employment costs has an important role in this uncertainty. figure 3 problems encountered in the covid-19 period in medium-scaled firms by financial turnover level in addition to labour costs, input costs such as rent and energy have also increased. considering that the firms cannot collect their receivables, they are stuck in a difficult situation due to increasing costs. a few solutions that can have a positive impact on the economic recession process firms are in can be listed as follows; facilitation of the necessary procedure for credit, long-term and low-interest loan stimulus, tax and payment delays. the pandemic has also hurt production and raw material supply. the depreciation of the turkish lira during the process caused an increase in costs, which made foreign trade and raw material supply difficult. in addition, in line with the precautions taken by the firms, the production efficiency cannot be achieved at full capacity. as a solution of this proposal, it can be offered to turn to domestic production and to provide a full-time working by increasing the precautions. nazım ekren & elçin aykaç alp & mefule findikçi erdoğan & yeliz güner 174 3.2.1.1.3.large-scaled firms figure 4 the problems encountered in the covid-19 period in large-scaled firms by financial turnover level considering the problems of large-scaled companies according to the financial turnover level, the first three problems are decrease in demand, financing problems and increase in costs. covid-19 pandemic period, it is both in turkey and the global experienced a severe decreasing demand. with the decrease in the activity in the economy, the financing problems of the firms have appeared. while the sales rates decreased, the increase in fixed expenses continued to have a negative impact on firms. during the period, three important solution suggestions for companies can be expressed as follows: facilitating firms’ accessing to financing resources, supporting firms by banks and applying monetary policies to prevent fluctuations in exchange rates. it is possible that the negativities in the financial markets, when combined with the pre-pandemic economic problems, may cause deeper problems. this environment of uncertainty is also expected to have a negative impact on investments. in addition, one of the main problems of firms is that they cannot collect payments for the products which they deliver. the disrupting collection-payment balance is a serious problem for firms. it is specified by firms that public progress payments were not paid or were paid delay in this period. during the pandemic, firms that continued their production by protecting the health of their employees had great difficulty in providing employment. firms that had to be closed within the scope of the precautions taken faced greater problems. it is thought that the negativities will cause serious unemployment in the future. providing government support and reducing labour costs can be considered as a solution suggestion. in addition, it is necessary to transition to domestic production and to produce technological production. one of the problems of large-scaled firms is the tax burden. the solutions suggested as a result of the study are as follows: the deciding on tax delays in the epidemic period by looking at the previous periods of the taxpayers, the instalment of tax payments in 2021, the giving the number of gross personnel expenses paid by taxpayers during the year as a human capital investment discount as a discount in the annual income and corporate tax return. the impact of covid-19 on the firms: results of the thematic survey conducted by cscpa of istanbul 175 3.2.1.2.firms scaled by number employees 3.2.1.2.1.small-scaled firms the two main problems of firms which is “less than 50” employees during the pandemic process are demand shrinking and financing problems. with the effect of the pandemic, trade has sometimes come to a stopping point. there has been a serious decrease in economic activities. there has been a shrinking business volume in domestic and foreign sales. in addition to the decrease in income from sales, fixed costs such as personnel, rent and energy increased due to the effect of floating exchange rates. the due payments could not be paid on time because of the lack of financing resources, decreases in collections and costs increased. the making arrangements for facilitating access to the financing source and result new markets with government relief can be proposed as a solution. with some firms closed within the scope of the precautions taken in turkey, these firms' owners and employees have been in a difficult situation. it has become very difficult to maintain employment during the pandemic. in addition, sectors which are not included in the scope of force majeure were more affected by the negativities of the period. figure 5. problems encouraged in small-scaled firms according to number of employees during covid19 period another precaution taken during this period is closing the borders. however, closed borders caused problems in raw material supply so the dependency on abroad in production has been a problem. there were rapid increases in production costs. by increasing support for domestic production, the contribution can be made to both localization and employment. stockist firms disrupt the order in the market and cause an increase in competition. the role of these firms in the increase of raw material and product prices can't be ignored. in order to prevent this situation, the government should play a regulatory role and take disincentive precautions. 3.2.1.2.2.medium-scaled firms when mediumscaled firms are analyzed according to the number of employees, decrease in demand specifies as the most fundamental problem. there are serious reductions in cancellation of orders and new period orders. the nazım ekren & elçin aykaç alp & mefule findikçi erdoğan & yeliz güner 176 problem of decrease in demand triggers many problems such as, with the decreasing demand, there has been an increase in financing problems. consequently, the firms can't make loan payments and payments of overdue debts. firms can be relieved with government grant and restructuring in bank debts. due to the epidemic, collections can't be made from previous product orders. it is known that the terms are getting longer and the previous period receivables can't be collected. therefore, the collection problems cause serious decreases in revenues. in this period, the increases in input costs, production costs and personnel costs are challenging firms. for this reason, costs can be reduced to more reasonable levels for firms by increasing work and wage stimulus, deferring personnel taxes and social security premiums. making public progress payments in a timely and sufficient amount will also have a positive effect on firms. solving the accumulated vat refund receivables and the problems in export transactions can be offered as a solution. figure 6 problems encouraged in medium-scaled firms during covid-19 period according to number of employees also, there is a serious decrease in working hours and number of employees. employers are worried about protecting employee health. alternative scenarios should be prepared and actions should be taken without delay for future anxiety. employers and employees who are in a disadvantaged situation can be supported by the precautions taken by expanding the scope of force majeure. mediumscaled companies also experience difficulties in obtaining production inputs during the pandemic. it appears that firms are indecisive to supply raw materials. firms can be supported by changing the tariff rates on inputs and preparing a medium-term flexible crisis budget. 3.2.1.2.3.large –scale firms the biggest problem seen in the covid-19 period in large-scaled companies is financing problems. especially in this period, there is a disruption in the general economic conditions of companies. taking loan has become a problem for firms so low interest rates and flexible payment model can provide facilities for their loan payments. the impact of covid-19 on the firms: results of the thematic survey conducted by cscpa of istanbul 177 figure 7 problems encouraged in large-scaled firms during covid-19 period according to number of employees due to the pandemic, there is a decrease in domestic and international demand. firms are worried about delivering the products with the anxiety of collection. trade receivable insurance application is offered as a suggestion to avoid collection problems. in order to increase the trade volume, discount in customs taxes, vat and sct rates and taxes on income can be listed as solution suggestions. the decline in sales has increased the problems in stock and personnel costs. fluctuations in exchange rates also affect firms negatively. in such an atmosphere, a short-time working allowance alone is not sufficient. government support should be provided for fixed costs. besides, efficiency from working personnel also decreased with the negative effect of the period. if the economic atmosphere in the pre-pandemic period can't be rebuilt, an increase in the unemployment rate will be unavoidable. in the current situation, employers can't cancel the labour contract of workers due to the restriction imposed by the law. however, firms' owners want to direct workers for the repair of factories and workplace, they dislike that employees are unemployed due to the disruption of production. 4. conclusion in many developed and emerging market economies, especially the usa, eu and japan, the economic and financial stimulus packages that have been implemented since the global financial crisis and have increased until today (before the coronavirus) have reached huge volume. the different approaches are underlined and discussion is done on this subject in international literature. it is specified that there are fragilities of effectiveness, efficiency, alternative costs in the decisions and practices, preferences and priorities of the public authority. the demands and expectations of the corporate sector and, the preferences and priorities of the public authority are different from each other. therefore, it points out that the stimulus packages by the public authority do not match the expectations of the firms. it is dwelled on that the structural problems and failures of the market economy have become unsustainable. one of the most important points that the coronavirus brings to mind once again is the systemic vulnerabilities and the necessity of a new perspective in sustainability. sustainable fragilities that can't be unsolved in a reasonable time become unsustainable. in such cases, very costly solutions and/or management can be encountered. at this stage, decision-making and implementation processes that are not based on accurate and necessary data or information caused new alternative costs. this progress of the cycle changes to trust and reputation evaluations and perceptions. nazım ekren & elçin aykaç alp & mefule findikçi erdoğan & yeliz güner 178 the direction and form of the economic problems produced by the coronavirus on the basis of companies and the interventions against them varies depending on the opportunities and resources in the economic structure and relations system of the countries. however, there are many widespread views between the processes faced by firms and the approaches of the public authority. considering the international models regarding these issues, the features of the standard table regarding the processes faced by firms and the intervention contents of public authorities can be expressed as follows. the public authority is systematically planning and implementing its policy response to covid-19. public authority give priority to reducing the damage that can be caused by the crisis effected demand and supply shocks. in addition, the setting up the appropriate order after the crisis is also considered. within the framework of these purposes, the public authority interfered in the processes with necessary and appropriate monetary and fiscal policy tools. reducing and controlling the damage of the crisis depends on economic problems and the forms of intervention prepared for them. demand contraction is interfered in by demand incentives and financial supports. public authority uses interest rate lowering, liquidity increase and other financial supports in case of insufficient liquidity. in case of insufficient production, capitalization, resource transfer and other financial support are put into practice. problems and solution suggestions surveys and economic expectation indices produced by chamber of sworn-in certified public accountants of istanbul and istanbul commerce university is a project that contributes to the correct perception of the current process and the determination of correct preferences and priorities. surveys are about detecting the problems in the coronavirus process and determining the solutions for them. the fact that there are thirteen sectors and six sector scales in two different categories enables the surveys to have a wide range of problems in terms of identified problems and suggested solutions. thus, it is possible to analyze different categories and breakdown. two factors affect the activities and thus the performance of firms. the first is macroeconomic indicators, including macroeconomic indicators and macroeconomic policies and regulations. the other is firms’ specific issues observed in financial and non-financial performance indicators. therefore, both the problems of the firms' sector and the solution suggestions have been formed depending on these factors. the main result is also summarized in the figure 8. this figure also helps to follow up the main results of this study. the real sector supreme board which will be established can be used as an institutional mechanism in guidance sectors and firms, therefore the board will establish basic rules and principles related to monitoring process. thus, it will be possible to monitor efficiency, productivity and alternative costs and reduce waste in decisions and practices aimed at reducing the output gap, inflation gap and employment gap. in addition, this institutional mechanism can be made to include the competitive economy approach to the structure of the competition board. the developing and strengthening the strategic response capabilities of companies in every atmosphere will reduce the chance of damage to welfare-generating mechanisms. it is important that how to formulate actions that reduce costs and increase revenues in improving companies' performance is important. in this regard, the preparation of strategies to focus on the main business, to determine the growth path with new products and services, to create a business style that will provide differentiation, and to establish methods of providing financial resources have a critical role and function. the ability of firms to design and implement these actions is closely related to their capacities. the business society should give priority to these issues, and create platforms that provide the necessary data and successful implementation examples with the sharing of knowledge and experience. the impact of covid-19 on the firms: results of the thematic survey conducted by cscpa of istanbul 179 figure 8 main results references akbaba, m. 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(2020). the impact of the covid-19 pandemic on firm performance. emerging markets finance and trade, 56(10), 2213-2230. şen, m. a. koronavirüs (covid-19) salgınının türkiye’deki yemek firmalarında oluşturduğu etkinin belirlenmesi üzerine bir araştırma. afet ve risk dergisi, 3(1), 89-100. tayar, t., gümüştekin, e., dayan, k., & mandi, e. covid-19 krizinin türkiye’deki sektörler üzerinde etkileri: borsa i̇stanbul sektör endeksleri araştırması. yüzüncü yıl üniversitesi sosyal bilimler enstitüsü dergisi, (salgın hastalıklar özel sayısı), 293-320. international journal of commerce and finance, vol. 7, issue 2, 2021, 21-49 21 comparative analysis of the effect of loan/financing to deposit ratio, labor costs growth and promotion costs growth to returns on assets in islamic banks and conventional banks in indonesia lucky nugroho, universitas mercu buana, jakarta, indonesia lucky.nugroho@mercubuana.ac.id erik nugraha, universitas sangga buana ypkp, bandung, indonesia ahmad badawi universitas mercu buana, jakarta, indonesia yananto mihadi putra universitas mercu buana, jakarta, indonesia submitted: 13.04.2021 accepted: 10.08.2021 published: 02.12.2021 abstract: the banking industry is the locomotive of economic growth in a country. therefore, the performance of the banking industry must be the focus of all stakeholders. this study compares the factors that influence the performance represented by the return on asset (roa) ratio in both the islamic banking industry and the conventional banking industry. the factors that affect the roa used in this study are the distribution of financing (fdr/ldr), growth in labor costs, and growth in promotion costs. the method used in this research is quantitative by using lucky nugroho & eric nugraha & ahmad badawi & yananto mihadi putra 22 a panel data regression test. the data used are primary data from islamic banks and conventional banks for four years, namely in the 2014-2018 period. moreover, the research questions are: (i) are there differences in fdr's effect on roa between islamic banks and conventional banks?; (ii) are there differences in the effect of growth in labor costs on roa between islamic and conventional banks?; (iii) are there differences in the influence of the growth in promotion costs on roa promotion between islamic banks and conventional banks? the results of the study show that the distribution of financing (fdr) to islamic banks and conventional banks positively and significantly affects roa. the growth of labor costs in islamic banks and conventional banks has a negative and significant effect on roa. at the same time, the growth in promotion costs between islamic banks and conventional banks is different. promotion cost growth in islamic banks has a negative and significant effect on roa growth. however, in conventional banks, the growth in promotion costs has a positive and significant effect on roa. key words: islamic banks, conventional banks, roa, fdr/ldr, labor cost growth, promotion cost growth 1. introduction in the era of globalization, competition in the banking industry has become a necessity. therefore, every organization or company must make changes adaptation to survive (levinthal, 1991). on the other hand, customers have benefits where the tight competition can get excellent quality service (podolny, 1993). however, on the other hand, the internal bank competition impacts the requirement for banks to run their operations efficiently and increases bank income through their business optimally. the increased competition was due to an increase in the number of banks. the increase in the number of banks was due to a policy from the regulator, a policy package dated 1 june 1983, and a policy dated 27 october 1988, which comparative analysis of the effect of loan/financing to deposit ratio, labor costs growth and promotion costs growth to returns on assets in islamic banks and conventional banks in indonesia 23 opened up opportunities to grant permits to open new bank operations. this policy has implications for the relative ease of opening a new bank. the requirement for a new bank following the regulation is that investors are permitted to open new banks with a capital of indonesian rupiah (idr) 10 billion (ihwanudin, maulida, et al., 2020). therefore, the growth of banks in indonesia in the 1990s experienced significant growth. furthermore, in the 2000-2020 era, competition in the banking industry also increased, resulting in many banks closed due to failures in managing these banks. during the 2005-2018 period, 92 banks were closed, both rural banks (bpr) and commercial banks (setiyaningsih, 2019). one of the commercial banks that was liquidated and brought to the public's attention was the case of century bank at the end of 2008, which resulted in state losses of rp6.4 trillion (dharmasaputra et al., 2010). the impact of century bank's liquidation declined the public trust to place their funds in bank financial institutions. on the external side, the global economic condition is still relatively sluggish and unable to provide good prospects for entrepreneurs and investors, which is a challenge for the banking sector to channel funds to the public. another external factor that causes banks to implement efficiently and have effective strategic initiatives to improve their performance is the existence of growth in financial technology services (fintech) which is currently able to replace the function of banking services (hiyanti et al., 2019; nugroho et al., 2020; zafani & arifqi, 2020). according to iqbal fasa et al. (2020) and soeharjoto et al. (2019), there is a phenomenon that the existence of fintech can threaten the business of banking. the fintech existence that can threaten the banking business include: (i) the banking services that can replace with fintech services are cash transfers and online loan applications; (ii) the high growth of fintech providers in indonesia; (iii) fintech services facilitate financial transactions for people living in rural and remote areas, thereby increasing financial inclusion; (iv) digital-based businesses such as lucky nugroho & eric nugraha & ahmad badawi & yananto mihadi putra 24 fintech have promising prospects in the future, and (v) fintech services can beat the popularity of current banking services, where the majority still rely on physical outlets. currently, the indonesian government has plans and programs to make indonesia the center of the world's sharia economy, finance, and business. therefore, one of the government programs is to advance islamic banking as a locomotive for islamic business in the growing national business and economics as same as with conventional banking. based on intense competition and demands for quality services, islamic banks must increase productivity compared to conventional ones. one of the bank profitability indicators and a critical financial indicator is the return on assets (roa). roa is a financial indicator that functions to analyze a bank's business activity's ability to manage its productive assets to generate optimal profits (akgün & şamiloğlu, 2016; satibi et al., 2018). islamic banks in indonesia are new players in the banking industry compared to conventional banks. the comparison of the existing gap between islamic banks and conventional banks is quite far away from where conventional banks have existed since 1896, namely bank rakyat indonesia (bri), while islamic banks were only established in 1992, which was marked by the establishment of bank muamalat indonesia (bmi) (ihwanudin, maulida, et al., 2020). this study continues from the author's team's previous research regarding the business continuity of islamic banks from the perspective of islamic banks' ability to generate profits (nugroho et al., 2019). at the same time, this research's novelty uses the variables of production factor determination, namely operational costs and salary costs, including financing deposit ratio (fdr), labor costs, and promotion costs that can affect revenue. one of the leading banking businesses is channeling funds to the public, wherein the bank will get optimal returns or income (gavalas & syriopoulos, 2014; paisittanand & olson, 2006). furthermore, indicators to determine whether the distribution of funds to the public are the financing to deposit ratio (fdr) in islamic banks and the loan to deposit ratio (ldr) in comparative analysis of the effect of loan/financing to deposit ratio, labor costs growth and promotion costs growth to returns on assets in islamic banks and conventional banks in indonesia 25 conventional banks, the better the function of the bank to channel funds to the public (ramlan & adnan, 2016). also, labor costs are the dominant cost in bank operations. nearly 70% of banks operating costs are spent on paying employees (portillo & stinn, 2018). therefore, the more productive the bank employees work on marketing the bank's products and services, the better their income (swierczek et al., 2005). on the other hand, the decision to use and choose a service product is based on information obtained from the public from various sources, especially from social media (bienstock & royne, 2007). therefore, promotion is an essential medium for disseminating information related to islamic banks and conventional banks (ivan, 2012). furthermore, following the phenomenon mentioned above, this study aims to compare and analyze the influence of factors including the fdr ratio, the growth in promotion costs, and the growth in labor costs on roa. also, this study contributes to stakeholders in the banking sector, bank management funds, in particular, in making decisions related to the amount of employee productivity and promotion to improve performance from the roa perspective. thus, according to the phenomenon and background, the formulation of the problem in this study is: (i) are there differences in fdr's effect on roa between islamic banks and conventional banks?; (ii) are there differences in the effect of growth in labor costs on roa between islamic banks and conventional banks?; (iii) are there differences in the influence of the growth in promotion costs on roa promotion between islamic banks and conventional banks? 2. literature review legitimacy has an essential role in running an organization. this is because legitimacy is an acknowledgment of the public or society related to company operations and activities (hansen löfstrand, 2015). thus, in running its business, the banking industry needs legitimacy because lucky nugroho & eric nugraha & ahmad badawi & yananto mihadi putra 26 it is a business that requires trust from the public (ki, 2013). banks are financial institutions that manage and mobilize funds from and for the community. people who invest and save their money in the bank must have confidence that the money invested and stored is safe. according to nugroho (2014), it is necessary to have regulations or laws that guarantee these regulations' implementation to implement legitimacy. legitimacy can be a tool to govern or provide instructions to carry out something, and if it does not implement these rules, there will be sanctions imposed (yang et al., 2009). on the other hand, in the stakeholder theory, companies must maintain relationships with stakeholders by accommodating existing wants and needs, especially stakeholders who have power over the availability of resources used for company operational activities, such as labor, customers, and owners (riyadi et al., 2018). therefore, the organization's sustainability depends on its stakeholders' support, so that the company's activity is to seek that support. according to law no. 21 of 2008, there are two banking industry categories: the conventional banking industry and the islamic banking industry. referring to the law, islamic banks are banks that operate and carry out their business activities based on sharia principles of islamic law. furthermore, in establishing sharia principles, islamic banks must refer to and follow the indonesian ulema council's fatwa (mui). therefore, the operational bank of islamic banks and the central bank or bank indonesia (bi) regulations, and the financial services authority (ojk) must comply with the mui fatwa. in contrast to conventional banks that operate only based on regulations from bi and ojk. islamic banks' fundamental principle is to provide fair, balanced financial services, provide benefits, and provide services with universalism values. thus, according to sukmadilaga & nugroho (2017) dan ihwanudin et al. (2020), transactions at islamic banks must be free from maghrib, namely maysir (transactions that contain elements of gambling and speculation), gharar (transactions whose designation is not clear), and riba (transactions that are detrimental to other parties or borrowers where the borrower comparative analysis of the effect of loan/financing to deposit ratio, labor costs growth and promotion costs growth to returns on assets in islamic banks and conventional banks in indonesia 27 must return the principal of the loan plus a certain percentage of the principal amount of the loan). fundamental principal differences between islamic banks and conventional banks have implications for the bank's activities' objectives. islamic banks are banks looking for profit and care about social problems such as poverty, low education, and low quality of health. apart from the social aspect, islamic banks also have a responsibility towards environmental sustainability because doing damage in the world is one of the actions that allah swt doesn't like. following q.s al-qashash verse 77: “but seek, through that which allah has given you, the home of the hereafter; and [yet], do not forget your share of the world. and do good as allah has done good to you. and desire not corruption in the land. indeed, allah does not like corrupters." meanwhile, conventional banks carrying out and carrying out their business activities are based on the vision and mission set by all the conventional bank stakeholders. these differences impact the different perspectives and ways of working employees and stakeholders on performance and its factors. islamic banks should prioritize profit or roa and how islamic banks can alleviate poverty (nugroho et al., 2020). on the other hand, the productivity of islamic bank employees should be better than that of conventional bank employees. this is because the purpose of working for islamic bank employees is to carry out worship (nugroho and hidayah et al., 2020). on the other hand, islamic banks carry out sales promotions on media that are under sharia principles. the marketing communication function of a sharia bank must choose promotion channels that are under sharia compliance. the company or organization is established to provide added value, both material and non material. therefore, all company activities must be able to provide added value to all stakeholders of the company. the banking industry is a financial industry that supports the lucky nugroho & eric nugraha & ahmad badawi & yananto mihadi putra 28 financial and commercial transaction activities of the public. the public has the confidence to invest and place their money in the bank because banks can manage the funds they collect correctly. one of the performance indicators that a bank can manage its earning assets well is the return on assets (roa). roa in banking shows that banks can generate income and manage banking operations efficiently to generate profits, according to agreed targets, and become all stakeholders' commitment (pelham, 1997). the main business to generate income is channeling its money to the public as working capital or business investment to drive society's economy. the indicator for channeling funds to the public is the loan to deposit ratio (ldr) in conventional banks or the financing to deposit ratio (fdr) in islamic banks. the better the distribution of funds to the public, the bank's potential to get optimal profit (sufian, 2009). the bank must compensate its workers for managing and running the bank's operations on the expenditure side. therefore, labor costs are an essential element in the bank's sustainability. however, the higher the costs incurred for labor costs, the higher the demand for higher income (durand, 1952). therefore, employee productivity is an essential indicator in company operations, including the banking industry (narwal, 2016). also, promotional costs are an essential factor in selling products and services owned by a company and a bank (mullineaux & pyles, 2010). furthermore, banks must increase public trust for their products and services through effective communication (semuel, 2012). at present, effective communication through social media is one of the primary keys that these products and services are chosen by society (zhao, li, he, wen, & li, 2016) comparative analysis of the effect of loan/financing to deposit ratio, labor costs growth and promotion costs growth to returns on assets in islamic banks and conventional banks in indonesia 29 3. methodology the going concern of the organization, including the banking industry, is very dependent on profit, so this study compares the factors that affect roa in islamic banks with conventional banks. based on the above phenomena and literature review, the framework for this research is as follows figure 1. conceptual framework according to figure 1, the conceptual framework, the research hypothesis is as follows: ha1: there is a difference in the effect of fdr on roa between islamic banks and conventional banks; ha2: there is a difference in the effect of the growth in labor costs on roa between islamic banks and conventional banks; ha3: there is a difference in the effect of the growth in promotion costs on promotion on roa between islamic banks and conventional banks; ha4: there are differences in the effect of fdr, growth in labor costs, and promotion costs on roa between islamic banks and conventional banks. the data collection period for conventional lucky nugroho & eric nugraha & ahmad badawi & yananto mihadi putra 30 banks and islamic banks in four years, namely 2015 to 2018. this study uses data during this period because, when using data in 2019 and 2020, data bias is possible due to the bank's business conditions during the covid-19 pandemic. the number of banks taken in this sample is 16 conventional banks and 8 islamic commercial banks. therefore, this study's total observation for conventional banks is 64 banks, and islamic banks are 32 banks. this research uses descriptive quantitative and causal explanatory methods of testing one variable that causes changes in other variables or not (napitupulu et al., 2020; nugroho, 2020; sekaran & bougie, 2016). the research object is a variable being researched or measured where the objects in this study include: (i) profitability or return on assets (roa); (ii) financing to deposit ratio (fdr); (iii) growth in labor costs; (iv) growth in promotion costs. furthermore, the variable formula in this study consists of four variables, as follows: profitability variable variable profitability uses ratio scale measurements. furthermore, the profitability as performance variables of conventional banks and islamic banks are represented using roa (return on asset). furthermore, according to ihwanudin, wicaksono, et al. (2020), the roa proxy formula is as follows: 𝑅𝑂𝐴 = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 variable financing to deposit ratio (fdr) or loan deposit ratio (ldr) financing / loan to deposit ratio (fdr/ldr) is the ratio of the ability of banks, both islamic banks and conventional banks, to channel the funds they have collected. the ratio representing a bank's capacity to channel financing is the fdr in islamic banks or ldr in conventional banks. according to ihwanudin, wicaksono, et al. (2020), the formula is as follows: comparative analysis of the effect of loan/financing to deposit ratio, labor costs growth and promotion costs growth to returns on assets in islamic banks and conventional banks in indonesia 31 𝐹𝐷𝑅/𝐿𝐷𝑅 = 𝑇𝑜𝑡𝑎𝑙 𝐿𝑒𝑛𝑑𝑖𝑛𝑔 𝑇𝑜𝑡𝑎𝑙 𝐹𝑢𝑛𝑑𝑖𝑛𝑔 labor cost growth variable in this study, labor costs (btk) are proxies as the cost of employee salaries and the bank's total allowances and incentives as a reward for their contribution. moreover, according to maulida (2019) the formula used for the btk growth indicator is: ∆𝐵𝑇𝐾 = 𝐵𝑇𝐾 𝐵𝑇𝐾 − 1 promotion cost growth variable promotion costs in this study are costs incurred to market products and services from the bank. according to maulida (2019), the formula used for the approximation of promotion cost growth is: ∆𝑃𝑟𝑜𝑚𝑜𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 = 𝑃𝑟𝑜𝑚𝑜𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝑃𝑟𝑜𝑚𝑜𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 − 1 4. results and discussion 4.1 determinants of roa in islamic banks after the classical test has been carried out and has met the requirements for the panel data multiple regression tests, the following data are obtained: table 1. statistical value the coefficient of determination, f-test, and t-test variable coefficient std. error t-statistic prob. c 3.832331 0.543349 7.053173 0.0000 lucky nugroho & eric nugraha & ahmad badawi & yananto mihadi putra 32 fdr/ldr 0.230464 0.089671 2.570094 0.0158 btk -0.016649 0.007015 -2.373477 0.0247 promotion cost -0.290673 0.141024 -2.061153 0.0487 r-squared 0.385467 mean dependent var 3.343125 adjusted r-squared 0.319625 s.d. dependent var 1.231931 s.e. of regression 1.016157 akaike info criterion 2.986401 sum squared resid 28.91209 schwarz criterion 3.169618 log likelihood -43.78242 hannan-quinn criter. 3.047132 f-statistic 5.854361 durbin-watson stat 1.835018 prob(f-statistic) 0.003098 source: software eviews 9 based on table 1 above, it is known that the results of the f test of all financing, distribution variables, labor cost growth (btk), and promotion cost growth have significant implications for roa. this is because the prob (f-statistic) is 0.003098 <0.05 (table 1). while the formula for the equation results from the t-test is as follows: 𝑅𝑂𝐴 = 3.832 + 0.230𝐹𝐷𝑅 − 0.016𝐵𝑇𝐾 − 0.290 𝑃𝑟𝑜𝑚𝑜𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 + 𝑒 (1) according to table 1 and equation (1), each independent variable influences the roa variable as follows:  financing disbursement proxied by fdr has a positive and significant effect on roa. this is because the prob fdr value is 0.015 lower than 0.05. therefore, the greater the distribution of financing, will have implications for an increase in profit or roa (nugroho et al., 2019). based on the results of the statistical test, the hypothesis ha1 can be accepted. thus, to get optimal roa, islamic banks must have the ability to market their financing products. islamic bank financing products are still the main product of islamic banks in generating income, both margin income and profit-sharing (ihwanudin, maulida, et al., comparative analysis of the effect of loan/financing to deposit ratio, labor costs growth and promotion costs growth to returns on assets in islamic banks and conventional banks in indonesia 33 2020; nugroho, ghazali, et al., 2020). furthermore, in channeling financing, there are risks that islamic banks will bear in the future if the debtor is unable to pay or has terrible faith. mitigation of moral hazard and asymmetric information means that the account officer of a sharia bank must carry out an adequate business feasibility analysis to reduce the potential for future risks (nugroho & malik, 2020; nugroho, villaroel, & utami, 2018).  the growth in labor costs has a negative and significant effect on roa. this is because the prob value is 0.024, which is lower than a significance level of 0.05 (table 1). therefore the hypothesis ha2 can be accepted. furthermore, based on statistical tests, islamic banks must control their labor costs because the higher the growth in labor costs will have implications for the decreased performance or roa of islamic banks. islamic banks that following sharia principles must be more productive than conventional banks. the employees in islamic banks should believe that work is a part of worship (bhatti, aslam, hassan, & sulaiman, 2016). moreover, work aims to benefit society (arafah & nugroho, 2016; vizano, utami, & johanes, 2021).  the growth of promotional costs has a negative and significant impact on roa. the higher the cost of promotion, the more impact the decline in performance is proxied by roa. this is because the prob value is 0.048, which is lower than a significance level of 0.05, so that the hypothesis of ha3 can be accepted (table 1). thus, islamic banks' promotional costs were not able to generate optimal profits. there is a possibility that the promotional mechanisms carried out by islamic banks have not been right on target (irfan harmoko, 2017). as for the overall independent variables, both the distribution of financing (fdr), the growth of labor costs (btk), and the growth of promotional costs simultaneously have an effect of lucky nugroho & eric nugraha & ahmad badawi & yananto mihadi putra 34 0.3196 or 31.96% (adjusted r-squared) on roa (table 1). meanwhile, 68.1% are influenced by other variables. 4.2 determinants of roa in conventional banks data processing results using multiple regression panel data for conventional banks are carried out after fulfilling all the classical test provisions. the results of the data processing are as follows: table 2. statistical value the coefficient of determination, f-test, and t-test variable coefficient std. error t-statistic prob. c 3.518430 0.424761 8.283312 0.0000 fdr/ldr 0.198736 0.063005 3.154291 0.0025 btk -0.013551 0.006639 -2.041169 0.0456 promotion cost 0.071819 0.034662 2.071975 0.0426 r-squared 0.295736 mean dependent var 3.566094 adjusted r-s(quared 0.260523 s.d. dependent var 1.163540 s.e. of regression 1.000561 akaike info criterion 2.899460 sum squared resid 60.06730 schwarz criterion 3.034390 log likelihood -88.78270 hannan-quinn criter. 2.952615 f-statistic 8.398456 durbin-watson stat 1.024626 prob(f-statistic) 0.000095 source: software eviews 9 according to table 2 above, it is known that the prob value. (f-statistics) that is 0.000095 <0.05, which means all independent variables, including the distribution of financing (fdr), comparative analysis of the effect of loan/financing to deposit ratio, labor costs growth and promotion costs growth to returns on assets in islamic banks and conventional banks in indonesia 35 labor cost growth, and promotion cost growth, simultaneously significantly affect the roa variable. while the formula for the equation results from the t-test is as follows: 𝑅𝑂𝐴 = 3.518 + 0.198𝐿𝐷𝑅 − 0.013𝐵𝑇𝐾 + 0.071 𝑃𝑟𝑜𝑚𝑜𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 + 𝑒 (2) according to table 2 and equation (2), each independent variable influences the roa variable as follows:  lending disbursement (ldr) to conventional banks positively and significantly affects these conventional banks' roa. thus, the better the function of lending, it will have implications for an increase in roa from conventional banks. this is because the ldr prob value is 0.025, which is lower than a significance level of 0.05 so that the hypothesis of ha1 can be accepted. conventional banks must manage credit well so that bank performance or roa has an optimal ratio. several ways to mitigate credit are adequate analysis of account officers, good willingness to pay from customers, and intensive credit monitoring (brown & zehnder, 2007; ding & abdulai, 2018; hoffmann & kleimeier, 2021).  furthermore, the growth in conventional banks' labor costs has a negative and significant effect on the bank's roa. this is indicated by the value of the probability of growth in labor costs (btk) is 0.044, which is lower than a significance level of 0.05. the hypothesis of ha2 can be accepted. conventional banks must control labor costs so that roa can be optimized so that all conventional bank stakeholders have trust in their fund placement (muniarty et al., 2020; schanz, 2009).  promotion cost growth has a positive and significant effect on roa. this is because the probability value for the growth of promotion costs is 0.042, which is lower than the 0.05 significance level. thus, the hypothesis of ha3 can be accepted, and where the higher the growth in promotional costs, it will impact the increase in the conventional bank's roa. in other words, the promotion target of conventional banks has been effective or right on lucky nugroho & eric nugraha & ahmad badawi & yananto mihadi putra 36 target. it has implications for an increase in opinion to directly increase conventional banks' roa (teck weng & cyril de run, 2013). furthermore, based on table 2 above, it is known that the value of the coefficient of determination (adjusted r-squared) is 0.2605. this value can be interpreted as the distribution of financing (fdr), growth in labor costs (btk), and growth in promotional costs simultaneously or jointly affect roa of 26.05%. other factors influence the remaining 73.95%. 4.3 comparison analysis of roa determinants islamic bank vs conventional banks the factors that affect roa in both islamic banks and conventional banks, which include: distribution of financing (fdr), growth in labor costs (btk), and growth in promotional costs, simultaneously have a significant effect. however, if it is analyzed based on each variable, there are differences which include the following:  the distribution of financing to islamic banks has a positive and significant effect on roa. likewise, lending to conventional banks has a positive and significant effect. this is because the bank's primary business is channeling funds to the public, resulting from accumulating savings from the community. islamic banks' primary income is margin income and profit-sharing from the distribution of financing under a sale-purchase agreement or financing under a cooperation agreement (huda, 2012). meanwhile, the primary income of conventional banks is interest income from lending. in islamic banks and conventional banks, income from lending reaches around 80% (bahnsen et al., 2015; suprapty et al., 2021). the rest can be in the form of fee-based income from other bank services such as remittance fees, loan administration fees, mobile banking usage fees, internet banking fees (uppal, 2010). therefore, both islamic banks and conventional banks rely on income from distributing their funds to the public. therefore, the banking industry must maintain the quality of the distribution of these funds (hang, ha, & thanh, comparative analysis of the effect of loan/financing to deposit ratio, labor costs growth and promotion costs growth to returns on assets in islamic banks and conventional banks in indonesia 37 2020; nugroho, villaroel, & utami, 2017). according to nugroho & malik, (2020), to maintain the quality of disbursement of funds, the banking industry must have the ability to analyze the distribution of these funds to mitigate risks in the future to provide optimal income for banks.  furthermore, the growth in labor costs in islamic banks and conventional banks has a negative and significant effect on roa. therefore, the banking industry, both islamic banks and conventional banks, must increase their employees' productivity. also, in the era of vuca (volatility, uncertainty, complexity, and ambiguity) and the industrial revolution 4.0, innovations in digital and information technology are needed, reducing the number of employees in the banking industry. according to banker et al. (1995), labor costs are the most significant portion of overhead costs, and increasing employee productivity will impact the banking industry's cost-efficiency. based on these conditions, the banking industry, both islamic banking and the conventional banking industry in the future, must consider the number of employees they currently have. furthermore, employees in the banking industry must innovate and demonstrate creativity and marketing skills where the impact public wants to purchase the products they have created.  however, it is different from the impact of the growth in promotion costs on roa. the growth of conventional bank promotion costs has a positive and significant impact on roa. therefore, the promotional activities carried out by conventional banks have succeeded in boosting the sales growth of conventional bank products and increasing their income. thus, the cost of promotion effectively has significant implications for the increase in roa. conversely, the growth in promotion costs in the islamic banking industry has a negative and significant effect on roa. thus, islamic banking's promotional activities were not on target, so that they have not been able to increase sales of products from islamic banks. there are several possibilities that islamic banks' promotional activities will have a negative and significant impact, namely: (i) public lucky nugroho & eric nugraha & ahmad badawi & yananto mihadi putra 38 understanding of islamic products is still low compared to conventional banks. according to data from the financial services authority (ojk), islamic financial literacy is still very low, amounting to 8.93%, while financial literacy is 38% (intan & yolandha, 2020); (ii) the number of outlets of islamic banks is still limited compared to conventional bank outlets. the total number of islamic bank outlets as of december 31, 2020, only reached 2034 outlets, while conventional banks were 28,699 outlets (ojk, 2020). based on the discussion of the roa determination in the aspect of financing distribution, growth in labor costs have the same behavior where the distribution of financing to islamic banks and conventional banks has a positive and significant influence on roa. however, on the other hand, the growth of labor costs will have a negative and significant impact on roa both in islamic banks and conventional banks. therefore, for both islamic banks and conventional banks to improve their profitability indicators (return on asset), islamic banks and conventional banks must channel their funds derived from the community in the form of loans and financing. thus, the funds obtained from the community become productive assets and provide optimal profits. in addition, for the aspect of labor cost growth, both islamic banks and conventional banks have a negative and significant influence which means that the increase in labor costs will impact the decrease in roa. thus, the productivity of islamic bank employees and conventional banks is still low. therefore, increasing employee productivity takes efforts from islamic banks and conventional banks to provide motivation, development of employee knowledge, and even optimal welfare improvement to be more innovative, creative, and passionate in carrying out their work activities. however, on the influence of increased promotional costs between islamic banks and conventional banks, there is a difference in influence. the increase in promotional costs at islamic banks has a negative and significant effect. if there is an increase in promotional costs at islamic banks will have an impact on reducing profitability. thus, islamic banks' management and use of promotional costs has not been on target and has not been effective. comparative analysis of the effect of loan/financing to deposit ratio, labor costs growth and promotion costs growth to returns on assets in islamic banks and conventional banks in indonesia 39 5. conclusion the islamic banking industry and conventional banks are almost identical. this is indicated by analyzing three variables that can affect the performance (roa) of islamic banks and conventional banks. these variables include the distribution of financing (fdr), growth in labor costs (btk), and promotion costs. these three variables simultaneously have a significant effect on the roa of islamic banks and conventional banks. however, when analyzed further, these variables affect roa with the following explanation:  the distribution of financing to islamic banks and conventional banks affects the bank's roa. the effect of loan distribution (fdr/ldr) on roa is positive and significant. thus the better the intermediation function of islamic banks and conventional banks will impact improving performance (roa);  the growth in labor costs in islamic banks and conventional banks affects these banks' roa. the effect of growth in labor costs (btk) is negative and significant. thus, the higher the growth in labor costs (btk), will lower the performance (roa). therefore, the banking industry must consider the current workforce with its phenomena, namely the vuca era and the 4.0 industrial revolution. with the vuca era and the 4.0 industrial revolution, the banking industry will tend to use digital services and reduce the number of physical outlets to digital outlets, so it is predicted that the number of workers in the banking sector will also experience a downward trend;  there are differences in the growth in promotion costs between islamic banks and conventional banks. sharia bank promotion cost growth has a negative and significant effect on performance (roa). on the other hand, the growth of conventional bank promotion costs has a positive and significant effect on performance (roa). regarding these differences, conventional banks' performance (roa) is supported by a promotion strategy that is right on target, a good marketing communication function, and an excellent lucky nugroho & eric nugraha & ahmad badawi & yananto mihadi putra 40 public response to conventional bank products. on the other hand, as newcomer banks with a limited number of outlets and low islamic financial literacy, islamic banks have not optimized their promotion and communication functions optimally. this research implies that islamic banks must collaborate with the government and educational institutions (triple-helix collaboration) to increase the effectiveness of promotions so that they can impact performance or return on assets. references akgün, a. i̇., & şamiloğlu, f. 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(2016), “exploring demographic information in social media for product recommendation”, knowledge and information systems, 49(1), 61–89. https://doi.org/10.1007/s10115-015-0897-5 http://journals.ums.ac.id/index.php/jisel/article/view/11904 international journal of commerce and finance, vol. 8, issue 1, 2022, 132-146 * prof. dr, st. xavier’s college, commerce department, kolkata, india, e-mail: basu.sk@sxccal.edu 132 convergence of global sustainability reporting standards: need of the hour sanjib kumar basu* submitted: 06.09.2021 accepted: 25.03.2022 published: 24.06.2022 abstract a single and uniform reporting on sustainability is the need of the hour that will communicate every domain of the performance of the reported company. at present different patterns and forms of sustainability reporting practices are followed throughout the globe. the firms involved in the practice are confusing and trying to leverage some of the standards that have been developed by groups like the sustainability accounting standards board, the global reporting initiative, the international integrated reporting council, the climate disclosure standards board and the carbon disclosure project. these organizations that are involved in the setting of the global standards relating to sustainability reporting have expressed their intention to work jointly to develop uniform sustainability reporting standards. this initiative is expected to serve as a beacon of things to come, given the premise of adapting the international financial reporting standards (ifrs) and the conceptual framework to sustainability related financial disclosures. in this context, this study considers all the present practices of sustainability report throughout the globe and tries to establish the need for convergence of the diversified practices and adopt a unified and globally accepted sustainability reporting practice. in this challenging and fast-changing sustainability reporting landscape, the most notable occurrence is the speeding up of the initiatives for converging all the existing practices of sustainability reporting into a single and uniform sustainability reporting practice. it is believed that the initiatives for converging of the reporting pattern will be directed toward the end goal of a unique and global standards for sustainability disclosure. key words: convergence, reporting, sustainability, reporting standards and framework mailto:basu.sk@sxccal.edu international journal of commerce and finance sanjib kumar basu 133 1. introduction different forms of reporting on sustainability are required to be converged into a single and uniform report that will communicate every domain of the performance of the reported company. effective sustainability reporting is considered to be a meaningful and effective medium of communicating with stakeholders about how companies are performing on the basis of their objectives. companies that are following this practice, likely to have an advantage over their competitors and can be able to boost value for shareholders. 2. aim of the study customers, investors, governmental agencies, non-governmental organizations, researchers and business associations are in great demand of information about the sustainability performance of the companies and it is the responsibility as well as a real challenge for companies to respond efficiently and effectively in fulfilling their demands. for multinational companies doing business across countries are also facing the challenge to report information that is based on consistent data from across the organization and complied with the regularity framework. therefore, it is considered to be a significant challenge to the companies to make sustainability related information and reporting thereon more reliable, exhaustive and effective – for the benefit of both the external stakeholders as well as the internal management. this study considers all the present practices of sustainability report throughout the globe and tries to establish the need for convergence of the diversified practices and adopt a unified and globally accepted sustainability reporting practice. 3. present practice in corporate reporting the corporate reporting practices has been going through an identity crisis throughout the globe in the past few years. there is no denying the fact that companies are having legal obligations to prepare and present an annual report describing historical financial performance and regulatory compliance to the stakeholders, more specifically to the shareholders. this task invites a significant cost to the business entity as it requires collection and production of data, preparation and presentation of financial statements and their audit. but unfortunately these international journal of commerce and finance sanjib kumar basu 134 reports remain backward looking and mostly focussed on compliance of regularity requirements. at the same time, there is a significant growth and expansion of sustainability reports. these reports are enjoying more freedom not only in their presentation and compliance and in many ways these reports afford the company an opportunity to exhibit its wider stakeholder’s community the business’s response to social and environmental issues. the users of the reports are provided with an elaborate and meaningful understanding of the objectives, business operations, organisational culture and social and environmental responsibility of the business entity. in this challenging and dizzyingly fast-changing sustainability reporting landscape, another most notable occurrence is the speeding up of the initiatives for converging all the existing practices of sustainability reporting into a single and uniform sustainability reporting practice. 4. different players in the convergence process while most of the big audit firms have been providing services for sustainability reporting for more than a decade, it is seen that smaller firms are approaching to move forward cautiously into this field. smaller firms are to some extent confusing and trying to leverage some of the standards that have been developed by groups like the sustainability accounting standards board, the global reporting initiative, the international integrated reporting council, the climate disclosure standards board and the carbon disclosure project. those groups are currently working on converging their standards and frameworks, laying the groundwork for an international sustainability standards board that the international financial reporting standards foundation has proposed creating and which it would oversee alongside the international accounting standards board. international journal of commerce and finance sanjib kumar basu 135 4.1 sustainability accounting standards board (sasb) the standards of the sustainability accounting standards board (sasb) were published in 2018, following at least six years of research and extensive feedback from the existing companies involved in the preparation of the sustainability reports and also from the prospective users. sasb is continuing with the extensive research, interacting closely with professionals and corporate experts, existing and prospective investors and subject matter specialists and also monitoring existing, evolving and emerging sustainability related issues. it is trying to incorporate the required amendments to the standards through rigorous and due diligence process which includes research based on evidence, participation of the stakeholders in a broad and balanced way, exclusive public transparency and overall independent oversight in the whole process of development of standards. it is evident that a large number of companies across the world covering each and every sector are using sasb standards to communicate sustainability related material financial information to the investors. sasb follows updates to the standards using a project-based model, which enables them for focused standard-setting to effectively address key issues. in fact, the approach adopted by sasb motivates and helps them to have the ability to address the key and important issues, regulatory changes in the legal and regulatory framework and other directions and trends which affect different sectors, while still retaining the ability to pursue targeted, industryinternational journal of commerce and finance sanjib kumar basu 136 specific issues where appropriate. not only that the research and market engagement provides it with insights that impact the prioritization of projects. the sasb foundation works in such an administrative structure, which is also found more or less similar to the administrative structure followed by other internationally recognized regulatory bodies that are also involved in the process of setting standards for disclosure of information to different stakeholders, including the international accounting standards board (iasb) and the financial accounting standards board (fasb). the sasb foundation is also not recognised by any regulatory body of the government like the fasb, the iasb or any other financial accounting standard-setting body and does not receive any government financing. 4.2 global reporting initiative (gri) gri (global reporting initiative) is an independent international organisation. it helps business and other organisations take responsibility to disclose the impact of their operational activities to their stakeholders by providing them with the global common language. in fact, this organisation provides the world’s mostly accepted and widely used standards for sustainability reportingthe gri standards. it develops the gri standards in consultation with the businesses, existing and prospective investors, policymakers, civil society members, labour unions and other experts and promote the adoption of their standards by the business organizations throughout the world. with millions of followers over hundred countries around the globe, these standards are promoting the sustainability reporting practices by the corporates and enabling them and their stakeholders to take effective decisions and to make better understanding. this, in turn, creates economic, environmental and social benefits for everyone associated with the organisations including the society at large. in response to the public outcry over the environmental damage, gri was founded in boston in the year 1997. in order to ensure companies adhere to responsible environmental conduct principles, this organisation started issuing guidelines and the objective behind the development of these guidelines was to create accountability mechanism first, which was then broadened to include social, economic and governance issues. it focuses on a future which is sustainable, which is enabled by proper and transparent information and also found open discussion about the impacts of corporate operations with adequate disclosure. this organisation is dreaming about a future in which reporting on impacts by the corporate operations on the globeits society, environment and people will be a common style by all the international journal of commerce and finance sanjib kumar basu 137 organizations in the globe. this organisation can be considered to be a catalyst for that change as it provides the most widely used sustainability disclosure standards in the globe. it also extends its helping hands to different organizations for being transparent and responsible for their impacts so that a sustainable future can be developed with the help of their guidelines. in short, gri has created a common global language for different organizations to report their impacts. the first version of the gri guidelines was published in the year 2000 and at that point of time it was presented as gri guidelines (g1). it is considered as the first version of the global framework for sustainability reporting. in the next year, i.e., in 2001, gri was established as an independent and non-profit seeking institution and in 2002, gri was shifted to amsterdam, netherlands and the first update to the guidelines (g2) was published. with the increase in the demand for gri reporting and the application of the guidelines by the organizations steadily grew, the guidelines were continuously expanded and improved, leading to g3 in the year 2006 and g4 in the year 2013. in the year 2016, gri shifted their activities from providing guidelines related to sustainability to setting of the standards for sustainability reporting – popularly known as the gri standards. the standards continue to be updated, upgraded and added new dimensions in it. 4.3 international integrated reporting council (iirc) the international integrated reporting council (iirc) is basically a global platform of different companies, existing and prospective investors, standard setters of different countries, various regulators, accounting professionals, academicians and non-governmental organisations. this coalition promotes communication about creation, preservation and erosion of values as the next step in the evolution of corporate reporting. a large number of companies are legitimately on the way to integrated reporting and have started publishing reports that largely follow the integrated reporting framework. however, it is also recognised by them that there may be still some areas for improvement. currently, there are significant information gaps in the published reports. it is also observed that the world bank and the international monetary fund are calling for a greater focus on aspects such as business risk and plan for the future development in the reports and in fact, these areas are ignored in the present situation. international journal of commerce and finance sanjib kumar basu 138 the concept of integrated reporting has been introduced for enhancing accountability, stewardship and trustworthiness as well as to ensure the responsibility for the information flow and transparency of business that technology has brought to the modern world. the corporates need to make more effective capital allocation decisions, which will facilitate better long-term investment returns by providing investors with the required information. the objective of iirc is to align capital allocation and corporate behaviour to wider goals of financial stability and sustainable development through the cycle of integrated reporting and thinking. to achieve this objective, the international integrated reporting framework has been developed and it includes principles-based guidance and content elements to govern and explain the information within an integrated report. the framework was released in 2013 following extensive consultation and testing by businesses and investors in all regions of the world from 26 countries that participated in the iirc pilot programme. 4.4 climate disclosure standards board (cdsb) the climate disclosure standards board (cdsb) is an international consortium of business and environmental non-governmental organisations. they are focussed to align and including the global available corporate reporting model with the natural capital, i.e., both the natural capital and financial capital will be an integral part of the modern business reporting. they are interested to achieve this objective by offering the corporate houses an integrated framework for reporting both the environmental information with the same and equal weightage as financial information. as a result of their initiative the investors, both existing and prospective, will be provided with decision-useful environmental information through the present corporate reporting practices. it will enhance as well as ensure the efficient allocation of different types of capital including the financial capital. regulators will also get benefit from compliance based and user ready materials. in fact, information about both the natural capital and the financial capital is equally important for an understanding as well as proper recognition of corporate performance. not only that, the pattern of reporting as suggested will build trust and provide transparency needed to foster resilient capital markets. this in turn will contribute to more sustainable economic, social and environmental foundation of the corporate houses. for reporting environmental and climate change information, cdsb has provided a comprehensive framework, which is ultimately designed to assist business organisations international journal of commerce and finance sanjib kumar basu 139 prepare and present environment related information in the mainstream reporting practices for the benefit of all stakeholders. with the help of this report, the investors will be able to assess the relationship between specific environmental issues and the strategies, performance and prospects of the organisation. in order to align with the recommendations of the task force on climate-related financial disclosures and other key mainstream reporting requirement, the cdsb framework was updated in april 2018. with the help of this revised and updated framework, a number of companies have been able to streamline their reporting cycle. the development of the cdsb framework has been overseen by the technical working group of cdsb. this technical working group consists of representatives from the largest professional accounting firms, reporting business organisations and companies as well as academic experts in this field. cdsb is hopeful to encourage analysis and decision-making by investors through the provision of robust environmental information. it is because of the fact that it recognises the dependence and impacts of economic and financial stability on natural capital. 4.5 carbon disclosure project (cdp) the role of carbon disclosure project is very significant for the success of businesses throughout the globe in this century. the project is intended to help companies throughout the world by measuring, managing, disclosing and ultimately reducing their carbon gas emissions. this is the only project throughout the globe which is involved in gathering this type of climate change related data of the corporate houses and in providing the collected data to the intended users. in fact, this carbon disclosure project is a non-profit seeking initiative that runs the global disclosure system of greenhouse gas emissions for the intended users including existing and prospective investors, business houses, local bodies and states for managing their environmental impacts. it is more pertinent to state that over the past twenty years this project has developed a system that has resulted in unparalleled engagement on environmental issues throughout the globe. a large number of companies from india have also started to recognise the problems related to climate and are committed to handle climate changes by disclosing the relevant information through this project and it is considered to be the first step towards achieving corporate climate goals. there is no denying the fact that disclosing the carbon emission related information https://www.cdsb.net/twg international journal of commerce and finance sanjib kumar basu 140 through a report helps a company get ahead of the curve and prepare for potential market fluctuations and policy and regulatory changes in the future. 5. convergencean attempt the above five organizations that are involved in the setting of global standards relating to sustainability reporting have expressed their intention to work jointly to develop uniform sustainability reporting standards. this attempt is mainly focused to support the stakeholder’s base decisions on comparative set of relevant information and lighter the responsibility of the reporting companies concerned. in a statement launched on 11th september, 2020 the committee of climate disclosure project (cdp), the global reporting initiative (gri), the international integrated reporting council (iirc) and the sustainability accounting standard board (sasb) have expressed the urgency for reporting cohesiveness. it will be possible for them by establishing an interrelationship between sustainable performance and financial risk and return in one hand and the climate change with the global pandemic. these organisations require a comprehensive support of the stakeholders for an integrated reporting system. disclosure of performance about sustainability enables the stakeholders to understand a company very well and the impact of the sustainability performance on the environment and the society at large. it helps to explain as to how these issues affect the financial performance of the organisation as well as its process of value creation in long term perspective. this group also emphasised the need for well-structured data on corporate sustainability and to be made it available in public domain. in order to improve corporate reporting on sustainable practices different efforts were taken initially. one of such efforts was the launching of toolkit by the un conference on trade and development (unctad) in 2019. this effort was aimed at improving coherence between financial and sustainability reporting. in this context, it may be stated that converged sustainability reporting could help the government incorporates the contributions of the private sectors for the implementation of the sustainability development growth into voluntary national reviews. another effort was taken in april, 2020 by the gri and it has suggested to government capture business action on the sustainability development growths with the help of corporate reporting practices. in fact, gri has emphasized on the understanding and reporting of the contribution of the private sector and it is required to understand and to chalk out the necessary international journal of commerce and finance sanjib kumar basu 141 actions to be taken and to identify the parties responsible for taking actions in order to achieve the sustainability development growth targets in each country. 6. way forward a series of announcements and commitments made in the past few years point out that the convergence will be taking place at three different levels, which include sustainability reporting standards and frameworks at level one; financial and non-financial reporting standards at level two and market and regularity drivers at level three. in fact, in the month of september, 2020 the five global non-profit seeking organisations whose standards (sasb, gri, cdsb), framework (iirc) and platform (cdp) are used for most sustainability reporting entities announced their intent to work together in order to achieve comprehensive corporate reporting. follow up action was also taken in the month of november, 2020 with the announcement of the iirc’s and sasb’s intent to merge and positioning this move as a major step towards simplifying the corporate reporting system. more importantly, these five organisations followed through in the month of december, 2020 with a release of a prototype sustainability related financial disclosure standard and it also includes a prototype standard specific to climate related financial disclosure. this prototype standard is expected to serve as a beacon of things to come, given the premise of adapting the international financial reporting standards (ifrs), and the conceptual framework to sustainability related financial disclosures. 6.1 sustainability reporting standards and framework the sustainability reporting requirements are initially felt by the european union. in fact, the directive of the european union on the disclosure of non-financial and diversity information came into effect in 2018. the objectives of the european union in issuing such directive is to ensure a clear direction towards greater business transparency and accountability on social and environmental issues. in fact, it was intended to assist the corporate houses in measuring, monitoring and managing companies’ performance and their overall impact on the society. however, the european commission has found deficiencies in this directive, which include lack of reliability, absence of comparability and presence of relevance of non-financial information provided and as a result it started a fresh process of reviewing the directive. a revised and more specific and prescriptive directive is expected within a short span of time. international journal of commerce and finance sanjib kumar basu 142 6.2 convergence of financial and non-financial (sustainability) reporting standards in the month of september, 2020 the ifrs foundation launched a consultation process to collect feedback from different stakeholder to know as to whether there was a need for a global sustainability reporting standard and whether the foundation should involve in the process at all. the overwhelming response from almost 600 submissions was unsurprisingly affirmative. taking this affirmative response into consideration, the ifrs foundation announced that it is moving forward with its initiative to produce a definitive proposal along with a roadmap with timeline by the end of september, 2021, possibly leading to an announcement on the establishment of a sustainability standards board at the meeting of the un climate change conference.. the ifrs foundation has duly noted the feedback it received on the need for urgency to deliver global standards, most specifically on climate change. 6.3 convergence of market and regulatory drivers in understanding the importance of the above developments in the area of sustainability reporting, it may be recalled that the reporting on corporate sustainability remains essentially voluntary. in fact, the early proliferation of frameworks and standards is merely the reflection of the market forces working to meet the growing demand for more and better corporate sustainability information. there are those who say that only market forces, not policies, can drive change. but policies are also needed to drive change at scale. in the united states, the speed and scale of the biden administration’s commitments and measures to address such systemic issues as climate change, diversity or inequality of income have been nothing short of astounding. one such measure was the appointment of a senior policy advisor for climate and environment, social and governance at the security and exchange commission, a new position with responsibility for advising on environmental, social and governance matters and advancing related new initiatives across the commission’s offices and divisions. it stands to reason that the growing number of petitions and filings for mandatory corporate sustainability disclosures will be getting more attention and it may not be surprised to see announcements to this effect coming soon. one might also interpret recent regulations mandating climate related disclosure for all publicly listed companies such as in new zealand and the united kingdom as leading indicators to regulating sustainability disclosures more broadly. international journal of commerce and finance sanjib kumar basu 143 it is important to understand the fact that regulating corporate disclosure is not necessarily synonymous with standardizing how these disclosures are produced. however, it is expected that the two will be dissociable in the near future , because the purpose of the regulation is not only to drive all companies to report more information, but to report information that is comparable, material, reliable, consistent, balanced and also on timely disclosure of relevant information. only a common set of standards can deliver this desired goal. 7. conclusion in summary, it is to be believed that the initiatives for change of reporting pattern will only be directed toward the end goal of a unique and global standards for sustainability disclosure. it is also 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july 11, 2016. smith, m. and taffler, r (1992), ‘the chairman’s statement and corporate financial performance’ accounting and finance, 75-90. stechemesser, k. and guenther, e., 2012. carbon accounting: a systematic literature review. journal of cleaner production 36, 17–38. utama, s., 2011. an evaluation of support infrastructures for corporate responsibility reporting in indonesia. asian bus manage 10, 405–424. international journal of commerce and finance, vol. 7, issue 1, 2020, 92-108 92 the role of customer experience for re-visit and purchase intention: a case study of amazon gökhan meri̇ç istanbul commerce university, turkey figen yildirim istanbul commerce university, turkey received: february 13, 2021 accepted: march 15, 2021 published: may 01, 2021 abstract in this study, it is aimed to examine the relationship between customer experience and re-visit intention, and purchase intention in ecommerce sites in the example of amazon.com.tr. the questionnaire form prepared to collect data within the scope of the research was shared on the internet. descriptive statistical analysis and regression analysis were performed with the data obtained from 358 participants who answered the questionnaire. as a result of the analysis, it was found that customer experience has significant effects on purchase intention and re-visit intention, as well as purchase intention on re-visit intention. keywords: customer experience, revisit intention, purchase intention 1. introduction for every company that wants to maintain its market share and competitiveness, it is more important to focus on the experience the customer has acquired throughout the entire shopping rather than selling products or services. for this reason, experiences become a critical component of the product or service purchased. customer experience includes a service or product experience that begins with the customer's decision to purchase the product or service and continues until the service or product is delivered (berry et al., 2002). customers find “successful experiences” unique, memorable and sustainable (pine and gilmore, 1998). higher customer experience results in more frequent shopping visits, larger budget shares and higher profits (kamaladevi, 2010). kim et al. (2016) state that consumers are willing to pay a high price not only for a premium quality product, but also for an exceptional and prestigious experience. kotler (2010) stated that a positive customer experience will increase the willingness of consumers to shop and repurchase online. ibsan et al. (2016) stated in their study that a positive relationship was found between positive experience and repurchase tendency. in this study, it is aimed to examine the relationship between customer experience, re-visit intention and purchase intention in e-commerce sites in the example of amazon.com.tr. there are limited studies in the literature that examine the effect of customer experience on purchase intention. it can be said that there is almost no study examining the relationship between customer experience and re-visit intention. a very limited number of studies that examined the mentioned relationship were examined within the scope of the intention of revisiting to a physical place such as a hotel, restaurant, vacation place. consequently, it is considered that the importance of this study is to contribute to the gap in the literature with this study, which examines the intention of revisiting the e-commerce site. 2. literature 2.1. customer experience 2.1.1 customer experience consept a customer is defined as the purchaser of a good, service, product or idea in exchange for a monetary or other valuable consideration (kendall, 2007). as boydrick (1996) states, one of the most important goals of businesses is in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e the role of customer experience for re-visit and purchase intention: a case study of amazon 93 to increase their profits and make their profits sustainable. for this purpose, businesses improve their relations with their customers, increase their customers' experience and create brand loyalty. for diller et al. (2005), an experience can simply be defined as a feeling of change. experience is any process that is recognized and involved in its realization. palmer (2010) suggests that experience includes progress over time, expectation, emotional involvement, and "a uniqueness that makes an activity different from the ordinary". in marketing, the concept of experience is defined from a different perspective. palmer's (2010) understanding of experience is a learned result associated with predictable behavior. experience is the transformation of products into consumer perceived value. experiences provide sensory, emotional, cognitive, behavioral, and relational values that replace functional values. individuals' personal experiences with brands completely shape their perceptions and affect their feelings about the brand. these experiences define their thoughts, attitudes, behaviors towards brands and the value they add to life. joseph (2010) expresses this as the "experience effect". the essence of good marketing is to create a consistent brand experience in every consumer interaction. due to the increasing growth in online transactions, the online customer experience is becoming an important concept. the cognitive and affective experience acquired by the customer during his/her stay on the site creates perception in the customer and takes place in his/her memory. cognitive experience is defined as a concept "linked to thinking or conscious mental processes". emotional experience is expressed as a concept that includes the emotional system of the person through the formation of moods, feelings and emotions (rose et al., 2012). 2.1.2. the importance of customer experience crosby and masland (2009) emphasize that institutions which successfully differentiated by serving an extraordinary and catchy customer experience, place in the senses, mind and emotions. according to palmer (2010), it is not the products people really desire, but satisfying experiences. people want goods because they, indeed, want the experience that they think these goods will provide. firms can no longer compete to deliver value only through their core products; instead, they must create long-term, emotional bonds with their customers through the co-creation of a resonant, coherent, authentic and sensually stimulating total customer experience (bitner et al., 2008). contrary to popular belief, loyal customers arise from feelings about the total customer experience rather than rational thoughts about a company's products and services (berry and carbone, 2007). noci et al. (2007) state that customer experience plays a fundamental role in determining customers' preferences, and this affects their purchasing decisions. providing attractive customer experiences is also seen as an important factor influencing customer loyalty, because customers are more likely to repeat purchases and carry them word of mouth when they have a good experience (badgett at al., 2007). thus, the success of the business lies not only in the perceived increasing value of its products and services, but also in the perceived value of the experience the business provides to its customers (moore, 2002). as a result, “customer experience” is a critical concept for organizations to create loyalty to brands, channels and services (badgett at al., 2007) and create long-term competitive advantage (shaw and ivens, 2005). 2.2. purchase intention purchasing intention is defined by spears and singh (2004) as "the conscious plan of an individual to make an effort to buy a brand". the purchasing decision process is a complex process and the purchase intention is an important component in the alternative evaluation phase of this process (kotler and armstrong, 2004). the online purchase intention is derived from the purchase intention (close and kukar-kinney, 2010). according to dodds et al. (1991), purchasing intention refers to customers' willingness to buy. meskaran et al. (2013) states that purchasing intention occurs when customers are ready to purchase online. similarly, ariffin et al. (2018) defined online purchasing intention as the consumers' desire to purchase products and services over the internet. 2.3. re-visit intention çavuşoğlu and bilginer (2018) define re-visit intention as an individual's decision to repurchase the product / service previously purchased by evaluating the current and possible conditions. retaining customers by allowing them to visit again is a key feature for the profitability of businesses (noyan and şimsek, 2012). gökhan meri̇ç & figen yildirim 94 understanding the difference between pre-purchase and post-purchase will contribute to a better understanding of the concept of re-visit intention (kim and lough, 2007). while external factors such as price, brand image and communication have a higher effect on customers before purchasing, these external factors lose their effect after purchasing (patterson and spreng, 1997). in other words, consumers will build their purchasing decisions on their own satisfaction assessments after purchasing (kim and lough, 2007). 2.4. empirical literature there are studies in the literature that examine the relationships between the variables of our research, experience, purchase intention and repeat visit intention. the findings of some of these studies are presented below. in the study conducted by keskin, sezen and dağ (2020) with 350 tourists visiting cappadocia, it is reported that the experience of the participants has a positive and significant effects on their satisfaction and their satisfaction on their re-visit intention. in another study conducted by ahsanah and artanti (2020) with 220 participants, it is stated that the unforgettable tourism experience has a positive and significant effect on re-visit intention. çavuşoğlu (2019) also found in his study with 819 participants who visited green hotels in turkey that customer experience has a positive and significant effect on experiential value, experiential value has a positive and significant effect on attitude towards green behavior and attitude towards green behavior has a positive and significant effect on revisit intention. in the study conducted by situmorang, rini and sembiring (2020) with 135 participants who visited the habitat park, it was reported that the customer experience had a positive and significant effect on customer satisfaction and re visit intention. similarly, oğuz and timur (2020) reported that there were positive and significant effects among the variables mentioned in their study in which the relationships between customer experience, satisfaction, and repeat visit intention were examined specifically for theme park. in the study conducted by sever and girgin (2019) with 500 local and foreign tourists visiting istanbul, it was reported that the restaurant experiences of the participants had a positive and significant effect on restaurant satisfaction and restaurant satisfaction on the intention to visit again. it is stated that customers' feeling of satisfaction with the service provides them with confidence in the business from which they purchased the service (naghizadeh, 2019) and affects their intention to buy the same service again (javed & wu, 2019). as a result of the research conducted with 199 participants by uz and mutlu (2020), it was reported that the brand experience had a positive and significant effect on the purchase intention. barber et al. (2012) revealed that past experiences affect the purchasing intention of the consumer. it is stated that the features of the website where online shopping is made have an effect on the purchase intention (mallapragada et al., 2016). shergill and chen (2005) emphasizes that the design of the website also affects the online purchasing decision. according to hausman and siekpe (2009) the design of the website has a critical role in turning online visitors into real customers. a successful website design can provide sufficient information to customers and positively affect the purchasing decision (siau & zixing, 2003). in the literature, empirical studies which conclude that there is a positive relationship between purchase intention and security / privacy factors (aghekyan-simonian et al., 2012) and graphic / content quality (bai et al., 2008) are encountered. sa and tahir (2009) put forward website design, trust, empathy, perceived risk, information quality and usability as factors that show the quality of a website and stated that these factors have positive effects on purchase intention according to the results of their research. in the studies mentioned below, it is seen that there are positive and significant relationships between experience, purchase intention and re-visit intention. the role of customer experience for re-visit and purchase intention: a case study of amazon 95 3. the methodology of the study 3.1. model and hypotheses in this study, the effect of customer experience on purchase intention and re-visit intention, as well as purchase intention on re-visit intention was investigated. the research model developed in this context is presented in figure 1. figure 1. research model the hypotheses developed in the context of the theoretical framework and the relationships between variables discussed in the second part of the study are presented below. h1: customer experience has a positive and significant effect on purchase intention. h2: customer experience has a positive and significant effect on re-visit intention. h3: purchase intention has a positive and significant effect on re-visit intention. 3.2. data collection and analysis method data was collected using an online survey to measure the customer experience, purchase intention and re-visit intention of the participants. the questionnaire was open to the access of the participants between 20.12.202018.01.2021, and 358 participants filled the questionnaire during this period. the collected data were analyzed with the spss program. 3.3. measuring tools the questionnaire form of the study consists of four parts. the scales were prepared in five-point likert type as "1 = strongly disagree" and "5 = strongly agree". the first part consists of questions about demographic information. second part of the questionnaire form consists of customer experience scale adapted from sönmezay's (2019) study. this scale, consists of 16 items and includes four dimensions: security (α = 0.818), interface (α = 0.876), image (α = 0.773) and trust (α = 0.789). in the third part, the re-visit intention scale adapted from the study of han and kim (2010) was used. the reliability coefficient of the scale, which consists of 3 questions and one dimension, was expressed as α = 0.850. finally in the fourth part, the "purchase intention scale" adapted from the study of chang and chen (2008) was used. the reliability coefficient of the scale, which consists of 3 questions and one dimension, was expressed as α = 0.903. 3.4. findings 3.4.1. reliability analysis cronbach's alpha (α) values calculated to test the reliability of the scales used in the study are presented in table 1. according to the results, it can be stated that the scales used in the study are reliable, as it is seen that all of them are greater than 0.70. table 1. reliability analysis results scale cronbach alfa gökhan meri̇ç & figen yildirim 96 customer experience scale (ces) 0,924 ces security dimension 0,871 ces interface dimension 0,854 ces image dimension 0,823 ces trust dimension 0,925 re-visit intention scale 0,912 purchase intention scale 0,903 3.4.2. validity analysis in order to perform the validity analysis of the scales used in the study, firstly, kaiser meyer olkin (kmo) and bartlett sphericity tests were conducted to determine whether the data collected in the study were suitable for confirmatory factor analysis. in order to express that the data are suitable for confirmatory factor analysis, the kmo value must be greater than 0.5 and the barlett sphericity test must be significant. subsequently, confirmatory factor analysis was carried out in order to test the validity of the scales used in the study. finally, the ability of the scales to meet the acceptance requirement of the goodness of fit (gof) values was examined (gürbüz and şahin, 2014). customer experience scale confirmatory factor analysis results are presented in table 2. when the analysis results are examined, it is seen that the factor loadings of the items collected under four factors vary between 0.4626 and 0.9761, and all gof criteria are acceptable. as a result, it has been confirmed that the 16-item and four-factor structure of the customer experience scale is consistent with the data collected from the sample. table 2. customer experience scale confirmatory factor analysis results factor item factor loading pre-test and post-test results security item1 0,6879 pre test kaiser meyer olkin test : kmo=0,921 barlett sphericity test : p=0,000 post-test χ2/df: 2,332 tucker-lewis index (tli): 0,960 comparative fit index (cfi): 0,971 rmsea: 0,061 item2 0,6203 item3 0,6758 item4 0,9229 interface item5 0,9761 item6 0,6110 item7 0,7902 item8 0,4626 item9 0,5349 image item10 0,8375 item11 0,5045 item12 0,5942 trust item13 0,6805 item14 0,7437 item15 0,6893 item16 0,7671 the re-visit intention scale confirmatory factor analysis results are presented in table 3. when the analysis results are examined, it is seen that the factor loads of the items collected under a single factor vary between 0.8452 and 0.9076, and all gof criteria are acceptable. as a result, it was confirmed that the 3-item and single-factor structure of the revisit scale was consistent with the data collected from the sample. table 3. re-visit intention scale confirmatory factor analysis results item factor loading pre-test and post-test results item1 0,9076 pre test kaiser meyer olkin test : kmo=0,754 barlett sphericity test : p=0,000 post-test χ2/df: 0,001 item2 0,8919 the role of customer experience for re-visit and purchase intention: a case study of amazon 97 item3 0,8452 tucker-lewis index (tli): 0,999 comparative fit index (cfi): 0,999 rmsea: 0,001 the results of the confirmatory factor analysis of the purchase intention scale are presented in table 4. when the factor analysis results of the purchase intention scale in table 4 are examined, it is seen that the factor loads of the items collected under a single factor vary between 0.8478 and 0.8903 and all gof criteria are acceptable. as a result, it was confirmed that the 3-item and one-factor structure of the purchase intention scale was compatible with the data collected from the sample. table 4. purchase intention scale confirmatory factor analysis results item factor loading pre-test and post-test results item1 0,8903 pre test kaiser meyer olkin test : kmo=0,753 barlett sphericity test : p=0,000 post-test χ2/df: 0,001 tucker-lewis index (tli): 0,999 comparative fit index (cfi): 0,999 rmsea: 0,001 item2 0,8731 item3 0,8478 3.4.3. demographic statistics the distribution of the participants by demographic variables is presented in table 5. table 5. demographic descriptive statistics variable groups n % gender female 144 40,22 male 214 59,78 age 17 and below 5 1,40 18-24 49 13,69 25-34 139 38,83 35-44 90 25,14 45-54 60 16,76 55-64 13 3,63 65 and above 2 0,56 education level primary education 4 1,12 high school 31 8,66 junior college 32 8,94 undergraduate 193 53,91 post graduate 79 22,07 doctorate 19 5,31 income 0-999 tl 38 10,61 1000-1999 tl 12 3,35 2000-2999 tl 35 9,78 3000-3999 tl 39 10,89 4000-4999 tl 41 11,45 5000 tl and above 193 53,91 3.4.4. descriptive statistics of the scales descriptive values of the responses given to the scales used in the study are presented in table 6. gökhan meri̇ç & figen yildirim 98 table 6. descriptive statistics of the scales 3.4.5. correlation analysis pearson correlation coefficients are calculated and presented in table 7 in order to determine the relationships between the variables examined in the study. table 7. correlation analysis results variable customer experience re-visit intention security interface image trust ces interface dimension 0,358** ces image dimension 0,640** 0,460** ces trust dimension 0,744** 0,412** 0,787** re-visit intention 0,566** 0,484** 0,702** 0,687** purchase intention 0,609** 0,434** 0,695** 0,687** 0,868** * p<0,05; ** p<0,01 when table 7 is examined, it is seen that all variables are in positive and meaningful relationships with each other. in addition, it is seen that the strongest relationship is between purchase intention and re-visit intention (r = 0.868; p <0.01), the weakest relationship is between customer experience interface dimension and customer experience security dimension (r = 0.358; p <0.01). 3.4.6. hypothesis tests the h1 hypothesis of the study was created to examine the effect of customer experience on purchase intention. in this context, the results of the regression analysis in which customer experience dimensions are independent variables and purchase intention are dependent variables are presented in table 8. table 8. the effect of customer experience on purhase intention independent variable: customer experience dependent variable: purhase intention vif 1/vif β t p f adj.r2 p security dimension 0,190 3,06 0,002 111,44 0,55 0,000 2,29 0,437 scale mean sd min. max. customer experience scale (ces) 3,640 0,607 1,562 5 ces security dimension 3,680 0,723 1,5 5 ces interface dimension 3,486 0,757 1 5 ces image dimension 3,662 0,751 1,333 5 ces trust dimension 3,776 0,759 1,25 5 re-visit intention scale 3,619 0,900 1 5 purchase intention scale 3,732 0,839 1 5 the role of customer experience for re-visit and purchase intention: a case study of amazon 99 interface dimension 0,128 2,89 0,004 1,28 0,779 image dimension 0,381 5,74 0,000 2,82 0,354 trust dimension 0,274 3,74 0,000 3,54 0,282 when table 8 is analyzed, it is seen that all dimensions of customer experience have positive and significant effects on purchase intention (f=111.44; p<0.01), besides, the model explains 55% of the variance in purchase intention. accordingly, security dimension (β=0.190; p <0.01), interface dimension (β=0.128; p<0.01), image dimension (β=0.381; p<0.01) and trust dimension (β=0.274; p <0.01) have effects on purchasing intention. in addition, it is seen that there is no multicollinearity problem between variables (vif<10; 1/vif>0.2). as a result, the h1 hypothesis was accepted. the h2 hypothesis of the research was created to examine the effect of customer experience on re-visit intention. in this context, the results of the regression analysis in which customer experience dimensions are independent variables and re-visit intention is a dependent variable are presented in table 9. table 9. the effect of customer experience on re-visit intention independent variable: customer experience dependent variable: re-visit intention vif 1/vif β t p f adj.r2 p security dimension 0,073 1,12 0,265 116,18 0,56 0,000 2,29 0,437 interface dimension 0,214 4,57 0,000 1,28 0,779 image dimension 0,420 5,98 0,000 2,82 0,354 trust dimension 0,345 4,44 0,000 3,54 0,282 when table 9 is examined, all dimensions of the customer experience except security dimension (β=0.073; p> 0.05) have positive and significant effects on re-visit intention (f=116.18; p<0.01), besides it is seen that it explains 56% of the variance in the re-visit intention. accordingly, interface dimension (β=0.214; p<0.01), image dimension (β=0.420; p<0.01) and trust dimension (β=0.345; p<0.01) have effects on re-visit intention. in addition, it is observed that there is no multicollinearity problem between variables (vif<10; 1/vif>0.2). as a result, the h2 hypothesis was partially accepted. the h3 hypothesis of the research was created to examine the effect of purchase intention on re-visit intention. the results of the regression analysis carried out in this context are presented in table 10. table 10. the effect of purchase intention on re-visit intention independent variable dependent variable: re-visit intention β t p f adj.r2 purchase intention 0,930 32,97 0,000 1087,19 0,75 when table 10 is examined, it is seen that purchase intention has a positive and significant effect on repeat visit intention (f=1087.19; p<0.01), besides, the model explains 75% of the variance re-visit intention. accordingly, gökhan meri̇ç & figen yildirim 100 purchase intention has an effect (β=0.930; p<0.01) on repeat visit intention. as a result, the h3 hypothesis was accepted. 4. conclusion within the scope of the study, as a result of the regression analysis conducted to examine the relationships between variables, it was concluded that the customer experience has positive and significant effects on the purchase intention and re-visit intention, and the purchase intention on the re-visit intention as well. according to these results, it can be said that as the level of positive customer experience increases, the level of re-visit intention and purchase intention will also increase. in addition, it can be stated that the increase in purchase intention also leads to an increase in the re-visit intention. under the title of “2.4.empirical literature” of our study, examples of other studies that examined the relationships between customer experience, purchase intention and re-visit intention were given, and it was stated that positive relationships found between these variables in these studies. so, it can be stated that our study, which is found positive and significant relationships among these variables, is in accordance with other studies in the literature. while the relationships between research variables are examined in the context of traditional commerce in other studies, the examination of these relations in the context of e-commerce in our study constitutes a different aspect of our study. in particular, the variable of re-visit has been addressed for traditional commercial venues such as hotels and restaurants in other studies, while in our study it has been examined for an e-commerce website. in addition to the literature and previous study results, the results of this study also shows that the customer experience provided by online shopping sites has significant effects on the re-visit intention and purchase intention of the users. the customer experience for online shopping develops on the features such as the security and ease of use of the website. in addition to the design and features of the website, it is stated that the information and services provided by the relevant company to customers before, during and after sales have an impact on the customer experience. in this context, it is considered that it would be beneficial for online shopping site managers who want to gain competitive advantage and increase their profitability to design their websites as specified in the literature. in addition, it is considered that it would be beneficial for online shopping companies that want to bring the customer experience to a "great" level, to reconsider the information and services they offer to their customers before, during and after sales in the context of customer experience management. there are also suggestions for researchers within the scope of the study. this study was conducted with data collected from participants in istanbul province. it is important to conduct the study in a different sample in order to generalize the results obtained. in addition, there are different scales in the literature to determine the levels of customer experience, purchase intention and re-visit intention. scales other than those used in this study can also be used in another study. in addition, this study examined the effect of customer experience on purchase intention and re-visit intention, as well as the effect of purchase intention on re-visit intention. in a different study, different variables that might have an effect on purchase intention and re-visit intention can be examined, or more explanatory results can be obtained by adding different variables to the model of this study. it is also considered that a different study with a model that includes a mediator or moderator effect can achieve meaningful results. in addition, different from this cross-sectional study, a longitudinal study can be conducted. finally, in another study it can be examined if these 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(2010). hedonic shopping value and impulse buying behavior in transitional economies: a symbiosis in the mainland china marketplace. journal of brand management, 18(2), 105–114. international journal of commerce and finance, vol. 1, issue 1, 2015, 11-24 the performance of indian equity funds in the era of quantitative easing ömer faruk tan, (research assistant) mef university, istanbul, turkey abstract: this study aims to evaluate the performance of indian equity funds between january 2009 and october 2014. this study period coincides with the period of quantitative easing during which the developing economies in financial markets have been influenced. after the global financial crisis of 2008 came a period of quantitative easing (qe), creating an increase in the money supply and leading to a capital flow from developed countries to developing countries. during this 5-year 10-month period, in which the relevant quantitative easing continued, indian cnx500 price index yielded approximately 21% compounded on average, per annum. in this study, indian equity funds are examined in order to compare these funds’ performance within this period. within this scope, 12 indian equity funds are chosen. in order to measure these funds’ performances, the sharpe ratio (1966), treynor ratio (1965), jensen’s alpha (1968) methods are used. jensen’s alpha is also used in identifying selectivity skills of fund managers. additionally, the treynor & mazuy (1966) regression analysis method is applied to show the market timing ability of fund managers. keywords: equity funds; performance evaluation; quantitative easing; jensen’s alpha 1. introduction: mutual fund performance has always become one of the most researched areas of finance studies. using different technical measurement methods, these types of studies analyze fund performances of various markets from different perspectives. especially, after the period of liberalization of the financial markets, mutual funds have gained much more significance among investors, resulting in v arious studies that have been carried out on performance evaluations. mutual funds bring investors who share a common goal together. according to deepak (2011), investors invest their money into capital market instruments such as shares, debentures and oth er securities. the returns from investments are equally shared among shareholders according to their investment ratio. hence, mutual funds are proper investment and provide the chance to invest different professionally managed financial instruments. according to rao (2006), diversification of the risk is the main objective of investing in a mutual fund. diversified portfolios are created by mutual fund investments and fund managers take different level of risk in order to get maximum value from their invest ments. therefore, when comparing and evaluating the investments, returns are measured by taking into account the risks involved in achieving the returns. the global crises appeared in america in 2008 and later spread to other countries, affecting mainly th e economies of europe and america and their financial markets dramatically. the american and european economies went into recession and some major financial investment banks collapsed, such as lehman brothers. also, in europe, banking crises happened in many countries led by portugal, ireland, spain, greece, and italy. this situation caused to lose of credibility of america and europe in the eyes of investors and making investors turn towards other stock markets for investment purposes. to minimize the infl uence of the recession, the fed applied quantitative easing policy between december 2008 and october 2014. the fed bought huge quantities of government bonds and bills from the markets to enhance the money supply for the sake of encouraging the revival of the economy. quantitative easing policy separates four terms qe1 (december 2008 june 2010), qe2 (november 2010june 2011), qe3 (september 2012october 2014) and finally qe4 (january 2013october 2014). (useconomy, 2014). during the period, huge amount of money inflow from developed countries to in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 12 ömer faruk tan http://ijcf.ticaret.edu.tr developing countries experienced. hence, in this paper, indian equity funds are tried to analyze over the period from january 2009 to 31 october 2014 during the quantitative easing era. india is known one of the emerging markets and over the study period of 5 years-10 months; indian cnx500 price index grew by 20.9% compounded annually on average. in the sample period, developed market indices s&p500, dax, ftse 100, cac 40 yielded 15.1%, 12.1, 6.8% and 4.1% respectively. indian cnx500 price index performed better performance than developed markets. 2. literature review beginning from the 1960s, there have been several studies carried out on mutual fund performance. treynor (1965), sharpe (1966) and jensen (1968) are among those who measure fund performance related to risk and return measurements. sharpe (1966) measured 34 open-ended mutual funds between 1954-1963 using the sharpe ratio and treynor ratio. as the result of the study, it has been found out that while 11 fu nds out of 34 show a better performance than the index, 23 funds underperform their benchmarks. jensen (1968) examined 115 mutual funds which were active between 1945-1964 – by using an alpha indicator that he generated. his alpha indicator shows the selectivity skills of fund managers. based on his results, funds could not outperform the market performance, revealing that mutual fund managers, in general, did not have selective ability. mcdonald (1973) computed mutual funds invested between 1964 and 196 9 by using the treynor, sharpe and jensen measures. the study showed that there was a positive correlation between risk and return. malkiel (1995) used the jensen method to calculate the performance of american funds between the years 1972 and 1990. he revealed that mutual funds could not show positive excess return. dahlquist, engström and söderlind (2000) evaluated 201 swedish mutual funds – including only domestic funds from the period between 1993 and 1997. they found that regular equity funds seemed to over perform while bond and money market funds performed less. furthermore, actively managed funds demonstrated better performance than passively managed funds. with the aim of detecting the market timing ability of the fund managers, treynor and mazuy (1966) established the quadratic regression analysis method. they applied this method to 57 open -end mutual funds (25 growth funds and 32 balanced funds). they revealed only a single fund as having statistically significant market timing ability. henriksson and merton (1981) and henriksson (1984) developed both parametric and nonparametric statistical models to the test market timing ability of portfolios. having been introduced by henriksson and merton (1981), the parametric and non-parametric tests in question were applied by henriksson (1984) to evaluate the market timing ability of 116 open-end funds between 1968 and 1980 in the u.s. market. the results revealed that there wasn’t any support for market timing ability. moreover, henriksson found an inve rse relationship between selection ability and market timing ability. chang and lewellen (1984) tested the market timing ability of 67 u.s. funds covering the period from 1971 to 1979 by using the henriksson & merton (1981) method. it was found that there were weak indications of fund manager market timing ability. gallo and swanson (1996) tested 37 u.s. mutual funds by using the treynor & mazuy model for market timing, yet found no evidence of market timing of funds. christensen (2005) evaluated 47 danish funds between january 1996 and june 2003. he found that fund managers did not have selectivity skills in general and, in terms of timing ability, the results were also negative, due to the fact that only two funds had significant timing ability. the performance of indian equity funds in the era of quantitative easing 13 http://ijcf.ticaret.edu.tr in india, sapar and madava (2003) evaluated the performance of indian mutual fund schemes during the bear market between september 1998 – april 2002 using the treynor, sharpe, and jensen methods, the relative performance index (rpi), a risk-return analysis and fama’s measure. of 269 schemes, 49 under performed, 102 were performed on par and 118 outperformed the market. sharad and ranganatham (2005) evaluated indian funds and separated them into public sector sponsored funds and private sector sponsored funds over a period between may 2002 and may 2005. they found that both funds did not differ statistically in terms of mean returns; whereas there were statistically significant differences between both funds in respect to average standard deviation, average variance , coefficient of variation (var) and residual variance (rv). furthermore, rv had a direct impact on the sharpe fund performance measure. rao (2006) computed 21 growth plans and 21 dividend plans in india during the period between april 2005 and march 2006. the study covered a 12-month period when the indian stock market was generally bullish. the results showed that growth funds were better than dividend funds. duggimpudi, abdou and zaki (2010) evaluated the performance of 17 equity-diversified mutual funds in the indian market over the last ten years. two different overlapping period samples between 2000 and 2009 and between 2005 and 2009 were used. in this study, the sharpe, treynor and jensen’s alpha methods were applied and the results showed that 17 funds outperformed the markets. prajapati and patel (2012) analyzed the mutual funds over the period from 2007 to 2011. according to their results, all funds demonstrate positive result during the period. 3. methodology 3.1.methodology in this study, it is tried to evaluate the performance of indian equity funds. a total of 12 equity funds performances’ are analyzed. in order to evaluate fund performance, the sharpe (1966), treynor (1965) and jensen’s alpha (1968) ratios are computed. jensen’s alpha method also shows the selectivity skills of fund managers. in order to test mutual fund managers’ market timing ability, the treynor & mazuy (1966) is applied. 3.2.treynor ratio according to kouris et al. (2011), the treynor ratio is developed by treynor in 1965 is t he first measurement of mutual fund performances. it is calculated as the ratio of the excess return of the mutual fund divided by its beta (systematic risk) and is defined as: ti = (rp rf) / p (1) where ti = treynor’s performance index rp = portfolio’s return in a time period rf = risk-free rate of return in a time period p = beta of the portfolio 14 ömer faruk tan http://ijcf.ticaret.edu.tr 3.3.sharpe ratio according to noulas &lazaridis (2005), the sharpe technique was settled in 1966 and is fairly similar to the treynor technique. however instead of beta of the portfolio, sharpe technique uses the standard deviation of the fund in its denominator. this technique computes the risk premium earned per unit of the total risk. the sharpe value is calculated as below: sp =(rp – rf /) p (2) where sp = sharpe ratio rp = the average rate of return for a fund rf = the average risk-free return p = the standard deviation of the fund. the sharpe ratio (sp) calculates the performance of its level of total risk. if the result of sharpe ratio is higher, fund shows higher performance. (duggimpudi, et. al., 2010). 3.4.jensen’s alpha as jensen explained, “a portfolio manager’s predictive ability – that is, his ability to earn returns through the successful forecast of security prices that are higher than those which we could presume given the level of his riskiness of his portfolio” (jensen, 1968, p. 389) jensen’s model can be written as: rpt – rft = p + p (rmt – rft) + ept (3) p = the excess return on the portfolio after adjusting for the market rpt = the return on the portfolio p at time t rft = the return on a riskless asset at time t rmt = the return on the market portfolio at time t p = the sensitivity of the excess return on the portfolio t with the excess return on the market. the sign of the alpha displays whether the portfolio manager are superior to the market after adjusting for risk. a positive alpha denotes better performance relative to the marke t, and a negative alpha designates poorer performance. (mayo, 2011). 3.5.treynor&mazuy regression analysis investment managers may well beat the market, if they are able to adjust the composition of their portfolios in time when the general stock market is going up or down. that is, if fund managers believe the market is going to drop, they alter the composition of the portfolios they manage from more to less volatile securities. if they think the market is going to climb, they shift in the opposite direction. (treynor&mazuy, 1966). the performance of indian equity funds in the era of quantitative easing 15 http://ijcf.ticaret.edu.tr mutual fund managers may hold a higher proportion of the market portfolio if they are qualified to predict future market conditions and envisage the stock market as a bull market. on the other hand, mutual fund managers may hold a lower proportion of the market portfolio if they expect the market to underperform in the future. treynor and mazuy (1966) developed the following model to evaluate market-timing performance: (4) where i is the timing-adjusted alpha, which represents the timing-adjusted selective ability of mutual fund managers. the quadratic term in equation (4) is the market timing factor and the coefficient of the market timing factor, , represents mutual fund managers’ market timing ability. if is positive, mutual fund managers have superior market timing ability i.e., the investment portfolios of mutual funds are adjusted actively to well anticipated changes in market conditions. a negative implies that mutual fund managers do not exhibit market timing ability. (chen et al., 2013). 3.5.statistical properties in order get reliable result; we need to check whether the model satisfies ols assumptions. it is important to find to be best linear assumptions, which shows the lowest possible mean squared error, when applying ols with the aim of estimating parameters. if tests show autocorrelation or heteroskedasticity within the regression, as a consequence the results will no longer be considered blue. there fore, adjustments of data will be needed in order to obtain efficient and reliable estimators. in this study, breusch -pagan test is applied for heteroscedasticity and breusch-gdfrey test is applied for autocorrelation . 3.6.heteroscedasticcity test when the variance of the errors are not constant and finite, var(et) ≠ σ2 this will be of concern in the application of regression analysis, as the presence will make the statistical tests invalid. the case with heteroskedasticity will as a fact not imply biased ols estimators, but will involve biased residuals. consequently, the data will provide deceiving standard errors and our inferences might not be a correct. (kolobaric&khatabakhsh, 2012). in this study, it is applied breusch-pagan test. the breusch-pagan test is designed to detect any linear form of heteroskedasticity. in order to test whether this assumption holds, the following hypothesis should be tested: null hypothesis: there is no heteroskedasticity (homoscedasticity) alternative hypothesis: there is heteroscedasticity 3.7.autocorrelation test there are several test for autocorrelation, but the most commonly are used the durbin -watson and the breusch godfrey test. in this study, it is used the breusch godfrey test instead of the durbin -watson test, because the durbin-watson test is used for the first order serial correlation, whereas the breusch -godfrey test is used for higher order serial correlation. autocorrelation represents the similarity of a time series and a lagged version of itself. this assumption states that the errors should be uncorrelated in the time series regression. in statistical terms the model states that: corr (ut,us x) = 0, for all t≠s. in order to test whether this assumption holds, the following hypothesis should be tested: null hypothesis: no serial correlation alternative hypothesis: serial correlation (autocorrelation) 16 ömer faruk tan http://ijcf.ticaret.edu.tr 3.8.data in this study, the mutual fund performances of 12 indian equity funds are analyzed using the sharpe (1966), treynor (1965) and jensen’s alpha (1968) ratios. jensen’s alpha also displays the selectivity skills of fund managers. in order to test mutual fund managers’ market timing ability, the treynor&mazuy (1966) method is applied. the time period is between january 2009 and october 2014. weekly returns of funds are used and 304 weeks are observed for this study. all data are taken from the thomson reuters datastream. 3.9.selection of equity funds according to the investment institute database (2014:q3), there are 728 mutual funds in india. “indi an mutual funds have different types of mutual fund schemes such as open-ended, close ended, interval (based on structure), growth/equity, income, balanced and money market schemes (based on investment objectives). there are also other schemes such as tax saving schemes, special schemes that provide the needs of the financial position, risk tolerance and return expectations.” (duggimpudi et al., 2010, p.77). in this study, only growth/equity funds are considered because they carry risk and should be investe d with at least 65% equity or equity-related securities. of these funds, only equity funds that are managed by the largest asset management companies and have a net asset value of more than 1 billion rupees are analyzed. in the study period, it was disrega rded if a fund was closed, newly established or had merged with another fund. funds that had less than 65% equity shares in their portfolio were also not considered. in total, 12 equity funds were left to work with. tables 1 and 2 indicate the net asset value of investment fund companies and the equity shares of the selected funds, respectively. table 1. net asset value of investment fund companies in india mutual fund company assets under management (rupee) hdfc mutual fund 14.183.476.070 icici prudential mutual fund 12.776.072.850 reliance mutual fund 12.338.634.120 birla sun life mutual fund 10.269.015.040 uti mutual fund 8.324.991.040 sbi mutual fund 7.353.032.480 idfc mutual fund 4.585.077.130 dsp blackrock 3.865.156.590 tata mutual fund 2.454.383.580 l & t mutual fund 2.067.270.560 sundaram mutual 1.894.355.510 religare invesco mutual fund 1.766.735.330 this table is taken from https://www.baanmoney.com/mutual_funds/rankings and https://www.amfiindia.com/net-asset-value https://www.baanmoney.com/mutual_funds/rankings https://www.amfiindia.com/net-asset-value the performance of indian equity funds in the era of quantitative easing 17 http://ijcf.ticaret.edu.tr table 2. indian equity funds fund name icici prudential dynamic plan growth uti equity growth fund religare invesco growth fund l&t equity growth hdfc equity growth dsp blackrock equity growth sbi magnum equity growth reliance growth fund tata pure equity growth birla sun life equity growth idfc equity fund sundaram growth fund 3.10.returns on funds logarithmic returns of funds were computed over weekly price indices of funds. for the study, 304 weeks of data between january 9, 2009 and october 31, 2014 are used. rp = ln (pt /pt-1) (6) where rp = return on the fund pt = price of the fund at week t pt-1 = price of the fund at week t-1 3.11.benchmark in this study, the cnx5001 price index is used as a benchmark. a weekly return of the cnx500 is used. rm= ln (pmt / pmt-1) where rm = returns on the jse pmt = value of the cnx500 price index on week t pmt-1 = value of the cnx500 price index on week t-1 3.12.risk-free rate in this study, 364-day t-bills are used as a risk-free rate and are sourced from the thomson reuters datastream. prajapati & patel (2012) used the same measures in their studies. 1 the cnx index represents about 96.42% of the free float market capitalization of the stocks listed on the national stock exchange on june 30, 2014. http://www.nse-india.com http://www.nse-india.com/ 18 ömer faruk tan http://ijcf.ticaret.edu.tr 4. empirical results 4.1.descriptive statistics of indian funds descriptive statistics of indian equity funds, benchmarks and risk-free rates are given in table 3. the average column indicates returns on funds, benchmarks and risk-free rates. other than the sundaram growth fund and the indian 1-year t-bill, the average returns of all funds are higher than the cnx500 price index. the skew column displays the skew of equity funds and the corresponding value of their benchmarks. all funds and benchmark are negatively skewed which denotes a distribution with an asymmetric tail extending toward more negative values. only the 1-year t-bill is skewed positively, which indicates a distribution with an asymmetric tail extending toward more positive values. all funds and benchmarks have positive kurtosis, which infers typical heavy tailed financial distributions and risk-free rate has negative kurtosis, which implies a relatively flat distribution. the r column depicts the correlation between funds and their benchmarks. the average correlation of funds and their benchmarks is 0.95925, which means that there is a strong positive correlation. the l & t equity growth fund has the highest correlation (0.98080) and the religare invesco growth fund has the lowest correlation (0.90691). the standard deviation column shows volatility of equity funds, benchmarks and risk-free rates. standard deviation of the hdfc equity growth fund, the sundaram growth fund and the birla sun life equity growth fund are higher than the cnx500, which makes them more volatile than their benchmark. the last column exhibits betas of equity funds, which measure the systematic risks of the funds. all funds’ betas are less than 1, implying that all 12 funds carry less risk compared to the benchmark cnx500 index. table 3: descriptive statistics of indian funds fund name average skew kurtosis r std, dev, beta birla sun life equity growth 0,00386 0,5152 4,41315 0,97728 0,02849 0,98023 dsp blackrock equity growth 0,00394 0,67331 4,38487 0,94923 0,02626 0,87807 hdfc equity growth 0,00455 0,43879 3,74740 0,96286 0,02907 0,9857 icici prudential dynamic plan growth 0,00411 0,20379 1,70031 0,95479 0,02149 0,72296 idfc equity fund 0,00346 0,55093 3,17477 0,93411 0,0282 0,92766 l & t equity growth 0,00411 0,37458 2,39007 0,9808 0,0244 0,84316 reliance growth fund 0,00393 0,53665 4,62021 0,95508 0,02804 0,94332 religare invesco growth fund 0,00358 0,44458 2,33631 0,90691 0,01884 0,6023 sbi magnum equity growth 0,00392 0,90585 6,72613 0,96966 0,0261 0,89136 sundaram growth fund 0,0029 0,12332 2,50491 0,97365 0,02857 0,97924 tata pure equity growth 0,00358 0,49361 4,08968 0,97107 0,02448 0,83726 uti equity fundgrowth 0,00421 0,3432 1,55537 0,97558 0,02297 0,78954 cnx 500 0,0034 0,495 3,75628 0,0284 indian t-bill 1 year 0,00134 -0,80741 -0,7711 0,00031 the performance of indian equity funds in the era of quantitative easing 19 http://ijcf.ticaret.edu.tr 4.2.results of the sharpe ratio for india table 4 shows the performance of the sharpe ratio. a higher sharpe ratio implies that funds have a better performance. the icici prudential dynamic plan growth, the uti equity fund growth and the religare invesco growth fund have the highest sharpe ratios. the sundaram growth fund, the idfc equity fund and the birla sun life equity growth have the lowest sharpe ratios. table 4. results of the sharpe ratio for india fund name sharpe rank icici prudential dynamic plan growth 0.12902 1 uti equity growth fund 0.12477 2 religare invesco growth fund 0.11899 3 l&t equity growth 0.11353 4 hdfc equity growth 0.11031 5 dsp blackrock equity growth 0.09891 6 sbi magnum equity growth 0.09866 7 reliance growth fund 0.09249 8 tata pure equity growth 0.09139 9 birla sun life equity growth 0.08827 10 idfc equity fund 0.07528 11 sundaram growth fund 0.05465 12 4.3.results of treynor ratio for india table 5 displays the performance of the treynor ratio. a fund with a higher treynor ratio indicates that the fund has a better risk-adjusted return compared to a fund with a lower treynor ratio. a higher treynor ratio implies that funds have better performances. the icici prudential dynamic plan growth, the uti equity fund growth and the religare invesco growth fund have the highest treynor ratios. the idfc equity fund, the birla sun life equity growth and the sundaram growth fund have the lowest treynor ratios. table 5. results of the treynor ratio for india fund name treynor rank icici prudential dynamic plan growth 0.00384 1 religare invesco growth fund 0.00372 2 uti equity fund-growth 0.00363 3 l&t equity growth 0.00329 4 hdfc equity growth 0.00325 5 20 ömer faruk tan http://ijcf.ticaret.edu.tr table 5. continue dsp blackrock equity growth 0.00296 6 sbi magnum equity growth 0.00289 7 reliance growth fund 0.00275 8 tata pure equity growth 0.00267 9 birla sun life equity growth 0.00257 10 idfc equity fund 0.00229 11 sundaram growth fund 0.00159 12 4.4.results of jensen’s alpha for india table 6 shows the results of jensen’s alpha measure that indicates the selectivity skills of fund managers. fund managers have either a higher performance or a lower performance relative to the market. eleven of the 12 funds have positive alphas and among them 7 are statistically significant. the dsp blackrock equity growth is statistically significant at the 10% level; the religare invesco growth fund and sbi magnum equity fund are statistically significant at the 5% level; the icici prudential dynamic plan growth, the uti equity fund growth, the religare invesco growth fund and the l & t equity growth fund are statistically significant at the 1% level. only the sundaram growth fund has a negative alpha. it can be interpreted that indian fund managers, in general, had selectivity skills during the quantitative easing era term. test results of heteroskedasticity and autocorrelation are available on table 7. table 6. results of jensen's alpha for india fund name jensen's alpha t-stat p-value icici prudential dynamic plan growth*** 0,00129 3,49453 0,00055 uti equity growth fund*** 0,00124 4,27385 0,00003 hdfc equity growth*** 0,00118 2,60977 0,00951 l & t equity growth*** 0,00104 3,77797 0,00019 religare invesco growth fund** 0,001 2,19174 0,02916 dsp blackrock equity growth* 0,00079 1,66388 0,09717 sbi magnum equity growth** 0,00074 2,01898 0,04437 reliance growth fund 0,00065 1,36660 0,17277 tata pure equity growth 0,00052 1,53034 0,12698 birla sun life equity growth 0,0005 1,43494 0,15234 idfc equity fund 0,00022 0,37198 0,71017 sundaram growth fund -0,00045 -1,20616 0,2287 significance levels: * indicates 10%, ** indicates 5%, *** indicates 1% the performance of indian equity funds in the era of quantitative easing 21 http://ijcf.ticaret.edu.tr table 7 indicates the results of heteroskedasticity test (breusch-pagan), autocorrelation test (breusch pagan serial correlation) and normality test (breusch pagan. heteroscedasticity test assumption means that there is no constant variance. if the p-value is smaller than %5 level; then we reject the null hypothesis and there is heteroscedasticity. pvalues of dsp blackrock equity growth, hdfc equity growth, reliance growth fund and sbi magnum equity growth are smaller than %5 levels. for autocorrelation test, this test indicates that the errors should be uncorrelated in the time series regression. if the p-value is smaller than %5 level; then we reject the null hypothesis and there is serial correlation. p-values of birla sun life equity growth, idfc equity fund and tata pure equity growth are smaller than %5 levels. table 7: test results for jensen's alpha heteroskedasticity test autocorrelation test breusch-pagan breusch-godfrey serial correlation p-value p-value birla sun life equity growth 0,6362 0,0363* dsp blackrock equity growth 0,0150* 0,1352 hdfc equity growth 0,0283* 0,3353 icici prudential dynamic plan growth 0,4045 0,0329 idfc equity fund 0,1134 0,0000* l&t equity growth 0,0508 0,4656 reliance growth fund 0,0123* 0,3095 religare invesco growth fund 0,2561 0,5208 sbi magnum equity growth 0,0001* 0,0802 sundaram growth fund 0,9202 0,0617 tata pure equity growth 0,1461 0,0282* uti equity growth fund 0,2729 0,2137 significance levels: * indicates %5 level 4.5.results of the treynor & mazuy regression analysis for india the treynor & mazuy (1966) analyzes the market timing ability of fund managers. if fund managers believe that the market is going up, they change their portfolio composition from less volatile to high volatile securities. when the market is going down, they shift their portfolio composition from high volatile to less volatile securities. if fund managers have market timing ability, they create their portfolios according to their estimates of the tendency of the markets. table 7 denotes the results of the treynor & mazuy (1966) method. eight out of the 12 funds have positive results, but only the sbi magnum equity growth is both positive and statistically significant at the 1% level. the icici prudential dynamic plan growth is statistically significant at the 10% level and the sundaram growth fund is statistically significant at the 1% level. consequently, fund managers did not have market timing ability during the quantitative easing policy era. four funds have a negative market timing ability. test results of heteroskedasticity and autocorrelation are available on table 9. table 9 indicates the results of heteroskedasticity test (breusch-pagan), autocorrelation test (breusch pagan serial correlation) and normality test (breusch pagan. heteroscedasticity test assumption means that there is no constant variance. if the p-value is smaller than %5 level; then we reject the null hypothesis and there is heteroscedasticity. pvalues of birla sun life, dsp blackrock, hdfc equity growth, icici prudential dynamic, l&t equity growth, reliance, religare invesco, sbi magnum, sundaram and uti equity are smaller than %5 levels. for autocorrelation test, this test indicates that the errors should be uncorrelated in the time series regression. if the p-value is smaller 22 ömer faruk tan http://ijcf.ticaret.edu.tr than %5 level; then we reject the null hypothesis and there is serial correlation. p-values of birla sun life, icici prudential, idfc equity, l&t equity, sbi magnum and tata pure equity are less than %5 levels. table 8. results of the treynor & mazuy regression analysis for india fund name t&m t-stat p-value sbi magnum equity growth*** 0,72864 3,97980 0,00009 dsp blackrock equity growth 0,31648 1,30499 0,19289 tata pure equity growth 0,12662 0,73637 0,46208 idfc equity fund 0,10798 0,36448 0,71575 birla sun lıfe equity growth 0,09274 0,52213 0,60196 reliance growth fund 0,08542 0,3493 0,72711 hdfc equity growth 0,07225 0,31284 0,75462 religare invesco growth fund 0,02882 0,12324 0,902 l & t equity growth -0,21318 -1,52602 0,12805 uti equity fund growth -0,23444 -1,58402 0,11424 icici prudential dynamic plan growth* -0,34777 -1,85942 0,06394 sundaram growth fund*** -0,68809 -3,66860 0,00029 significance levels: * indicates 10%, ** indicates 5%, *** indicates 1% table 9: test results for treynor&mazuy regression analysis heteroskedasticity test autocorrelation test: breusch-pagan breusch-godfrey serial correlation p-value p-value birla sun life equity growth 0,0045* 0,0433* dsp blackrock equity growth 0,0004* 0,5946 hdfc equity growth 0,0362* 0,4851 icici prudential dynamic plan growth 0,0078* 0,0142* idfc equity fund 0,113 0,0000* l&t equity growth 0,0000* 0,0194* reliance growth fund 0,0000* 0,3253 religare invesco growth fund 0,0000* 0,633 sbi magnum equity growth 0,0025* 0,0448* sundaram growth fund 0,0144* 0,0604 tata pure equity growth 0,0833 0,0273* uti equity growth fund 0,0000* 0,3069 significance level: * denotes %5 level 5. conclusion in this study, indian equity funds performances’ are analyzed over the period from 09 january 2009 to 31 october 2014. during this quantitative easing policy term, fed increased money supply in order to lower the interest rates and the performance of indian equity funds in the era of quantitative easing 23 http://ijcf.ticaret.edu.tr this excess of money in financial markets made a significant contribution to capital influx from developed countries to developing countries. the study period coincides with the qe era when stock market sizes have improved extremely. india is considered as one of the developing markets and during the study period 5 years-10 months, indian cnx500 price index stock market surpassed developed stock market indices. indian equity funds’ performances were analyzed in this study by using sharpe ratio (1966), treynor ratio (1965), jensen alpha (1968) and treynor&mazuy (1966) regression analysis method. in order to find fund performances, it has been utilized sharpe (1966) and treynor (1965) ratio. higher sharpe and treynor ratio imply funds have better performances. in general, these risk-adjusted performance ratios give similar rankings of mutual funds. icici prudential dynamic plan growth, uti equity growth fund, religare invesco growth fund have the highest ratios for both. jensen’s alpha (1968), treynor&mazuy (1966) regression analysis method is used for determining selectivity skills and market timing ability of fund managers, respectively. in this work, it is revealed that in the era of quantitative easing, indian fund managers had selectivity skills, because 7 of the 12 funds are positively statistically significant. on the other hand, furthermore, treynor&mazuy (1966) regression analysis shows that over the same period fund managers did not also have market timing ability. for treynor&mazuy regression analysis (1966), solely sbi magnum equity growth fund is statistically significant. it can be deduced that although indian fund managers had selectivity skills, but they did not have market ability in the era of quantitative easing. in future, this study can be developed using persistence analysis. to the best of knowledge this is the first study that considers how indian funds performed in the recent quantitative easing era. references association of mutual funds in india. (2014), “net asset value of indian mutual funds”, available at https://www.amfiindia.com/net-asset-value (accessed 22 october 2014). baan money. (2014), “mutual fund rankings” available at https://www.baanmoney.com/mutual_funds/rankings (accessed 21 october 2014). cesari, r., & panetta, f. (2002). “the performance of italian equity funds”, journal of banking and finance, 26(1), 99-126. chang, e., & lewellen, w. (1984), “market timing and mutual funds investment performance”, journal of business, 57, 57-72. chen, d., gan, c., & hu, b. (2013), “an empirical study of mutual funds performances in china”, available at http://ssrn.com/abstrat=2220323 (accessed 15 november 2014) christensen, m. (2005), “danish mutual fund performance: selectivity, market timing and persistence”, working paper, department of accounting, finance and logistics, aarhus school of business, 1-37. dahlquist, m., engström, s., & söderlind, p. (2000), “performance and characteristic of swedish mutual funds. journal of financial and quantitative analysis, 35, 409-423. deepak, a. (2011), “measuring performance of indian mutual funds”, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1311761 (accessed 15 november 2014). duggimpudi, r. r., abdou, h. a., & zaki, m. (2010), “an investigation of equity diversified mutual funds: the case of indian market”, investment management and financial innovations, 7(4), 77-84. gallo, j. g., & swanson, p. e. (1966), “comparative measures of performances for u.s. – based internationally equity mutual funds. journal of banking and finance,” 20, 1636-1650. henriksson, r. d. (1984), “market timing and mutual fund performance: an empirical investigation”. the journal of business, 57(1), 73-96. henriksson, r.d., & merton, r.c. (1981), “on market timing and investment performance. ii. statistical procedures for evaluating forecasting skills”, the journal of business, 54(4), 513-533. investment company institute (ici) (2015), “unit investment data”, http://www.ici.org/research/stats (accessed 15 february 2015). jensen, m.c. (1968), “the performance of mutual funds in the period 1945-1964”, the journal of finance, 23(2), 389-416. kolobaric, a. & khatabakhsh, p. (2012), “performance of hedge funds in the european market”. unpublished master’s thesis. lund university school of management, sweden, lund. https://www.amfiindia.com/net-asset-value https://www.baanmoney.com/mutual_funds/rankings http://ssrn.com/abstrat=2220323 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1311761 http://www.ici.org/research/stats 24 ömer faruk tan http://ijcf.ticaret.edu.tr kouris, a., beneki, c., adam, m., & botsaris, c. (2011), “an assessment of the performance of greek mutual equity funds selectivity and market timing”, applied mathematics sciences, 5(4), 159-171. malkiel, b. g. (1995), “returns from investing in equity funds: 1971-1991”, journal of finance, 50, 549-572. mayo, h. b. (2011), introduction to investments (10th. edition), southwestern cengage, mason, usa. mcdonald, j.g. (1973), “french mutual fund performance: evaluation of internationally-well diversified portfolios”, the journal of finance, 28(5), 1161-1180. noulas, g., papanastation, j. a., & lazaridis, j. (2005), “performance of mutual funds”, managerial finance, 3(12), 101-112. prajapati, k. p., & patel, m. k. (2012), “comparative study on performance evaluation of mutual fund schemes of indian companies”, journal of arts, sciences & commerce, 3(3), 47-59. rao, d. n. (2006), “investment styles and performance of equity mutual funds in india”, available at http://ssrn.com/abstract=922595 (accessed 15 november 2014). sapar, n. r. & madava, r. (2003), “performance evaluation of indian mutual funds, available at http://ssrn.com/abstract=433100 or http://dx.doi.org/10.2130/ssrn.433100. (accessed 12 january 2015). sharad, p. & ranganatham, m. (2005), “characteristics and performance evaluation of selected mutual funds in india”, available at http://ssrn.com/abstract=876402 or http://dx.doi.org/10.2139/ssrn.876402 (accessed 16 november 2014). sharpe, w.f. (1966), “mutual fund performance”, journal of business, 34, 119-138. the national stock exchange. (2014), “cnx500 price index”, available at http://www.nseindia.com/products/content/equities/indices/cnx_500.htm (accessed 25 october 2015). treynor, j.l. (1965), “how to rate management of investment funds”, harvard business review, 43(1), 63-75. treynor, j.l., & mazuy, k.k. (1966), “can mutual funds outguess the market?”, harvard business review, 44, 131136. “what is quantitative easing? definition and explanation”, available at http://useconomy.about.com/od/glossary/g/quantitative-easing.htm (accessed 23 january 2015). http://ssrn.com/abstract=922595 http://ssrn.com/abstract=433100 http://dx.doi.org/10.2130/ssrn.433100 http://ssrn.com/abstract=876402 http://dx.doi.org/10.2139/ssrn.876402 http://www.nseindia.com/products/content/equities/indices/cnx_500.htm http://useconomy.about.com/od/glossary/g/quantitative-easing.htm international journal of commerce and finance, vol. 2, issue 2, 2016, 13-25 exchange rates’ effect on spot and futures equity index markets: a study on borsa istanbul1 ayben koy, (ph. d.) istanbul commerce university, istanbul i̇hsan ersan, (prof. dr.) istanbul university, istanbul abstract: this paper examines the linkages between the foreign exchange rates, spot equity index and equity index futures. the study aims to investigate whether there is difference between the spot and futures markets in the scope of relation with the foreign exchange rates’ returns and which leads the other. the relationships are examined by using the vector autoregression (var) model, impulse-response functions, variance decomposition and granger causality tests. the sample of the study consists of us dollar to turkish lira rate (usd/try), euro to turkish lira rate (eur/try), bist 30 index and bist 30 index futures. the data of the study includes the period between january 2011 and december 2014 with daily data range. our results have evidence that the foreign exchange rate markets in turkey are driven by the equity market. keywords: exchange rates, equity index, equity index futures, causality jel codes: g15 and g10 1. introduction international financial markets have become increasingly linked, both as a result of rapid financial and technological innovation. the instruments of the international financial markets like equities, stock market indices, interest rates, exchange rates, futures prices and swaps are linked with each other. there have been many studies examining the relationship between these financial instruments and financial markets. foreign exchange rates and stock market. on the other hand there have been some studies examining the relationship between the same variables and futures markets. this study aims to show the differences between spot and futures markets in the scope of relation with the foreign exchange rates’ returns. additionally, we analyzed the effects of foreign exchange rates on basis between spot and futures index. theoretically, the futures price is the sum of spot price and cost of carrying, where cost of carrying includes time value of money from the spot date to the futures date. there should be a difference between spot price and futures price in any date except the maturity. the actual basis is the difference between the futures price and the same day's spot price and it should be zero in the maturity. 2. literature review in the early studies, franck and young (1972) could not find a significant relation between stock prices and foreign exchange rate. aggarwal (1981) finds a stronger positive relation in the short term than long term using the simple regression method. however, soenen and hennigar (1988) find a negative relation. roll’s (1992) study show that there are three main factors effecting stock market returns. first, stock market indices vary widely in the number of constituent individual common stocks and in their diversification. some indices are more diversified than others. second, each country's industrial structure plays a major role in explaining stock price behavior. third, for the majority of countries, a portion of national equity index behavior can be ascribed to foreign exchange rate behavior. roll’s basic data are equity price indices for 24 countries. the foreign exchange rate variable is statistically significant for 1 this study is presented in the 23rd international academic conference in venice, in 27 april 2016. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 14 ayben koy & i̇hsan ersan http://ijcf.ticaret.edu.tr most of the countries. malaysia and sweden are not significant and norway is significant at only the 5% level. some other studies show that stock prices have a significant effect on the exchange rate (smith, 1992; bahmani-oskooee and sohrabian, 1992; morley 2007) and some studies (hasan and javed, 2009) cannot find. gay (2008) investigates the relationship between foreign exchange rate and oil price among the equity markets brazil, russia, india, and china (bric) by employing box-jenkins arima model and finds no evidence about existence of significant relationship among variables. one of the studies in turkey is kasman (2003) analyzed the relationship between the foreign exchange rate and bist100, finance sector index, industry index and service index. the results show that causality relationship exists only from foreign exchange rate to the industry sector index. kasman (2003) uses the daily returns, besides ayvaz (2006), savaş and can (2011), ceylan and şahin (2015) used the montly returns. the results of savaş and can (2011) indicate that euro-dollar parity and real effective exchange rate index affect the bist100 positively with 77,5%. in addition, according to granger causality test results, a causality has been found from bist 100 to the euro‐dollar parity and real effective exchange rate. the cointegration test results of ayvaz (2006) reveal that there exists a long-term stable relationship between foreign exchange rate and bist 100, foreign exchange rate and financial sector index, and foreign exchange rate and industry sector index. however, there is no relationship between foreign exchange rate and service sector index. besides, the results indicate that there is a bi-directional causality among foreign exchange rate and stock price indices. ceylan and şahin (2015)’s findings obtain that; rate of foreign exchange and equity indices are stationary at the same level and cointegrated, there is a strong causal correlation from the rates of foreign exchange to the indices. there are some studies about the relationship between exchange rates and futures prices. in some studies (klitgaard and weir (2004), tornell and yuan (2012), hossfeld and röthig (2016)), the relationship between the spot and futures markets of the exchange rates are investigated. these studies investigate two different markets of the same financial asset. one of the focus of the study is on the effect of the exchange rates on index futures prices. the related literature is bound with the futures prices except exchange rate futures. by using the granger causality tests and impulse response functions of var, li (2011) indicate that us exchange rate isn’t related with the energy futures prices. moussa (2012) cannot find an effect of the exchange rates on the frozen concentrated orange juice futures return. bernardina (2014) finds that us/euro exchange rate is one of the drivers are relevant in explaining commodity futures returns. 3. the data and methodology the sample of the study consists of usd/try, eur/try, bist 30 index and bist 30 index futures with the nearest maturity. the data of the study includes the january 2011 and december 2014 with daily data range and obtained from finnet. bist 30 index, consists of 30 stocks selected among the stocks of companies traded on the national market and the stocks of real estate investment trusts and venture capital investment trusts traded on the collective products market. a the same time, the underlying security of bist30 futures is bist30 price index. the settlement of the futures index is by cash. the contracts months are february, april, june, august, october and december (contracts with three different expiration months nearest to the current month shall be traded concurrently. if december is not one of those three months, an extra contract with an expiration month of december shall be launched.) the expiry date is the last business day of each contract month. in case domestic markets are closed for half day due to an official holiday, expiry date shall be the preceding business day. we also analyzed the basis. basis is the difference between the spot index price and the futures index price with the nearest maturity. we used vector autoregression (var) model which is an econometric model used to capture the linear interdependencies among multiple time series. we chose this model, because in var, the researcher does not need to specify which variables are endogenous or exogenous all are endogenous (brooks). vector autoregression model (var) is used to discover the connection of the different time series without selecting any of them independent. the models are applied to binary series which are consist of an equity index/equity index futures/basis and foreign exchange. six https://en.wikipedia.org/wiki/econometric_model https://en.wikipedia.org/wiki/time_series exchange rates’ effect on spot and futures equity index mar-kets: a study on borsa istanbul 15 http://ijcf.ticaret.edu.tr different models are studied. var is applied to the stable time series. we calculated the logarithmic differences and applied the unit root tests. it is found that all of the five time series have unit root and become stable in the first differences. thus, we run the var lag order selections. by the lag order decisions, we run the var models. we didn’t clarify the var models in detail. owing to the appointed var models, we tried to explain the short term and long term relationship between the variables. impulse response and variance decomposition tests are used to extract the short term relationship, following granger causality test is used to point the long term. 4. results and analysis the results of the unit root tests are shown in table 1. the augmented dickey–fuller (adf) regression tests for the existence of unit root of the variable. the null hypothesis indicates that the variable is stationary, and the alternative hypothesis tests the existence of the unit root. phillips-perron (pp) developed an alternative unit root test procedure that does not affect the asymptotic distribution of the test statistics while testing for a unit root and also robust to general forms of heteroscedasticity (teker and alp: 2014). the null hypothesis in pp indicates that the variable is stationary, and the alternative hypothesis tests the existence of the unit root. kwiatkowski-phillips–schmidt–shin (kpss) tests are used for testing a null hypothesis that an observable time series is stationary around a deterministic trend. the null hypothesis in kpss is different from the other tests and tests the existence of the unit root (kwiatkowski, phillips, schmidt and shin, 1992). it is shown in table 3 that both of the time series that calculate from logarithmic differences are stationary. table 1: unit root tests var lag order selection results of usd/try and bist30 are shown in table 2. the criteria that used in the var are lr (sequential modified lr test statistic (each test at 5% level)), fpe (final prediction error), aic (akaike information criterion), sc (schwarz information criterion), hq (hannan-quinn information criterion). the var lag order selection criteria for usd/try and bist30 (log differences) are shown in table 2. the results indicate that the model should be done by three lags. adf philipsperron kpss schwarz akaike lag t-stat. prob. lag t-stat. prob. t-stat. prob. prob. bist30 0 -33.1532 0.00 3 -15.7517 0.00 -33.1314 0.00 0.09532 bist30ft 0 -33.6476 0.00 2 -17.3183 0.00 -33.6073 0.00 0.09746 basis 4 -20.0057 0.00 14 -10.9729 0.00 -108.7631 0.00 0.05289 usd/try 0 -30.7750 0.00 0 -30.7750 0.00 -30.7684 0.00 0.05609 eur/try 1 -23.0496 0.00 1 -23.0496 0.00 -26.9736 0.00 0.1152 https://en.wikipedia.org/wiki/null_hypothesis https://en.wikipedia.org/wiki/time_series https://en.wikipedia.org/wiki/stationary_process 16 ayben koy & i̇hsan ersan http://ijcf.ticaret.edu.tr table 2: var lag order selection criteria: usd/try bist30 lag logl lr fpe aic sc hq 0 6360.590 na 0.000.1 -12.7555 -12.7456 -12.7517 1 6397.438 73.4728 0.0001 -12.8214 -12.7918 -12.8101 2 6436.060 76.8583 0.0001 -12.8908 -12.8416* -12.8721* 3 6441.984 11.7643* 0.0001* -12.8947* -12.8258 -12.8685 4 6445.917 7.7950 0.0001 -12.8945 -12.8060 -12.8609 5 6448.530 5.1684 0.0001 -12.8917 -12.7835 -12.8506 6 6452.565 7.9647 0.0001 -12.8918 -12.7639 -12.8432 7 6453.783 2.3989 0.0001 -12.8862 -12.7386 -12.8301 8 6454.231 0.8805 0.0001 -12.8791 -12.7118 -12.8155 the var lag order selection criteria for eur/try and bist30 (log differences) are shown in table 3. the results indicate that the model should be done by two lags. table 3: var lag order selection criteria bist30 –eur/try lag logl lr fpe aic sc hq 0 6378.959 na 0.0001 -12.7923 -12.7825 -12.7886 1 6413.112 68.1007 0.0001 -12.8528 -12.8233 -12.8416 2 6435.276 44.1058 0.0001* -12.8892* -12.8400* -12.8705* 3 6437.622 4.65856 0.0001 -12.8859 -12.8170 -12.8597 4 6439.752 4.2215 0.0001 -12.8822 -12.7936 -12.8485 5 6445.023 10.4262* 0.0001 -12.8847 -12.7765 -12.8436 6 6445.963 1.8548 0.0001 -12.8786 -12.7507 -12.8299 7 6446.094 0.2581 0.0001 -12.8708 -12.7232 -12.8147 8 6446.624 1.0427 0.0001 -12.8638 -12.6966 -12.8003 exchange rates’ effect on spot and futures equity index mar-kets: a study on borsa istanbul 17 http://ijcf.ticaret.edu.tr the coefficients of the var models between bist30 – usd/try and bist30 – eur/try are shown in table 4. table 4: var model substituted coefficients (bist30usd/try) (bist30 – eur/try) usd/try(-1) usd/try(-2) usd/try(-3) bist30 (-1) bist30 (-2) bist30 (-3) c bist30 0.0912 -0.1184 -0.0307 -0.0448 0.0579 0.0441 0.0002 usd/try -0.0817 -0.0538 -0.0218 -0.1016 -0.1021 0.0360 0.0005 eur/try(-1) eur/try (-2) bist30 (-1) bist30 (-2) c bist30 0.0648 0.1504 -0.0430 0.0524 0.0002 eur/try 0.1294 0.1132 -0.0755 -0.0581 0.0003 figure 1 shows the results of impulse response tests and variance decomposition of the var model which applied to bist30 and usd/try with two lags. if one standard deviation’s shock is applied to bist30, usd/try decreases 1.5 days, then it approaches to zero until 4 days. if one standard deviation’s shock is applied to usd/try, there is a small decrease in bist30 in the first day, and it approaches to zero in the same day. the variance decomposition of the model shows that nearly 20% of the variance of usd/try can be explained by the variance of bist30, besides the variance of bist30 only can be explained by its own variance. figure 1: impulse response tests and variance decomposition of bist30-usd/try -.004 -.002 .000 .002 .004 .006 1 2 3 4 5 6 7 8 9 10 res pons e of dlogusdtry to dlogusdtry -.004 -.002 .000 .002 .004 .006 1 2 3 4 5 6 7 8 9 10 res pons e of dlogusdtry to dlogbist30 -.005 .000 .005 .010 .015 .020 1 2 3 4 5 6 7 8 9 10 respons e of dlogbist30 to dlogusdtry -.005 .000 .005 .010 .015 .020 1 2 3 4 5 6 7 8 9 10 response of dlogbist30 to dlogbist30 response to cholesky one s.d. innovations ± 2 s.e. 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogusdtry variance due to dlogusdtry 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogusdtry variance due to dlogbist30 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbist30 variance due to dlogusdtry 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbist30 variance due to dlogbist30 variance decomposition figure 2 shows the results of impulse response tests and variance decomposition of the var model which applied to bist30 and eur/try with two lags. if one standard deviation’s shock is applied to bist30, eur/try decreases 1.5 days, then it approaches to zero until 4 days. if one standard deviation’s shock is applied to eur/try, there is a very small increase in bist30, in the second day, and it approaches to zero in the same day. the variance decompo18 ayben koy & i̇hsan ersan http://ijcf.ticaret.edu.tr sition of the model shows that nearly 10% of the variance of eur/try can be explained by the variance of bist30, besides the variance of bist30 only can be explained by its own variance. figure 2: impulse response tests and variance decomposition of bist30-eur/try -.005 .000 .005 .010 .015 .020 1 2 3 4 5 6 7 8 9 10 response of dlogbist30 to dlogbist30 -.005 .000 .005 .010 .015 .020 1 2 3 4 5 6 7 8 9 10 res pons e of dlogbist30 to dlogeurtry -.002 .000 .002 .004 .006 1 2 3 4 5 6 7 8 9 10 respons e of dlogeurtry to dlogbist30 -.002 .000 .002 .004 .006 1 2 3 4 5 6 7 8 9 10 res ponse of dlogeurtry to dlogeurtry response to cholesky one s.d. innovations ± 2 s.e. 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbist30 variance due to dlogbist30 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbist30 variance due to dlogeurtry 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogeurtry variance due to dlogbist30 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogeurtry variance due to dlogeurtry variance decomposition the var lag order selection criteria for usd/try and bist30 futures (log differences) are shown in table 5. the results indicate that the model should be done by three lags. table 5: var lag order selection criteria: bist30 futures-usd/try lag logl lr fpe aic sc hq 0 6332.066 na 1.05e-08 -12.6982 -12.6884 -12.6945 1 6368.669 72.9869 9.81e-09 -12.7636 -12.7341 -12.7524 2 6406.024 74.3352 9.18e-09 -12.8305 -12.7814* -12.8118* 3 6412.990 13.8342* 9.13e-09* -12.8365* -12.7676 -12.8103 4 6415.068 4.11865 9.16e-09 -12.8326 -12.7441 -12.7990 5 6417.893 5.5870 9.18e-09 -12.8303 -12.7221 -12.7891 6 6422.389 8.8743 9.17e-09 -12.8313 -12.7034 -12.7827 7 6423.553 2.2922 9.23e-09 -12.8256 -12.6780 -12.7695 8 6424.195 1.2628 9.29e-09 -12.8189 -12.6516 -12.7553 exchange rates’ effect on spot and futures equity index mar-kets: a study on borsa istanbul 19 http://ijcf.ticaret.edu.tr the var lag order selection criteria for eur/try and bist30 futures (log differences) are shown in table 6. the results indicate that the model should be done by two lags. table 6: var lag order selection criteria: bist30 futures-eur/try lag logl lr fpe aic sc hq 0 6350.153 na 0.0001 -12.7345 -12.7247 -12.7308 1 6386.040 71.5579 0.0001 -12.7985 -12.7690 -12.7873 2 6407.716 43.1347* 0.0001* -12.8339* -12.7847* -12.8152* 3 6410.732 5.98895 0.0001 -12.8320 -12.7631 -12.8058 4 6411.453 1.42938 0.0001 -12.8254 -12.7368 -12.7917 5 6416.052 9.0966 0.0001 -12.8266 -12.7184 -12.7854 6 6416.676 1.2321 0.0001 -12.8198 -12.6919 -12.7712 7 6416.950 0.5394 0.0001 -12.8123 -12.6648 -12.7562 8 6417.443 0.9686 0.0001 -12.8053 -12.6380 -12.7417 the coefficients of the var models between bist30 futures – usd/try and bist30 futures – eur/try are shown in table 7. table 7: var models substituted coefficients (bist30 futuresusd/try) (bist30 futures– eur/try) usd/try (-1) usd/try (-2) usd/try (-3) bist30ft (-1) bist30 ft (-2) bist30ft (-3) c bist30ft 0.0722 -0.1699 -0.0217 -0.0597 0.0249 0.0495 0.0003 usd/try -0.0788 -0.0535 -0.0263 -0.0993 -0.0976 -0.0381 0.0005 eur/try (-1) eur/try (-2) bist30ft (-1) bist30ft (-2) c bist30ft 0.0414 -0.1980 -0.0597 0.0196 0.0003 eur/try 0.0133 -0.1119 -0.0759 -0.0543 0.0003 figure 3 shows the results of impulse response tests and variance decomposition of the var model which applied to bist30 futures and usd/try with three lags. if one standard deviation’s shock is applied to bist30 futures, usd/try decreases 1.5 days, then it approaches to zero until 4 days. if one standard deviation’s shock is applied to usd/try, there is a small decrease in bist30 futures in the third day, and it approaches to zero in the next day. the variance decomposition of the model shows that nearly 20% of the variance of usd/try can be explained by the variance of bist30 futures, besides the variance of bist30 futures only can be explained by its own variance. 20 ayben koy & i̇hsan ersan http://ijcf.ticaret.edu.tr figure 3: impulse response tests and variance decomposition of bist30 futures-usd/try -.005 .000 .005 .010 .015 .020 1 2 3 4 5 6 7 8 9 10 response of dlogbist30ft to dlogbist30ft -.005 .000 .005 .010 .015 .020 1 2 3 4 5 6 7 8 9 10 response of dlogbist30ft to dlogusdtry -.004 -.002 .000 .002 .004 .006 1 2 3 4 5 6 7 8 9 10 response of dlogusdtry to dlogbist30ft -.004 -.002 .000 .002 .004 .006 1 2 3 4 5 6 7 8 9 10 res ponse of dlogusdtry to dlogusdtry response to cholesky one s.d. innovations ± 2 s.e. 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbist30ft variance due to dlogbist30ft 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbist30ft variance due to dlogusdtry 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogusdtry variance due to dlogbist30ft 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogusdtry variance due to dlogusdtry variance decomposition figure 4 shows the results of impulse response tests and variance decomposition of the var model which applied to bist30 futures and eur/try with two lags. if one standard deviation’s shock is applied to bist30 futures, eur/try decreases 1.5 days, then it approaches to zero until 4 days. although, if one standard deviation’s shock is applied to eur/try, there is a very small decrease in bist30 futures in the third day, and it approaches to zero in the next day. the variance decomposition of the model shows that nearly 10% of the variance of eur/try can be explained by the variance of bist30 futures, besides the variance of bist30 futures only can be explained by its own variance. figure 4: impulse response tests and variance decomposition of bist30 futures-eur/try -.005 .000 .005 .010 .015 .020 1 2 3 4 5 6 7 8 9 10 response of dlogbist30ft to dlogbist30ft -.005 .000 .005 .010 .015 .020 1 2 3 4 5 6 7 8 9 10 response of dlogbist30ft to dlogeurtry -.002 .000 .002 .004 .006 1 2 3 4 5 6 7 8 9 10 response of dlogeurtry to dlogbist30ft -.002 .000 .002 .004 .006 1 2 3 4 5 6 7 8 9 10 res ponse of dlogeurtry to dlogeurtry response to cholesky one s.d. innovations ± 2 s.e. 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbist30ft variance due to dlogbist30ft 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbist30ft variance due to dlogeurtry 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogeurtry variance due to dlogbist30ft 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogeurtry variance due to dlogeurtry variance decomposition exchange rates’ effect on spot and futures equity index mar-kets: a study on borsa istanbul 21 http://ijcf.ticaret.edu.tr the var lag order selection criteria for usd/try and basis (log differences) are shown in table 11. the results indicate that the model should be done by six lag. table 8: var lag order selection criteria: basis-usd/try lag logl lr fpe aic sc hq 0 7738.244 na 0.0001 -15.5190 -15.5092 -15.5153 1 7863.296 249.3520 0.0001 -15.7619 -15.7324 -15.7507 2 7895.524 64.1330 0.0001 -15.8185 -15.7693* -15.7998 3 7904.494 17.8146 0.0001 -15.8285 -15.7596 -15.8023* 4 7907.668 6.2903 0.0001 -15.8268 -15.7383 -15.7932 5 7916.652 17.7686 0.0001 -15.8368 -15.7286 -15.7957 6 7924.567 15.6245* 0.0001* -15.8447* -15.7168 -15.7961 7 7925.179 1.2055 0.0001 -15.8379 -15.6903 -15.7818 8 7928.551 6.6284 0.0001 -15.8366 -15.6694 -15.7730 the var lag order selection criterias for eur/try and basis (log differences) are shown in table 9. the results indicate that the model should be done by six lag. table 9: var lag order selection criteria: basis-eur/try lag logl lr fpe aic sc hq 0 7759.177 na 0.0001 -15.5610 -15.5512 -15.5573 1 7896.122 273.0660 0.0001 -15.8277 -15.7982 -15.8165 2 7933.541 74.4633 0.0001 -15.8948 -15.8456* -15.8761 3 7943.174 19.1297 0.0001 -15.9061 -15.8372 -15.8799* 4 7946.946 7.4760 0.0001 -15.9056 -15.8171 -15.8720 5 7954.588 15.1147 0.0001 -15.9129 -15.8047 -15.8718 6 7962.547 15.7118* 0.0001* -15.9209* -15.7930 -15.8722 7 7963.589 2.0528 0.0001 -15.9149 -15.7673 -15.8588 8 7965.837 4.4187 0.0001 -15.9114 -15.7441 -15.8478 22 ayben koy & i̇hsan ersan http://ijcf.ticaret.edu.tr the coefficients of the var models between basis – usd/try and basis – eur/try are shown in table 10. table 10: var models: basis and usd/try, basis and eur/try basis usd/try basis eur/try usd/try (-1) 0.0136 -0.0204 eur/try (-1) 0.0111 0.1769 usd/try (-2) -0.0448 0.0148 eur/try (-2) -0.0435 -0.1235 usd/try (-3) -0.0167 0.0197 eur/try (-3) -0.0192 0.0459 usd/try (-4) 0.01 0.0075 eur/try (-4) 0.0031 -0.0237 usd/try (-5) 0.0022 -0.0271 eur/try (-5) -0.0042 0.056 usd/try (-6) -0.0257 -0.1384 eur/try (-6) -0.0304 -0.0224 basis (-1) -0.6409 0.0305 basis (-1) -0.6427 -0.0983 basis (-2) -0.3649 -0.0159 basis (-2) -0.3649 -0.0649 basis (-3) -0.2309 0.0001 basis (-3) -0.2333 -0.0977 basis (-4) -0.1769 0.0008 basis (-4) -0.1803 -0.1318 basis (-5) -0.1621 0.0687 basis (-5) -0.1644 -0.1233 basis (-6) -0.799 0.0341 basis (-6) -0.0805 -0.1289 c 0.0001 0.0004 c 0.001 0.0003 figure 5 shows the results of impulse response tests and variance decomposition of the var model which applied to basis and usd/try with six lags. if one standard deviation’s shock is applied to basis, usd/try has a late and weak response in the seventh day. besides if one standard deviation’s shock is applied to usd/try, there is a small decrease in basis in the third day, and it approaches to zero in the same day. the variance decomposition of the model shows that basis and usd/try only can be explained by their own variances. figure 5: impulse response tests and variance decomposition of basis-usd/try 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbasis variance due to dlogbasis 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbasis variance due to dlogusdtry 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogusdtry variance due to dlogbasis 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogusdtry variance due to dlogusdtry variance decomposition -.003 -.002 -.001 .000 .001 .002 .003 .004 1 2 3 4 5 6 7 8 9 10 res pons e of dlogbasis to dlogbasis -.003 -.002 -.001 .000 .001 .002 .003 .004 1 2 3 4 5 6 7 8 9 10 res pons e of dlogbasis to dlogusdtry -.002 .000 .002 .004 .006 .008 1 2 3 4 5 6 7 8 9 10 response of dlogusdtry to dlogbasis -.002 .000 .002 .004 .006 .008 1 2 3 4 5 6 7 8 9 10 res ponse of dlogusdtry to dlogusdtry response to cholesky one s.d. innovations ± 2 s.e. exchange rates’ effect on spot and futures equity index mar-kets: a study on borsa istanbul 23 http://ijcf.ticaret.edu.tr figure 6 shows the results of impulse response tests and variance decomposition of the var model which applied to basis and eur/try with six lags. if one standard deviation’s shock is applied to basis, eur/try has a weak decrease in the second day. although, if one standard deviation’s shock is applied to eur/try, there is a small decrease in basis in the third day, and it approaches to zero in the same day. the variance decomposition of the model shows that basis and eur/try only can be explained by their own variances. figure 6: impulse response tests and variance decomposition of basis-eur/try the results of the granger causality for all of the var models are shown in table 11. the granger causality test is a statistical hypothesis test to determine whether one time series is an explaining variable for the other. the test identifies any causal relationship between the variables. three types of granger causality might be identified between two time series a and b. a might be the granger cause of b, b might be the granger cause of a or two of the series might be granger cause of each other. as mentioned before, while the impulse-response tests and the variance decomposition tests explain the short run relationship, the granger causality test explains the long run relationship. the results indicate that the logarithmic differences of bist30 index and bist30 index futures are granger causality of the logarithmic differences of the foreign exchange rates. especially if an international investor decide to invest in turkey in a long term maturity, following bist30 index and bist30 index futures would be recommended. changes in index prices would be an indicator for foreign exchanges. conversely, usd/try or eur/try is not a granger cause for bist30 index, bist30 index futures or the basis. 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogeurtry variance due to dlogeurtry 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogeurtry variance due to dlogbasis 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbasis variance due to dlogeurtry 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dlogbasis variance due to dlogbasis variance decomposition -.002 .000 .002 .004 .006 .008 1 2 3 4 5 6 7 8 9 10 res pons e of dlogeurtry to dlogeurtry -.002 .000 .002 .004 .006 .008 1 2 3 4 5 6 7 8 9 10 res pons e of dlogeurtry to dlogbasis -.003 -.002 -.001 .000 .001 .002 .003 .004 1 2 3 4 5 6 7 8 9 10 response of dlogbasis to dlogeurtry -.003 -.002 -.001 .000 .001 .002 .003 .004 1 2 3 4 5 6 7 8 9 10 res ponse of dlogbasis to dlogbasis response to cholesky one s.d. innovations ± 2 s.e. https://en.wikipedia.org/wiki/statistical_hypothesis_testing https://en.wikipedia.org/wiki/time_series 24 ayben koy & i̇hsan ersan http://ijcf.ticaret.edu.tr table:11 granger causality tests dependent variable causality variable chisq lags probability bist30 usd/try 3.1014 3 0.3763 usd/try bist30 161.8467 3 0.0000 bist30 eur/try 3.1508 2 0.2069 eur/try bist30 70.7317 2 0.0000 bist30 ft usd /try 4.3318 3 0.2278 usd/try bist30 ft 156.4857 3 0.0000 bist30 ft eur/try 4.8139 2 0.0901 eur/try bist30 ft 71.3616 2 0.0000 basis usd/try 9.8910 6 0.1293 usd/try basis 7.9607 6 0.2410 basis eur/try 10.2830 6 0.1252 eur/try basis 9.9876 6 0.1132 5. conclusion: both bist30 and bist30 futures have the same effect on the foreign exchange rates. the impulse response tests indicates that if there is a shock in spot or futures index borsa istanbul, each of the two foreign exchange rates (usd/try and eur/try) give the same response. they decrease in the first two days, and the response disappears in the fourth day. besides, the variance decomposition tests show that nearly 10%-20% of the variance of foreign exchange rates can be explained by the variance of the spot or futures equity indices. however foreign exchange rates’ variances don’t explain the variances of the equity indexes. in addition, basis between spot and futures indices do not have a prominent response to the changes in foreign exchange rates and foreign exchange rates do not have to the change in basis too. while the impulse-response tests and the variance decomposition tests explain the short run relationship, the granger causality test explains the long run relationship. the results indicate that the logarithmic differences of bist30 and bist30 futures are granger causality of the logarithmic differences of the foreign exchange rates. in literature, there are different results for the relationship between foreign exchange rates and borsa istanbul equity market. we found an evident result in the short run and also long run. our results confirm ayvaz (2006), savaş and can (2011) thus the foreign exchange rate markets in turkey are driven by the equity market. one of the reasons might be the international investors who interest in those equities in bist30. therefor bist30 is an important indicator for turkey financial markets. in further studies we recommend searching the related literature and doing analyses between the variables in this study and portfolio invests. references aggarwal, r. (2003) "exchange rates and stock prices: a study of the us capital markets under floating exchange rates." , akron business and economic review, 12, 7-12. arshad h. and javed, m. t. (2009) “an empirical investigation of the causal relationship among monetary variables and equity market returns”, the lahore journal of economic, 14(1), 115-137. exchange rates’ effect on spot and futures equity index mar-kets: a study on borsa istanbul 25 http://ijcf.ticaret.edu.tr ayvaz, ö, (2006). “döviz kuru ve hisse senetleri arasındaki nedensellik i̇lişkisi”, gazi üniversitesi i̇i̇bf dergisi, 8(2), 1-14. bahmanioskooee m. and sohrabian a. (1992). “stock prices and the effective exchange rate of the dollar”, applied economics, 24, 459–64. bernardina, a. (2014), “the influence of biofuels, economic and financial factors on daily returns of commodity futures prices”, energy policy, 69, 227-247. brooks, c.. 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(2007), “the monetary model of the exchange rate and equities: an ardl bounds testing approach school of management and business”, applied financial economics, (17), 391–397. roll, r. (1992), “industrial structure and the comparative behavior of international stock market indices”, the journal of finance, 17(1), 3-41. moussa, f. k. (2012), “the impact of stock prices return, energy prices return, and exchange rate changes on orange juice futures price return”, international journal of business, accounting and finance, 6(1), 124131. savaş i̇. ve can i̇. (2011), “euro-dolar paritesi ve reel döviz kuru’nun i̇mkb 100 endeksi’ne etkisi”, eskişehir osmangazi üniversitesi i̇i̇bf dergisi, 6(1), 323-339. smith, c. (1992), “equities and the uk exchange rate: a multi-country approach”, applied economics, (24), 327–35. soenen, l. a. ve hennigar, e. s. (1988), “an analysis of exchange rates and stock prices: the u.s. experience between 1980 and 1986”, akron business and economic review, (19), 7-16. tornell, a. and yuan, c. (2012), “speculation and hedging in the currency futures markets: are they informative to the spot exchange rates?”, journal of futures markets, 32(2), 122-151. finnet. http://www.cluteinstitute.com/ojs/index.php/iber/article/view/3229 http://www.cluteinstitute.com/ojs/index.php/iber/article/view/3229 http://dx.doi.org/10.1016/j.frl.2016.04.019 international journal of commerce and finance, vol. 2, issue 1, 2016, 157-168 the role of collaborative advantage for analyzing the effect of supply chain collaboration on firm performance huriye yılmaz, (mssc) i̇stanbul commerce university, turkey murat çemberci, (asst. prof. dr.) i̇stanbul commerce university, turkey nagehan uca, (phd, candidate) i̇stanbul commerce university, turkey abstract: collaboration plays a critical role in a globalized, rapidly changing and competitive world, as the resources of an individual company are limited to compete with the challenges of the era. supply chain collaboration is defined as a partnership process where two or more autonomous firms work closely to plan and execute supply chain operations towards common goals and mutual benefits. supply chain collaboration results in collaborative advantage, the strategic benefits gained over competitors through supply chain partnering, and these both increase firm performance of the partners. in this research, the effect of supply chain collaboration on firm performanc e has been investigated by distributing a survey to turkish companies which have been responded by 150. the role of collaborative advantage in this relation has also been measured. the results of the research suggest that there is a positive correlation between supply chain collaboration and collaborative advantage. the results also prove that supply chain collaboration positively affects firm performance. it is also proven that the mediator role of collaborative advantage on the effect of supply chain collaboration on firm performance is statistically significant. keywords: supply chain collaboration, collaborative advantage, firm performance 1. introduction improvements in supply chain have gained more importance as customer’s demands have increased to purchase better quality products with a cheaper price. it’s obvious that these improvements are not independent from the environment of the company. companies have to align their processes according to the requirements of the market and the outer world. they have searched for collaboration possibilities with their supply chain partners in order to improve the efficiency of their operations and to respond the market requirements quickly. open innovation is a paradigm change starting in 1990’s and open innovation relationship can be extended to the customers, supply resources, universities and independent research companies/experts and competitors (karabulut; 2015). supply chain collaboration provides network, partnership and mechanism for supply chain innovations (liao & kuo; 2014). the literature studies show that supply chain collaboration has positive impacts on firm performance. stank et al (2001) mentions that the collaboration within the company as well as outside the company has positive effects on company performance. inter-organizational collaboration also creates competitive advantage (jap, 1999). this study begins with background part where literature studies are presented about supply chain collaboration, collaborative advantage and firm performance. background section is followed by hypothesis development part where arguments are developed. the research methodology, introduced after hypothesis development part, explains the measures and the samples. the data is analyzed by baron and kenney method and confirmed by sobel test. in the final part, discussions and implications are presented and the study concludes with the suggestions for future research. in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 158 huriye yılmaz, murat çemberci, nagehan uca http://ijcf.ticaret.edu.tr 2. background the studies about supply chain collaboration began in 1990’s. the examples for these studies are vmi (vendormanaged inventory), cpfr (collaborative planning forecasting and replenishment), continuous replenishment, ecollaboration systems. wal-mart has made a planning and forecasting collaboration with the supplier warnerlambert, and as a result achieved an improvement in the stock level from 87% to 98%, a shorter lead time from 21 days to 11 days, more accurate sales orders and 8,5 million usd increase in sales. similarly, general electric (ge) has made collaboration with the retailers and switched to order based production and full truck orders, which resulted in the reduced inventory costs for all parties, 12 % reduction in delivery costs and more profitable sales (simatupang & sridharan, 2005). supply chain collaboration is an active participation of all supply chain partners in order to achieve common goals (liao & kuo; 2014; s.296). in other words, it’s the joint work of two autonomous firms working jointly to plan and execute supply chain operations by achieving higher gains than they would have by themselves (simatupang & sridharan, 2002). lambert et al. (1999) define supply chain collaboration as the level of relationship in which supply chain partners share risks and benefits in order to reach a higher performance that they would have by acting themselves. supply chain collaboration can also be defined as the close and long terms relationships where supply chain partners share information, resources and risks in order to achieve common goals (bowersox, closs, & stank, 2003) (golicic, fogginn, & mentzer, 2003). even though supply chain collaboration and supply chain integration have been used interchangeably in the beginning of the studies, they have different meanings. integration implies a unique, integrated and central management whereas collaboration covers combined management and relational tools (nyaga, whipple, & lynch, 2010). initial studies on supply chain collaboration focus more on process integration and give less importance to the creation of information and communication factors (simatupang & sridharan, 2005). however, problems on the communication cause misunderstandings and conflicts among the supply chain partners and are regarded as the failures of collaborations (tuten & urban, 2001). communication is a glue that keeps supply chain together by means of balanced, two-sided, multi-level contacts and messages (chen & paulraj, 2004) (mohr & nevin, 1990). there are three levels of collaboration named as vertical, horizontal and lateral (simatupang & sridharan, 2002). vertical collaboration refers to the collaboration with the suppliers and the customers in the chain and covers the manufacturers, distributors, carriers and the retailers. horizontal collaboration, on the other hand, covers the information and resource sharing of the competitors and the parties that are not linked with the firm in order to have joint benefits (badea, prostean, goncalves, & allaoui, 2014, s. 119). lateral collaboration aims to gain more flexibility by sharing the capabilities in both vertically and horizontally. the results of the collaboration change by the duration. for example, short term benefits are that the meeting of the needs of all the supply chain partners whereas in the long run, the gains are serving to customers in a better way by creating common plans and improvements (simatupang & sridharan, 2002). supply chain collaboration provides cost reduction and increase in revenues (lee, padmanabdan, & whang, 1997). it allows supply chain partners to respond to the changing demands and meeting the needs of the customers by flexible options (simatupang & sridharan, 2005). decision and incentive alignment affect the responsiveness of the firm (fisher, 1997). supply chain collaboration allows a company to benefit the market opportunities (uzzi, 1997). the collaboration among the supply chain partners can also result in the new product ideas (kalwani & narayandas, 1995). the companies that share their resources can create joint competitive advantage. production lead time and capacity utilization are also positively affected by supply chain collaboration (ramanathan, 2014). handfield (2002) and sheu et al (2006) suggest that supply chain collaboration reduces purchasing costs and increases the competitive advantage of the firm by reducing costs. supply chain collaboration results in flexibility, efficiency, competitive advantage and reduction of risks (nyaga, whipple, & lynch, 2010). çağlıyan’s (1999) study with turkish companies proves that collaborative firms have better firm performance. the dimensions of supply chain collaboration are information sharing, goal congruence, decision synchronization, incentive alignment, resource sharing, collaborative communication and joint knowledge creation. information sharing can be defined as the partners’ sharing of market trends, new technologies, new process management information to create value (liao & kuo, 2014). it can also be defined as a company’s level of sharing the relevant, confidential, accurate and complete information with its supply chain partners (angeles & nath, 2001) (cagliano, the role of collaborative advantage for analyzing the effect of supply chain collaboration on firm performance 159 http://ijcf.ticaret.edu.tr caniato, & spina, 2003) (sheu, yen, & chae, 2006). information sharing is the heart (lamming, 1996), nerve center (chopra & meindl, 2001), lifeblood (stuart & mccutcheon, 1996), essential ingredient (min, et al, 2005), key requirement (sheu, yen, & chae, 2006) and foundation (lee & whang, 2001) of supply chain collaboration. the aim of information is to keep up-to-date information about expectations, future plans and promotions and it needs transparency (badea, prostean, goncalves, & allaoui, 2014). confidentiality, timing and accuracy of information sharing are also important for information sharing and the communication should be two ways. depending on the facilities and systems provided technology, thousands of messages are transferred in seconds, preventing the errors in transmission. the contracts established taking the interactions of the users in the chain will facilitate the e-trade and allow companies using different systems to work jointly (manthou, vlachopoulou, & folinas, 2004). one of the other benefits of supply chain collaboration is the “collaborative advantage”. collaborative advantage is a relational view of intercompany competitive advantage (dyer & singh, 1998). it expresses the addition of the common benefits created by the gathering, exchange and improvement of the resources to the collaborating partners (dyer & singh, 1998). it’s the joint competitive advantage focusing on the joint value creation (cao & zhang, 2011). the studies by mentzer et al. (2001), stank et al. (2001) and manthou (2004) state that the collaborating partners gain more benefits than they would have if they operated by themselves. according to jap (2001), collaborative advantage is the joint competitive advantage. it is also defined as the benefit gained over the competitors by supply chain collaboration (cao & zhang, 2011, s. 166). vangen and huxham (2003) define collaborative advantage as the synergic results achieved by companies by collaborative activities rather than individual actions. the studies of jap (1999) show that collaboration increases common benefits, and provides that the partners gain more benefits than they would have if they acted alone. the creation of the collaborative advantage may be ruined if the collaborating partners search for their own goals rather than the common goals, as the effects of actions on supply chain partners will be neglected (chopra & meindl, 2007). in their studies, cao and zhang (2010) have proven that collaborative advantage directly improves firm performance. min et al (2005) state that the business synergies are not seen immediately but the possible long term benefits are strategic and attractive. there are five dimensions of collaborative advantage named as process efficiency, offering flexibility, business synergy, quality and innovation. the process efficiency is defined as the level of cost advantage of the collaborative process compared to the processes of their competitors (bagchi & skjoett-larsen, 2005). it may cover joint decision making processes. process efficiency is one of the success criteria and the profitability indicators (cao & zhang, 2011, s. 167). the second dimension, offering flexibility is the extent to which one company’s supply chain network supports the launch of new product and services depending on the environmental changes. it can also be named as customer responsiveness. business synergy can be defined as the extent to which supply chain partners unite their complementary and relevant resources in order to gain extraordinary benefits (cao & zhang, 2011). according to ansoff (1998), this relationship results in more returns to the resources than the resources alone. this joint result is provided by physical resources like production equipment and by non-visible resources like technology expertise, customer knowledge and company culture (itami & roehl, 1987). quality is defined as the extent that a company offers quality products that create value together with its supply chain partners (li, ragu-nathan, ragu-nathan, & rao, 2006). a higher market share and profitability are expected from the companies who can quickly offer quality products and innovations to customer needs. the last dimension of collaborative advantage, innovation, is defined as the degree that the supply chain partners work together to develop new products, services and processes. as the product life cycles have shortened due to competition, there is a need for companies to innovate more frequently. the companies that have good relations with their supply chain partners can improve their skills for product and process developments (kaufman, wood, & theyel, 2000). firm performance, which is the independent variable in this study, is defined as how well a firm accomplishes its financial goals compared to the competitors (li, ragu-nathan, ragu-nathan, & rao, 2006). there are many tools to measure firm performance like return on investment (roi), return on sales, and increase in revenues, cash flow and market share. in this research, the firm performance has been measured as one component through the survey. 160 huriye yılmaz, murat çemberci, nagehan uca http://ijcf.ticaret.edu.tr 3. hypothesis development based on the literature research presented in the previous section, this study aims to answer the following questions: is collaborative advantage affected by supply chain collaboration? does collaborative advantage affect firm performance? is firm performance affected by supply chain collaboration? does collaborative advantage have a mediator role in the relation between supply chain collaboration and firm performance? to be able to analyze these questions, below hypotheses have been developed. hypothesis 1: supply chain collaboration positively affects collaborative advantage hypothesis 2: collaborative advantage positively affects firm performance. hypothesis 3: firm performance is positively affected by supply chain collaboration. hypothesis 4: collaborative advantage has a mediator role in the effect of supply chain collaboration on firm performance. the research model, developed by the literature review and the hypotheses, can be seen in figure 1 as follows: figure 1. conceptual model 4. research methods 4.1. measures and sampling in order to find answers to the questions identified in previous section, a questionnaire with likert-5-scale was formed. in the questionnaire, the scale developed by cao and zhang (2010) by analyzing the literature reviews for supply chain collaboration and collaborative advantage, has been used. in order to measure the firm performance, akgün et al.’s (2007) scale which they have developed from ellinger et al.’s (2002) has been used. the questionnaire was sent to 210 companies operating in various cities in turkey and 150 questionnaires were answered. 4.2 construct validity and reliability in order to make a correct evaluation, principal component analysis, which is used to express many variables by using a few main variables, has been made. there have been question reductions for collaborative advantage and supply chain collaboration variables. the results for collaborative advantage can be seen in table 1. kaiser-meyer-olkin value of the analysis is 0,744 showing that principle factor analysis can be made. bartlett's test of sphericity test has a p value smaller than 0,05, which also means that the data is suitable for principle factor analysis. h2 h1 h3 h4 the role of collaborative advantage for analyzing the effect of supply chain collaboration on firm performance 161 http://ijcf.ticaret.edu.tr table 1. factor analysis results for collaborative advantage factor name statement factor weight % of variance reliability (cronbach α) in n o v at io n 54. our firm with supply chain partners has time-to-market lower than industry average ,905 %25,276 0,896 52. our firm with supply chain partners introduces new products and services to market quickly. ,882 53. our firms with supply chain partners has rapid products development. ,861 55. our firms with supply chain partners innovates frequently. ,691 q u al it y 48. our firms with supply chain partners offers products that are highly reliable ,935 % 23,260 0,934 49. our firms with supply chain partners offers products that are highly durable ,920 50. our firms with supply chain partners offers high quality products to our customers. ,897 b u si n e ss s y n e rg y 44. our firm and supply chain partners have integrated it infrastructure and it resources ,915 % 17,729 0,788 45. our firm and supply chain partners have integrated knowledge bases and know-how. ,857 46. our firm and supply chain partners have integrated marketing efforts ,679 162 huriye yılmaz, murat çemberci, nagehan uca http://ijcf.ticaret.edu.tr p ro c e ss e ff ic ie n c y 37. our firm with supply chain partners meets productivity standards in comparison with industry norms. ,806 % 13,655 0,629 38. our firm with supply chain partners meets on-time delivery standards in comparison with industry norms. ,726 total %79,92 kaiser-meyer-olkin measure of sampling adequacy ,744 bartlett's test of sphericity approx. chi-square 1193,429 sd 66 p ,000 table 2 shows the results for supply chain collaboration. kaiser-meyer-olkin value of the analysis is 0,776 which also shows that principle factor analysis can be made. bartlett's test of sphericity test for supply chain collaboration also has a p value smaller than 0,05, which also means that the data is suitable for principle factor analysis. table 2. factor analysis results for supply chain collaboration factor name statement factor weight % of variance reliability (cronbach α) in fo rm a ti o n s h ar in g 1. our firm with supply chain partners exchange relevant information 0,847 % 19,324 0,856 2. our firm with supply chain partners exchange timely information 0,844 3. our firm with supply chain partners exchange accurate information. 0,833 4. our firm with supply chain partners exchange complete information 0,806 d e c is io n s y n c h r o n iz at i o n 12. our firms with supply chain partners jointly develop demand forecasts 0,890 % 17,781 0,872 the role of collaborative advantage for analyzing the effect of supply chain collaboration on firm performance 163 http://ijcf.ticaret.edu.tr 13. our firms with supply chain partners jointly manage inventory 0,810 14. our firms with supply chain partners jointly plan on product assortment 0,781 11. our firms with supply chain partners jointly pln promotion events 0,768 jo in t k n o w le d g e c re at io n 32. our firm and supply chain partners jointly assimilate and apply relevant knowledge 0,917 % 14,492 0,845 31. our firm and supply chain partners jointly search and acquire new and relevant knowledge 0,822 33. our firm and supply chain partners jointly identify customer needs 0,632 g o al c o n g ru e n c e 9. our firm and supply chain partners agree that our own goals can be achieved through working toward the goals of the supply chain 0,862 % 13,456 0,806 8. our firm and supply chain partners have agreements on the importance of improvements that benefit the supply chain as a whole. 0,857 10. our firm and supply chain partners jointly layout collaboration implementation plans to achieve the goals of the supply chain. 0,552 7. our firm and supply chain partners have agreement on the importance of collaboration across the supply chain 0,548 r e so u r c e s h ar i n g 24. our firm and supply chain partners share equipments (e.g. computers, networks, machines) 0,865 % 10,870 0,791 164 huriye yılmaz, murat çemberci, nagehan uca http://ijcf.ticaret.edu.tr 25. our firm and supply chain partners pool financial and non-financial resources (e.g. time, money, trainig) 0,812 total % 75,922 kaiser-meyer-olkin measure of sampling adequacy ,776 bartlett's test of sphericity approx. chi-square 1550,325 sd 136 p ,000 cronbach’s alpha values for each dimension of both supply chain collaboration and collaborative advantage show a high internal consistency. 79,92 % of collaborative advantage is explained by the variables and this is 75,922 % for supply chain collaboration. 4.3 test of hypotheses the hypotheses have been tested by means of multiple linear regression analysis. the baron and kenny (1986) method has been used to measure the mediator effect. according to the baron and kenny method, the below conditions must be present for a variable to be named as a mediator: 1. a change in the independent variable causes the mediator variable to change. 2. a change in the mediator variable causes the dependent variable to change. 3. when the mediator and the independent variables are included to the analysis together, the influence of independent variable on dependent variable to decrease or completely disappear. (baron & kenny, 1986) before making an analysis using baron and kenny method, significant correlation among the variables should be secured by hierarchical regression. in table 3, the correlation results according to pearson correlation coefficient for all three variables can be seen. the results show that there is a significant correlation among the variables. table 3. correlations among all variables variables 1 2 3 scc ca ,731** fp ,233** ,435** ** correlation is significant at the 0.01 level (2-tailed). note: scc: supply chain collaboration, ca: collaborative advantage, fp: firm performance as correlation prerequisite is proven, baron and kenny analysis can be made. in order to make the analysis, 3 models with the below details have been established. model 1: fp = 0 + 1.scc+ (hypothesis 3) model 2: ca = 0 + 2.scc+ (hypothesis 1) model 3: fp = 0 + 1.scc+2.ca + (hypothesis 2 and 4) the role of collaborative advantage for analyzing the effect of supply chain collaboration on firm performance 165 http://ijcf.ticaret.edu.tr when the models are tested, below results are received: table 4. coefficients model 1 model 2 model 3 β1 0,233* -0,184 β2 0,731* 0,570 r2 0,054 0,535 0,205 adjusted r2 0,048 0,531 0,194 f 8,461* 170,018* 18,971 * significant at 5% level according to these results received by baron and kenney analysis, h1, h2, h3 and h4 hypotheses are accepted. supply chain collaboration affects collaborative advantage in a positive way. firm performance is also positively affected by supply chain collaboration. collaborative advantage has a mediator role on the effect of supply chain collaboration on firm performance. r2 value is also positively affected meaning that more of the variance in firm performance can be explained by the mediator variable. in order to make verify the baron and kenney results, the sobel test was also run. sobel test is one of the methods used for measuring the mediator effect (sobel, 1982). the results of sobel test verify the baron and kenney method results. sobel test results can be seen in table 2. therefore, the mediator role of collaborative advantage on the effect of supply chain collaboration on firm performance is proven. table 5. sobel test results the mediator effect of collaborative advantage z value standard error p supply chain collaborationcollaborative advantage firm performance 4.39618182 0.10606022 0.00001102 5. discussion and implications the study results throw that firm performance is positively affected by supply chain collaboration. this result is in line with the literature information (lee, padmanabdan, & whang (1997); simatupang & sridharan (2005); (fisher, 1997); uzzi (1997); kalwani & narayandas (1995); ramanathan (2014); handfield (2002); sheu et al (2006); nyaga, whipple, & lynch (2010); çağlıyan (1999)). another result of the study is that supply chain collaboration has a positive impact on collaborative advantage which also proves the literature research (cao & zhang (2011), mentzer et al. (2001); stank et al. (2001); manthou (2004); vangen and huxham (2003); jap (1999); chopra & meindl (2007), cao and zhang (2010); min et al (2005)). 166 huriye yılmaz, murat çemberci, nagehan uca http://ijcf.ticaret.edu.tr another result of the study is that, the mediator role of collaborative advantage on the effect of supply chain collaboration on firm performance is statistically significant. this means that the relation between supply chain collaboration and firm performance is more significant, when the mediator variable collaborative advantage is in place. as a managerial implication, these results show that companies should participate in collaborations where collaborative advantage can be created; and when they are in collaboration, they have to achieve the common goals of collaboration instead of the individual targets of the company. these conditions will affect the firm performance in a positive way. the selection of the partner that the company will collaborate is critical. therefore, the managers should pursue the ways that helps to select the best collaborating partner. 6. constraints and further research the survey for this study has been distributed to 210 companies in various cities of turkey and 150 responses have been received. further research can be made by a larger number of respondents, which will increase the size of the sampling and the relation of supply chain collaboration, collaborative advantage and firm performance can be analyzed for a larger group in turkey. besides, the questionnaire has been sent to only one person in each company resulting in a constraint of unique resource tendency. further research can be held by taking the questionnaire results from more than one person in the company, by directing independent variable questions and dependent variable questions to different people in the company. 7. conclusion this study reveals that supply chain collaboration has a positive effect on collaborative advantage and also firm performance. firm performance is also positively affected by collaborative advantage. when the mediator role of collaborative advantage in the effect of supply chain collaboration on firm performance has been analyzed, the results show that the mediator effect of collaborative advantage is statistically significant. as a managerial implication, companies have to collaborate with supply chain partners by which they gain more collaborative advantage, so that the collaboration partners can have better firm performance results. references angeles, r., & nath, r. 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(2003). enacting leadership for collaborative advantage: dilemmas of ideology and pragmatism in the activities of partnership managers. british journal of management, 1(14), 61-76. international journal of commerce and finance, vol. 2, issue 2, 2016, 27-39 determination of anger expression and anger management styles and an application on operating room nurses hülya aslan, (nurse supervisor assc.) yeditepe university hospital, istanbul nilay gemlik, (dr.) faculty of health sciences, marmara university, i̇stanbul gülfer bektaş, (dr.) acibadem university, school of healthcare management, i̇stanbul abstract: this research has been carried out in order to determine anger expression and anger management styles in operating room nurses. by applying an in-depth interview technique on operating room nurses working in a private hospital, a qualitative study has been performed in order to determine anger expression and anger management styles in operating room nurses. the interview consisted of ten questions such as demographic questions addressing the workers’ age, sex, education level and duration of employment in the organization they work, aiming to determine their anger expression and anger management styles. since operating room environments contain various risk factors, and require active team work in a stressful dynamic setting under excessive workload, , it has been found that operating room nurses display their anger through loud speaking, fail to settle their anger positively, fail to control their anger in a behavioural pattern despite their cognitive awareness in anger management. thus, it has been suggested that operating room nurses should be trained on anger management methods so that they can manage their anger in a stressful operating room environment. keywords: anger, anger expression, anger management methods, operating room nurses 1. introduction like love and joy experienced in human life, anger is a feeling observed in all living species in nature. like other feelings, anger is a feeling that affects many systems cognitively and physiologically. although anger is considered to be a negative emotion, it can be turned to a positive one if properly managed, and is universal. expression of anger is an acquired behaviour. majority of anger-related problems are caused by inappropriate expression of anger, and how critical it is to express the anger properly is still debated. one of the most important things to know about anger is that, emergence or experience of anger may not be avoided as anger is a natural emotion. therefore, feeling anger is something that can never be ignored. for an individual to experience his anger, which is a natural emotion, without harming himself and the environment, the individual should first recognize and identify anger, and then express it in a positive way (sülün, 2013:2). a very healthy and natural feeling when expressed appropriately, anger leads to significant problems in business life, personal relationships and overall quality of life when it becomes uncontrollable and destructive. in addition, failure to express anger appropriately depletes the individual’s energy and makes it difficult for the individual to control his behaviours (baran, 2009:1). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 28 hülya aslan, nilay gemlik, gülfer bektaş due to intensive working conditions, higher number of patients, paucity of budget and economic resources and conflicts within the team, nursing profession is considered to be an occupational group frequently exposed to anger. this study has been conducted to identify how operating room nurses express and control their anger. 2. overview 2.1. the concept of anger there are many definitions for the feeling of anger which we frequently experience in our daily and business life. lexically, anger is defined as the aggressive reaction, annoyance, rage and fury in response to frustration, offence or threat (www.tdk.gov.tr date of access: april 19, 2015). anger is one of the five basic emotions of a person, others of which are happiness, sadness, fear and hate (bilge and ünal,2005:189-196). anger is an important sign indicating that we are hurt, our rights are violated, our requirements or demands are not properly satisfied, or simply things go wrong (lerner,2014:5-15). as an inborn sense developing early in life, anger is a quite natural, universal, aggressionand violence-free and lifeenriching emotional reaction necessary to sustain in response to unsatisfied demands, undesired results and unmet expectations (albayrak and happy 2009: 57-69). based on these definitions, we experience the feeling of anger as a result of unrealized expectations in daily and business life, dissatisfaction about the life, unhappiness, encountering various undesired situations, and reduced tolerance. when expressed quite naturally and properly like other feelings, anger is indeed constructive and can enhance communication between individuals. however, anger may also turn to an uncontrolled behavioural abnormality potentially culminating in aggressive and highly destructive reactions. 2.1.1. functions of anger although anger is commonly perceived as a negative emotion harming people, it is in fact a humane, normal and healthy emotion. it is necessary for the individual to safeguard his presence and establish it in his environment. despite commonly connoting negativity, anger is also known to have a set of functions that make one’s life easier. the functions of anger are summarized as follows;  anger energizes,  anger prevents disturbing internal reactive behaviours that further infuriate one’s emotions,  anger facilitates the expression of negative feelings towards others,  anger also makes a person bold in achieving his demands,  anger warns a person that he is being irritated,  anger builds a defence against the risk of damage to ego resulting from the orientation of the concern to external conflicts (falcon, 2005: 1-22). expression of anger constructively fosters trust, intimacy and empathy in interpersonal relationships, and founds a basis for communication by giving a sense of self-control (batıgün and falcon, 2009: 1-193). while directly warning the individual for a problem and allowing him to protect himself, anger may, on the other hand, harm the individual and his environment if not controlled. hence, it has both positive and negative functions (soyka, 2000: 19-27). 29 hülya aslan, nilay gemlik, gülfer bektaş briefly, anger is an efficient, productive and motivating condition when not suppressed and denied. yet, when denied and suppressed, anger turns into a condition that harms individuals as well as their environment. the resulting frustration deteriorates relationships between people and its suppression leads to mental and physical disorders. furthermore, when intense feelings of anger are experienced, verbal and non-verbal aggression may occur. 2.1.2. causes of anger anger may develop both from internal and external causes. anger may be directed at a specific person or a specific event, as well as being a result of general individual problems. given the complex nature of anger, abundance of internal and external factors involved in evaluating anger is remarkable. internal causes: basic feelings underlying internal causes driving anger are jealousness, sadness, worry, loneliness, alienation, anxiety, frustration, injustice, not being understood and distress. such primary feelings lead to anger when they accumulate, harden and solidify (tatlıoğlu and karaca, 2013:1102-1123). external causes: injustice, physical harm and injury, getting harassed, attacked and threatened. while external causes of anger may be the physical environmental factors or individual disputes arising from disagreement, a variety of social and cultural factors introduced by the social life may also take place (tatlıoğlu and karaca, 2013: 11021123). many people and events we encounter in our daily lives and at work may trigger anger. it may be our mother, a friend, a man on the street, traffic jam or a work-related problem. while our own personal delusions may be responsible for our anger, it may also be the memories of a past frustrating event that drive the anger. frustration, rejection, unpleasant situations, disrespect for our personal rights as well as economic, cultural, social and biological factors we encounter at particular times in our lives constitute the stimuli that cause anger. 2.1.3. types of anger in literature, anger is studied in two ways depending on its occurrence and expression. 2.1.3.1. trait-destructive anger this refers to individual tendency to get angry. these individuals have higher levels of anger and get angry more often. since anger is employed destructively, feelings of hatred, revenge, hostility, resentment, sadness, aggression and fear are experienced more intensely (i̇lhan, 2014:162-165). destructive anger may cause problems in the work and family environment, interpersonal relationships, and/or the person’s quality of life. driving individuals to behave aggressively, anger is destructive and entails negative emotions (kaplan, 2007:1). 2.1.3.2. situational-constructive anger situational anger is the form of anger that has accumulated in the individual over time and that erupt suddenly. despite being apparently exhibited and called in the form of anger, situation anger is in fact underlain by the individual’s sense of disappointment, injustice, suffering, frustration, offence and dissatisfaction of expectations (ozmen, 2004: 30). in constructively expressing the anger, the angry person establishes a positive relationship with others. people exhibit direct and true, positive and healthy behaviours upon their feelings (karslı, 2008:23). 30 hülya aslan, nilay gemlik, gülfer bektaş 2.1.4. dimensions of anger there are dimensions that trigger, create and effect the expression of anger. typically, these are physical and physiological dimensions, cognitive and emotional dimensions, and behavioural and reactive dimensions. anger is addressed as an all-round structure composed of various variables including physiological (generally sympathetic stimulation, acceleration of heartbeat, increased blood pressure), cognitive (irrational beliefs), perceptual (subjective recognition of anger), and behavioural (mimics, verbal or behavioural expression) variables. in other words, the root causes of behavioural responses are not principally related to the events, but are rather associated with the meanings, interpretations and thoughts produced by the individual in his mind, as well as the beliefs underlying them. such ways of thinking are formed by social experiences we are involved in since early childhood. thus, anger and expression thereof may be said to be the collective outcome of biology and culture, our cognitive structures, and the body (sülün, 2013:37). anger is an emotion experienced in a broad spectrum of intensities ranging from very mild to intense. like other emotions, physiological and biological changes are felt together. if the person is attentive, his body informs him that he is angry. there are also physical signs of anger. the stimuli mobilizes the emotion, stress and tension are initiated, and energy-driving adrenalin excretion starts followed by more frequent breathing, faster heart beating, increased blood pressure, and the body and the mind get ready for the “fight or escape” response (kökdemir, 2004:7-10). cognitive and emotional approach reveals how the person perceives and interprets the anger. once anger is detected and redirected by the central nervous system, the intensity of anger is determined by the person’s response to anger and nature of this response, way of expressing the anger, person’s rational or irrational ways of thinking, beliefs, prejudices, past experiences and their association with events (herdem, 2009:25). depending on the type of stimulus and the individual cognitive structure, individuals display various reactions to the anger perceived. while some individuals tend to suppress or repress their anger under the effect of the community and the social system they are involved in, some attempt to exhibit their anger in different ways or express it (peters, 2004:28). 2.1.5. positive and negative aspects of anger besides its positive aspects, anger has also negative ones particularly when it is not expressed properly and healthily. when anger harms interpersonal relationships, it transforms into an unhealthy state of feeling. such mode of anger is destructive, harmful and includes aggressive behaviours. persons that cannot control their anger commonly display certain behaviours including severe and sudden outbursts of anger, utilizing anger as an instrument to gain power, substance abuse to cope with the underlying causes of anger, overreacting to critics and rejection, and denying the responsibility for their own behaviours and blaming others. transformed mode of anger may be in the form of “finding a whipping boy”, namely deflection. sometimes, it may be expressed in the opposite direction in the form of excessively polite reaction. and sometimes it may affect and impair mental health. it may lead to paralysis and tics. anger is the underlying reason of some psychosomatic diseases such as headaches, ulcer, reflux, gastritis, high blood pressure and asthma.. anger may be expressed in the form of slander, gossip and conspiracy as well. moreover, anger affects the individual’s cognitive abilities. individual starts to consider and judge the events from that point of view. since an angry person will judge events negatively, anger also represents a barrier to positive thinking. in this respect, sudden responses driven by anger constitute negative responses of anger. this feeling that cannot be exhibited in a positive way leads to negative results in interpersonal relationships (genç, 2007:18). 31 hülya aslan, nilay gemlik, gülfer bektaş in persons with high level of anger, regretting and drawing lessons from the negative experiences for which anger is expressed is less probable and interpersonal problems are more frequent (dilekler et al., 2014:44-59). anger is known as a negative emotion by almost everyone. in fact, anger dresses and protects the individual against tough and dangerous situations. by reminding that something has to change, anger helps to promote interpersonal relationships into a more productive and healthy form (i̇mamoğlu, 2003:35). when energy released by anger is employed constructively, anger is considered as a normal and positive feeling. by guiding the individual to react properly, it imparts to the individual strength, superiority and the ability to control events. when openly expressed, anger renders relationships meaningful, prevents interpersonal conflicts, and provides individual with the necessary motivation for change (tambağ and öz, 2005:11-22). on the other hand, unhealthy form of anger does not represent a tool for solving a problem, taking revenge, blaming and controlling others, and proving to be right. unhealthy anger leads to problems in business life and overall life quality, and causes impairment of health. anger is experienced healthily when it is expressed towards the appropriate person for appropriate reasons in a controlled manner. anger is a reaction to a negative experience. by reminding us that something has to change, this feeling helps to transform relationships and situations into a more efficient and positive state. 2.2. expression of anger 2.2.1. anger expression patterns expression of anger varies from person to person. these can be classified as inward anger, outward anger and controlled anger. while repression includes restraining and expressing anger, outward expression is manifested physically such as hitting, damaging objects, as well as verbally such as yelling, insulting and criticizing. controlling anger means that the individual is patient and tolerant in his relationships with others, and maintains an attitude of controlling the anger. in environments based upon a good communication, the individual desires to express his feelings comfortably and wants to be understood by others. in life, the milieu occasionally strives to control and guide the individual’s feelings and thoughts. people attempting to control and guide the feelings, thoughts and behaviours of others in life induce negative effects on people's psychological health. in this case, the primary response from the other person would be to deny and resist to the control directed to him. and this is manifested in the form of anger and exhibition of the angry behaviour. in other words, the individual harshly shows a furious reaction to the external control directed to him. the secondary response to be shown by the individual involved in such a communication may occur in the form of repressing the anger and resigning himself to the control of the external stimuli (özmen, 2006:39-56). whatever the sources of anger are, all people tend to get angry. however, how the anger is expressed or what induces the anger most varies by individual. individuals displaying anger aggressively without considering the cause of their anger fail to control their reactions as they usually act without thinking. and due to such uncontrolled behaviours, they experience problems in communicating with the people around and lose their friendship. on the other hand, an individual who has attained the emotional maturity allowing him to control his feelings and behaviours first tends to temper the same excitement of anger and exhibit it without hurting others. yet, individuals failing to exhibit their anger and constantly suppressing it may have some psychosomatic or depressive issues (yılmaz, 2007:171-172). 2.2.2. repressing the anger some people have great difficulty in expressing their anger, and block the expression of anger due to the intrinsic rules and obstacles they have. non-exhibited anger leads to physiological effects in the individual further culminating in physical health problems. it is important for such individuals to recognize their anger first. 32 hülya aslan, nilay gemlik, gülfer bektaş individuals with repressed anger have difficulty in accepting that they are angry. reaction of these individuals to anger usually consists of passive responses. such passive reactions to anger usually occur in the form of frowning, pout, sulk and resentment. these individuals hope that others recognize and read their thoughts. eventually, this may end up with suffering, resentment or frowning. individuals with repressed anger do not immediately exhibit an aggressive response when faced with an anger-triggering situation, but rather think for a long time over the severity of the situation and the reaction to give (özmen, 2006:39-56). finally, isolation from others and refusing to cooperate with them, silence, forgetfulness, psychosomatic disorders, depression and guilt, susceptibility to accidents, resistance to cooperation, addictive behaviours, excessive tolerance, unsociable behaviours, crying, hopes for violence and crime, intense discomfort and feeling of stress, unhappiness and tension, resentment and presence of mental suffering are the signs and symptoms of indirect expression of anger (soykan, 2003:19-27). 2.2.3. outward expression of anger outward expression of anger and frequently expressing it verbally is the uncontrolled release of anger. individuals outwardly expressing their anger need to learn how to express their anger in a more controlled and useful manner rather than releasing it in an uncontrolled way. some individuals act despotically in a way to hurt and humiliate others. even though such outward expression of anger provides a temporary relief, it depletes individual’s energy, makes it difficult to control the behaviours, and render the individual aggressive and offensive. if these individuals keep releasing their senses of anger in an exposed and uncontrolled manner, they will most probably face difficulties in their interpersonal communications, be excluded from communities they are involved, and begin to have conflicts in the family, at work and in social relationships (beyazaslan, 2012: 24). anger may also be released through verbal forms including yelling and reprimanding, as well as non-verbal forms including glowering or hostile glances. and further, anger may be outwardly expressed in indirect forms including vilification, defamatory humour or gossip (engin, 2004:9). 2.2.4. controlling the anger anger control means the acquirement of the ability to express anger properly. anger control is one of the most challenging emotions. it is important for the individual to understand what anger is and how to manage it. what’s critical in the control of anger is the positive rather than negative response to the situation arousing the anger. for individual happiness at home and workplace, psychological health and social cohesion, one of the important skills that an individual should have is the ability to control anger. in anger control, various skills such as using humour, maintaining a peaceful, flexible and accommodating attitude, relaxing, acknowledging, identifying and confronting the problem as well as focusing on and solving it, enhancing communication skills, sharing thoughts and feelings, changing the mindset, and being able to recognize the anger are effective ( özkaya up and buga, 2010:5059). anger and aggressive behaviours should never be perceived as a tool for problem solving, taking revenge, blaming others, justification for committing a crime, reason for violence, and a tool for advocacy and controlling others. what is healthier is to render personality as the protective instrument for the psychological and social health by constructively redefining this emotion, which initially appears negative, through appropriate trainings and methods (tatlıoğlu and karaca, 2013:1102-1123). 33 hülya aslan, nilay gemlik, gülfer bektaş 2.2.5. methods for controlling anger there are many methods teaching anger management, yet, the accurate method depends on the individual. the selection of the appropriate method should be based on the individual’s own personality and lifestyle. methods for controlling anger contain cognitive, emotional, communicational and behavioural dimensions. in the cognitive method, confronting the situation inducing the anger, avoiding it, describing the event from different angles, and thinking in different perspectives may direct the individual towards more accurate responses. in addition, individual should strive to control his anger through his own guiding sentences such as “do not let the anger seize you”, “take a deep breath” etc. (bilge and ünal, 2005: 189-196). next, in the emotional method, detecting the early signs of anger, being aware of the resulting feelings, discovering how the body reacts, reducing physical stimulation such as gritting teeth and fists, stomach cramps, difficulty in swallowing, biting lips, etc., and employing anger as a hint to change the thoughts and behaviours are effective (kökdemir, 2004:7-10). moreover, communication should be used properly to control anger. this means listening to the partner, calming down, correctly analysing the events, and criticizing positively instead of saying what immediately comes to mind during anger (karadal, 2009:75). the purpose of the behavioural method is to prevent aggressive behaviours. it further means creating efficient, namely productive anger behaviour, avoiding and protecting from destructive and provocative behaviours, and reviewing and reassessing the root causes of and underlying the anger as well as their results. hence, improper actions triggered by anger would be replaced by more favourable alternatives (www.aktuelpsikoloji.com). date of access: may 16, 2015). briefly, it is not always possible to change, fend off or move away from people that drive us angry. however, it is in our hands to learn how to control our reactions. acknowledging anger as a normal feeling and being aware of our reactions at the time of anger are critical for controlling the anger. 2.3. an overview on hospitals, operating rooms and nurses 2.3.1. the hospital environment hospitals are among the most complex organizations, and therefore have a great potential for conflicts. hospitals harbour various conflict inputs primarily including the involvement of many professionals from a broad range of disciplines, continuous service at full capacity, heavy workload, disputes among staff in the patient treatment process, complexity of roles, and uncertainty of tasks, leading to the frequent emergence of anger cycles. hospitals typically represent non-profit service organizations where all varieties of health services are produced continuously and cost-effectively. hospitals offer education, research and public health services, interact with the milieu in the healthcare industry, process various inputs into useful outputs, and display complex, expensive and specific various functions (yılmaz, 1996:5). furthermore, hospitals are organizations where different disciplines should collectively work across a common purpose. they offer vital services to people, race against time, employ distinct technologies, intensely interact with a big mass of people, and are hence exposed to conflicts and tension. 2.3.2. operating room setting operating rooms are typically the spaces where sophisticated technology, tools and equipment are used, various surgical techniques and methods are employed in the light of new and advanced information, and where teamwork is http://www.aktuelpsikoloji.com/ 34 hülya aslan, nilay gemlik, gülfer bektaş critical to take and implement proper decisions rapidly. since critical and high-risk procedures are conducted in operating rooms, their atmosphere frequently triggers anger. in addition, operating rooms are isolated sections of the hospital where required surgical treatment is conducted upon the diagnosis. an operating room can also be defined as a physical and functional space where surgical procedures are conducted. physical components of this space are the architectural design, engineering, equipment and surgical tools. functional components comprise systems used to apply the treatment safely, reliably and costeffectively (uludoğan, 2010:23). due to the working atmosphere inside, operating rooms accommodate major issues that may be faced by operating room nurses potentially leading to anger most frequently, including anaesthesia gases leaking from the anaesthesia machine, stab wounds, non-ergonomic equipment positions and postures, solutions used for sterilization/disinfection, exposure to radioactive rays, communication issues within the team arising from the difficulty to handle a self-opinionated group, stress due to the necessity of showing utmost attention for the specific nature of the work, psychosocial problems induced by dark and lack of daylight, and disarrangement of working conditions, particularly resting and meals. 2.3.3. operating room nurses while nurses working in an operating room provide an all-round dynamic nursing care demanding utmost attention and close observation in an isolated environment due to rapid circulation of patients, they are also supposed to use complex technological tools and equipment. such working conditions affect operating room nurses, frequently entailing anger resulting from intense stress. besides typical roles of getting acquainted with new knowledge and applications, new technological trends, implementing, organizing, inspecting, as well as evaluating the results, operating room nurses are also supposed to carry the skills of thinking straight, acting fast, being attentive, showing prudence, observing, being inclined to teamwork and developing good communication within the team (gümüşkaya, 2010:9). anger is also defined as an emotional response to frustration and intense stressors encountered at work. negative factors impairing patient care, conditions associated with the physical work environment, heavy workload, poor social support, high mass of patients, standing for a long time, and working indoors are the compelling factors for operating room nurses. at this point, stressful working environment, absence of common goals, poor consultation within the organizational process, competition between teams, and poor communication within the team cause nurses to tend to get into conflicts and experience a rage (bayrı, 2007:19). operating room nurses are exposed to myriad of risks in their work environment. these are typically stress-related factors including long-term work, heavy workload, time pressure, difficult or complex tasks, insufficient rest intervals, monotony and physically poor work conditions (location, temperature and lighting). besides, standing for long time depending on the service load, lack of sleep during on-call service, and eating disorders also add to the level of stress faced by nurses, culminating in physical, mental and social impacts (tan et al., 2009:67-68). operating room nursing has different characteristics from other nursing functions. nurses are supposed to work in harmony with other members of the team within such a critical field characterized by rapid scientific and technological advancements, intensive teamwork, high level of patient dependency, and strict intolerance to unsatisfactory knowledge and skills. to maintain teamwork within the operating room is a very difficult task. there is a set of problems that the team faces. these are mainly differences in the educational background, ambiguity of roles entailing false expectations, authority, power struggle, hierarchic conflicts, and personal characteristics of team members, all frequently leading to tension within the team and inducing anger in operating room nurses (uludoğan, 2010:25). 35 hülya aslan, nilay gemlik, gülfer bektaş 3. material and method the aim of this study is to identify how operating room nurses express and control their anger in the operating room. first, the researcher has attempted to identify the underlying causes of anger induced in nurses working in operating rooms that can be characterized as complex spaces harbouring myriad of risk factors strictly requiring a mistake-free teamwork, and further to figure out whether nurses are knowledgeable about anger management in such a complex environment. the research is a qualitative study where in-depth interviews were made through the semi-structured interview guide. this is because in a qualitative study, it is a quite strong tool as it better unveils the personal data, opinions, experiences and feelings of individuals, and is based on speech, which is the most common form of communication. qualitative research is based on the principle of induction. researcher is in an attempt to determine the key themes of the studied problem based on descriptive and detailed data gathered, and translate this data into a meaningful form, namely to develop a theory based on this data. case-related factors (environment, individuals, events, processes, etc.) are explored in a holistic approach with emphasis in how they affect the case (yıldırım and şimşek, 2013:63). upon the consent of participants, interview minutes and data were gathered through the semi-structured interview guide according to the convenience sampling and in-depth interview method. the in-depth interview method is a preferred method in comprehending, understanding and interpreting social reality. the interview form ensures the coverage of all dimensions and questions relating to the research problem. (cevahir, 2013:123). in designing the questions, 2 academic researchers have been consulted with. the convenience sampling method was selected as the study method because the researcher was in the intent of involving into the study the individuals agreeing to meet at hospitals. research was carried out through in-depth interviews as accompanied by eight operating room nurses. each interview lasted for 15 to 20 minutes. interview is composed of 10 questions. while creating the interview form, the emphasis was to include open-ended targeted questions that are clear and that suit the experiences of interviewees, allowing the individuals to provide more detailed answers. also during the interview, directive reactions were avoided. questions were structured in an order ranging from the private to common, with questions on sensitive issues being at the end of the form, and questions on knowledge and skills were logically associated with experiences (yıldırım and şimşek, 2013:156). questions on the guide were aimed at identifying the demographics of employees such as date of birth, gender, educational background, term of employment in the organization, as well as their way of expressing anger and their knowledge on and experiences in anger management. to ensure the validity and reliability of the research, interviews with participants were held in the operating room, and clear, detailed and deep-focussed data were gathered during the research through long-term interaction allowing researcher’s evaluation by the researcher, so that expert could review and the participant could assess the data gathered. 4. results anger may be found in majority of the employees regardless of their age, education and work experience. this study was conducted on operating room nurses at a private hospital through the in-depth interview method. briefly, the following results have been derived from the research. title: operating room nurse number of participants: 8 gender: female year of birth: between 1975-1989 36 hülya aslan, nilay gemlik, gülfer bektaş educational background: postgraduate degree (1), graduate degree (1), associate degree (1), high school (5) experience in the organization (years): 5 years and over in average the majority of the group defined anger as extreme tension and uncontrolled reactions resulting from injustice and dissatisfaction. seven participants acknowledged that they are generally angry while only one stated occasional anger. the general statement of the group is that they frequently experience anger upon the mistakes of others, when they are frustrated, not understood, and in case of poor physical environment, cold, hunger, staying indoors, conflict within the team, failure and feeling worthless. since causes of anger are common throughout the group, no association is built with their demographics. only two of the nurses stated that they occasionally repress their anger while other nurses stated that they generally raise their voices, satirize and talk with third parties about the person making them angry. four of the nurses stated that they experience frequent outbursts of anger while the remaining four stated rare outbursts. four of the nurses described control of anger as the ability to manage tension at the time of anger while three described it as the ability to understand the other party, and one stated that she has no knowledge about anger management. while five of the nurses preferred to move off during anger, one stated that she tries to take a deep breath, and two stated that they are unable to control anger and have no knowledge about it. while five of the nurses stated that they go angry when they work indoors without daylight, three stated that they are used to this situation and do not experience any anger. additionally, it was found that nurses with a term of employment of 5 years or above are stressed more when they work indoors. while eight of the nurses stated that they feel frustrated in the operating room, four stated that they get angry because of irresponsible, indifferent and insensitive behaviours of their colleagues, and the other four stated that heavy workload, long-time hunger, standing, and poorly limited resting drive them angry. 5. discussion majority of the operating room nurses frequently experience anger because of the risk factors in the operating room, long-time hunger and standing, poorly limited resting, staying indoors, mistakes within the team, heavy workload, and disinterested and irresponsible behaviours of colleagues in some cases. it has been found that the whole group frequently experiences anger commonly because of the mistakes of others, not being understood by others, poor physical environment, conflicts within the team, failure, and perfectionist attitudes of some. it has further been found that, at the time of anger, six of the nurses raise their voice, satirize and talk with third parties about persons making them angry, and outwardly express their anger, while two occasionally repress it. five of the nurses exhibit verbal aggression rather than physical aggression at the time of anger, and sleep disorders entailed by their on-call service cause them feel angry. eight of the nurses often display their angry outwardly through fury and shouting. four of the nurses often experience outbursts of anger at home and work. the nurses generally describe the control of anger as the ability to manage tension and understand the other party at the time of anger. the nurses commonly state that they fail to control their anger, and rather prefer to leave the site. 37 hülya aslan, nilay gemlik, gülfer bektaş finally, it has been found that majority of the operating room nurses tend to confront the situation causing the anger, avoid them, describe the events from different angles, and ask themselves the questions of “at the time of anger, where am i?, who am i with?, what happens?, what do i expect?” in order to consider different points of view. 6. conclusion anger is an emotional response necessary to survive directed to unsatisfied requests, undesired outcomes and unmet expectations. the most important thing to know about anger is that the emergence or experience of anger is unavoidable. for an individual to develop the ability of experiencing anger without harming himself and his environment, he needs to first recognize and identify anger, and then express it in a positive way. operating rooms are typically the spaces where sophisticated technology, tools and equipment are used, various surgical techniques and methods are employed in the light of new and advanced information, and teamwork is critical to take and implement proper decisions rapidly. while nurses working in an operating room provide an allround dynamic nursing care demanding utmost attention and close observation in an isolated environment due to rapid circulation of patients, they are also supposed to use complex technological tools and equipment, and therefore such tough working conditions induce intensive stress and frequently cause anger in them. they often express anger by expressing it outwardly. though they are cognitively aware of anger management, they fail to control anger at the behavioural side. in addition, the results of other researches provided below suggest that nurses fail to properly express and control their anger, and therefore experience various problems. in his study where the association between the way nurses express their anger and their overall health condition is explored, bayrı (20007) has found that nurses have a high level of anger and suffer some health problems as they fail to express their anger properly. in his study where the influence of anger level on job satisfaction is explored for nurses, baran (2009) has found that job satisfaction decreases as the scores of outward expression and repression of anger rise. in his study exploring for nurses the level of anger and way of expressing it in the working environment, i̇lhan (2014) has found that nurses fail to express their anger properly, leading to problems in their professional relationships. in his study exploring how nurses express their anger and communicate, yılmaz (2009) has found that, as the level of assertiveness increases, their level of anger is reduced and they manage to control their anger. surprisingly, there are already researches in the literature on the expression and control of anger in nurses, however there is no study specifically on operating room nurses. though some of the operating room nurses have a high level of cognitive awareness, they fail to control anger at the behavioural side. and finally based on the foregoing facts and results, i recommend that a training support should be procured from expert professionals on the control of tension and anger in operating rooms that are highly exposed to stress. references albayrak b, kutlu y., (2009), “ergenlerde öfke i̇fade tarzı ve i̇lişkili faktörler”, 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[16.05.2016] http://www.tdk.gov.tr/ http://www.aktuelpsiloloji.com/ international journal of commerce and finance, vol. 9, issue 1, 2023, 172-187 * * istanbul kent university, turkey, orcid: 0000-0002-7519-3068, cagri.pehlivanoglu@kent.edu.tr ** istanbul ticaret university, turkey, orcid: 0000-0002-2847-5126, ecivelek@ticaret.edu.tr *** turkey,orcid: 0000-0001-7943-043, emreeymur@gmail.com 172 the relationship between organizational identification and job satisfaction in retail industry m. çağrı pehlivanoğlu* mustafa emre civelek** emre eymür*** submitted: 13.03.2023 accepted: 24.05.2023 published: 06.07.2023 abstract the purpose of this study is to examine the relationship between organizational identification and job satisfaction among retail industry employees. quantitative data was gathered using questionnaires. to ensure the scales' validity, principal component analysis was used. cronbach alpha values were calculated to assess reliability. simple regression was used to test the theoretical model hypothesis. the analyses were carried out using the statistical software spss. as the result of the analyses performed, the main hypothesis was supported. it has been empirically proven that organizational identification has positive effect on job satisfaction. although these two constructs are subjects that have been researched for years, this research adds to the literature by investigating how the job satisfaction of employees working at a particular sector, the national retail industry, is affected within the framework of organizational identification. as a result, the study's findings indicated that further research should be done to improve organizational identification among employees in the retail industry to boost job satisfaction and decrease the risk of leaving. keywords: job satisfaction, organizational identification, retail industry. jel classification: j28, l2, l22 1. introduction the literature contains numerous definitions for retailing. in a brief explanation, a business relationship that exists between the producer and the consumer in matters such as marketing goods and services, offering them for sale, and consumer purchase is regarded as “retailing” mailto:cagri.pehlivanoglu@kent.edu.tr mailto:ecivelek@ticaret.edu.tr mailto:emreeymur@gmail.com international journal of commerce and finance m. çağrı pehlivanoğlu & mustafa emre civelek & emre eymür 173 (arıkbay, 1996). retailing facilitates the delivery of goods and services to customers, and retailers are essential for the trade and distribution of goods and services in an economic system. it is a labor-intensive industry with a large global workforce. the research sample, the turkish retail industry, is a prominent business line of the country's economy and employs 2.7 million people as of 2021 (tampf, 2022). business sectors, professions, and employee expectations are all subject to change on a global scale. the free-market economy provides consumers with a wide range of options, but this also makes it difficult for the competitive environment on retailers’ perspective. on the path to success, particularly in the retail, the relationship between companies that produce goods and services, and consumers who supply the goods or services are crucial (eymür & pehlivanoğlu 2022). within the context of the organization, job satisfaction of employees is an important factor to achieve organizational goals also in the retail, as it is in many other industries. in this perspective, organizational identification may be a way to deal with the fast changes while maintaining job satisfaction and maximize employee stability. the retail industry is one of the major industries in which employees frequently express a desire to leave their jobs and studies have been done in the literature on this issue (tian-foreman, 2009; coetzee et al., 2015; park et al., 2021). in this study, organizational identification has been used to frame discussions about job satisfaction. to collect data from the research participants, mael & ashforth (1992)'s organizational identification (oi) and brayfield & rothe (1951)'s shortened version of the job satisfaction (js) scale by judge, durham & kluger (1998) were used. various researchers have investigated the relationship between organizational identification and job satisfaction in the literature. however, sector-specific studies on this subject have been found to be scarce, particularly in the national literature. a quantitative analysis of the employees' organizational identification at national retail industry in this regard could produce key sectoral outcomes. this study therefore contributes to the body of knowledge by offering a more in-depth understanding of the evolution of employee job satisfaction and organizational identification in the light of recent data. international journal of commerce and finance m. çağrı pehlivanoğlu & mustafa emre civelek & emre eymür 174 2. conceptual background this section explains organizational identification and job satisfaction concepts considering the literature review. the research model was subsequently created. 2.1. organizational identification organizational identification is a psychological concept that refers to the degree to which an individual identifies with and feels a sense of belonging to a certain organization (lee, 1969; mael & ashforth, 1992). it is a form of social identification (ashforth & mael, 1989), which is the process by which people start to perceive themselves as belonging to a group and experience a sense of community with that group. organizational identification is a form of attachment to an organization (riketta & van dick, 2005), and it frequently comes with a sense of loyalty and commitment to the objectives and tenets of the organization. it can be influenced by the person's interactions and experiences within the organization, the culture and values of the organization, and the person's values and beliefs (edwards, 2005; edwards & peccei, 2007). organizational identification has its roots in social psychology and research on the conceptual structure dates to the 1950s and 1960s. during these dates, researchers began to investigate how individuals form psychological attachments to organizations and the factors that influence this process. organizational identification became a well-known field of study in the discipline of organizational behavior in the 1980s. researchers started delving deeper into the idea, looking at the variables that affect organizational identification and the effects it has on both people and organizations. researchers such as march & simon (1958), merton (1968), tajfel (1978), porter et al. (1979), turner (1985) and ashforth & mael (1989) contributed to organizational identification. march and simon (1958) made an early contribution to the organizational behavior and management literature by asserting that organizational identification has an apparent role in the “functioning of organizations”. years later, merton (1968) introduced the idea of "reference groups" in his studies of social identity and social structure. according to this theory, people use reference groups to define their own identities and understand their place in society. other international journal of commerce and finance m. çağrı pehlivanoğlu & mustafa emre civelek & emre eymür 175 researchers later built on the concept, starting to investigate how people develop psychological attachments to organizations and how these attachments affect both individual behavior and organizational performance. another notable contribution to the development of organizational identification concept is the “social identity theory” developed by tajfel (1978). social identity theory expresses that an individual's sense of who they are is derived from the groups they belong; and the components of a person's self-concept are their social identity and personal identity. this theory asserts that people seek out prestigious and admirable groups to join to strengthen their social identities. porter et al. (1979) added to the field's understanding of organizational identification and “how it relates to other organizational factors” by contending that organizational identification plays a key role in predicting a person's level of commitment to their organization, as well as their level of job satisfaction and risk of leaving. later, turner (1985) enhanced the literature by “the self-categorization theory”. this theory indicated that people evaluate themselves, others, and social situations by using their mental representations of the groups they belong to as a guide. the organizational perspective of identification theories was influenced by ashforth & mael (1989). organizational identification describes how a person feels as though they are a part of an organization and how they experience the achievement and failure of that organization as being like their own. people who have strong organizational identification view the organization's existence as influencing how they define their identities. people are more likely to develop a strong organizational identification when they start to feel that their organization's values align with their own (ashforth & mael, 1989). organizational identification has been found to have several significant consequences for both individuals and organizations. individuals can benefit from increased job satisfaction and commitment, as well as improved job performance and well-being (efraty & wolf, 1988 ; lee et al., 2015). for organizations it can lead to increased organizational effectiveness and performance. the scale created by mael & ashforth (1992) is used in this study as the measurement tool. international journal of commerce and finance m. çağrı pehlivanoğlu & mustafa emre civelek & emre eymür 176 2.2. job satisfaction job satisfaction is the sense of fulfillment and contentment that comes from doing enjoyable and rewarding work. it is the degree to which an individual enjoys or dislikes their job, and it is influenced by several factors, including the nature of the work itself (spector, 1997), the working environment (aziz et al., 2015; pandey & asthan, 2017), and the individual's relationship with coworkers and supervisors (straiter, 2005; stringer, 2006). job satisfaction is a determinant component of total well-being and can have a significant impact on a person's mental (lu et al., 1999) and physical health (verbrugge, 1982). low levels of job satisfaction can lead to increased stress (appleton et al., 1998), absenteeism (scott & taylor, 1985), and turnover (mbah & ikemefuna, 2012), whereas high levels of job satisfaction can lead to increased productivity (nanda & browne, 1997; hoboub et al., 2017), motivation (danish & usman, 2010; van scheers & botha, 2014), and engagement (abraham, 2012; simone et al., 2018). job satisfaction has been studied and debated for many years. hoppock (1935) conducted one of the first studies to investigate the concept in the 1930s. later, a remarkable study that sheds light on people's satisfaction is maslow (1943)’s "hierarchy of needs" on determining the phases of human growth (pehlivanoğlu, eymür & civelek, 2022). early job satisfaction theories focused on the individual factors that influence an individual's job satisfaction, such as personality, skills, and abilities. later theories investigated the role of the work environment and employee-supervisor relationships in determining job satisfaction. researchers have recently begun to focus on broader social and economic factors that influence job satisfaction, such as the state of the economy, job security, and work-life balance. overall, the study of job satisfaction has evolved over time to take a wide range of factors into account. there are many different theories of job satisfaction. some of the most popular and extensively researched ones are as follows: the two-factor theory by herzberg, et al. (1959); the job characteristics model by hackman & oldham (1975); range of affect theory by locke (1976); the personenvironment fit theory (lawton, 1983; 1985); the social exchange theory (homans, 1958; blau, 1964). job satisfaction theory and its evaluation on people also benefited from the development of the "minnesota satisfaction questionnaire" by weiss et al. (1967) and "job international journal of commerce and finance m. çağrı pehlivanoğlu & mustafa emre civelek & emre eymür 177 descriptive index" by smith et al. (1969). the complex factors that affect a person's feelings about their work cannot be fully explained by a single theory. instead, many theories present various viewpoints on the elements that affect job satisfaction. it is an important field of research due to the potential impact on individual well-being and organizational performance. in this study, the scale developed by brayfield & rothe (1951), as condensed by judge et al. (1998), is used as the measurement tool. 2.3 theoretical model the purpose of this study was to determine the relationship between the predictor variable organizational identification and the dependent variable job satisfaction. figure 1 depicts the theoretical model developed in accordance with the theoretical underpinnings of these notions. figure 1. theoretical model 3. hypothesis development studies showed that a variety of factors influence organizational identification and job satisfaction. job satisfaction is frequently influenced by factors such as an employee's salary, promotion opportunities, job security, coworkers, and workplace conditions. organizational identification is generally related to the values, culture, image, and strategies of the employees' organizations. employees who have an intense sense of organizational identification adopt their jobs, roles, organizational goals, values, and culture. these employees are highly motivated and feel like they are a part of the organization's success. this bond encourages employees to contribute more to the organization and make a greater effort into the organization's success. studies examining the relationship between organizational identification and job satisfaction have increased since the second half of the twentieth century. many studies investigating the international journal of commerce and finance m. çağrı pehlivanoğlu & mustafa emre civelek & emre eymür 178 relationship between the two concepts have found positive relationships (van dick et al., 2004; karanika-murray et al., 2015; li et al., 2015; başar & basım, 2015; yavan et al., 2018; sökmen, 2019; bayram, 2019; subba, 2019). when previous research findings in the literature are considered, it is predicted that employees with low organizational identification will be less satisfied with their jobs in general. these employees are expected to have difficulty adapting to their organizations' values, culture, and goals, which reduces their job satisfaction. the following hypothesis was developed for the research objectives, considering the prior findings and the apparent relationship between the two concepts in the literature. h1: organizational identification has positive effect on job satisfaction 4. research methods the research scales were derived from earlier studies. quantitative data has been gathered using questionnaires. principle component analysis has been conducted to verify the validity of the scales. to evaluate reliability cronbach alpha values were computed. the theoretical model hypothesis has been tested by means of simple regression. the statistical programs spss has been used to carry out the analyses. 4.1. sampling and measures the constructs in the theoretical model of the research are evaluated using scales derived from existing literature. 5-point likert scales were utilized, ranging from strong disagreement to strong acceptance. over 400 questionnaires were distributed, with 370 of them being valid. three demographic questions and two scales comprise the measurement tools. to measure organizational identification, the scale suggested by mael & ashforth (1992) with 6 items was used; and to measure job satisfaction the scale suggested by brayfield & rothe (1951) and shortened by judge et al. (1998) with 5 items were used. all the items are gathered using a 5level likert-type measurement tool. the research universe comprises of employees working at retail industry in türkiye. the demographic distribution of the sample population is as follows: 43% are between 18-29, 36% are between 30-39, 18% are between 40-49, %3 is between 50international journal of commerce and finance m. çağrı pehlivanoğlu & mustafa emre civelek & emre eymür 179 59 years old. 50% of them have only high school, 21% have associate, 24% have graduate, 5% have postgraduate degree. in terms of work experience 30% of them have 0-5 years, 21% have 6-10 years, 24% have 11-15 years, 14% have 16-20 years, 11% have above 21 years. 4.2. construct reliability and validity the principal component analysis was conducted to verify the validity of scales. the fact that the kmo value of 0.824 is greater than 0.80 indicates that there is an excellent level of correlation between the variables suitable for factor analysis. the fact that the p value of 0.000 in the bartlett sphericity test is less than 0.05 confirms that the relationship between the variables is sufficient for factor analysis. the data is suitable for factor analysis. to ascertain the validity of the scale, first, confirmatory factor analysis was applied, and it was determined that the validity of the scale was in 2 dimensions. then, the independent variables were added to the analysis and principal component analysis was applied. msa (measure of sampling adequacy) values in the anti-image correlation matrix were examined to determine the sufficiency of the research questions for factor analysis. since all values found diagonally here are greater than 0.50, the dimensions are found to be suitable for factor analysis. the results of the factor analysis in the direction of the rotated component matrix are given in table 1. in this study, it is observed that the factor weights of the questions belonging to the variables are greater than 0.5. total variance explained value reached 55 percent. table 1. results of factor analysis variables items factor loads organizational identification (oi) oi0510 0.757 oi0106 0.751 oi0409 0.674 oi0308 0.609 oi0207 0.605 job satisfaction (js) js0202 0.797 js0101 0.786 js0505 0.759 js0404 0.733 js0303 0.545 international journal of commerce and finance m. çağrı pehlivanoğlu & mustafa emre civelek & emre eymür 180 table 2 displays the dimensions' cronbach's alpha and pearson correlations values. table 2. construct reliability and correlation variables 1 2 1. organizational identification 2. job satisfaction .341* cronbach α .715 .779 *p < 0.05 4.3 test of the hypotheses the theoretical model hypothesis has been tested by means of simple regression. table 3 and table 4 indicate model summary and anova results respectively. table 3. model summary model r r square adjusted r square std. error of the estimate 1 ,341 ,117 ,114 ,75349 table 4. anova model sum of squares df mean square f sig. 1 regression 27,576 1 27,576 48,570 ,000b residual 208,933 368 ,568 total 236,509 369 table 5. results of tests relationships standardized coefficients unstandardized coefficients hypotheses results oi → js 0.341* 0.328 h1 supported *p < 0.05 as seen in table 5, h1 hypothesis is confirmed. this means organizational identification (oi) has positive effect on job satisfaction (js). international journal of commerce and finance m. çağrı pehlivanoğlu & mustafa emre civelek & emre eymür 181 5. discussion throughout the last few decades, job satisfaction has been a popular research topic. many theoretical models have been developed, and studies from various geographies have provided a better understanding of the causes and consequences of job satisfaction. according to the study's findings, the analyses confirmed the main hypotheses. the predictor variable, organizational identification, has a direct effect on the job satisfaction dependent variable. many studies have discovered a similar relationship between organizational identification and job satisfaction (van dick et al., 2004; karanika-murray et al., 2015; li et al., 2015; başar & basım, 2015; yavan et al., 2018; sökmen, 2019; bayram, 2019; subba, 2019). these findings show that when employees feel a strong bond, organizational identification, with their organizations, they typically have a greater sense of job satisfaction. this connection can foster a sense of ownership and affiliation in the company, which in turn can boost job satisfaction of individuals. the former studies demonstrate the significance of organizational identification in determining job satisfaction in samples from various industries. although the retail sector has served as a research sample for many studies in the national literature, the relationship between organizational identification and job satisfaction has not received much attention in this sector. in retail industry, job satisfaction of employees is crucial, particularly for positions that involve frequent interaction with customers. employees who are not satisfied may act negatively toward customers and underperform at work. 6. conclusion research has shown that individuals who have a high level of organizational identification tend to have higher levels of job satisfaction than those who have a low level of organizational identification. the reason for this relationship is that individuals who feel a strong sense of belonging to their organization are more likely to feel a sense of alignment with the organization's values and goals. additionally, people who feel deeply a part of their organization are more likely to feel valued and appreciated by it. therefore, in turn, can lead to increased job satisfaction as individuals believe their contributions are valued and that they are having a meaningful impact at work. international journal of commerce and finance m. çağrı pehlivanoğlu & mustafa emre civelek & emre eymür 182 it is anticipated that the retail sector will continue to grow rapidly as a substantial business sector of the national economy. to support this expansion, the industry needs a skilled labor force. retaining a trained manpower and generating shortand long-term plans are crucial in this regard. companies must be thoughtful and strategic in their human resources policies because all individual's performances are essential factors in the performance of workforce. employees who are dissatisfied with their jobs may eventually leave. at this point, the most prevalent process for long-term success is moving the workforce to a level of organizational identification that will respond to business needs and individual job satisfaction. therefore, strategies that invest in human resources that will serve the sector should be adopted for businesses operating in retail sector to achieve stable growth rates and to make their performance permanent, considering the possibility that leaving every job will disrupt the workforce competency. giving employees the chance to participate in decision-making and problem-solving is a way that organizations can promote a sense of ownership and responsibility among staff members to encourage organizational identification. also, recognizing and rewarding employees for their contributions to the company is another way to inspire employees to work harder and pursue success as a result, helping to foster organizational identification. employees who have high organizational identification are better able to comprehend the enterprises' goals and put forth more effort to do so. consequently, happy workers improve the company's image as a great place to work, which helps it recruit more talented workers. the findings are only applicable to this research sample size. the study has some limitations, and the findings must be evaluated in this context. the study's findings are based on the perspectives of 370 retail workers in türkiye. a more comprehensive analysis can be carried out by working with a diverse sample. according to the findings of this study, job satisfaction is related to an individual's organizational identification. in future research, the relationship between these two constructs in retail industry could be tested using additional organizational research dimensions and various demographic variables. international journal of commerce and finance m. çağrı pehlivanoğlu & mustafa emre civelek & emre eymür 183 references abraham, s. 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(2018). the effect of charismatic leadership and organizational identification on job satisfaction and turnover ıntention. journal of business research-türk, 10(1), 898913. international journal of commerce and finance, vol. 8, issue 2, 2022, 57-74 * *stie malangkucecwara, indonesia, muslichahmachali21@gmail.com **stie malangkucecwara, indonesia, abdulkadir@stie-mce.ac.id *** stie malangkucecwara, indonesia, tutik.arniati@gmail.com 57 moderated mediation model of the effect of managerial ownership on financial performance muslichah muslichah* abdul kadir usry** tutik arniati*** submitted: 05.10.2021 accepted: 07.03.2022 published: 01.11.2022 abstract this research examines the impact of managerial ownership on financial performance with earning management as an intervening variable and audit quality as a moderating variable. this study's population included all manufacturing enterprises in the basic industrial and chemical industries listed on the indonesia stock exchange between 2016 and 2018. the sampling technique used in this study was purposive sampling, which yielded 60 observations from 20 companies. the results indicated that (1) managerial ownership has a positive impact on financial performance, (2) audit quality has a positive impact on financial performance,(3) the relationship between managerial ownership and financial performance is not mediated by earning management, (4) audit quality moderates the impact of managerial ownership on financial performance. keywords: managerial ownership, financial performance, earning management, audit quality jel classification: g34; l25 international journal of commerce and finance muslichah muslichah & abdul kadir usry & tutik arniati 58 1. introduction good corporate governance (gcg) is a structure implemented to regulate and control company operations with standards that regulate the behavior of owners, directors, and managers. gcg is intended to ensure the company's accountability to stakeholders. corporate governance practices will increase investor confidence, reduce the cost of capital, and create sustainable company performance (international finance corporation, 2014). applying a good corporate governance mechanism in the company's operational activities can positively signal investors and the public that management and company have done their job properly and well so that its performance can increase. there has been a lot of research done on the impact of corporate governance on firm performance. many studies found that governance has a positive effect on company performance (tam & tan, 2007; munisi & randøy, 2013; vo & nguyen, 2014; akdogan & boyacioglu, 2014; wahyudin & solikhah, 2017; mahrani & soewarno, 2018; danoshana & ravivathani, 2019; muhammad & damayanti, 2020; hermuningsih et al., 2020). further different results were found by muhammad & damayanti (2020), khatib & nour (2021), wu (2021) that corporate governance has a negative effect on company performance. in contrast, other researchers found that corporate governance had no impact on company performance (grove et al., 2011; brenes et al., 2011; castaner and kavadis, 2013; shank, hill, and stand, 2013; murhadi, 2021). corporate governance represented by managerial ownership influences the company’s financial performance. a manager who owns a considerable number of shares will be more driven to maximize performance since he will benefit from his actions. according to vafeas and theodorou (1998), when managers hold a large percentage of shares, they will be keen to maximize their performance. conflicting results have been found in studies on the relationship between managerial ownership and corporate success. according to previous research, boosting managerial ownership in the firm is critical in reducing agency problems and encouraging managers to improve firm performance (balatbat et al., 2004; li et al.,2007; alabdullah, 2018; al farooque et al., 2019). on the other hand, other studies, such as acharya and bisin's, have found a negative association between managerial ownership mechanisms and business performance (2009). previous research (aluchna & kaminski, 2017; ghazali, 2020) has found no link between managerial ownership and company performance. international journal of commerce and finance muslichah muslichah & abdul kadir usry & tutik arniati 59 the researcher decided to employ another variable to moderate the association between managerial ownership and financial performance due to the inconsistency of prior research findings. the authors seek to review the influence of managerial ownership on financial success by including earnings management as a mediation variable. earnings management can be caused by an information asymmetry between management (agent) and the owner (principal) (harahap, 2018; priyastiwi et al., 2020; widagdo et al., 2021; bachmid et al., 2021; surbakti & sudaryati, 2021) . the manager delivers the owner a signal about the company's state but does not convey information based on the actual situation. in these cases, a control mechanism is required to align the opposing objectives of both parties. one of the mechanisms that can be used is the managerial ownership mechanism. in addition to examining earnings management mediation variables, this study also includes audit quality as moderating variable. an audit is one of the essential aspects of governance mechanisms, with the primary goal of improving the quality and effectiveness of financial management and internal audit systems. audit plays a role in reducing information asymmetry and conflicts of interest between shareholders and managers (arens et al., 2010). one of the control mechanisms that can help to reduce agency conflict is auditing (zhou et al., 2018; ali et al., 2020). the higher the quality of the audit, the better the company's performance. independent auditors can reduce debt financing costs (hou et al., 2019). high audit quality will produce appropriate recommendations for the company in achieving its objectives (sayyar et al., 2015). the impact of managerial ownership on financial performance is investigated in this study, with earning management as an intervening variable and audit quality as a moderating variable. the motivation of this study is twofold. first, this study analyzes the mediating effect of earning management on the relationship between managerial ownership and financial performance. second, examine the influence of managerial ownership on financial performance with audit quality as a moderating variable. 2. literature review 2.1 agency theory according to agency theory, the company's internal relationships constitute a contract between the owner (principal) and the agent to conduct business in the principle's best interests. agents international journal of commerce and finance muslichah muslichah & abdul kadir usry & tutik arniati 60 (management) may act against the interests of the owner of the company. a conflict of interest occurs when management has an interest in obtaining rewards while the owner of the company has an interest in maximizing the welfare and profits of the company. managerial ownership can reduce conflicts or agency problems between shareholders and company management. it is said that the greater the management's ownership of the firm, the fewer the stakeholder conflicts, and the lower the agency problem and cost associated with it (friend and lang, 1986; jensen and meckling, 1976). because insiders have a motive to safeguard shareholders' interests, they require less oversight from the board, which is a costly monitoring option (vafeas, 1999). it's also claimed that when the incentive alignment improves, more agent ownership lessens the requirement for monitoring. 2.2 the effect of managerial ownership on financial performance prior research has focused chiefly on the financial performance effects of various corporate governance mechanisms. the governance framework of a company can reduce information asymmetry and agency costs (florackis, 2008; tahir et al., 2019; huu nguyen et al., 2020). the corporate governance structure is formed by 2 (two) governance mechanisms, namely: 1) internal governance mechanisms (i.e., board of commissioner, audit committee) and 2) external governance mechanisms (i.e., various policies and regulations). both mechanisms are expected to offer corporations monitoring services. evidence suggests that certain governance mechanisms outperform other governance mechanisms in the system (holm and schler, 2010), meaning that adherence to the corporate governance code is a must for enhancing financial performance. separation of ownership and control has long been identified as a source of disagreement between shareholders and management. prior research has demonstrated that the ownership structure, such as managerial ownership, is one of the essential components in corporate governance processes. previous research has shown that managerial ownership of a company is a critical component in reducing agency disputes and improving company performance (alfadhl & alabdullah, 2013; rashid, 2016; jusoh, 2016; serly & zulvia, 2019). the financial performance of a corporation is influenced by corporate governance, which is represented through managerial ownership. management who buys shares of the company will become the owner of the company. managers will act as owners and controllers of the company, which makes them work harder to manage the company. their efforts resulted in increased company performance. furthermore, li et al. (2007), jusoh & ahmad (2013), alabdullah (2018), al international journal of commerce and finance muslichah muslichah & abdul kadir usry & tutik arniati 61 farooque et al. (2019) all agree that increased managerial ownership improves business performance. h1: managerial ownership influences the company’s financial performance. 2.3 the effect of audit quality on financial performance an auditor plays a crucial role in managing and controlling accounting and financial activities, ensuring that financial statements are transparent and of high quality. an auditor's tasks include detecting errors and frauds, detecting deceptive data, and presenting them honestly for transparency. auditing is a component of governance that is important in both the private and public sectors. in both areas, a professional and independent auditor can promote transparency. audit quality is a critical component of a healthy equity market. an audit can boost the value of financial statements and directly support corporate governance actions through transparent financial reporting. in previous research, audit quality has been shown to improve a company's performance (elewa & el-haddad, 2019; sayyar et al., 2015; sattar et al., 2020). h2: audit quality has an impact on a company's financial performance.. 2.4 earnings management mediates the effect of managerial ownership on performance. according to research, corporate governance has a negative impact on earnings management. (kamran and shah, 2014; mahrani & soewarno, 2018; wahyuningsih & rasmini, 2020). managerial ownership can minimize differences in interests between company owners and managers. managerial ownership will make managers feel they own the company, so managers will avoid actions that can harm the company, including reducing managers' motivation to practice earnings management.furthermore, the rate of profit earned is closely tied to earnings management. when determining an entity's success rate, profit is frequently used as a benchmark. as a result, management is incentivized to manage earnings. the information presented by management to the owner cannot be guaranteed to reflect the company's true financial statement. earnings management actions have the potential to decrease the quality of profit information provided in financial statements. the poor quality of information presented in the financial statements will harm the organization's financial performance. international journal of commerce and finance muslichah muslichah & abdul kadir usry & tutik arniati 62 h3: earnings management mediate the effect of managerial ownership on financial performance 2.5 audit quality moderates the relationship between the influence of managerial ownership on performance the competence of the audit committee to oversee the financial reporting process and ensure truthful and fair financial reporting is defined by its audit committee skills (abdulrahman, 2020). according to amin et al. (2018), an audit committee meets at least four times a year and includes one person with financial competence linked to earnings quality. mcmullen (1996) also states that the existence of an audit committee results in reduced errors, irregularities, and other indicators of unreliable financial reporting. the effectiveness of supervisory functions by external auditors requires high independence. managers perceive independent auditors as more vigilant to agency concerns, according to agency theory, because an auditor is expected to provide reasonable confidence that financial statements are free of significant misstatements, and so protect stockholders' interests. auditors of higher caliber are less likely to accept dubious accounting procedures and are more likely to report errors and irregularities uncovered during the audit. it is hypothesized that audit quality moderates the relationship between managerial ownership and financial performance. under high perceived audit quality, increased managerial ownership likely to increase financial performance. in other words, higher audit quality and coupled with higher managerial ownership will improve financial performance. improved audit quality reduces knowledge asymmetry and conflicts of interest between shareholders and managers (arens et al., 2010). as a result, auditing is viewed as a monitoring method that aids in improving financial performance. the statements lead to the following hypothesis: h4: audit quality moderates the effect of managerial ownership on financial performance based on the introduction, literature review, and theoretical basis, which have been explained previously, the research model can be described as follows. international journal of commerce and finance muslichah muslichah & abdul kadir usry & tutik arniati 63 figure 1. research model 3. research methodology this research aim is to examine the causal relationship between variables studied through hypothesis testing. causality research aims to explore the effect of one variable on other variables. the purpose of this research is to look into the impact of corporate governance on financial performance, with earning management as an intervening variable and audit quality as moderating variable. the data used in this study is secondary data obtained through available sources. the population of this study included all manufacturing enterprises in the basic industrial and chemical industries listed on the indonesia stock exchange between 2016 and 2018. the basic and chemical industrial sector companies were chosen as research objects because these sectors have an important role in the indonesian economy. in the 2016 2018 period, the sector had high growth and was recorded as the sector with the second highest growth after the financial sector. the technique for sampling in this study used a purposive sampling method and obtained 60 observations from 20 companies. sem (structural equation modeling) is used in this work to analyze data using a variance-based approach (vb-sem) and pls-sem (partial least square path modeling) approaches. pls (partial least square) has various advantages, including modeling multiple dependents and independents, handling multicollinearity between independents, and making more accurate predictions. sem (structural equation modeling) is used in this work to analyze data using a variance-based approach (vb-sem) and pls-sem (partial least square path modeling) approaches. pls (partial least square) has various advantages, including modeling multiple dependents and independents, handling multicollinearity between independents, and making more accurate predictions. managerial ownership financial performance earning management audit quality international journal of commerce and finance muslichah muslichah & abdul kadir usry & tutik arniati 64 managerial ownership refers to a company's management owning shares. the proportion of share ownership owned by the management of the total outstanding share capital is used to calculate managerial ownership. the ability of a corporation to create profit from operations through various business activities is referred to as financial performance. return on assets (roa) is a typical metric for assessing a company's financial performance and profitability (belu and manescu, 2013). roa represents a better measure of the ability of the firm to generate returns on its portfolio of assets (san & heng, 2013; olalekan & adeyinka, 2013). earnings management is the manager’s choice to use certain accounting policies to achieve personal goals. the measurement used to measure earnings management variables in this study calculates discretionary accruals using the modified jones model (dechow et al., 1995). a dummy variable was used to assess auditor quality in this study. if a company utilizes a big four public accounting firm to audit financial statements, the value is 1, but if it hires a non-big four accounting firm, the value is 0. 4. findings and discussion 4.1 research findings table 1 below is used to test the hypothesis of this study. table 1. path coefficient original sample (o) sample mean (m) standard deviation (stdev) t statistics (o/stdev) p values aq  fp 0.563 0.574 0.165 3.418 0.001 em  fp 0.010 0.006 0.034 0.280 0.779 mo  em -0.150 -0.150 0.090 1.667 0.096 mo  fp 2.066 2.096 0.241 8.572 0.000 (mo*aq)  fp 1.185 1.210 0.218 5.426 0.000 hypotheses testing the effect of managerial ownership on financial performance table 1 shows that managerial ownership has a significant impact on financial performance with p-value < 0.05 (0.000 < 0.05) with t statistics of 8.572. as a result of these findings, international journal of commerce and finance muslichah muslichah & abdul kadir usry & tutik arniati 65 managerial ownership appears to have a significant and positive effect on financial performance. thus h1 is accepted. the effect of audit quality on financial performance table 1 shows that audit quality has a significant effect on financial performance with p-value < 0.05 (0.001 < 0.05) with t statistics of 3.418. so these results indicate that audit quality has a significant and positive effect on financial performance. thus h2 is accepted. earnings management mediates the effect of managerial ownership on performance. according to hypothesis 4, firms with higher managerial ownership will have better earnings management and, as a result, a higher level of performance.. table 1 shows that the p-value of the effect of managerial ownership on earnings management is 0.096 > 0.05. furthermore, table 1 also shows that the effect of earnings management on performance is not significant (p-value = 0.779 > 0.05). thus, because the two paths are not significant, managerial ownership does not appear to mediate the effect of managerial ownership on performance. thus hypothesis 3 is not supported. audit quality moderates the relationship between the influence of managerial ownership on financial performance the result suggests audit quality strongly strengthens the effect of managerial ownership on performance (p-value 0.000 < 0.05). the results denote that the higher audit quality, the stronger the impact of managerial ownership on performance. thus, h4 is accepted. 4.2 discussion 4.2.1 the effect of managerial ownership on financial performance managerial ownership shows that the manager owns shares of the company or the manager is a shareholder of the company. the finding is indicated by the percentage of share ownership by the management. the higher the managerial ownership, the more productive actions of managers in maximizing firm performance. managerial ownership can assist shareholders and management align their interests. the greater the proportion of managerial share ownership, the bigger the company's performance. managers who are also stockholders in a company will match their managerial interests with their shareholder interests. meanwhile, managers who are not shareholders in a corporation may only be concerned with their interests. jensen and meckling (1976) claim that expanding managerial ownership in a corporation can help to lessen the conflict of interest between agent and principle. managers who are also international journal of commerce and finance muslichah muslichah & abdul kadir usry & tutik arniati 66 shareholders will increase their wealth as individual shareholders by enhancing the company's value. according to katper et al. (2018), boosting managerial ownership is vital for promoting enhanced organizational performance. according to previous research, increasing managerial ownership in the firm is a critical factor in reducing agency problems and encouraging managers to improve firm performance (balatbat et al., 2004; li et al.,2007; alabdullah, 2018; al farooque et al.,2019) 4.2.2 the effect of audit quality on financial performance the findings of this study suggest that a higher level of audit quality leads to an improvement in firm financial performance. financial reports must be audited by an independent and qualified auditor. auditors must conduct themselves professionally and base their work on appropriate standards or regulations, as well as the public accountants' code of ethics. the information presented in financial reports is used by stakeholders in making economic, political, and social decisions. therefore, companies need to use the services of auditors who provide adequate audit quality in auditing financial statements (darwin, 2012). financial reports audited by a qualified auditor will help reduce information asymmetry and protect stakeholders by providing reasonable assurance that management's financial reports are free from material misstatement (hassan & farouk, 2014). the audit results from a reliable external auditor will be used by investors to form the basis for decisions on the allocation of company resources. when investors have confidence and trust in financial reports that external auditors have audited, they are interested in providing more funds to the company, which will increase financial performance. elewa & el-haddad (2019) investigated non-financial firms, and their findings show that audit quality positively affects financial performance. 4.2.3 earnings management mediates the effect of managerial ownership on financial performance. share ownership by management in a company has not been proven to minimize earnings management practices. the average percentage of managerial ownership in this study is only 7,868%. this percentage of managerial ownership is relatively small compared to the total outstanding shares of the company, so it does not play a role in decision-making. these results international journal of commerce and finance muslichah muslichah & abdul kadir usry & tutik arniati 67 are consistent with research conducted by pambudi et al. (2020), nguyen et al. (2020), and wahyuni & hamidi (2020) that managerial ownership did not affect earnings management. 4.2.4 audit quality moderates the influence of managerial ownership on financial performance. audit quality services will increase the confidence of users of financial statements that financial statements are qualified financial reports, so they can be used as a basis for making economic decisions. there will be good information disclosure with a quality audit, making it easy for principals to oversee their agents. financial statements are the source of information used to make choices by managers who rely on fundamental information. the company's published financial statements have gone through an auditing process. from these financial statements, the owner can assess the company's financial performance. the higher managerial ownership and supported by good audit quality will certainly encourage an increase in company performance. 5. conclusion based on the description of the research results and discussion, the conclusions from this study can be drawn as follows. first, managerial ownership has a significant positive effect on financial performance. the finding indicates that the higher managerial ownership, the better the financial performance. the study supports the results of the past empirical studies that managerial ownership affects financial performance (balatbat et al., 2004; li et al.,2007; alabdullah, 2018; al farooque et al.,2019). second, the effect of audit quality on financial performance is positive and significant. the finding indicates that the higher the audit quality, the better the financial performance. the study supports the results of the prior empirical studies that audit quality affects financial performance (elewa & el-haddad, 2019; sayyar et al., 2015; sattar et al., 2020). third, earning management does not mediate the relationship between managerial ownership and financial performance. fourth, the impact of managerial ownership on financial performance is moderated by audit quality. the findings suggest that the influence of managerial ownership on financial performance is strengthened by audit quality. this research has two limitations. firstly, only one variables associated with corporate governance were selected in the current research, which may restrict the generalizability of the results. other governance such as board independence, board size, audit committee, also international journal of commerce and finance muslichah muslichah & abdul kadir usry & tutik arniati 68 influence firm performance. future research can overcome this limitation by including other governance mechanistms in the existing model. secondly, this study investigates basic industrial and chemical industries for the period 2016 2018. as a result, the results may not be applicable to different types of companies or years. future research might cover all types of publicly traded corporations and conduct a longitudinal study to obtain a more complete picture of the relationship between managerial ownership, earnings management, audit quality, and corporate performance. references arens, a., elder, r. & beasley, m. 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(2016). financial reporting quality and idiosyncratic return volatility: evidence from china. emerging markets finance and trade, 1–13. international journal of commerce and finance, vol. 9, issue 1, 2023, 123-148 * * politeknik negeri sriwijaya, indonesia, siskaaprianti@polsri.ac.id ** sriwijaya university, indonesia, didiksusetyo@unsri.ac.id *** sriwijaya university, indonesia, inten26@gmail.com ****sriwijaya university, indonesia, lukluk_fuadah@unsri.ac.id 123 corporate governance and sustainability reporting : a literature review siska aprianti* didik susetyo** inten meutia*** luk luk fuadah**** submitted: 23.01.2023 accepted: 02.04.2023 published: 05.07.2023 abstract purpose these research objectives to get an overview of the corporate governance's impact on sustainability reporting through a systematic literature review. methodology the review method was conducted qualitatively through slr in mapping existing research, with a sample of 62 articles published in 2012-2020. findings the findings provide three categories for how corporate governance affects sustainability reporting. board characteristics consist of 5 variables (board size, board independence, board meeting, ceo duality, csr committee), board diversity consists of 7 variables (community influential member, board age, board expertise, board incentives, board education, board nationality and gender diversity), and the audit committee characteristics consists of 4 variables (audit committee expertise, audit committee size, audit committee independence, audit committee meetings). research limitations – since the subject of the study is major corporations, the findings cannot be generalized, however they will be the same for other study subjects like micro, small, and medium-sized businesses. mailto:inten26@gmail.com international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 124 originality the research focuses on how corporate governance affects sustainability reporting and generates a thorough report on the predictor variables of sustainability reporting and its measurements in order to shed light on future sustainability reporting aspects.. keywords: sustainability reporting, corporate governance, board characteristics, audit committee jel classification: g30, m14, m40 1. introduction sustainability reporting (sr) is an organization's accessible reporting procedure on its effects on the economy, the environment, and society, as well as how well it contributes to the goals of sustainable development (gri 101, 2016). the data provided by sr is crucial in promoting corporate reporting that is transparent and accountable. because natural sustainability reporting process of the entity will do significant identification of three conditions, economy (profit), environment (planet), and society (people), and conduct disclosures according to internationally recognized norms. internal and external stakeholders can create views and decisions on the company's participation in sustainability objectives using the sr information. sustainability reporting is an interesting topic for further research. many studies were conducted by previous researchers, both focusing on one segment e.g environmental segment (akbas, 2016; al-shaer & zaman, 2018; de villiers et al., 2011; fernandes et al., 2019; giannarakis et al., 2020; grace & odoemelam, 2018; masud et al., 2018; odoemelam & okafor, 2018; trireksani & djajadikerta, 2016) or three segments, economy, environment and society (aboud & diab, 2018; a. buallay, 2019; coulmont et al., 2015; dyck et al., 2019; gnanaweera & kunori, 2018; sar, 2018; stötzer, 2015). the factors which encourage companies to do sr are still diverse. hahn & kühnen (2013) research indicates sr determinants are divided into 2, internal determinants (company size, financial performance, and social and environmental performance) and external determinants international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 125 (company visibility, affiliated sector, country of origin, legal requirements). dienes et al. (2016) found 7 determinants (company size, profitability, capital structure, media visibility, corporate governance, ownership structure, and company age) that operationalized in 33 variables have relevance to sr. meanwhile, beasy & gale, (2020) found that board diversity (gender, board independence, board size, and board duality) influenced sr. this research re-examines the driving factors of sr, using slr method refering to hahn & kühnen's (2013), dienes et al. (2016), and beasy & gale (2020). the difference is, dienes et al. (2016) examined all the driving factors of sr only if the variable was found to have been studied in the articles at least 3 times, with a sample of 48 articles published in 2000-2015. beasy & gale (2020) analyzed 45 articles published from 2009-2019 with a variable focus on board diversity. while the study concentrated on how corporate governance affected sr, using 62 samples of articles published in the period 2012 2020. 2. literature review a literature review aims to report trends, relationships, consistencies, and gaps so that work is done in an organized and evaluated manner (hahn & kühnen, 2013). according to morioka et al. (2018), the slr process is made by three steps: planning, implementation, and dissemination of results. the first step involves planning an slr by determining the big topics of the slr. the second step of implementation is carried out through a series of activities conducting examination and evaluation of the articles obtained, to adjust the selected theme in connection with the slr. the third is present the sample data descriptively, either in the form of an image or tables. slr is done to answer the question of whether sr is impacted by corporate governance. how is corporate governance driving sr measured? the article is presented in 4 parts, the first is the introduction, the second is the research methodology, the third result and the discussion that presents information related to mapping based on the article source, year of publication, the object of article research, and the influence of corporate governance on sr, the last part is a conclusion. international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 126 3. research framework the slr process is carried out in three steps, the first exploration of literature by electronic searching in four randomly selected databases, google scholar, prequest, science direct, and emerald insight using the keywords “sustainability report”, “sustainability disclosure” and “sustainability performance”. the process of selecting and evaluating articles adopts beasy & gale (2020), such as in figure 1. the search is conducted in stages, with a deadline of february 2021. the article is downloaded, then filtered to assess whether it is relevant to the sr topic. review is not only limited to abstracts, but also methodologies for obtaining variable data used, how measurements and results. the article filtering process uses certain criteria, with the year of publication in 2012-2020. the year 2012 was chosen as the starting year, to continue hahn & kühnen (2013) which used sample articles from 1999 to 2011. in addition, slr is done on articles in english and can be downloaded intact, for example has a word extension or pdf (print document file). articles in the form of abstracts or books are excluded from the sample. in addition, duplicate articles are also eliminated. second, the arrangement of articles according to the criteria in the form of mapping so that structured information is obtained. articles with different dependent variables such as an integrated report, focusing on environmental disclosure or on corporate social responsibility disclosure were excluded, as well as when duplicate articles occur. so it produced a final sample of 62 articles. third, presents a sample descriptively covering an overview of the article's source, the year it was published, and the topic of the study. then the synthesis and evaluation of data resulted in this paper. exploration of factors that affect the sustainability report/sustainability disclosure  main focus: a sustainability report's or disclosure's relationship to corporate governance  empirical quantitative research articles, published in 2012-2020  in english available on electronic database of google scholar, proquest, science direct and emerald insight. international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 127 source: beasy & gale (2020) figure 1: literature review research methodology 4. discussion 4.1 distribution by source the 62 articles reviewed come from various sources as presented in table 1. according to table.1, the top three most frequently published sr research, first journal of cleaner production with the publication of 6 articles. second with 5 articles is the sustainability (switzerland) journal, an international journal that provides an advanced forum for research related to sustainability both environmental, cultural, economic, and social human or sustainable development. while the third with 4 articles is social responsibility journal. judging from the scope and focus, sustainability articles are more likely to be published in journals that are already concerned with sustainability issues. 72 articles article removed because it does not meet criteria=10 the main focus is not sr or sd use primary data sources research object not private sector sample 62 articles international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 128 table 1: number of sample articles no source number of articles % articles 1 accounting, finance, sustainability, governance & fraud 1 2% 2 asian journal of accounting and governance 1 2% 3 asian journal of multidisciplinary studies 1 2% 4 asian review of accounting 1 2% 5 business strategy and the environment 1 2% 6 corporate governance (bingley), 1 2% 7 energy policy 1 2% 8 environmental science and pollution research 1 2% 9 european journal of scientific research 1 2% 10 global business & management research international journal 2 3% 11 indonesian journal of sustainability accounting and management 1 2% 12 international journal of academic research in business and social science 1 2% 13 international journal of accounting, finance and business (ijafb 1 2% 14 international journal of agriculture and economic development 1 2% 15 international journal of applied economics, finance and accounting 1 2% 16 international journal of commerce and finance 1 2% 17 international journal of energy economics and policy 2 3% 18 international journal of engineering and technology (uae) 1 2% 19 international journal of ethics and systems 1 2% 20 international journal of law and management 1 2% 21 international journal of research in business and social science 1 2% international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 129 22 international journal of sustainable strategic management, 1 2% 23 izvestiya journal of the university of economics – varna 1 2% 24 journal of applied accounting research 1 2% 25 journal of asian finance, economics and business 1 2% 26 journal of business ethics 1 2% 27 journal of business research 1 2% 28 journal of cleaner production 6* 10% 29 journal of economics, management and social sciences 1 2% 30 journal of management and governance 1 2% 31 meditari accountancy research 1 2% 32 pacific accounting review 1 2% 33 pakistan journal of commerce and social science, 1 2% 34 procedia social and behavioral sciences 1 2% 35 procedia economics and finance 1 2% 36 review of business management 1 2% 37 science & technology development 1 2% 38 scientific papers of the university of pardubice 1 2% 39 serbian journal of management 1 2% 40 social responsibility journal 4*** 6% 41 south east asia journal of contemporary business, economics and law 1 2% 42 sriwijaya international journal of dynamic economics and business 1 2% 43 sustainability journal (switzerland) 5** 8% 44 sustainability accounting, management and policy journal 2 3% 45 international conference 3 5% amount 62 100% note: google scholar, prequest, science direct and emerald insight 4.2 distribution by year of publication international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 130 figure 1 shows the largest sample distribution was in 2019 with 19 articles, in 2020 of 14 articles, and 13 articles published in 2018. in 2020 only 14 articles, probably due to the author downloading the last article in february 2021, at which time some articles " accepted” by the end of 2020 have not been published. . figure 2: distribution by year of publication 4.3. distribution by research object the majority of articles feature stock exchange-listed firms as their primary study subject. some come from all industrial sectors, and some come from one industry sector such as manufacturing, oil and gas, or banking. in the review, the author was unable to map the research based on whether the research was conducted in a particular sector. this is due to the limited information presented in each article. the research objects used also vary. as presented in figure 2, 49 articles (79%) used research objects from one country, and the remaining 13 articles (21%) used more than one state as research objects. 1 1 3 3 2 6 13 19 14 0 2 4 6 8 10 12 14 16 18 20 2012 2013 2014 2015 2016 2017 2018 2019 2020 n u m b e r o f a rt ic le s publication year international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 131 figure 3: distribution by research object figure 4: distribution by geographical location in figure 3, most of the research was done in asia. 41 articles are using a sample in asia, 7 articles on the african continent, 4 articles in the americas, 3 articles on the european continent, 2 articles on the australian continent, and 5 articles use sample mixed countries from several continents for analysis. analysis of a combination of countries from several continents e.g. continents europe, latin america, north america, caribbean, oceania, africa, and asia (karaman et al., 2018). asia and australia consist of korea, india, japan, malaysia, china, australia, taiwan, new zealand, indonesia, philippines, singapore and thailand (amran et al., 2013). america and europe (michelon & parbonetti, 2012). 28 countries in the region of 5 continents region, namely the united states, south america, canada, united kingdom, 0 10 20 30 40 50 60 1 country more than 1 n u m b e r o f a rt ic le s research object 41 3 7 4 2 5 asia eropa africa america australia mix 0 5 10 15 20 25 30 35 40 45 geographical location n u m b e r o f a rt ic le s international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 132 europe, south africa, australia, and asia (chams & blandon, 2019). countries in the continent of africa, asia, europe, latin america, north america, and oceania (naciti, 2019). 4.4 corporate governance effect on sustainability reporting based on the slr that has been done, the corporate governance's impact on sr is divided into 3 namely board characteristics, board diversity, and audit committee characteristics. table 2: systematization of board characteristics variables independent variable measurement result author board size number of board members + (alotaibi et al., 2019; janggu et al., 2014) number of directors + (awodiran, 2019; bello & abdul-manaf, 2017; chams & blandon, 2019; ganesan et al., 2019; garcia et al., 2020; hashim et al., 2015; hu & loh, 2018; husted & sousa filho, 2019; khalili & azwan, 2020; m. mahmood & orazalin, 2017; z. mahmood et al., 2018; mascena et al., 2020; munir et al., 2019; raquiba & ishak, 2020; wang, 2017 ) natural log number of directors + (bae et al., 2018; kılıç & kuzey, 2020; mudiyanselage, 2018; shamil et al., 2014) independence board board independent + (jouha, 2015) “0” if the majority of board members are not independent, 100 if two or more are independent (naciti, 2019) international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 133 number of independent directors + (hashim et al., 2015; khalili & azwan, 2020; raquiba & isaac, 2020) percentage of board members from outside + (özcan, 2020) percentage of independent directors + (alotaibi et al., 2019; awodiran, 2019; ganesan et al., 2019; hu & loh, 2018; hussain et al., 2018; husted & sousa-filho, 2019; mahmood et al., 2018; nguyen & nguyen, 2020) proportion of independent directors (mahmood & orazalin, 2017) + (arayssi et al., 2020; bello & abdul-manaf, 2017; mascena et al., 2020; mudiyanselage, 2018; ong & djajadikerta, 2018; wang, 2017). board meeting number of board meetings + (alotaibi et al., 2019; hu & loh, 2018; hussain et al., 2018; munir et al., 2019; raquiba & ishak, 2020; sunday et al., 2019) (bello & abdul-manaf, 2017; hardika et al., 2018) ceo duality "1" if ceo holds chairman position, “0” otherwise + (ganesan et al., 2017; munir et al., 2019; shamil et al., 2014; wang, 2017) number of directors who serving on more board + (anazonwu et al., 2018) international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 134 “1” if the ceo is concurrently chairman of board directors, “0” otherwise (arayssi et al., 2020; chams & blandon, 2019; hussain et al., 2018; husted & sousa-filho, 2019; khanh & tuan, 2018) “0” if the ceo and chairman are the same person, “100” otherwise + (naciti, 2019) csr committee “1” has a social responsibility committee, "0” otherwise. + (amran et al., 2013; arayssi et al., 2020; awodiran, 2019; hussain et al., 2018; kılıç & kuzey, 2020; m. mahmood & orazalin, 2017; z. mahmood et al., 2018) number of active committees in the company + (chams & blandon, 2019). the ratio of the total score given + (jamil et al., 2020) a. the board characteristics table 2 shows the board characteristic variables that affect sr, along with its measurements. the findings of 21 articles showed that board size variables can be operationalized through 3 measurements, and all three proved to have a positive influence on sr consistently. 7 articles found board size variables did not effect on sr (amran et al., 2013; arayssi et al., 2020; bhatia & tuli, 2017; fuadah et al., 2019; ganesan et al., 2017; hussain et al., 2018; khanh & tuan, 2018). and 3 articles used board size variables as control variables (aa zaid et al., 2020; michelon & parbonetti, 2012; umukoro et al., 2019). the findings of 19 articles demonstrated that board independence had a favorable impact on sr., on the contrary, 2 articles found board independence had an unfavorable effect on sr. while munshi & dutta (2016), ganesan et al. (2017), jamil et al. (2020), amran et al. (2013), international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 135 garcia et al. (2020), karaman et al. (2018), michelon & parbonetti (2012), shamil et al. (2014) did not prove a connection between sr and board independence.. 6 articles prove boards meeting had a positive effect on sr, in turn, 2 articles prove a negative effect. while hidayah et al. (2019) and khalili & azwan (2020) did not find a relationship between board meetings with sr, while hussain et al. (2018) found a positive influence between a board meeting and social disclosures but found no relationship between board meeting with disclosures in the economic and environmental fields. 6 articles prove a positive relationship between duality ceos towards sr, on the contrary, 5 articles found a negative relationship direction. ganesan et al. (2019), hu & loh (2018), khalili & azwan (2020), michelon & parbonetti (2012), mudiyanselage (2018), and munshi & dutta (2016) found no relationship between duality ceos to sr. hussain et al. (2018) found that the duality of ceos had no effect on sr disclosure in the economic and social fields, but negatively impacted environmental disclosure. 9 articles' findings demonstrate that the csr committee attribute has a favorable impact on sr, while chams & blandon (2019) and michelon & parbonetti (2012) did not find any influence between the csr committee variable and sr. hussain et al. (2018) found the existence of sustainability committees had an influence on environmental and social disclosure but had no effect on economic disclosure. b. the board diversity table 3: systematization of the board diversity variables independe nt variable measurement res ult author community influential members proportion of influential board of directors members in community + (michelon & parbonetti, 2012) board designation + janggu et al. (2014) international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 136 independe nt variable measurement res ult author board of directors age average age of directors; young bod is % of directors under 45 years old, and old bod is % of directors over 70 years old. + (chams & blandon, 2019) “1” if the board directors average age are less than 60 years, “0”otherwise (musa et al., 2020) educational background number of directors with a higher education certifications + (umukoro et al., 2019) “1” if the board director has a second/third degree, “0” otherwise (musa et al., 2020) director expertise/s kills/profess ionalism participation in professional institutions + (janggu et al., 2014) percentage of board directors experience in sustainability + (jamil et al., 2020) number of board directors trainings in sustainability + board incentive/ compensati on “1” if the company's executive director remuneration package includes incentives based on performance over one year, “0” otherwise. + (hu & loh, 2018) total compensation given to board of directors + (alotaibi et al., 2019) natural logarithm of total compensation paid to directors a year. + (sunday et al., 2019) % attendance meeting of compensation committee + (munir et al., 2019) % independent directors on the compensation committee + (munir et al., 2019) ethnicity board blau foreign ; blau index of nationality diversity (kılıç & kuzey, 2020) proportion of foreign directors (kılıç & kuzey, 2020) international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 137 independe nt variable measurement res ult author number of foreign board + (chams & blandon, 2019; sunday et al., 2019) % foreign directors on the board + (bae et al., 2018; musa et al., 2020) subsidiaries / total foreign subsidiaries. + (garcia et al., 2020) gender number of female directors + (bello & abdul-manaf, 2017; chams & blandon, 2019) proportion of female board members + (anazonwu et al., 2018; arayssi et al., 2020; khalili & azwan, 2020; khanh & tuan, 2018; z. mahmood et al., 2018; ong & djajadikerta, 2018) (husted & sousa-filho, 2019; wiryania et al., 2019); “1” if female directors presence on the board, “0” otherwise. (shamil et al., 2014) + (abu bakar et al., 2019; m. mahmood & orazalin, 2017; mudiyanselage, 2018) "0" if the majority of board members are from the same nation as the company and the majority are not women; "100" if at least two thirds of the board members are + (naciti, 2019) international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 138 independe nt variable measurement res ult author from nations other than the company and at least two thirds of the board are women. table 3 shows independent factors and how they are measured concerning sr. the findings of 2 articles show that community influential members have a positive effect on sr. bod age and educational background variables show inconsistencies in the direction of the relationship towards sr, the research findings show the positive and negative relationship directions respectively in one article. on the contrary, the director expertise/skills/professionalism variable shows a positive and consistent relationship direction in 3 research results. in line with that, board incentives/compensations found a positive effect on sr in 4 articles. the board ethnicity variable showed results, not in the same direction, 5 research findings showed a positive influence and 2 studies found a negative influence. 22 articles looking at how sr is affected by board gender diversity. using 4 proxy measurements, a favorable correlation between board gender diversity and sr was found in 11 papers, while a negative correlation was found in 3 articles. c. the audit committee characteristics table 4: systematization of the audit committee characteristic variables independent variable measurement result author ac size number of audit committee members + (buallay & al-ajmi, 2019; buallay & aldhaen, 2018) ac independence amount of independent audit committee + (buallay & al-ajmi, 2019; buallay & aldhaen, 2018) % independent directors on the audit committee + (munir et al., 2019) proportion of independent nonexecutive directors + (said et al., 2020) international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 139 ac meetings number of audit committee meetings + (buallay & al-ajmi, 2019; buallay & aldhaen, 2018; hidayah et al., 2019; musa et al., 2020) (hardika et al., 2018) % audit committee attendance + (munir et al., 2019) ac expertise number of members who have more than 5 years of experience as an audit committee member (buallay & al-ajmi, 2019; buallay & aldhaen, 2018) table 4 describes characteristics of the audit committee (ac) that have an impact on sr are ac size, ac independence, ac meetings, and ac expertise. the findings of 2 articles show the audit committee size with the proxy number of audit committee members has a positive effect on sr. using 3 different proxies, 4 articles revealed the same conclusion: sr was enhanced by ac independence. instead, sunday et al. (2019) found no influence between the proportion of independent directors in the audit committee to sr. 5 articles found that audit committee meetings with a proxy number of audit committee meetings in a year, proved to have a positive influence on sr. in turn, hardika et al. (2018) found a negative influence. the audit committee expertise variable presented a negative effect on sr in 2 articles. 5. conclusion the results showed corporate governance that affects sr is divided into 3, attributes of the board consisting of 5 variables (board size; board independence; board meeting; ceo duality; csr committee). board’s diversity consists of 7 variables (community influential members; board age; board expertise; board incentives; board education; board nationality and gender diversity). the audit committee attributes consist of 4 variables (audit committee expertise; audit committee size; audit committee independence; audit committee meeting). the board size variables, csr committee, board expertise, board incentives, audit committee expertise, and audit committee size show the direction of a positive relationship towards sr consistently. while the variables of board independence, board meetings, and ceo duality, board age, board international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 140 education, ethnic board, board diversity, audit committee independence, and audit committee meetings show the direction of inconsistent relationships thus providing further research opportunities to ensure the direction of the relationship between these variables to sr. this article has limitations, first in this slr’s findings of the sample articles concluded as sr drivers if the variable has a significant influence on sr, although in reality such influences are found only in 1 article. further research would be better if considering certain criteria when determining driver variables, for example limiting the amount of consistency of research findings in research, so that it’s more represented and scientifically tested. second, in the sample collection process, some sample articles lead to disclosures of the economic, social, and government (esg) fields rather than on the economic, social, and environmental. however, researchers still include it as a sample because the topic of discussion led to sr. future research should be done consistently, namely issuing sample papers that are less focused on the economic, social, and environmental fields so that the results of the research will be more objective and not subjective. third, the focus of this research is on the object of research in large companies so that the research results cannot be generalized. it would be interesting if the next slr used different research objects for example focusing on micro, small and medium enterprises to find out if the factors that affect sr will be the same. lastly, the keywords in the sample article search are only 3 keywords. further research should use more diverse keywords, so it is expected that the sample paper obtained will be larger and more varied. references aboud, a., & diab, a. 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(2019). profitability, feminism of board of directors and corporate sustainability performance: role of independent board as a moderating variable. international journal of research in business and social science (21474478), 8(6), 351-356. cheng, h., chen, c., wu, s., mirza, z. a., & liu, z. (2017). emergy evaluation of cropping, international journal of commerce and finance siska aprianti & didik susetyo inten meutia & luk luk fuadah 148 poultry rearing, and fish raising systems in the drawdown zone of three gorges reservoir of china. journal of cleaner production, 144, 559-571. international journal of commerce and finance, vol. 8, issue 2, 2022, 21-56 * *universitas mercu buana, indonesia, lucky.nugroho@mercubuana.ac.id **universitas trisakti, indonesia, tatik_m2002@yahoo.com *** institut tazkia, rifki_ismal@yahoo.com ****universitas darussalam, indonesia, affandi@unida.gontor.ac.id 21 determinants of islamic performance ratio in islamic banks with return on assets as moderating factor lucky nugroho* tatik maryanti** rifki ismal*** akhmad affandi mahfudz **** submitted: 18.05.2021 accepted: 07.09.2022 published: 01.11.2022 abstract the plan of the indonesian government that wants to make indonesia the center of the world's islamic economy and finance must be supported by all stakeholders. therefore, as one of the vital elements in the islamic financial ecosystem, islamic banks need to have an excellent performance to increase the trust of the national and international community. in addition, islamic banks with different operational principles from conventional banks should have different performance measurements compared to performance measurements from conventional banks. the purpose of this study is to analyze the factors that can potentially affect the islamic performance ratio (ipr). these factors include independent variables consisting of financing, the distribution ratio (financing to deposit ratio-fdr), labor cost ratio (lcr), promotion cost ratio (pcr), financing quality ratio (non-performing financing-npf), ratio distribution of financing to micro, small and medium enterprises (msmes) and return on assets (roa). furthermore, to determine the relationship between financial performance indicators in mailto:rifki_ismal@yahoo.com international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 22 conventional banks (roa) with financial performance indicators and social performance in islamic banks (ipr), roa becomes a moderating variable. the results of this study show that fdr has a positive and significant effect on ipr, lcr has a negative and insignificant effect on ipr, pcr has a positive and significant effect on ipr, npf has a negative and significant effect on ipr, msmes have a positive and significant effect on ipr, roa has a positive and significant effect on ipr, and roa has a positive and significant effect on ipr. significant to the ipr. whereas the roa variable as a variable that moderates the relationship of these independent variables to ipr results in that roa moderates the effect of roa positively and significantly on ipr, roa moderates the effect of lcr negatively and significantly on ipr, roa moderates the effect of pcr positively and significantly on ipr. also, roa positively and significantly moderates the effect of msmes on ipr. key words: islamic bank, islamic performance ratio (ipr), financing to deposit ratio (fdr), labor cost ratio (lcr), promotion cost ratio (pcr), non-performing financing (npf), micro small & medium enterprises (msmes), return on assets (roa) jel classification: g20, g21, g23, g32 1. introduction the indonesian government plans to make indonesia the center of the world's islamic finance and economy (kneks, 2019). therefore, one of the essential elements to make this happen is islamic finance in indonesia should have good resilience and stability (nugroho & anisa, 2018a; nugroho, ghazali, et al., 2020). indonesia, which has the largest muslim population globally, which in 2019 has reached 262 million, needs to have a good performing islamic bank (nugroho, utami, sukmadilaga, & fitrijanti, 2017). this is because the excellent performance of islamic banks will have implications for the good welfare of the community. furthermore, islamic banking is an intermediary institution that mobilizes funds in the community to have implications for the movement of the real sector and economic growth (ductor & grechyna, 2015). furthermore, the development of return on assets (roa) of islamic banks from 2009 to 2017 has fluctuated. however, compared to the roa of conventional banks, the roa of islamic banks is still relatively low. the roa of islamic banks from 2009 to 2017 tended to decline by 0.85%, from 1.48% in 2009 to 0.63% in 2017. while the roa of conventional banks decreased by 0.38% from 2.83% in 2009 became 2.45% in 2017. the decreasing roa occurred in all international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 23 banking industries (islamic banks and conventional banks) in the 2009-2017 period. however, the decline in roa of islamic banks was relatively more significant, namely 0.63%, while conventional banks experienced a decrease of 0.38%. in addition, compared to islamic banks in middle eastern countries such as palestine, qatar, united arab emirates, lebanon, saudi arabia, kuwait, bahrain, jordan, oman, and iraq, the roa of islamic banks in indonesia is among the lowest. the low roa of islamic banks in indonesia, when compared to the roa of islamic banks in middle eastern countries, is shown in graph 1 below: source: cpifinancial (2017) figure 1.1 return on assets of indonesian islamic banks vs islamic banks in middle eastern countries referring to graph 1.1 above, islamic banks in indonesia have the lowest roa level compared to 10 other countries in the middle east. according to this phenomenon, the profitability of islamic banks in indonesia still needs to be improved. based on the phenomenon of low roa from the indonesian islamic banking industry, it shows that the contribution of islamic banks to improving the welfare of the people in indonesia is still not optimal (nugroho, mastur, harnovinsah, & aryanti, 2020). another phenomenon is that indonesian islamic financial literacy is still low compared to financial literacy in general. the low level of islamic financial literacy is shown in table 1 below: table 1.1 financial literacy vs islamic financial literacy in 2016 and 2019 international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 24 literacy 2016 2019 growth 2016-2019 financial literacy 29,70% 38% 27,9% islamic financial literacy 8,10% 11,10% 37% source: nugroho (2020) table 1.1 above shows that financial literacy is the public's understanding of financial products and services by 38%. while the population understood sharia financial products in 2019, only 11.1% understand sharia financial products. the size of the gap can cause low levels of society to use the services of islamic banks. in connection with the low literacy of islamic finance, it is necessary to provide adequate information to the public that using financial service products from islamic banks can provide a sense of security and comfort for customers and the public but can also fulfill the need to carry out their religious teachings in totality (a. rachmawati & widana, 2019). in addition, as a bank that aims to serve the public based on sharia principles, islamic banks must have good performance and have good productivity (nugroho, badawi, & hidayah, 2019b; nugroho, ghazali, et al., 2020). furthermore, referring to a hadith narrated by al-hakim, rasulullah saw delivered a message that has relevance to productivity and performance. rasulullah saw said: "whoever today (performance) is better than yesterday means he is lucky, whoever today his condition (performance) is the same as yesterday means he is losing, and whoever today his condition (performance) is worse than yesterday then really he is a person who is lost or despicable.” performance measurement or success in managing a company can be done by comparing output with input, so the better the income generated is compared to expenses, the better the company's performance (lee & roh, 2020). meanwhile, the output of islamic banks or the performance of islamic banks, which is called the islamic performance ratio (ipr), can be measured through ratios: profit-sharing ratio (psr), zakat performing ratio (zpr), equitable distribution ratio (edr). the greater this ratio, the better the islamic bank has implemented sharia principles. based on the ipr indicator above, the success of islamic banks can be measured by achieving the ratio elements of the ipr (nugroho, nugraha, & badawi, 2020b). therefore, the measurement of the performance of islamic banks cannot be assessed only from return on assets (roa) but needs to be complemented by using a more comprehensive and unique measurement because islamic banks have different objectives from conventional banks (nugraha, nugroho, lindra, & sukiati, 2020; usman & khan, 2012; vania, nugraha, & nugroho, 2018). islamic banks have more comprehensive objectives when compared to conventional banks because international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 25 islamic banks carry out their activities to optimize profit and focus on social and sharia (spiritual) aspects (nugroho, badawi, & hidayah, 2019a; nugroho, meiwanto doktoralina, indriawati, safira, & yahaya, 2020; nugroho, nugraha, & badawi, 2020a). the performance indicator of the banking function in channeling funds collected to the public in the form of loans is the financing to deposit ratio (fdr). this ratio shows the bank's ability to channel loans from third-party funds or funds from the public that the bank has collected (hakiim & rafsanjani, 2016; lutfiandari & septiarini, 2016). furthermore, islamic banks require expenses, including labor costs, promotion costs, and general administrative costs. however, labor is the central resource in an organization or company, so that its role is significant for the progress and improvement of the company's performance. therefore, according to putra & sudirman, 2015 and waterman (2006), labor is a capital with essential values and is beneficial to the company. in addition, to increase the market share of islamic banks, the information conveyed to market islamic bank products and services in the form of promotion needs to be empowered. this promotion is expected to increase public interest in using islamic banking services, either saving funds or borrowing funds for business interests and using islamic banking services to pay zakat, infaq, sadaqah. the effectiveness of promotions will increase the use of products and services from islamic banks by the wider community to increase the market share of islamic banks in indonesia (lestari, 2009; patriana & nurismalatri, 2018; rust & zahorik, 1993). in addition, the promotion is also needed to increase literacy, where currently, the indonesian public's literacy for islamic bank financial products and services is still low (muzdalifa, rahma, & novalia, 2018; tan & bogomolova, 2016). in addition, to increase public trust, the quality of credit or financing is an essential financial indicator (bernstein, 1996a; nugroho, hidayah, & badawi, 2018). thus, to maintain this reputation and profitability, the bank tries to maintain the quality of financing so that the assets owned by the bank can generate optimal profits (rahman & rochmanika, 2012; setiawati et al., (2017). moreover, islamic banking is a bank that cares about social problems so that it can be used as a solution for micro and small entrepreneurs seeking capital to increase their financial capacity and income. therefore, islamic banks should be pro banks for micro, small and medium enterprises (msmes) so that every islamic bank must have financial products that are pro to msmes (nugroho, 2014; wajdi dusuki, 2008b). following the phenomena above, research is international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 26 needed to analyze the variables that can affect the ipr, which includes the ability of sharia bank financial (financing to deposit ratio/fdr), sharia bank productivity (labor cost ratio/lcr), sharia bank promotion ability (promotion cost ratio/pcr), quality of financing (nonperforming financing/npf), and distribution of financing to msmes. furthermore, because currently, one of the indicators used by regulators in determining good performance is return on assets (roa), the roa in this study is a moderating variable. the research aims are to determine the factors that influence the performance of islamic banking from a sharia perspective, namely the ipr, which is moderated by the performance measurement currently used, namely roa. furthermore, based on this phenomenon, the research questions in this study include:  does the financing to deposit ratio (fdr) affect the islamic performance ratio (ipr)?;  does the labor costs ratio (lcr) affect the ipr?;  does the promotion costs ratio (pcr) affect the ipr?;  does the ratio of financing quality (npf) to total financing affect the ipr?;  does the financing disbursement to micro, small and medium enterprises (msmes) affect the ipr?;  does the return on assets (roa) affect the ipr?;  does roa moderating fdr; lcr, pcr, npf, and msmes affect the ipr this study aims to analyze the factors that influence the performance of islamic banking, namely the islamic performance ratio. theoretically, the benefit of this research is to add to the treasury of science, especially in measuring the performance of islamic banks and the factors that influence them. this is done because, in general, in the study of the performance of islamic banking, conventional banking performance indicators still use. at the same time, there are differences in objectives between conventional banks and islamic banks. therefore, the results of this study can be used by further researchers that the phenomenon of using islamic bank performance indicators requires further analysis to measure islamic bank's achievement. it not only uses the roa currently used but also must also consider the impact of the roa on the ipr indicator. this study aims to analyze the effect of distribution of financing, labor costs, promotion costs, quality of financing, msme financing, and roa on the islamic performance ratio. 2. literature review and research framework international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 27 the existence of islamic banks can be used as a solution because islamic banking aims to improve the welfare of the community. in other words, islamic banking aims not only to seek profit but also to care for social problems (arafah & nugroho, 2016; cebeci, 2012). furthermore, islamic banks have islamic values that conventional banks do not own. the foundation of islamic banking is sharia maqasid which consists of six elements, according to fitrotulloh (2013) and masruri & rossidy (2007), namely: (1) maintaining religion; (2) guarding the soul; (3) maintain intellect; (4) safeguarding assets; (5) maintaining descendant and (6) maintaining environment. maqhasid sharia is implemented in everyday human life, namely, meeting basic needs, secondary needs, and tertiary needs. islamic banking services supporting human life in business and financial transactions need to have the same vision and mission. the vision and mission must be based on maqasid sharia, which aims to achieve maslahah (beneficiaries to each other) and falah (hereafter focus). in addition, islamic banking, with its pillars (prophet, profit, people, and planet), is to maintain a balance between the benefits of a business that has moral and spiritual responsibilities and has an impact on reducing social problems such as poverty, unemployment, social inequality, etc. furthermore, islamic banks must also contribute to preserving the environment for the next generation's survival (nugroho, utami, harnovinsah, & doktorlina, 2020). therefore, the entire islamic banking ecosystem, both internal and external, is significant in realizing the sustainable finance of islamic banking, such as the application of sharia principles; focus on the needs of society and the ummah; there is a business strategy that is just and following the needs of the industry; operational implementation based on islamic values; risk management implementation; appreciation of human resources that are objective and by islamic values; application of the principle of benefit to community welfare and environmental sustainability. therefore, islamic banks must be able to provide benefits for all the ummah in accordance with the qur'an al-anbya verses 107: “we have sent you ˹o prophet˺ only as a mercy for the whole world.” nevertheless, according to the phenomenon and the literature review, the conceptual research framework can be established as follows: international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 28 figure 2.1 research framework according to figure 2.1, the hypothesis in this research as follows:  fdr has affected the ipr positively;  lcr has to affect negatively to the ipr;  pcr has affected the ipr positively;  npf has to affect negatively to the ipr;  msmes has positive to the ipr;  roa has positive to the ipr;  roa as the moderating variable affected fdr, to the ipr has strengthened impact;  roa as the moderating variable affected lcr, to the ipr has strengthened impact;  roa as the moderating variable affected pcr, to the ipr has strengthened impact;  roa as the moderating variable affected npf, to the ipr has strengthened impact;  roa as the moderating variable affected msmes, to the ipr has strengthened impact; 2.1. the effect of financing to deposit ratio (fdr) to islamic performance ratio (ipr) the performance indicator of the banking function in channeling funds collected to the public in the form of loans is the financing to deposit ratio (fdr). this ratio shows the bank's ability to channel loans from third-party funds or funds from the public that the bank has collected (hakiim & rafsanjani, 2016; ihwanudin, wicaksono et al., 2020; widyaningrum & septiarini, 2015). so, the higher the ratio of the fdr reflect the better the intermediary function of the islamic bank. moreover, the excellent function of islamic banks in channeling their funds in the community will impact the excellent distribution of profit sharing from these islamic banks to all stakeholders of islamic banks (bashir, darrat, & suliman, 1993; sukmadilaga & nugroho, international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 29 2017). nevertheless, the optimum allocation profit sharing of islamic banks to the customer will also contribute to the increase in the islamic performance ratio of these islamic banks. 2.2. the effect of the ratio of labor costs ratio (lcr) to the islamic performance ratio (ipr) the globalization condition pushes muslims to have a diligent work ethic, disciplined, and toughness but always balances islamic values such as honesty and justice following sharia values. the excellent work ethic of a muslim, where they are also employees of a sharia bank, can directly increase income and contributing to improving the performance of islamic banks (ipr). the issue of productivity is crucial for islamic banking to compete with competitors and meet the needs of customers (fujii, managi, & matousek, 2014). 2.3. the effect of promotion cost ratio (pcr) to islamic performance ratio (ipr) the effectiveness of promotion will increase the use of products and services from islamic banks by the wider community. the impact of effective promotion of islamic banks will increase the market share of islamic banks in indonesia (lestari, 2009; patriana & nurismalatri, 2018). the promotion has a vital role for a company or organization that aims to introduce a new product or service. in addition, promotion can also be defined as costs or incentives given to customers by companies in conducting trials or introducing a product or service it has (blattberg & neslin, 1989; sudirman et al., 2020). furthermore, the effectiveness of the promotion of islamic banks will impact increasing the performance of islamic banks (ipr). 2.4. the effect of non-performing financing (npf) to islamic performance ratio (ipr) the quality of credit or financing (npf) is an essential financial indicator in maintaining a bank's reputation (bernstein, 1996b; budiman, 2016; nugroho, villaroel, & utami, 2018). thus, to maintain reputation and profitability (roa), the bank tries to maintain the quality of financing so that the assets owned by the bank can generate optimal profits (rahman & rochmanika, 2012; setiawati, rois, & nur‘aini, 2017). 2.5. the effect of financing to micro, small and medium enterprises segment (msmes) to islamic performance ratio (ipr) another internal capability of islamic banks that can contribute to improving company performance is the distribution of financing of micro, small and medium enterprises (msmes). the existence of msmes in indonesia is the backbone of the economy, so that the sustainability of msmes is essential. in addition, islamic banks that develop duties as banks based on sharia principles should prioritize channeling financing to the msme sector. previous researchers international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 30 argued that islamic bank financial products and services should prioritize msmes (arafah & nugroho, 2016b; dhumale & sapcanin, 1998; khan, 2010a; shahinpoor, 2009) 2.6. the effect of return on assets (roa) to islamic performance ratio (ipr) efforts to increase the growth of islamic banks must be accompanied by the principle of prudence so that the islamic banking industry becomes a fast-growing industry with good quality and is sustainable (beck et al., 2010). one of the critical financial ratios (key financial indicators) that investors and stakeholders consider in making investment decisions and financial actions is the ratio of profitability or return on assets (roa) (elton, 1999; hillman & keim, 2001; nugroho, aryani, & mastur, akhmad amien, 2019). roa shows the ability of a company's business activities through its resources to generate revenue or profit. the higher the roa of an islamic bank, the better the company's performance. moreover, the lower roa of islamic banks can be assumed that the company is experiencing financial problems (crutchley, jensen, jahera, & raymond, 2002; jusmansyah & sriyanto, 2010). in addition, the high level of roa in a bank will increase the bank's reputation to its stakeholders. 2.7. the effect of return on assets (roa) as moderating variable to the impact of fdr, lcr, pcr, npf, and msmes to ipr one of the indicators used to measure the performance of islamic banks in managing assets to generate profits is a return on assets (roa) (satibi, utami, & nugroho, 2018; wahab, hosen, & muhari, 2015). therefore, the indicators used to measure the performance of islamic banks are the same as conventional banks. roa indicator is an indicator based on a financial performance perspective, while ipr is an indicator based on financial and social aspects. therefore, the variables that can influence ipr (fdr, lcr, pcr, npf, and msmes) can be strengthened by the roa variable. 3. methodology the methodology used in this study is a quantitative method using a panel data regression model. the mechanism for taking the number of samples of islamic banks in this study is as follows: table 2. research sample method international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 31 no criteria number 1 the number of islamic commercial banks in indonesia, which operated during 2012 2017 13 2 islamic commercial banks that do not have the data needed for research during 2012-2017 (6) the number of islamic commercial banks used as a research sample 7 the total sample used in the 2012-2018 study (7x6 years) 42 furthermore, based on the research framework, there are two models equation in this study as follows: ipr = α + β1fdr β2lcr + β3pcr β4npf + β5msmes + β6roa + e (1) ipr = α + β1fdr*roa β2lcr*roa+ β3pcr*roa β4npf*roa + β6msmes*roa + e (2) remarks: fdr: financing to deposit ratio; lcr: labor cost ratio; pcr: promotion cost ratio; npf: non-performing financing; msmes: micro, small, medium enterprises financing ratio; ipr: islamic performance ratio. the use of the islamic performance ratio for performance measurement is carried out to test whether islamic banks are good at disclosing helpful information for stakeholders. islamic performance ratio is a method that evaluates the performance of islamic banks from a financial aspect and is also used to evaluate the principles of justice, halals and purification practiced by islamic commercial banks. furthermore, the operational variables in this study are as follows: international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 32 table 3. operational variables variable measurement scale references return on assets (roa) net profit total assets ratio (margaretha & letty, 2017; nugroho & bararah, 2018) islamic performance ratio (ipr) average (psr + zpr + edr) ratio (makruflis, 2019; nugroho, nugraha, et al., 2020b) profitsharing ratio (psr) mudharabah + musyarakah total financing ratio (makruflis, 2019; nugroho, nugraha, et al., 2020b) zakat performing ratio (zpr) zakat net assets ratio (makruflis, 2019; nugroho, nugraha, et al., 2020b) equitable distribution ratio (edr) (qard & donation) + (wages) + (dividend) + (net profit) total revenue − (zakat + tax) rati o (makruflis, 2019; nugroho, nugraha, et al., 2020b) financing deposit ratio (fdr) total financing total deposits rati o (nugroho, utami, doktorlina, soeharjoto, & husnadi, international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 33 variable measurement scale references 2017; soekapdjo, tribudhi, & nugroho, 2019) labor cost ratio (lcr) labor cost total income rati o (adab & rokhman, 2015; farida, 2016) promotion cost ratio (pcr) promotion cost total income rati o (acar & temiz, 2017; capon et al., 1990; hakim et al, 2011; peterson & jeong, 2010) financing to micro, small and medium enterprises (msmes) msmes financing outstanding total financing oustanding rati o (dhumale & sapcanin, 1998; dusuki, 2008; khan, 2010b; shahinpoor, 2009) nonperforming financing (npf) non performing financing total oustanding rati o (firmansyah, 2014; mawaddah, 2015; soekapdjo, nugroho, badawi, & utami, 2018) international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 34 4. results and discussion 4.1 model equation i 4.1.1 normality test the results of the normality test for the equation model i are as follows: figure 3.1. normality test based on figure 3.1, it is known that the probability value of the j-b statistic is 0.778043. because the probability p-value, which is 0.222649, is greater than the significance level, which is 0.05. this means that the assumption of normality is fulfilled. 4.1.2 multicollinearity test the results of the multicollinearity test for equation model i are as follows: table 3.1 multicollinearity test coefficient uncentered centered variable variance vif vif c 0.211110 22.56891 na fdr 0.005552 23.15136 1.511376 lcr 2.14e-05 3.372640 1.185175 pcr 0.000324 4.104791 1.296889 npf 0.004614 3.459536 1.090146 msmes 0.008018 2.383460 1.228325 roa 0.001750 6.873313 1.775888 international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 35 based on table 3.1, the multicollinearity test results show that there are no multicollinearity symptoms between the independent variables. this is because the vif value is not more than 10. 4.1.3 autocorrelation test the results of the autocorrelation test for the equation model i are as follows: table 3.2 autocorrelation test log-likelihood -98.25539 hannan-quinn criteria. 2.714949 durbin-watson stat 2.066793 based on table 3.2, the value of the durbin-watson statistic is 2.240788 because the durbinwatson statistical value lies between 1 and 3, namely 1 < 2.066793 < 3, then the nonautocorrelation assumption is fulfilled. in other words, there was no high autocorrelation symptom at the residuals. 4.1.4 regression test in testing the equation model i hypothesis, the coefficient of determination analysis will be carried out, simultaneous effect testing (f test), and partial effect testing (t-test). statistical values of the coefficient of determination, f test, and t-test are presented in table 3.4 table 3.4 regression test variable coefficient std. error t-statistic prob. c 2.108117 0.459467 4.588185 0.0000 fdr 0.149749 0.074513 2.009692 0.0482 lcr -0.007742 0.004622 -1.675084 0.0982 pcr 0.069339 0.017991 3.854015 0.0002 npf -0.170744 0.067928 -2.513593 0.0142 msmes 0.315256 0.089543 3.520740 0.0007 roa 0.086897 0.041835 2.077149 0.0413 r-squared 0.560218 mean dependent var 3.842625 adjusted r-squared 0.524071 s.d. dependent var 1.253928 international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 36 s.e. of regression 0.865055 akaike info criterion 2.631385 sum squared resid 54.62733 schwarz criterion 2.839812 log-likelihood -98.25539 hannan-quinn criteria. 2.714949 f-statistic 15.49855 durbin-watson stat 2.132282 prob(f-statistic) 0.000000 based on table 3.4, it is known that the prob. value (f-statistics), which is 0.000000 < 0.05, it can be concluded that all independent variables, namely fdr, lcr, pcr, npf, msmes, and roa simultaneously, have a significant effect on the ipr variable. based on table 3.4, the multiple linear regression equation is obtained as follows: ipr=2.108+0.149fdr-0.007lcr+0.069pcr-0.170npf+0.315msmes+0.086roa+ e (3) based on table 3.4 and equation three above, it is known that the relationship between variables is as follows:  it is known that the value of the regression coefficient of fdr is 0.149 with a prob. value of 0.048, which is < a significance level of 0.05, so ho is rejected, which means that fdr has a positive and significant effect on ipr;  it is known that the regression coefficient value of the lcr is -0.007 with a prob. value of 0.098, which is > a significance level of 0.05, so ho is accepted, which means that lcr has no significant effect on the ipr;  it is known that the regression coefficient value of the pcr is 0.069, with a prob. value of 0.000, which is < a significance level of 0.05, so ho is rejected, which means that pcr has a positive and significant effect on ipr;  it is known that the regression coefficient value of the npf is -0.170 with a prob value of 0.014, which is < a significance level of 0.05, so ho is rejected, which means that npf has a negative and significant effect on the ipr;  it is known that the regression coefficient value of msmes is 0.315 with a prob value of 0.000, which is < 0.05 significance level, so ho is rejected, which means that msmes have a positive and significant effect on ipr;  it is known that the regression coefficient value of roa is 0.086 with a prob value of 0.041, which is < a significance level of 0.05, so ho is rejected, which means that roa has a positive and significant effect on the ipr. international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 37 4.2 hypothesis testing equations model ii 4.2.1 normality test 5.2.1 the results of the normality test for equation model ii of this study are as follows: 0 2 4 6 8 10 12 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 series: standardized residuals sample 2012 2019 observations 80 mean -4.05e-16 median -0.035801 maximum 2.428749 minimum -1.614443 std. dev. 0.748429 skewness 0.204607 kurtosis 3.297264 jarque-bera 0.852741 probability 0.652874 figure 3.2 normality test b based on figure 4.2, it is known that the probability value of the j-b statistic is 0.823854. therefore the probability p-value, namely 0.652874, is greater than the significance level, namely 0.05. this means that the assumption of normality is fulfilled. 4.2.2 autocorrelation test the results of the autocorrelation test for equation model ii of this study are as follows: table 3.5 autocorrelation test log-likelihood -89.82957 hannan-quinn criteria. 2.467366 f-statistic 26.74382 durbin-watson stat 2.495213 prob(f-statistic) 0.000000 based on table 3.5, the value of the durbin-watson statistic is 2.215413 because the durbinwatson statistic value lies between 1 and 3, namely 1 < 2.495213 < 3, then the nonautocorrelation assumption is fulfilled. in other words, there was no high autocorrelation symptom at the residuals. 4.2.3 regression test the results of the autocorrelation test for equation model ii of this study are as follows: table 3.6 regression test variable coefficient std. error t-statistic prob. international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 38 c 4.005472 0.488178 8.204942 0.0000 fdr_roa 0.039497 0.014362 2.750102 0.0075 lcr_roa -0.349883 0.126735 -2.760745 0.0073 pcr_roa 0.025011 0.009685 2.582381 0.0118 npf_roa -0.593443 0.204243 -2.905568 0.0048 msmes_roa 0.153998 0.033476 4.600262 0.0000 r-squared 0.643750 mean dependent var 3.842625 adjusted r-squared 0.619679 s.d. dependent var 1.253928 s.e. of regression 0.773300 akaike info criterion 2.395739 sum squared resid 44.25148 schwarz criterion 2.574391 log likelihood -89.82957 hannan-quinn criter. 2.467366 f-statistic 26.74382 durbin-watson stat 2.495213 prob(f-statistic) 0.000000 the f test aims to test the independent variables together or simultaneously on the dependent variable. based on table 3.6, it is known that the prob value. (f-statistics), which is 0.000000 < 0.05, it can be concluded that all independent variables with roa moderation, namely fdr*roa, lcr*roa, pcr*roa, npf*roa, umkm*roa simultaneously, have a significant effect on variables ipr. furthermore, according to table 3.6, the multiple linear regression equation is obtained as follows: ipr=4.005+0.039fdr*roa-0.349lcr*roa+0.025pcr*roa0.593npf*roa+0.153msmes*roa+ e (4) furthermore, based on table 3.6 and equation 4 above, it can be analyzed the variable relationship between roa and ipr moderation with the following independent variables:  it is known that the regression coefficient value of fdr*roa is 0.039 with a prob value of 0.007, which is < a significance level of 0.05, so ho is rejected, which means that fdr*roa strengthens the relationship between fdr and ipr, which is positive and significant; international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 39  it is known that the regression coefficient value of lcr*roa is -0.349 with a prob value of 0.007, which is < 0.05 significance level, so ho is rejected, which means lcr*roa strengthens the relationship between lcr and ipr, which is negative and significant;  it is known that the regression coefficient value of pcr*roa is 0.083 with a prob value of 0.011, which is < a significance level of 0.05, so ho is rejected, which means that pro*roa strengthens the relationship between pcr and ipr, which is positive and significant;  it is known that the value of the regression coefficient of npf*roa is -0.593 with a prob value of 0.004, which is < a significance level of 0.05, so ho is rejected, which means that npf*roa strengthens the relationship between npf and ipr, which is negative and significant;  it is known that the regression coefficient value of msmes*roa is 0.153 with a prob value of 0.000, which is < 0.05 significance level, so ho is rejected, which means msmes*roa strengthens the relationship between msmes and ipr, which is positive and significant. 4.3 discussion 4.3.1 effect of fdr on ipr this study shows that the financing distribution ratio (fdr) has a positive and significant effect on the islamic performance ratio (ipr). therefore, the higher the fdr, the better the performance of islamic banks represented by the ipr ratio. this is because the distribution of financing to the public is the core business of islamic banks as an intermediary institution (ihwanudin, maulida, et al., 2020). furthermore, the implication of the excellent function of the distribution of financing will increase the ability of islamic banks to distribute zakat (2.5% of their profits) and the ability of banks to channel equitable financing using cooperation contracts (mudharabah and musyarakah). in addition, the good intermediary function of islamic banks is shown in table 3.7 below, where the average financing distribution ratio (fdr) of islamic banks is 88.78%. this ratio shows that islamic banks can channel the funds they have collected because according to the provisions of se bi no.15/41/dkmp regulations, regarding the calculation of secondary statutory reserves and statutory reserves based on the loan to deposit ratio in rupiah, the minimum ratio the distribution of financing to third party funds (fdr) is 78%. this is in line with research by nugroho et al. (2020) and nugroho & anisa international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 40 (2018). the excellent ability of islamic banks in carrying out their business activities impacts the good financial and social functions of islamic banks, including the ipr. table 3.7 descriptive statistics variable mean standard deviation min max fdr 0.8877548 0.1048796 0.4126 1.0475 lcr 0.208069 0.0573609 0.1027 0.3441 pcr 0.0581071 0.2405964 0.0016 1.576 npf 0.0223429 0.0147082 0 0.0494 msmes 0.3165 0.1390035 0.1238 0.7449 roa 0.0062024 0.0186991 0.0809 0.0381 ipr 0.3696595 0.2746017 0.0017 1.3466 4.3.2 effect of labor cost ratio (lcr) on ipr the ratio of labor costs (lcr) is the most significant portion of overhead costs so that to control costs, islamic banks must be able to manage lcr optimally. this study shows that the lcr ratio has no significant effect on the performance of islamic banks or ipr. therefore, lcr does not directly influence the ipr where the number of employees in a company, including islamic banks, has determined the number of employees following the established organizational structure (dalton, todor, spendolini, fielding, & porter, 1980; kasarda, 1973). based on this, the cost of labor has been planned and can be estimated effectively. financial companies such as islamic banks, where most salary payments are based on fixed costs, labor costs cannot be directly related to the income received. however, the productivity of islamic bank employees is measured by the ability to innovate and create in making and developing products and services from islamic banks (gupta & singhal, 1993; roffe, 1999). 4.3.3 effect of promotion cost ratio (pcr) on ipr information is vital for society and consumers in choosing to use products and services (porter, 1980; sudirman et al., 2020). therefore the function of marketing communication is essential international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 41 for islamic banks to market their products and services to attract people to use islamic banks in their financial and business transactions (villarejo-ramos & sánchez-franco, 2005). this study shows that the promotion cost ratio (pcr) positively and significantly affects the islamic performance ratio (ipr). therefore, the higher the cost of promotion, it will impact the increased sales of islamic bank products and services. it has implications for the increased performance of islamic banks (ipr). this is in line with research conducted by patriana & nurismalatri (2018), blattberg & neslin (1989), and pauwels et al. (2003), which in their research states that promotion costs can improve the performance of islamic banks. furthermore, the use of promotional costs, according to rachmawati (2011), can be used for the following matters: (1) developing and introducing a product and service; (2) perform retention of existing customers; (3) communicating the products and services of a company to the public (marketing communication/marcom). in addition, based on table 3.7 above, the promotion cost ratio is still relatively small, namely 5.81%. therefore, based on these conditions, islamic banks must increase promotional costs again to improve their performance. 4.3.4 effect of npf on ipr the results of the statistical data processing show that the npf has a negative and significant effect on the ipr. the higher the npf will have implications for the lower ipr and islamic banks. this is in line with previous research conducted by setiawan & indrian (2016), wibisono & wahyuni (2017), and suhadak et al. (2013), where npf has a negative and significant effect on bank performance. the quality of financing (npf) for islamic banks is a significant financial indicator for islamic banks in maintaining the bank's reputation. this is because if the npf of a bank is very high, it indicates that the bank has a high potential risk, so that it has an impact on the decline in the reputation of the islamic bank in the community. (nugroho et al., 2017). according to nugroho & malik (2020), there are several mitigations that islamic banks can do in preventing low quality of financing, which include:  financing for prospective customers who are unable or unwilling to submit information/data required by the bank following applicable regulations;  financing for speculative purposes, including in this type of financing, includes financing for the purchase of unproductive land or if the land being financed is productive, the source of repayment of obligations to the bank is doubtful; international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 42  financing, proposed without the support of adequate financial and other information. customer/prospective customer data and information are adjusted to the financing segment as well as the applicable risk assessment standards in the bank;  financing to customers, both individuals and business entities, including the management of the said business entity, is problematic or destructive at other banks or other creditors. in addition, the results of this study are in line with previous research conducted by setiawan & indrian (2016) and wibisono & wahyuni (2017), where npf has a negative and significant effect on bank performance. if further analyzed, the average npf of islamic banks in this study is 2.23% (table 3.7). this indicator shows the quality of islamic bank financing is still relatively good because, according to the financial services authority (ojk) through regulation no. 15/pojk.03/2017 concerning determination of status and follow-up for commercial bank supervision, the maximum npf that the regulator can tolerate is a maximum of 5%. 4.3.5 affet of msmes on ipr islamic banks have different goals from conventional banks where the purpose of islamic banks is not only to achieve the profit aspect but also must meet the social aspects (people), environmental aspects (planet), and spiritual aspects (prophet) where conventional banks do not have these things. therefore, according to wajdi dusuki (2008b), islamic banks must be concerned for msmes so that products and services to msmes are a priority. based on the results of this study, the msmes financing disbursement ratio has a positive and significant impact on ipr. the high distribution of financing to the msmes segment will significantly impact the increase in performance or ipr. the results of this study are in line with previous research related to the effect of msmes on a positive impact on the bank performance (afkar, 2017). however, the share of sharia banks' distribution to the msmes segment was still relatively low, namely 31.65% (table 3.7). therefore, islamic banks must focus more on channeling financing to the msmes segment so that islamic banks can improve their performance even better. 4.3.6 affect of roa on ipr performance measurement for islamic banks still uses the same ratio indicator as conventional banks, which is roa. however, islamic banks, according to different objectives, should have international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 43 different performance indicators from conventional banks. therefore, in this study, the indicator of islamic financial performance uses the ipr ratio, where the components of the ipr are following islamic values such as zakat payments from islamic banks, fair contracts, and equitable income sharing (nugroho, mastur, & wahyono, 2021). this study indicates that roa has a positive and significant impact on ipr, so it can be said that performance achievement based on the roa perspective is in line with the ipr where the higher the roa will have implications for the increase in ipr. 4.3.7 affect of fdr on ipr with roa as moderation variable according to the results of this study, it is known that roa moderates the effect of fdr on ipr so that the direction of the effect is positive and significant. roa as a moderating variable strengthens the effect of fdr on roa so that the better the fdr and the better roa will have implications for increasing the ipr. according to nugroho et al. (2021), the distribution of financing as one of the main activities of islamic banks will have implications for the profit of islamic banks. therefore, based on the results of this study, the financial performance of roa strengthens the effect of fdr on the ipr. 4.3.8 affect of lcr on ipr with roa as a moderation variable the roa variable as a moderating variable, the effect of lcr on ipr, has a negative and significant effect. therefore an increase in lcr will be accompanied by a decrease in roa so that it will also impact the decrease in ipr. therefore, to maintain financial performance and social performance, a bank must maintain employee productivity and have an adequate competition to adapt innovations under market needs and desires. (khasanah, 2016). this is also in line with previous research conducted by faslah & savitri (2013) and c. w. utami (2002), which states that employee productivity impacts improving the company's financial performance, so that in this study if labor costs increase and are not accompanied by innovation and service quality, it will contribute to the decline in the performance of the islamic bank. this is in line with the cost leadership principle that islamic banks must carry out their business activities by having products and services of equal quality to large conventional banks and even foreign banks, but labor costs must be lower. furthermore, by referring to the results of this study, the higher the lcr, the lower the financial performance and social performance (ipr ratio) of islamic banks. this is in line with previous research conducted by waterman (2006), das et al. (2009), and bhatti & qureshi (2007) stated that the company must manage the productivity of its employees so that the output produced international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 44 can compete with the company's competitors. therefore, according to the results of this study, islamic bank employees must have better productivity than conventional banks. this is because the phenomenon of the performance of islamic banks is still not better than conventional banks. referring to table 3.7 above, the average labor cost ratio (lcr) of islamic banks is 20.81% of the total income received by islamic banks. therefore, the share of islamic bank labor costs to total overhead costs of 20.81% is relatively competitive than conventional banks in the range of 22% (adawiyah & rahadian, 2020). opportunities to improve the performance of islamic banks can be through product innovation that is by the needs and desires of the community and products that are different from conventional banks, such as pawn financing products (bahari et al., 2021). 4.3.9 affect of pcr on ipr with roa as moderation variable the low level of islamic financial literacy in indonesia requires the socialization and dissemination of information related to islamic financial products and services to increase islamic financial literacy, which has implications for increasing market share. therefore, this study shows that roa as a moderating variable strengthens the effect of pcr on ipr where pcr has a positive and significant effect on ipr. therefore, the higher the promotional costs, which roa strengthens, will also impact ipr. therefore, promotional activities for islamic banks are vital because the implication is to increase profits and the social performance of islamic banks. this is in line with previous research that the effectiveness of promotion can increase performance. (ailawadi, harlam, césar, & trounce, 2006; ductor & grechyna, 2015) 4.3.10 affect of npf on ipr with roa as moderation variable the effect of financing quality (npf) on ipr, moderated by the roa variable, has a negative and significant impact. therefore, the higher the level of financing quality will impact the decline in the performance of islamic banks (ipr), which is also caused by a decrease in roa. the increase in the ratio of non-performing financing impacts the increased risk of loss in the future. the more risky the islamic bank is, the savers will feel insecure about saving or investing in the islamic bank. therefore, low public trust can impact the decline in the financial performance of islamic banks, which also has implications for the decline in the social performance of islamic banks. the results of this study are in line with the research conducted by nugroho et al. (2020). in contrast, the quality of islamic bank financing is an essential factor in determining its performance. international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 45 4.3.11 affect msmes on ipr with roa as moderation variable the distribution of financing to msmes should be the identity of a sharia bank and sharia banks' superior products and services. furthermore, this study shows that the roa variable strengthens the relationship between the msmes financing ratio variable to the ipr. the effect of the ratio of msme financing to ipr is positive and significant. therefore, with the increase in the distribution of financing to the msme segment, there is a positive impact on financial performance. the performance of islamic banks both in financial and social aspects also increases. based on this study's results, the financial aspects and social aspects as performance indicators (ipr) of islamic banks are embedded from previous performance indicators (return on assets-roa). this is in line with previous research that islamic banks focus on four aspects: financial aspects, social aspects, environmental aspects, and spiritual aspects (nugraha et al., 2020). 4.3.12 affect of all variables (fdr, lcr, pcr, npf, msmes, and roa) on ipr according to the research results in table 3.4 where the variables fdr, lcr, pcr, npf, msmes, and roa simultaneously affect ipr. the effect is 52.40%, while other factors influence the remaining 42.60%. furthermore, the study results are based on table 3.6, where roa is a moderating variable. it is known that the simultaneous test results of the fdr, lcr, pcr, npf and msmes variables simultaneously have a significant effect on ipr. in addition, it is known that the magnitude of this influence is 61.96%, other factors influence the remaining 38.04%. based on the simultaneous test, it can be analyzed that the roa variable as moderation strengthens the relationship between the fdr, lcr, pcr, npf, and msmes variables. this is indicated by the magnitude of the influence of the fdr, lcr, pcr, npf, msmes, and roa variables on the ipr before the roa variable is included as a moderating variable, which is 52.40%. furthermore, after the roa was included in the equation as a moderating variable, the effect increased significantly to 61.96%. therefore, the roa variable as a moderating variable can increase the influence by 9.56%. based on these results, it can be seen that the financial performance ratios based on roa and ipr performance ratios in islamic banks are closely related, where the increase in financial performance will also have an impact on the increased financial performance and social performance of islamic banks. international journal of commerce and finance lucky nugroho & tatik maryanti & rifki ismal & akhmad affandi mahfudz 46 5. conclusion this research was conducted to answer research questions about the factors that can affect the financial performance and social performance of islamic banks. following the results and discussion in this study, the islamic performance ratio (ipr) can be used as a complement to measure the performance of islamic banks in addition to return on assets (roa). based on the research results, fdr has a significant positive effect on ipr. pcr has a significant positive effect on ipr, npf has a significant negative effect on ipr, roa has a significant positive effect on ipr. furthermore, the financing ratio for msmes has a significant positive effect on ipr. meanwhile, the lcr variable does not affect ipr. furthermore, the moderating variable roa strengthens the relationship of all direct and significant variables to ipr, namely roa moderates the positive and significant effect of fdr on ipr, roa moderates the negative and significant effect of the lcr ratio, roa moderates the positive and significant effect of pcr on ipr, roa moderates the negative and significant effect. npf against ipr and roa positively and significantly moderate msmes against ipr. references acar, m., & temiz, h. 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(2017). pengaruh car, npf, bopo, fdr, terhadap roa yang dimediasi oleh nom. jurnal bisnis & manajemen, 17(1), 41–62. widyaningrum, l., & septiarini, d. f. (2015). pengaruh car, npf, fdr, dan oer terhadap roa pada bank pembiayaan rakyat syariah di indonesia. jurnal ekonomi syariah teori dan terapan, 2(12), 970–985. international journal of commerce and finance, vol. 9, issue 1, 2023, 188-216 * istanbul ticaret university, turkey, 0000-0002-7295-5733, arzan.dilek@istanbulticaret.edu.tr ** istanbul ticaret university, turkey, 0000-0002-6837-9649, anttekeoglu@ticaret.edu.tr 188 the probiotic market in turkey arzan dilek* aşkım nurdan tümbek tekeoğlu** submitted: 24.05.2023 accepted: 25.06.2023 published: 06.07.2023 abstract many of today's health-focused initiatives are centred around the gut microbiome. a healthy gut microbiome has been proven to aid in the healthy functioning of the digestive system, strengthen the immune system, and maintain overall body health. therefore, the development and use of microbiotic products are increasing rapidly, and turkey has become an important market in this area. in order to define the dynamics of this market, determine its growth potential, and make predictions about the future of the sector, an in-depth case study was conducted based on an interview with industry cognoscenti haydar yılmaz. during the interview, topics such as the history and current state of the industry, growth potential, market trends, consumer behaviour, regulations, and competition were discussed. in addition, detailed information was gathered on the product ranges, production processes, and r&d activities of companies operating in the sector. this information provided an important resource for understanding the industry's current state and identifying future growth opportunities. in the study, the data obtained were analyzed using the narrative analysis method. as the importance of healthy ageing and gut health continues to grow, microbiome and probiotic products are expected to be used more in marketing strategies. the microbiota strategy can help companies prepare for the effects of the microbiome in both the short and long term. keywords: microbiome, microbiota, functional food, probiotic market in turkey jel classification: l11, l15 1. introduction the microbiome health trend is causing a significant shift in the business world due to increased consumer awareness of health and nutrition. as this trend continues, significant changes are expected in the food and pharmaceutical industries. companies that focus on microbiome health in their products will be better equipped to meet consumers' needs accurately and effectively. mailto:arzan.dilek@istanbulticaret.edu.tr international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 189 furthermore, the continued emphasis on microbiome research in medical studies and disease diagnosis will highlight the importance of collaboration between the business and health sectors. the effects of the microbiome are becoming increasingly understood and causing significant changes in the business world. the gut-brain axis interaction, known as the microbiome, is believed to affect mental health. it has been shown that a healthy microbiome can slow aging and reduce the risk of dementia. in turkey, the emerging microbiome and probiotics sector, along with increasing entrepreneurial companies, could lead the way in producing healthier and antibiotic-free products in the european and middle eastern markets. this sector offers significant opportunities for both the health and business sectors. the purpose of this study is to examine the effects of the microbiome health trend on the business and health sectors. 2. literature review according to world-renowned futurists faith popcorn and adam hanft, companies are trapped in this paradox because they focus on short-term goals. many sectors, such as cpg companies, fitness brands, and travel companies, are facing the effects of the microbiome. therefore, companies need to break free from this paradox and prepare for where the world is heading (popcorn and hanft, 2023). an article in the new york times in 2021 reported that a study published in the journal nature metabolism showed that as people age, the types of microbes in their gut tend to change, and this change is important for the potential for healthy aging. people with a unique profile of shifting gut microbiome have been found to have higher levels of health-promoting compounds produced by gut microbes fighting chronic diseases. (o'connor, 2021) research on modulating the bacterial community in the human body and the microbiome continues to grow rapidly. there are numerous scientific issues that need to be addressed when evaluating prebiotics and fibers, live bacteria, or postbiotics (thermally killed microbes or components that provide health benefits). at the same time, product development opportunities arise in this complex and challenging market (montemarano, 2022). at the future of the microbiome summit organized by the trust transparency center in december 2021, scientists discussed the latest developments in proving the benefits of "biotic" international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 190 supplements. at the same time, market experts have started to develop successful commercialization strategies based on the digestive, immune, mood, sleep, and inflammation benefits of these supplements (montemarano, 2022). in this context, companies need to include the microbiome in their strategies while focusing on their short-term goals. a microbiome strategy can help companies prepare for where the world is heading and consider the effects of the microbiome in the short and long term. a personalized approach to the microbiome is expected to usher in a new era and help with more accurate diagnosis and treatment of diseases. products containing components that are beneficial to microbiome health, such as functional foods and probiotics, are being developed and launched by the food and pharmaceutical industries. this trend will have a significant impact on the healthcare sector and many other industries (matusheski et al., 2021). two significant events occur during childbirth. the first is the birth of a new human being, and the second is the seeding of the baby's microbiome, an invisible event that affects the baby's lifelong health. the seeding of the microbiome helps the baby acquire a healthy bacterial community and activate the immune system, thus making the baby more resilient to diseases throughout their life. however, interventions such as the use of synthetic oxytocin, antibiotics, cesarean section, and formula feeding can prevent or completely obstruct the transfer of microbes from the mother to the baby (harman and wakeford, 2017). the interaction between the human microbiome and the immune system affects many metabolic functions and influences our well-being. additionally, the interaction between humans and microbes can play a significant role in determining the state of human health or disease. dysbiosis is associated with many diseases, including skin, inflammatory, metabolic, and neurological disorders (malla, dubey, kumar, yadav, hashem, & abd_allah, 2019). the microbiome is a collection of genomes of not only bacteria but also fungi, viruses, and other microorganisms that can impact human health. 2.1. human microbiota and gut health according to montemarano (2022), "remembering where we came from is important. the microbiome is a collection of the genomes of all microorganisms, not just bacteria but also fungi, viruses, and their dna, rna, and proteins, that can all impact human health." the microbiota is a complex community of microorganisms that live in the human body, including international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 191 bacteria, viruses, fungi, and other microscopic organisms found in 18 different locations, including the skin, mouth, lungs, and genital area. the most diverse microbiota is found in the intestines. intestinal microbiota begins to develop during pregnancy and newborns born normally and breastfed receive more bacteria from their mothers. this early bacterial exposure is important for the development of healthy microbiota and is important for our overall health and well-being (dash, clarke, berk, & jacka, 2015). research on the human microbiota and gut health has gained momentum in recent years. however, initial studies on this topic began many years ago. for example, in 1907, élie metchnikoff conducted studies on the effects of probiotic bacteria found in the intestines on health (metchnikoff, 1907). in later years, in the 1970s, research began on the effects of gut microbiota on human health. in these studies, it was discovered that gut microbiota has more significant effects on the immune system, metabolism, and nervous system than on gut health. in particular, it was found to have an impact on many systems, such as the immune system, metabolism, and nervous system (turnbaugh et al., 2006). in the 2000s, many studies were conducted on the importance of human microbiota and gut health. in 2007, the national institutes of health launched the "human microbiome project". this project aims to contribute to the understanding of human health and diseases by determining the number, types, and genomic structures of microorganisms in the human body (the human microbiome project consortium, 2012). the effect of western-style nutrition on microbiota has been researched. african vegetarian children's microbiota was compared with italian children's microbiota. bacteroidetes species such as prevotella and xylanibacter were higher in african children's microbiota. these bacteria produce energy from plant polysaccharides. medications and dietary interventions can alter the composition of the human microbiota, which can have broad effects on individual microbes. everyone's microbiome is different, so they can respond to treatments in different ways (büyüktuncer demirel, 2017; altındiş, 2023). as we grow up, we continue to acquire and harbor different types of microorganisms. we get them from the foods we eat, the water and air we drink, and the people and animals we come into contact with. these microorganisms can be friends or foes and can affect our health in different ways. in a healthy human body, the number of friendly bacteria is primarily dominant. international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 192 these friendly microorganisms provide many benefits, including aiding digestion, producing vitamins and other nutrients, and supporting our immune system. the ratio of friendly/enemy microorganisms is estimated to be about 80/20. however, microbiota imbalances such as the excessive growth of harmful bacteria can lead to various health problems (dash, clarke, berk, & jacka, 2015). microorganisms have a significant impact on human health. in a healthy human body, friendly bacteria dominate and provide benefits such as digestion, vitamin production, and immune system support. probiotics are live microorganisms that colonize the intestinal system and improve microbial balance. fermented dairy products, malt, and grain extracts are the best sources of probiotics. prebiotics are indigestible substances that selectively support the growth of probiotics. nutrition plays a critical role in regulating gut microbiota, and the effects of different dietary patterns, components, and nutrients on microbiota are being studied. nutrition recommendations can be personalized, but a balanced intake of carbohydrates, fats, and proteins from the four basic food groups is essential. increased intake of prebiotics and fermented foods is also recommended (çakmak, 2018; erbaş, 2016; büyüktuncer demirel, 2017). research on human microbiota and gut health has been ongoing throughout history. today, research in this field is helping to better understand the effects of gut microbiota on health. the gut is a complex ecosystem containing different bacteria, fungi, and other microorganisms that are vital for healthy gut function. imbalances in human microbiota can lead to gastrointestinal disorders as well as many chronic diseases, such as obesity, diabetes, allergies, asthma, and even autism (marchesi and ravel, 2015). microbiota tests are technologies used to determine the diversity, density, and types of microbiotas in the gut. these tests can help healthcare professionals understand patients' microbiota profiles and create treatment plans accordingly. they can also be used to track personal health and well-being (david et al., 2014). the use of microbiota tests is beneficial in many areas, including determining health status, diagnosing diseases, determining drug therapy, preparing nutrition programs, and preventing diseases (o'hara and shanahan, 2006). however, it is important to have sufficient knowledge about the limitations and correct interpretation of these tests. the microbiome is a collection of microorganisms in the human body, and early bacterial exposure is important for the development of healthy microbiota. western-style diets can have international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 193 negative effects on the microbiota. the human body interacts with microorganisms through contact, and in a healthy body, friendly bacteria are dominant. microbiota imbalances can cause health problems, and probiotics, prebiotics, and balanced nutrition are important for gut health. 2.2. functional foods and dietary supplements functional foods are a marketing term used to describe foods enriched with ingredients that provide health benefits. the popularity of such products has increased with the growing connection between health, nutrition, and diet. manufacturers develop added ingredients that provide value to the food. for example, probiotic products can improve gut health thanks to the lactobacillus and bifidobacterium organisms included in dairy products. functional foods can be consumed in a normal food form and should not be in the form of a pill, capsule, or other dietary supplement. these types of products continue to grow rapidly in the global market (tastan, n.d.; çakmak, 2018). thanks to the beneficial components they contain, they protect and improve the body and reduce the risk of developing diseases. special functional foods such as probiotics and prebiotics have significant benefits for human health. consumption of these foods can encourage healthy eating within society and reduce healthcare expenses and workforce losses. the promotion and preference for functional foods can help people lead healthier and longer lives (erbaş, 2016). the effects of functional foods on human physiology are quite diverse. these include positive effects on early development and growth, regulation of metabolic processes, aiding in blood sugar control, and antioxidant effects. in addition, other health benefits of functional foods include strengthening the immune system, reducing the risk of cardiovascular disease, improving digestive health, and enhancing brain function (çakmak, 2018). people prefer to take preventive measures for a healthy and quality life, and dietary choices are among the most important measures. functional foods are among the foods consumed for this purpose and their trade volume is increasing. in turkey, there has been an increase in the quantity and variety of functional foods since 2005 (erbaş, 2016). functional foods are foods that contain components with proven health benefits that positively affect human health. these foods may have short-term effects or the potential to reduce the risk of long-term diseases. the science of functional foods aims to create conditions to maintain or improve current health status and reduce disease risk. the benefits of functional foods are seen international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 194 in several important health areas such as cardiovascular physiology, gastrointestinal health, cognitive and mental health, physical performance, and fitness. these potential health benefits, combined with an increasing health consciousness in modern societies, make functional foods an effective marketing tool. furthermore, deriving these products from natural sources and reducing the use of chemical additives may also align with consumers' tendencies to follow a healthier and more natural diet. 2.3. microbiome and probiotics probiotics can be associated with fermented foods that have been consumed by humans for thousands of years. for example, about 2,000 years ago, fermented rice water called "kombucha" started to be consumed in china (jayabalan et al., 2014). also, fermented dairy products such as kefir and yogurt have historically been considered probiotics in the middle east (hutkins, 2018). however, the term probiotic was defined in the early 20th century. it was first used in 1907 by elie metchnikoff, a nobel prize-winning scientist. metchnikoff suggested that yogurt consumption could protect health and called it "a yogurt-based therapy" (metchnikoff, 1907). but the modern meaning of probiotics was introduced in the 1960s with the lactobacillus casei shirota (lcs) probiotic developed by a japanese researcher named minoru shirota. lcs is found in "yakult," a fermented dairy product introduced in japan in 1935 and still sold today (lee and salminen, 1995). today, probiotics are considered beneficial live microorganisms for the body, and potential benefits in areas such as gut health, immune system function, inflammation, allergies, and even mental health have been investigated in many studies (hill et al., 2014). although probiotics are traditionally associated with fermented foods, their modern meaning and usage have developed through research on their potential benefits for human health. as research in this field continues, more information will be gained about the effects of probiotics on health, and new products and treatments will be developed to help people achieve a better quality of life. 2.3.1. probiotic market international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 195 the popularity of functional foods is based on a variety of factors, but health claims or implications do not guarantee success. factors such as consumers' ability to measure product benefits and changing demands that affect purchasing behaviors are important. processors must take these changes into account in their marketing strategies, target the appropriate market segment, and ensure that new products are suitable for consumers' future health goals (sloan, 1998; childs, 1997). according to the gwr (2020) report, japan is the leader with over 80 recognized functional foods and legal status for functional foods. europe has seen increased interest, particularly in probiotic foods, but the united states views probiotic foods as niche products. the functional food market is expected to continue to grow. the global probiotics market was worth $58.17 billion in 2021 and is expected to grow at a cagr of 7.5% from 2021 to 2030. probiotics play a significant role in preventive healthcare due to their positive effects on gut health. therefore, increasing awareness of preventive healthcare could increase market growth. in europe, probiotic dairy products, especially probiotic yogurts, and milks, have been the most active area in the functional food market. in 1997, these products accounted for 65% of the functional food market in europe and were valued at $889 million. probiotics, prebiotics, vitamins, and minerals are among the most important components of functional foods. japan is a leader in the functional food market with over 80 recognized functional foods and legal status for functional foods. europe has shown particular interest in probiotic foods. the functional food market will continue to grow. the functional food market in europe has focused on probiotic and prebiotic dairy products, while the united states has focused on food fortification with vitamins and minerals. probiotic cultures have been added to yogurts and fermented dairy products in europe, with brands such as lc1, vifit, actimel, and yakult leading the market. germany saw significant growth in the yogurt market due to the launch of probiotic products such as nestlé's lc1. misleading claims and existing laws on food safety are applied to functional foods in the absence of special legislation. nestlé's lc1, containing the l. tacidophilus la1 strain, has been extensively researched and claimed to stimulate the immune system. the different approaches to functional foods in various countries have resulted in related but distinct developments. (young, 1996; hilliam, 1998). international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 196 consumer research has identified that those who purchase functional foods are typically women, well-educated, high-income, between the ages of 35-55, and actively interested in health. women and high-income individuals have been found to have higher beliefs in the health benefits of food compared to men (childs, 1997). additionally, there is a positive relationship between belief in the health benefits of nutraceuticals and education level, which can be associated with higher income. functional food consumers are generally slightly older and better educated than the general population (gilbert, 1994). this trend is partly due to an aging population, increasing health concerns, and rising healthcare costs. therefore, functional foods that have effects on aging, energy levels, immunity, and certain measures of disease treatment will become more important (childs, 1997). additionally, the proportion of women over 40, who are the population segment most concerned about nutrition, will continue to increase. in 29 years, marketing food products for disease prevention and treatment will be widespread, and marketers will target the new generation of young adults who are more aware of existing health issues and risk factors such as coronary artery disease and cancer (sloan, 1998). 2.3.2. the probiotics market in turkey in recent years, with the increase of the healthy lifestyle trend in turkey, there has been a significant growth potential in the probiotics market. according to data from the turkish statistical institute, healthcare spending in turkey reached 207.6 billion turkish liras in 2021 (turkish statistical institute, 2021). this increase reflects the growing interest of consumers in healthy living and preventive healthcare services. demand for probiotic products is also increasing with this trend. there is no clear data on the size of the probiotics market in turkey, but according to a survey conducted by the turkish food and beverage industry associations federation (tgdf), the market size of probiotic products in turkey exceeded $200 million in 2019 (turkish food and beverage industry associations federation, 2020). factors behind this growth include increased consumer health consciousness, the sensitivity of the aging population to health problems, and scientific evidence of the benefits of probiotics for gut health. international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 197 according to a study conducted by kağan, tuğçe, and yurttaş (2019) on turkish consumers, the majority of participants had heard of probiotics and were consuming foods that contained them. those who did not consume probiotics either did not know the term or did not prefer them due to their high prices. advertising and the media were believed to influence probiotic consumption, which is generally consumed with meals. probiotics are defined as microorganisms or microbes that, when consumed, positively affect consumer health. the global probiotics market is valued at 50 billion euros and is expected to reach 55 billion usd by 2024 in yogurts, beverages, ice creams, and other food products. the probiotics market in turkey will double within 5 years. kefir is a popular probiotic product in turkey. market data on the medical use of probiotics for human health is inadequate (fortune turkey, 2020). the probiotics market is rapidly growing, especially in europe, with yogurt and fermented dairy products leading the way. long-term usage depends on clinical evidence supporting health benefits, accurate consumer knowledge, effective marketing strategies, and high-quality products. the majority of companies operating in the sector in turkey are less than 5 years old, with some having developed their first probiotic products with tubitak entrepreneurship support. although companies that sell human probiotic drinks or drug additives generally import them through distributors from abroad, there are also companies in turkey that produce them (tastan, n.d.). the growth potential of the probiotics market in turkey is associated with the production and consumption of processed foods, dairy products, yogurt, and kefir that contain probiotics. however, it is important to pay attention to issues such as determining product quality, providing accurate and sufficient information on product labels, and controlling and regulating production processes in the production and marketing of probiotic products. 3. research methodology 3.1. the purpose and scope of the research this study aims to examine the works of producers in turkey regarding microbiome and probiotic products. an interview was conducted with industry expert haydar yılmaz to analyze international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 198 the history and current state of the microbiome and probiotic market in turkey, as well as the dynamics of the market in the country. 3.2. importance, method, and limitations of the research the microbiome and probiotics market has significant potential worldwide. however, in turkey, the level of knowledge and awareness in this field has not yet been reached, and the lack of sufficient information among consumers is a limiting factor for market growth. therefore, it is important to work to understand the potential of the market and increase consumer awareness. turkey's production capacity could increase, especially the food industry could play an important role in this area. however, limited knowledge and awareness may hinder more effective use of production capacity. to examine the specifics of the market, marketing tactics, and export structure, an interview with probiotic industry specialist haydar yılmaz was conducted. the conclusions of this approach, however, are purely based on the participant's viewpoint, and the study's scope is constrained. 4. results in this research, specific questions were prepared, and answers were obtained from a specific participant. these answers were grouped according to relevant categories. 4.1. history of probiotics and yogurt the discovery of probiotics took place in the 1900s, with the microbiology department of the pasteur institute being the pioneer in this field. the nobel prize in medicine for the discovery of probiotics was awarded to a doctor named pasteur, who worked at the pasteur institute. yogurt, which is considered a fermented food in europe, did not exist in the past. haydar bey shared the story of isaac karasu, a sephardic jewish doctor, who had to migrate to barcelona after facing persecution following greece's independence. at that time, a disease known as the influenza pandemic caused the death of 40 million people according to official records. however, according to some sources, the actual number could be up to 250 million people, as some countries did not record deaths. spain's non-involvement in the war allowed for accurate records to be kept and played a role in revealing the actual number of deaths. the international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 199 pandemic caused many states to suffer serious losses in the war and even affected the end of world war ii. one story tells of a doctor named i̇zak karasu in spain who reduced the symptoms of influenza patients by giving them yogurt. i̇zak became famous among the public for the miraculous effect of yogurt, and started selling it as a medicine in pharmacies, eventually growing the business into the world-renowned danone brand named after his son, daniel. in another story, a family of dairy farmers in samatya made a living by producing yogurt and sent their sons to paris for education. however, after their father's death and money problems, their plans fell apart. to stay in paris, they decided to stick with what they knew best and produce yogurt. they set up a yogurt stand under the eiffel tower, but the yogurt was unknown in france and received little interest from the public. however, the young men went to pasteur, who was studying bacteria at the time, and requested that he examine the yogurt. pasteur wrote a document stating, "i have examined the yogurt and found beneficial bacteria within. i recommend it to all of the people of paris." as a result, yogurt became the second most consumed product after wine, and this process continued until the discovery of antibiotics. this is how yogurt and its beneficial bacteria began to be known in european countries. the discovery of penicillin by alexander fleming in 1927 and its subsequent development into antibiotics by other scientists had a significant impact on the medical world. the use of antibiotics to treat diseases, particularly with the widespread adoption of the marshall plan after world war ii, has been hailed as a miraculous cure. however, overuse of antibiotics has been shown to weaken the immune systems of individuals. prior to antibiotics, there were thousands of beneficial bacteria in the human gut. antibiotics killed off many of these bacteria, leaving only a few types to thrive and leading to weakened immune systems. many countries established antibiotic manufacturing facilities and antibiotics were widely used. however, this caused concern among experts. many medical professionals, including the world health organization, began warning about the harmful consequences of excessive antibiotic consumption. despite these warnings, the pharmaceutical and chemical lobbies were reluctant to lose the huge profits associated with antibiotics. it is considered a turning point in the 1970s and 80s, with the emergence of the knowledge that probiotics strengthen the immune system and shed light on the production of probiotic fermented foods. thanks to nestle's pioneering international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 200 efforts in this field, many companies have started producing probiotic yogurts. in turkey, nestlé made a collaboration attempt with gönen mis süt factory in 1998. however, this attempt was left incomplete at that time due to the inadequacy of regulations in turkey. he described the next process as follows: “actually, it was in 2004, after i started producing kefir, that it became popular in turkey. the reason i'm mentioning this is because it was around this time that people started becoming aware of the importance of probiotics for boosting the immune system after taking antibiotics. what's interesting is that turkey has the highest rate of antibiotic use in the world, which is kind of strange considering how much we now know about the negative effects of antibiotics on the body.” furthermore, the importance of probiotics for the health of people in turkey has been emphasized, with the statement that due to our weakened immune system, we need probiotics more. functional foods, which are foods that have a positive effect on health, and probiotics, have become popular worldwide, and it has been suggested that we need to understand and promote probiotic use in turkey. 4.2. history of the probiotic market in turkey the probiotic yogurt manufacturer nestle in switzerland was approached by the chairman of tekfen holding, nihat gökyiğit, in 1998 about producing the product in turkey. in order to start manufacturing probiotic yogurt in turkey, they came to an arrangement with nestle and bought a stake in the mis süt facility. however, the ministry of health noticed and started talking about the problem because of an overly ambitious promotional campaign during the launch. the ministry sought an opinion from a probiotic expert professor from the department of dietetics at hacettepe university, who advised against authorizing the consumption of probiotic yogurt. the ministry of health at the time forbade the selling of probiotics. haydar bey said for that period; "it's pretty interesting. i also had a chat with some food engineers working at a dairy factory in gönen. they were thrilled as they had studied probiotics in school and were up to date with the latest academic knowledge. however, they were also shocked and upset about the situation. afterwards, they even started a kefir project, but unfortunately, the factory management and owners didn't want to hear anything related to culture. they said, 'we've already faced enough international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 201 problems. do whatever you want, but it won't work for long.' the engineers went ahead and did it, but the project didn't last very long." as turkey approached 2003, it went through a period in which a rapidly implemented and poorly prepared approach was adopted, which hindered development. the introduction of probiotic products in turkey was delayed significantly due to inadequate marketing strategies and a lack of awareness. the marketing of traditional yogurt in small portions of 90 grams increased the importance of product presentation. some brands applied a marketing strategy focused only on reducing bloating, without using the term "probiotic." during this period, there were deficiencies in marketing and creating awareness. haydar bey characterized this period as "an interesting time" in general. “at the end of that period, some of them were eliminated, there were only 2-3 brands that could survive in a few years.” the majority of probiotics produced in turkey are generally intended for industrial use and are rarely accessible to end-users. therefore, a large portion of the products that reach end-users have to source their probiotics from abroad. however, in recent years, there has been an increasing interest in probiotic production in turkey. as people begin to adopt healthier lifestyles, domestic manufacturers are also looking for opportunities in this field. as a result, probiotic production in turkey has started to increase. especially in recent years, domestic probiotic producers are working to offer more natural and organic products that are in line with healthy living trends. additionally, efforts are being made to ensure that domestically produced probiotics reach end-users more quickly and economically. 4.3. probiotic industry world trends the global probiotic functional food market is rapidly growing, and the use of direct probiotic supplements is also increasing. when comparing europe and the united states, the probiotic market in the united states appears to be more advanced. in the european union, vitamin supplements still dominate the market, but there is an increasing amount of information being shared about the benefits of probiotics. platforms have been established in america to discuss the functional benefits of probiotics and how they can be proliferated. topics such as which international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 202 fruit powders or enzymes should be consumed are also addressed on these platforms. however, the use of probiotic supplements and yogurts is still not widespread in the european union and turkey. instead, vitamin supplements such as vitamin c or vitamin d are preferred, despite their lack of direct impact on the immune system. it is necessary to increase awareness of the benefits of probiotics and encourage their proper use. 4.4. challenges in the industry and ways to overcome the perception and knowledge of probiotics remain insufficient in society. the information provided by nutritionists and dieticians in the medical field is full of misinformation, narrow frames, and templates. there are misunderstandings and misconceptions about what probiotics are. due to the inadequate knowledge of fermentation among medical professionals, they often provide inaccurate information based on hearsay. for example, a cardiologist may provide incorrect information about yogurt. to overcome these problems, companies have taken it upon themselves to provide information directly to consumers. haydar bey has expressed this situation as follows: "we were really worried, like super worried, about all this false information going around. you know how they say, if you throw a stone in a well, forty-wise men cannot get out! well, someone's throwing those stones and they're spreading like wildfire. so, i felt like we had to do something about it. i created two groups on social media, one for the second brain-gut probiotics “ikinci beyin bağırsakları probiyotikler” and the other for probiotic kitchen “probiyotik mutfak”. the second brain group was meant to be a platform where we could share accurate and scientific information about probiotics, instead of just relying on hearsay from family and friends. we needed to move away from that and create a separate platform. and that's what we did. as for the probiotic kitchen group, we wanted to create a space where people could share their experiences with making their own fermented foods like yogurt, pickles, cheese, and vinegar. people even showcased their own homemade yogurt and gave tips on how to avoid mistakes. we also added some health information there." the sharing of accurate information on probiotics and the production of probiotic foods at home is facilitated through social media groups. these groups also contain health information. international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 203 the ministry of agriculture allows only two words in health claims related to probiotics. no information, presentation, advertisement, or promotion can be made about the product other than these two words. the permissible information that can be used is as follows. “probiotics regulate the digestive system and support the immune system.” the restrictions and limitations on health claims of probiotics in turkey make it difficult to properly promote the benefits of probiotics, such as improving digestive and immune system health and alleviating allergic reactions. this hinders the transfer of awareness about the benefits of probiotics. providing information on the benefits of probiotics is only possible through communication channels such as social media, which allows sharing of studies conducted abroad. to inform consumers outside of these social media channels, the company owner has established a phone line where they can access a dietician. he expressed this problem as follows: "people have this perception that health issues can only be solved with medication, and they don't consider food or fermented food containing probiotic bacteria as a solution. this is a perception management created by the pharmaceutical lobby. people think that if they have a problem, they should take medication or go to a doctor, who will prescribe them medication. there is no consideration for nutrition outside of that. it's also worth noting that nutrition is not given much importance in medical schools." during the interview, it was also noted that the medical community in turkey is still skeptical about probiotics and that pharmaceutical companies are trying to hinder this process. it was stated that even the ministry of agriculture and forestry is behind these lobbies and does not want probiotics to become widespread in turkey. it was emphasized that even food and nutrition engineers do not have sufficient knowledge on this subject. however, it was noted that people can learn about probiotics through the communication opportunities provided by social media. although awareness of the health benefits of probiotic foods has increased in recent years, the lack of social responsibility, profit-orientedness, and lack of vision among businesses in turkey are obstacles to the development in the field of probiotics. this makes it difficult to promote the production and consumption of probiotic foods that will contribute more to the health of international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 204 society. in addition, misunderstandings regarding the presentation and promotion of probiotic foods have led to the withdrawal of some products. however, informing more people about the health benefits of probiotic foods and continuing to work in this field is crucial for public health. 4.5. "doğadan bizim" case study during his consultancy work on growth strategies for a small ezine cheese producer, haydar bey's relationship with probiotics began. due to the cheese's long aging period, he recommended a new product development strategy for the company's growth, and they decided to produce turkey's first probiotic drink, kefir. the company began producing kefir in 2003 and spent four years on the product's positioning, presentation, and communication. at that time, there was no regulation or directive regarding probiotic technology, and haydar bey stated that relevant individuals were not knowledgeable about this topic. before launching a product like “kefir”, it was emphasized that probiotic tests must be conducted to comply with relevant legal regulations. he described this period as follows: “in 2003, being the first to introduce probiotics in turkey was quite remarkable. at that time, no one really understood or could even pronounce the term, and you were like a don quixote figure. in the dairy industry, where everyone was producing standard products in those small wholesale food shacks, you came up with something called kefir. sometimes people couldn't even pronounce it properly and would mistake it for something else. it was quite an interesting experience. it was a challenging time for us, and on the other hand, the ministry wasn't prepared for it.” haydar bey worked as a consultant for the company until 2008 and had been away from this field for 9 years. however, during this period, he conducted more research on probiotics to increase his knowledge. in 2014, which was 67 months later, probiotics began to be sold primarily by danone and then by other companies (sütaş, pınar, eker, sek, etc.). as he puts it, "probiotic yogurt is bombarding turkey and they have also started making kefir." in 2003, turkey made slow progress with a hasty and poorly prepared approach. however, in 2017, a great opportunity arose for small businesses, as debates about industrial yogurts in the media encouraged people to make yogurt at home. thousands of tons of raw milk began to be transported to cities for yogurt production, and large farms were established during this process. international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 205 tanks that maintained the cold chain were used to ensure the preservation of the raw milk, which was also sold in supermarkets. he explained his entry to the market by saying: “one of the figures in the media was yavuz dizdar who kept saying "make yogurt at home, make yogurt at home..." so, i asked myself, okay, let's make yogurt at home, but with which yeast? fermentation, which is the process of making yogurt, requires a specific type of yeast. what will you make yogurt within the end? will you use your old yogurt, store-bought yogurt, yogurt from the local market, yogurt from a small shop down the street, yogurt brought in from a village, or yogurt brought in by the milkman? this crucial step was overlooked. we realized that this was a serious mistake because when you use yogurt that has been contaminated with other bacteria and fungi, in addition to the two yogurt bacteria, to make yogurt again, the chain continues. we set a goal to use a standard and established yeast for this process and to emphasize that it is important to do so for health and safety reasons. we started with the story of the natural science safety organization.” in 2017, haydar bey established the business as our packaging facility based on the idea that probiotic yeast-containing bacteria can enhance our development. since probiotics were not produced in turkey, they had to import them from abroad. initially, they started negotiating with probiotic producers in specific countries where we could select suitable flavors. they chose probiotics from bulgaria that met our criteria of having a taste that would not be too offputting when making yogurt at home. later, when domestic production began, they sourced our probiotics from local suppliers and focused on packaging and presentation. 4.5.1. product variety the company has shaped the traditional yogurt-making process by focusing on probiotic yogurt production. various types of probiotic yogurt cultures have been produced to address different issues such as gas and bloating, constipation, and diarrhea. the statement "yogurt is a traditional and widely consumed product in turkey with a history of thousands of years. therefore, yogurt holds an important place in our production" emphasizes the importance of probiotic yogurt in the turkish market. the goal of probiotics is to enrich the intestinal flora and provide solutions for intestinal problems. international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 206 other than probiotic yogurt culture, people's interest in making probiotic cheese, pickles, vinegar, kefir, and kumis at home is limited, although it is possible to produce products by fermenting every carbohydrate-containing food. however, the popularity of these types of foods is lower than that of ready-to-eat foods, and such home fermentation activities are not yet widespread in turkey. nevertheless, such cultures have been produced by the company to fill the gap in the market and sold to consumers. 4.5.2. consumer profile it has been noted that there are certain limitations to the consumption of probiotics and that it is forbidden to give probiotic supplements to children between the ages of 0-6, which may be a restriction made due to the belief that probiotics may have more side effects on children's sensitive digestive systems. it should not be forgotten that more research is needed on the benefits and possible side effects of probiotics. these studies can help us to have more accurate information on the use of probiotics in children. while there is a category for 4-10-year-olds, there is a separate usage restriction for those over 11 years old. the reason for these restrictions and how effective they have not been mentioned, only their existence has been noted. the importance of probiotic use according to age groups and the underdeveloped concept of preventive health and nutrition in turkey have been addressed. the author has stated that babies and children need to use probiotics more and that the elderly and those with weakened immune systems also need to use them more. additionally, the author believes that there should be information-providing neighbourhood polyclinics and nutrition clinics for the development of the preventive health concept. this way, it will be possible for people to eat healthily and protect themselves from diseases. 4.5.3. marketing process in turkey the insufficient demand for probiotic products in supermarkets has been attributed to the indifference and disbelief of supermarket managers towards probiotics. some supermarket managers consider probiotics to be a fad or a passing trend. however, as demonstrated by examples in america, the probiotic market is rapidly growing, and supermarkets need to allocate more space for probiotic products to meet this demand. international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 207 supermarkets focus only on profit rather than showing the necessary interest in health issues. this leads to a greater emphasis on products such as chips and soda. at this point, it has been emphasized that it is important to market probiotic products correctly and increase consumer awareness. probiotic supplements are among the products with high sales in pharmacies. however, pharmacies mostly categorize probiotics as drugs and focus on excess demand, like selling drugs. in addition, pharmacists do not have sufficient knowledge about probiotic products and fall short of informing consumers. therefore, more education and information on probiotic products should be provided by health professionals and experts in the field for consumers to have access to accurate information. he said; "so, i've been working on these things for over ten years. i finally decided to withdraw. on the other hand, if you look at pharmacies, they are the best at marketing probiotic supplements. they have no knowledge whatsoever. unfortunately, i have to say it in quotes again. pharmacies. they are chasing surplus goods while selling drugs. have you heard of it? surplus goods. they used to tell me ‘sg sg' as well. then i said, explain it to me. they say, if i'm going to sell your product, i must make a 100% profit, and your margin is only 25-30%. you must give me surplus goods, otherwise, they say, i'll sell what your competitor gives me more. can a probiotic be marketed like this? i said no, won’t do it. you, me, and others aren't offering it, but someone else is. but that someone else isn't even related to it." probiotics include both human-origin and soil-origin strains, with soil-origin strains being the leader in turkey. it has been noted that probiotic supplements obtained from pharmacies mostly contain soil-origin bacteria, which have lower colonization properties compared to humanorigin probiotics. it is emphasized that more education and awareness campaigns are needed for a correct understanding and awareness of probiotics, enabling individuals to learn about what probiotics are, their benefits, which products contain them, and how to choose them. by providing correct information on the advertisements and labels of probiotic products and by ensuring their monitoring, individuals can acquire accurate knowledge and choose the appropriate probiotic supplements for a healthy lifestyle. he said; "for the past three to four years, congresses have been held. but do you know what they talk about there? an article is written, presented, read, and then passed over. so, there is no ininternational journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 208 depth analysis. what are the effects of each bacterium? how do microbes affect diseases? there is no information shared about these topics." haydar bey has developed a marketing strategy to communicate with people one-on-one and provide personalized support for their problems for his own company. during working hours, the company's dietitian is accessible to everyone free of charge. due to legal restrictions on advertising and communication, haydar bey listens to people's problems and provides personalized information on which probiotics to use. the company prepares short or long-term probiotic programs for free based on individual needs. they use communication channels such as phone, email, and social media intensively. haydar bey mentioned that when people start taking probiotics, some symptoms may appear, but these symptoms are called a healing crisis. he also mentioned that these issues are generally discussed in feedback and can be more easily discussed on social media. he has approximately 300,000 active members in two facebook groups he opened. these members can share their experiences, recipes, ask questions, and interact with each other. haydar bey regularly feeds these pages with scientific content and visuals. these channels are observed to be effective in one-on-one information sharing as previously mentioned by haydar bey, and they are very suitable for interactive communication. it has been reported that the marketing structure in turkey creates an expectation of regular price discounts among customers. the company stated that monthly discounts and promotions are offered, and sometimes other probiotics or yogurt cultures are given as gifts with the products, which helps to ensure customer satisfaction and build good communication between the company and its customers. haydar bey, emphasizing that selling products is a challenging task, highlighted the need to work hard to sell products to customers. he stated that e-commerce advertisements are more effective when they are published on google through the use of artificial intelligence technology, while television commercials and print media are still followed by some people, but their effects are short-lived. he also mentioned that his products are sold only in national supermarkets and some high-end pharmacies, where he sells them with a profit margin that he determines himself. he noted that unique markets that sell ecological and probiotic products can also be sales locations, but their numbers are very limited. international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 209 he summarized by saying "you need to constantly review your marketing strategies to determine the most suitable sales channels for your business." 4.5.4. export processes and future opportunities it has been stated that turkey encounters obstacles when exporting to countries such as europe and america due to the need for individual analysis of each product and suspicion towards products from turkey, making exportation difficult. turkey's political and economic issues have been noted to exacerbate export difficulties. despite these challenges, there have been demands for turkish products, particularly kefir, from some middle eastern countries. requests have also been made to establish kefir factories in the region. however, insufficient milk production or difficulties in transporting kefir have been reported as hindrances. furthermore, demand for probiotic products in the context of weight loss has been noted, with probiotics being a preferred choice in saudi arabia due to the prevalence of obesity and diabetes. considering difficulties in importing probiotics from abroad, an individual named haydar bey has advocated for supporting domestic probiotic production in turkey. he has sought the collaboration of universities, relevant organizations, public institutions, and private companies in this endeavor. initially, haydar bey established his own company, but he later partnered with an r&d company composed of academicians from the sakarya university faculty of medicine to begin domestic probiotic production. the r&d company, which operates in the sakarya technology development zone with academicians specialized in microbiology and chemistry, produces probiotic products, and haydar bey has indicated that he helps with the sales and marketing of these products. the market for probiotic products is rapidly expanding, driven by an increase in probiotic supplements and pharmaceutical companies' desire to invest in the field. the established company is meeting this demand and has broadened its product range to include probiotic products in addition to probiotic yeasts. the individualized identification of microbial flora, facilitated by the development of microbiological analyses, represents another area of advancement in the probiotic field mentioned by the interviewee. this method may have the potential to replace the conventional approach of listening to a patient's complaints and conducting certain tests to detect problems with the identification of the problems caused by microorganisms. consequently, more specific international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 210 treatments could be administered, leading to more effective disease management. additionally, future projects such as the fulfilment of product demands using domestic probiotics, and eliminating the need for imports, could be a possibility. “for example, patients can come for obesity, diabetes, cancer prevention, or just to have a good year. i think this can make turkey an important and attractive place in the future. another area is in the pharmaceutical industry where they are running out of new drugs to produce. they come up with a new drug, but then there are side effects and problems. we've seen this with previous cancer drugs. instead, we could focus on strengthening the immune system. many of the materials they use in drugs, like petrochemicals, have harmful side effects. however, the human body is amazing and can produce chemicals and compounds that could be used as medicines through fermentation.” bioactive agents produced naturally by probiotics, which are compatible with the human body, have the potential to play an important role in strengthening the immune system in the future. the compatibility of these drugs with human tissues, as opposed to chemical active agents, may contribute to a reduction in their side effects. therefore, the fermentation-based production of probiotics may be a significant alternative to producing these types of drugs. in the future, natural bioactive agents are expected to become more widespread compared to chemical-based drugs, such as antibiotics. while products such as chemical fertilizers, pesticides, and toxins pose serious health risks to humans and other living organisms, probiotics are considered a natural source of bioactive agents, and their compatibility with the human immune system allows them to strengthen it. additionally, animals and microorganisms in agricultural areas can also benefit from the positive effects of probiotics. using natural solutions such as biofertilizers instead of chemical fertilizers and toxins can lead to more productive agricultural products while addressing soil pollution and productivity issues. using natural methods for purification instead of chemicals can also be healthier in the face of pollution issues around the world. “there are probiotics that can clean up these ponds or inland seas. japan is an example of this. they clean up the sea using bacteria. the bad smells go away, and fish and mussels start to appear again. it's amazing. we can do this all over the world. there are bacteria that eat plastics, oil, and even iron. microbiology is such a deep subject that if we focus on it, we can international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 211 easily solve many of the problems we're facing and spending trillions of dollars on. there are bacteria that eat more carbon in the air, so let's release them between the clouds and reduce carbon. what i'm trying to say is that we can solve all the problems we face and make the world a more livable place.” the quote highlights the potential benefits of probiotics and microorganisms not only in the healthcare sector but also in many other areas. he emphasized that an industrial initiative is required to promote the widespread use of probiotics and that this is of great importance to the world. however, the risks associated with industrial initiatives, such as interference from pharmaceutical and gmo companies, were also noted. specifically, there may be instances where probiotic collections are purchased for monetary gain and their use as drugs or supplements is prevented. given the significance and impact of probiotics, it was underscored that research and discoveries in this field may be concealed. “they buy it, with money. how much money? 100 million dollars, 200 million dollars. he buys it. he seizes all the probiotic collections. then he can use it in the medicine or as a supplement if he wants." you have mentioned turkey's potential in probiotic production and usage and emphasized that turkey could be a leader in this field. you also highlighted the importance of using food waste as a biofertilizer in animal husbandry, agriculture, and environmental pollution. additionally, you noted that probiotics are needed for security personnel such as police and military to work more efficiently and maintain their health. conclusion turkey has high potential in the microbiome and probiotics market (fortune turkey, 2020), but there is a need to increase knowledge and awareness levels and make more effective use of production capacity. further work in this field could contribute to the growth of the market and play an important role in turkey's future health and food industry strategies. preparation for turkey's future requires collaboration between public institutions and the private sector. in this regard, it is known that states that implement supportive policies in research and innovation are more successful. additionally, it is important for the private sector to invest and collaborate. (tastan, n.d.). international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 212 turkey also has potential in probiotic production, and in order to be successful in this field, the support and collaboration of different sectors such as the food industry, agriculture, and healthcare are important. the agricultural sector can provide support for the cultivation of materials used in probiotic production, while the healthcare sector should raise awareness of the benefits of probiotics for human health. to prepare for the future and to be successful in value-added areas such as probiotic production, it is necessary for public institutions and the private sector to work together, promote inter-sectoral cooperation and increase investment. research shows that probiotics have many benefits for human health, which is why their production and use are increasing. however, there are many challenges related to probiotic production and marketing in turkey. overcoming these challenges requires stakeholders in the sector to collaborate and work in a coordinated manner. among the efforts to be made in this field are the genetic characterization of microorganisms used in probiotic production and the development of optimized production methods. additionally, clinical trials are necessary to better understand the effects of probiotics on human health, especially with regard to specific age groups. consumer attitude research on the product range can also support the proper expansion of the market. informing other sectors outside the probiotics industry is also essential for the growth of the probiotics market. particularly, supporting the use of probiotics in the agricultural sector, such as in the production of biogas, can provide environmental benefits and contribute to both the probiotics industry and the environment. the use of probiotics in healthcare and industry is increasing, and collaborative efforts among stakeholders, technological innovations, and clinical trials are all great importance for the growth and development of the probiotics industry. references altındiş, m. 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(2021). a changing gut microbiome may predict how well you age. the new york times. retrieved from https://www.nytimes.com/2021/03/18/well/eat/microbiomeaging.html. o'hara, a. m., & shanahan, f. (2006). the gut flora as a forgotten organ, embo reports, 7(7), 688-693. doi: https://doi.org/10.1038/sj.embor.7400731 popcorn, f. & hanft, a. (2023). the future doesn’t have to wait. faith popcorn's brain reserve. retrieved from https://faithpopcorn.com/trendblog/articles/the-future-doesnt-haveto-wait/. scientific american. (2010). think twice: how the gut’s ‘second brain’ influences mood and well-being. retrieved from https://www.scientificamerican.com/article/gut-second-brain/. international journal of commerce and finance arzan dilek & aşkım nurdan tümbek tekeoğlu 216 sloan, a. (1998). food industry forecast: consumer trends to 2020 and beyond, food technology, 52, 31–44. tastan, c. (n.d.). mikrobiyom & probiyotik pazarı, biyoteknoloji’yi 10 yıl i̇çinde yakalayacak! academia.edu. retrieved from https://www.academia.edu/35352615/mikrobiyom_and_probiyotik_pazar%c4%b1_biyotek noloji_yi_10_y%c4%b1l_%c4%b0%c3%a7inde_yakalayacak_. the human microbiome project consortium. (2012). structure, function and diversity of the healthy human microbiome, nature, 486(7402), 207-214. doi: 10.1038/nature11234 turnbaugh, p. j., ley, r. e., mahowald, m. a., magrini, v., mardis, e. r., & gordon, j. i. (2006). an obesity-associated gut microbiome with increased capacity for energy harvest, nature, 444(7122), 1027-1031. doi: 10.1038/nature05414 türkiye gıda ve i̇çecek sanayi dernekleri federasyonu. (2020). probiyotik pazarı raporu. retrieved from https://tgdf.org.tr/urunler/raporlar/probiyotik-pazari-raporu/ türkiye i̇statistik kurumu. (2021). sağlık istatistikleri. retrieved from https://tuikweb.tuik.gov.tr/preistatistiktablo.do?istab_id=1876 young, j. (1996). functional foods: strategies for successful product development, ft management report, london: pearson professional publishers. https://tgdf.org.tr/urunler/raporlar/probiyotik-pazari-raporu/ international journal of commerce and finance, vol. 2, issue 2, 2016, 1-12 the effect of decision making competence on managerial performance ertuğrul köse, (ph. d. candidate) istanbul commerce university, istanbul hüner şencan, (prof. dr.) istanbul commerce university, istanbul abstract: the performance of the manager, is partly related with decision-making competence. making decisions properly at the right time and in the best period has the potential to increase the overall success of the manager. decision-making which means comprehending, thinking, evaluating the alternatives and choosing one of the alternatives is a factor that affects manager’s performance directly and provides a competitive advantage for organisations. in this research, the relationships between decision-making competence and managerial performance were discussed. the main thesis of this research is that the managers who have high decision-making competence will have high managerial performance. the research was carried out with a population of 424 managers, subordinates, executives and customers/farmers. the evaluation of managerial performance was conducted by taking the factors of subordinates, executives and customers into consideration. the research scales compiled from the literature review and measurement tools developed by the researcher were used in the research. the test of hypothesis was examined by the method of linear regression analysis. the results of this research provided that there was a statistically significant relationship between the decision-making competence of the managers and managerial performance. however, this preliminary study needs to be tested in other businesses and sectors because the data of this study were gathered from a single institution of business. keywords: decision-making competence, self-confidence, performance, managerial performance 1. introduction decision-making is to be able to choose one of the alternatives. like interpersonal relations-hips and information sharing, decision-making is one of the basic functions of a manager. nowadays in which competition reveals itself evident, decisions given by the managers reflect on both personal performance and the company’s outcomes. while the right decisions made by the managers contribute to the value of the company, wrong decisions may lead the company to go down. making right decisions is a critical issue for managers and organizations. in the literature about decision-making competence, the factors and the aspects of decision-making competency, interactions between these aspects, the relationships between decision-making competence and demographic factors were examined. it was observed that relatively limited number of studies investigating the relationships between decision-making and performance exist. 2. literature review and hypothesis development decision-making competence is defined as the ability of evaluating, comprehending and expressing a choice (bavolar, 2013, p. 386). according to finucane and lees, decision-making competence is a multidimensional concept that expresses certain abilities needed to make the right decisions. among the dimensions of decision-making competence; there exist (a) understanding the relevant information regarding to the decision, (b) configuring the decision problem, (c) integrating information and reason, and (d) being aware of the personal significance of information and the limits of one’s decision-making skills (finucane and lees, 2005, p. 2; finucane and gullion, 2010, p. 272). in terms of normative decision-making models, decision-making competence is the ability or set of skills that are needed to make the proper decisions (appelt, milch, handgraaf and weber, 2011, p. 254). in te rn a ti o n a l jo u rn a l o f c o m m e rc e a n d f in a n c e 2 ertuğrul köse & hüner şencan http://ijcf.ticaret.edu.tr in the studies about decision-making processes, four fundamental skills are emphasized: (a) evaluating the belief that considers the likelihood of outcomes, (b) assessing the values that review the results, (c) integrating the values and beliefs in order to define the choices for decision-making and (d) metacognition consist of trust, process management and cognitive control (parker and fischhoff, 2005, p. 3; bruine de bruin, parker and fischhoff, 2007, pp. 939940). performance for each skill regarding the decision-making competence is measured in terms of accuracy or internal consistency. parker and fischhoff (2005) defined seven dimensions involving decision-making abilities and the standards of accuracy and consistency in order to develope an extensive model of decision-making competence. these are; (a) consistency in risk perception, (b) recognizing social norms, (c) resistance to sunk costs, (d) resistance to framing, (e) applying decision rules, (f) freedom of choice and (g) under/overconfidence. in that research examining the young, the researchers found that causal inferences related to decision-making are valid. they found that there is a relationship between decision-making performance and the measurements of basic cognitive abilities, cognitive manners, conditions of growing and risk-taking behavior (parker and fischhoff, 2005, pp. 1-16). the decision-making competency model developed by parker and fischhoff is based on the principles of making proper evaluations for the problems by applying decision rules in normative context and showing a consistent approach within the scope of cognitive competence (parker, bruine de bruin and fischhoff, 2015, p. 2). in 2007, parker and fischhoff with bruin de bruin’s participation developed adult decision-making competence scale (a-dmc). in this study, young decision-making competence scale (y-dmc) which parker and fischhoff developed in 2005 was used as a base. adult decision-making competence was defined in the form of six subdimensions: (a) resistance to framing, (b) recognizing social norms, (c) under/overconfidence, (d) applying decision rules, (e) consistency in risk perceptions, and (f) resistance to sunk costs (del missier, mantyla and bruine de bruin, 2012, s. 332). with a-dmc scale, four basic competences including belief assessment, value assessment, integration and metacognition assessed. belief assessment involves the measurement of the probability of outcomes; value assessment includes the measurement of reviewing the results of a behavior; integration contains the measurement of considering the beliefs and values together; and metacognition involves the measurement of one’s potential in coping up with the problems while determining the decision-making competence (bavolar, 2013, p. 387; weller, ceschi and randolph, 2015, p. 4). in adult decision-making competence scale developed by bruin de bruin et. al., resistance to framing, which is one of the six dimensions, measures whether irrelevant variations affect the choice or not in identifying problems. recognizing social norms deals with the evaluations of participants about basic social norms. the dimension of under/overconfidence discusses to what extent the participants trust their own knowledge. high scores taken in this sub-dimension reflect high performance. in the dimension of applying decision rules, the study made by payne, bettman and johnson (1993) was taken into account and the participants’ competences of applying the principles of decision making is measured. the dimension of consistency in risk perception measures the participants’ ability to follow the probability rules. resistance to sunk costs is based on the studies of arkes and blumer (1985) and evaluates whether sunk costs of former investments are taken into consideration or not while making a decision (bruine de bruin, parker and fischhoff, 2007, pp. 941-942; del missier et al, 2013, pp. 6-7). when the researches about managerial performance were examined after those about decision-making competence, it was seen that these researches go back to the period of classical management. since fayol published the study called “general and industrial management” in 1916, the concepts of management and performance have continued to arouse the researchers’ attention. it was observed that manager’s roles are evaluated with regard to function, trait and decision-making. gullick (1937), koontz and o’donnell (1976) and luthans (1976) who addressed the roles of the manager from functional perspective featured planning, organizing, directing, controlling and educating the employees in their studies (borman and brush, 1993, pp. 2-4). the effect of decision – making competence on managerial performance 3 http://ijcf.ticaret.edu.tr mahoney et. al. (1965), who viewed managerial performance from the point of function, de-fined eight functions of manager by taking the time that the managers spend in daily works into consideration. these are planning, coordinating, evaluating, investigating, supervising, staffing, negotiating and representing (lau, 2015, p. 152). allan researching in the same sub-ject focused on supervision of employees, harmonizing, information handling, analytical-evaluative approach, change-initiating and monitoring among the fundamental functions of managers (allan, 1981, p. 616). researchers also addressed the concept of managerial performance from the perspectives of role, skills and traits. katz (1974) evaluating from the point of skill asserted that an efficient manager should have technical, human and conceptual skills. technical skill implies specialized knowledge, analytical ability and proficiency that a manager about the field that she is responsible; human skill means reaching activeness by encouraging collaboration among the group that a manager leads. conceptual skill is being able to regard the organization as a who-le. a manager should evaluate interrelations of the units in the organization, changes and the effects of internal and external factors as a whole and should make a decision within this framework (katz, 1974, pp. 94-98). smit and kandell (1963) included communication, problem solving, business knowledge, time management, motivation and leadership as the criteria of managerial performance of the manager. mintzberg (1975) criticizing functional approach looked at managerial performance from role and behavioral perspective. mintzberg evaluated the roles of a managers in three categories which are interpersonal, information sharing and decision-making (clement, 1992, p. 440). according to mintzberg, leadership, figurehead and liaison role take place in the scope of interpersonal; observation, disseminator and spokesperson rest on information sharing roles; entrepreneurship, disturbance handler, resource allocator and negotiator take place in the roles related to decision-making (hall, 2008, pp. 159-160; stivers, adams and liu, 2007, pp. 78-80). borman and brush (1993) reviewed and categorized the studies about managerial performance and developed their classification on four mega-dimensions. these dimensions are specified as; (a) interpersonal relationships and communication, (b) leadership and supervision, (c) technical activities and management and (d) useful personal behaviors and skills (borman and brush, 1993, p. 10). interpersonal relationships and communication dimension consists of effective communication, representing, maintaining good working relationships and persuading; leadership dimension involves coordinating, directing and training subordinates; in the dimension of technical activities and management there exist planning, technical competence, administration, decision making, staffing, controlling, delegating, analyzing the data; in useful behaviors and skills dimension, being result oriented, handling crisis and organizational commitment exist (borman and brush, 1993, p. 10). while hall (2008) researching managerial performance paid regard to (a) planning, (b) investigating, (c) coordinating, (d) evaluating, (e) leadership, (f) negotiating, (g) representing and (h) general performance as the criteria of success; stiver et. al. (2007) discoursed the factors of (a) business knowledge, (b) communication, (c) team work, (d) workplace behaviors, (e) leadership, (f) ethical approach, and (g) creativity in measurement of managerial success (hall, 2008, pp. 159-160; stivers, adams and liu, 2007, pp. 78-80). when the studies on managerial performance were conceived, it was understood that the dimensions of communication, business knowledge, leadership, management, problem solving, planning, coordinating, employee training and decision-making come into prominence. the main objective of the study is to find out that to what extent the decision-making competence of the managers and the results of managerial performance are related. research question was tried to be answered by using decisionmaking competence scale developed by bruin de bruin et. al. (2007) and analyzing managers’ perceptions about managerial performance. 3. the methodology and model in the descriptive-analytical research, the responses that the participants gave to two conceptual structures were evaluated and the relationships between these structures were tried to be specified. for this purpose, two measure4 ertuğrul köse & hüner şencan http://ijcf.ticaret.edu.tr ment tools were used in order to reveal conceptual structures and the relationships between conceptual structures were tested with hypothesis testing. 3.1. population, sample and research application the research’s population consisted of 1623 managers working at agricultural cooperative credit center association across turkey. in every one of these cooperatives, one officier works as a manager. the theoretical population and the practical population of the study were not differentiated and all managers were accepted as practical population. for the selection of sample, “simple random sampling” method was applied. in simple random sampling method, the risk of bias disappears and sampling error can be predicted. the names of 1623 cooperatives were listed and among them 500 cooperatives were selected randomly. in order that managerial performance evaluations can be implemented within the scope of 360 degrees, 1 executive, 1 subordinate and 1 customer/farmer were selected from again cooperatives randomly to evaluate every manager. in data collection, questionnaire method was used and it was applied by receiving participants’ approvals. questionnaires were applied with three different methods. in the first method, the questionnaire was conducted by means of that the researcher in person met face to face with the participants. in this way, 102 questionnaires were obtained. in the second method, the questionnaire was distributed to participants via sales representatives working at fertilizer factory trade inc. district office and a week time was given to the participants to fill in the questionnaires. 186 questionnaires were gathered with the second application. in the third method, questionnaire forms were sent to people in target group via e-mail and were asked to reply back. 182 questionnaire forms were obtained by the third method. at the end of the survey, 470 questionnaire forms were taken back and the ratio of return was %94. after questionnaire application was completed, 46 questionnaire forms were evaluated as invalid; therefore, the number of testable questionnaire forms reduced to 424. 3.2. measurement in the research, a questionnaire including demographic variables and two attitude scales were used. attitude scales were designed for “revealing the way of perception” of the managers and other evaluators. the first measurement tool was used for measuring decision-making competence. for this, “decision-making competence” scale developed by bruine de bruin et. al. (2007) was used. this scale was translated into turkish by the researcher. this translation was submitted for consideration of experts in their field. the necessary changes made in accordance with the opinions of experts. items of the scale was adapted to the conditions of country. however, some of items were altered, and the number of items, which is 158 originally, was reduced to 78. there are six dimensions consisting of resistance to framing, recognizing social norms, self-confidence, applying decision rules, consistency in risk perception and resistance to sunk costs in decision-making competence scale. in addition to these dimensions, a new dimension called “thinking right” was added to the scale and thereby decision-making competence was consisted of seven sub-dimensions. in reliability analysis conducted, from the scales recognizing social norms-i and recognizing social norms-ii, the first one was left out of assessment because of the low internal consistency and omega values. moreover, among the sub-dimensions measuring decision-making competence’s conceptual structures, thinking right, applying decision rules and resistance to sunk costs scales’ internal consistency and omega values were low. for this reason, these scales were excluded from the analysis and decision-making competence was measured with the dimensions of resistance to framing, recognizing social norms-ii, self-confidence and consistency in risk perception. the second measurement instrument called “managerial performance” scale was formed as eight dimensions by the researcher in accordance with literature review. “the profile of ma-nagement skills” scale by sevy et. al. (1985), managerial performance classification by borman and brush (1993), “managerial success factors” by stiver et. al. (2007) and the studies by hall (2008) and bucur (2013) were taken into considiration while developing managerial performance scale. different versions of managerial performance scale were generated, which allows the evaluations of executive, subordinate and customer. accordingly, the other versions of managerial performance scale were (a) the effect of decision – making competence on managerial performance 5 http://ijcf.ticaret.edu.tr self-evaluation scale, (b) subordinate evaluation scale, (c) executive evaluation scale and (d) customer evaluation scale. there existed 45 items in self-evaluation scale, subordinate evaluation scale and executive evaluation scale. in customer evaluation scale, there were ten items related to managerial performance. managerial performance scale was designed in a form including leadership, business knowledge, management success, communication, interpersonal relationships, being result oriented, taking initiative and training subordinates. all items of the scales were designated on the basis of theoretical information from literature. managerial performance was defined as a dependent variable in the research. the scales of self-evaluation, subordinate evaluation, executive evaluation and customer evaluation were used in measurement of managerial performance. the number of items which was 45 for the first three scales was reduced to 20 after exploratory factor analysis; and the number of items for customer scale was reduced to eight. due to the low reliability, customer scale was left out of the analysis and to calculate the scores of managers’ managerial performance, the average of selfevaluation, subordinate evaluation and executive evaluation scores were taken into consideration. managerial performance scales are measurement tools of likert type; and labels used and the corresponding grades were specified as: (1) strongly disagree, (2) partly disagree, (3) neutral, (4) partly agree, (5) strongly agree. the sub-scales of decision-making competence were the independent variables of the research. the measurement tool of decision-making competence is a mixed scale and consist of these dimensions: resistance to framing, recognizing social norms, thinking right, self-confidence, applying decision rules, consistency in risk perception and resistance to sunk costs. recognizing social norms-i, thinking right, applying decision rules and resistance to sunk costs scales were left out of the analysis because of their low reliability scores. in calculating the scores of managers’ decision-making competence, the scores from the scales of resistance to framing, recognizing social norms-ii, self-confidence, consistency in risk perception were averaged. after factor analysis, the number of items reduced to 5 in resistance to framing scale, 12 in self-confidence scale, 5 in recognizing social norms-ii scale and 8 in consistency in risk perception. resistance to framing scale’s labels were designed as: (1) certainly option a should be chosen, (2) option a should be chosen, (3) option a can be chosen, (4) option b can be chosen, (5) option b should be chosen, (6) certainly option b should be chosen. resistance to sunk costs scale’s labels were: (1) 1st option has very high probability to be chosen, (2) 1st option has high probability to be chosen, (3) 1st option can be chosen, (4) 2nd option can be chosen, (5) 2nd option has high probability to be chosen, (6) 2nd option has very high probability to be chosen. the scales of recognizing social norms-i, recognizing social norms-ii, applying decision rules and consistency in risk perception were measurement tools that had two types of answers as “yes-no or true-false”. 3.3. hypothesis of the research in the research, decision-making competence was specified as the predictor variable and managerial performance was defined as the outcome variable. the hypothesis of the research determined that the managers having high scores of decision-making competence will have high scores of managerial performance. in scales of decisionmaking competence and managerial performance, scale scores were obtained by calculating arithmetic means of related items. 4. findings the findings of the research submitted as demographic findings related to participants, dimensionality, reliability, validity of scales and the results of hypothesis testing. 6 ertuğrul köse & hüner şencan http://ijcf.ticaret.edu.tr 4.1. descriptive statistics the frequency distributions of demographic data regarding executives, managers, subordinates and customer participants’ gender, age, educational status, work experience, period of management and period of recognition were calculated. according to results 89.20% of executives participating the survey were males, 10.80% of them were females. ages of 90.60% of executives were between 30 and 49. 93.60% of the executives, which was a great majority, had bachelor’s degree. work experience of 50.20% of the executives was 21 years and more. management period of 88% of the executives was between 0 and 16 years. 70.40% of the executives’ recognition period of managers was between 0 and 10 years. 84.90% of the managers participating the survey consisted of males; 15.10% of the managers were females. 81.60% of the managers were between 30 and 49 years old. 48.60% of the managers had bachelor’s degree; 34% of them were high-school graduates. work experience of 59.20% of the managers was between 0 and 20 years. management period of 74% of them was between 0 and 10 years. 72.60% of subordinates participating the survey were males and 27.40% of them were females. 76.20% of subordinates were between 30 and 49 years old. 54.60% of them had bachelor’s degree; 19.80% of them were high-school graduates. work experience of 79.70% of subordinates was between 0 and 10 years. 91.50% of subordinates’ recognition period of managers was between 0 and 5 years. 98.30% of customers participating the survey were males, 1.70% of them were females. 79.90% of the customers were between 30 and 59 years old. 50.20% of the customers were primary school graduates; 27.40% of them were high-school graduates. 62% of the customers’ membership period was between 0 and 16 years. 96% of the customers’ recognition period of managers was 0 and 10 years. 4.2. analyses of dimensionality, reliability and validity factor analysis is used in order to classify variables that have common relational connections on multi-dimensional variable cluster and so to specify variables’ dimensions. in the research, explanatory factor analysis method was used for the items in “decision-making competence” and “managerial performance” scales. for explanatory factor analysis (efa), “factor 10.3.01” program was utilized. within the scope of efa, inter-items correlation values resulted in between 0.01 and 0.82 in sub-scales of decision-making competence and between 0.04 and 0.79 in scales of managerial performance. the items which correlation coefficient with other variables was less than 0.20 were left out of the analysis by removing from the scales. polychoric and tetrachoric correlation analysis was utilized in order to find factorial structure and to specify the number of factors. horn’s parallel analysis method was used to determine the number of the factors. 0.40 value was defined as cut off line in determining individual factor loading. in result of explanatory factor analysis, it was observed that sub-scales of decision-making competence and scales of managerial performance have a single factorial structure and because of this, inter-dimensional correlation coefficients were not calculated. after determining factorial structure, reliability analysis was conducted both for measurement tools and the data. reliability analyses were examined under three main titles: inter-items correlation coefficient values, split half method and internal consistency. in literature it was suggested that inter-item correlation coefficients should be between 0.20 and 0.70; and that averages of correlations should be 0.20 and 0.40; and that items which has negative, low or too high correlation coefficient should be removed from the scale. in measurement tools, the items that had negative values and correlation coefficients were under 0.20 were left out of the analysis by removing them from the scales. as part of reliability analysis, split half method was conducted as a second technic. because of the fact that one half of the scale’s reliability can be measured with split half method, spearman-brown formula was applied in order to obtain the reliability of the whole test. it was seen that spearman-brown reliability coefficient calculated by split half method was between 0.53 and 0.95 in the scales. according to this values, it was found out that there existed a linear relationship between both parts of the scales apart from customer scale (r = 0.53). this results indicated that the scale reliability was at a good level. another method conducted for reliability analysis was internal consistency. in order to assess internal consistency reliability, cronbach alpha reliability is used mostly. alpha value should be at the effect of decision – making competence on managerial performance 7 http://ijcf.ticaret.edu.tr least 0.70. however, it was seen in the explanatory-descriptive researches that values up to 0.60 were accepted. general reliability coefficients relating to scales were calculated separately as alpha reliability coefficient, kr-20 and omega reliability coefficients; and then, the results were gathered in table 1, table 2 and table 3. table 1. dmc scales internal consistency reliability values number of items cronbach alpha omega values resistance to framing (rtf) 5 0.64 0.70 self-confidence (sc) 12 0.74 0.86 resistance to sunk costs (rsc) 5 0.35 0.58 table 2. dmc scales internal consistency reliability values number of items kr-20 coefficient omega values recognizing social norms-i (rsn1) 3 0.46 0.72 recognizing social norms-ii (rsn2) 5 0.67 0.84 thinking right (tr) 4 0.26 0.73 applying decision rules (adr) 3 0.35 0.58 consistency in risk perception (crp) 8 0.66 0.85 reliability coefficient of the scale is evaluated as poor if it is > 0.50; as questionable if it is > 0.60; as acceptable if it is > 0.70; as good if it is > 0.80 and as highly reliable if it is > 0.90 (gliem and gliem, 2003, p. 87). it was seen that among the scales of decision-making competence rtf, self-confidence, rsn2 and consistency in risk perception scales’ internal consistency reliability values were acceptable and that their omega values were high. rsc, rsn1,tr and adr scales’ internal consistency and omega values were low. because of the poor reliability, rsc, rsn1, tr and adr scales droped and were left out of the analysis. table 3. internal consistency reliability values of mp scales number of items cronbach alpha omega values managers-self (mps-ms) 20 0.83 0.96 subordinates (mps-s) 20 0.93 0.96 customers (mps-c) 8 0.56 0.86 executives (mps-e) 20 0.95 0.96 from among managerial performance scales, managerial performance scale-subordinates (mps-s) and managerial performance scale-executives (mps-e) were evaluated as highly reliable; managerial performance scale-managersself (mps-ms) was evaluated as quite reliable and the reliability of managerial performance scale-customer (mps-c) was evaluated as poor. it was resulted that the scales of mps-s, mps-e and mps-ms were sufficiently reliable because of the fact that their omega values were above 0.80. after reliability analysis, validity analysis was done for measurement tools and the data. 8 ertuğrul köse & hüner şencan http://ijcf.ticaret.edu.tr face validity assessment was carried out for the whole of the scale and on the basis of the items. it was concluded that scales had face validity because of the fact that the opinions of experts and participants were positive. lawshe’s content validity ratio (l-cvr) was utilized to specify content validity of the scales. cvr value of the items and scale scores should be equal to 1 to ensure content validity when the number of panel members are between five and eight (ayre and scally, 2014, p. 82). because decision-making competence and managerial performance scales’ lcvr value was equal to 1, it was concluded that these scales had content validity. construct validity analyses were examined as part of nomological network and confirmatory factor analysis. in order to provide evidence for a measurement tool measures the conceptual structure, nomological network should cover related structure. it was concluded that decision-making competence and managerial performance scales that were used in the research had nomological validity as these scales were constructed on the basis of conceptual framework. confirmatory factor analysis (cfa) is a frequently used method in search of construct validity. in this study, fit indices were used for construct validity analysis conducted with confirmatory factor analysis method. all fit index values of scales indicated good fit. 4.3. hypothesis testing results the hypothesis of the research was tested with linear regression analysis. before the analysis, it was examined whether the data met prior conditions of linear regression analysis or not. prior conditions of linear regression analysis were examined in four basic titles as linearity, normality, independence of errors and homoscedasticity and it was seen that the assumptions were satisfied. as a result, it was evaluated that the results from regression analysis were “objective” and “fair” because of the fact that four prior conditions were fulfilled totally. linear regression analysis was used in order to explore whether the markings of the participants in decision-making competence scale provides the opportunity to estimate managerial performance significantly or not and it was seen that predictor variable explained 5.8% of the variance (r2 = 0.058; f = 25.942; p = 0.000) and it was understood that decision-making competence factor provided the opportunity to explain managerial performance significantly (β = 0.149, p = 0.000). therefore, alternative hypothesis was approved by succeeding in reject of null hypothesis. when submitting the research results, in addition to p value, index values that indicate the strength of the relationship among variables or effect size should be included. effect size is a statistical value that quantifies the degree to which sample results diverge from the expectations specified in h0 (vacha-haase and thompson, 2004, p. 473). effect size value which is an indicator of practical significance enables more reliable evaluation by removing misjudgment that can be resulted from sample size. effect size can also be interpreted with “partial eta value” calculated. that partial eta value is 0.01 refers to poor effect size, that it is 0.06 refers to reasonably low effect size, and that it is 0.14 refers to high effect size (şencan, 2016, p. 88). although the fact that p value resulted as statistically significant (that it is lower than 0.05) in result of calculation showed that there was an “effect” which was that decision-making competence variable affected managerial performance variable, this fact did not give an idea about the strength and level of this effect. in the calculation made via spss, partial eta value ensued as 0.176 and this indicated high effect size in the relationship between decision-making competence and managerial performance. 5. conclusion and recommendation as a result of statistical analysis, it was seen that there was a significant relationship between managers’ decisionmaking competence and evaluators’ managerial performance perceptions. as there was not any study focusing directly on decision-making competence and managerial performance in body of literature, discussions were approached within the frame of related concepts. in their study, peters et. al. (2006) explained competence as being acquainted with numbers and asserted that the individuals who were highly numerate were more successful than less numerate individuals. it was concluded that highly numerate individuals in comparison to less numerate individuals applied numerical principles, tended to draw affective meaning from numbers, were less susceptible to framing effect and they gave precise responce. less numerate individuals were influenced by irrelevant information and drew poor precise meaning from relevant numbers. the effect of decision – making competence on managerial performance 9 http://ijcf.ticaret.edu.tr analyses indicated that the effect of numeracy was not a result of general intelligence (peters et. al., 2006, pp. 412413). it was understood that being acquainted with the numbers contributed to decision-making competence by way of analytical skills. another concept related to decision-making competence is critical thinking according to bensley et. al. (2010), critical thinking is to analyze the evidence comprehensively and totally in order to draw sound conslusions from evidence relavant to a claim (bensley, crowe, bernhardt, buckner and allman, 2010, p. 91). it is seen that critical thinking is closely related to creative approach, problem solving and decision-making. naktiyok and çiçek (2014) found that there were positive and significant relationships between strategic insight and critical thinking (naktiyok and çiçek, 2014, p. 175). resistance to framing and sunk cost fallacy are factors effecting decision-making competency. in the study conducted by carnevale et. al. (2011), it was seen that managers those high in need for cognition were less affected by resistance to framing and sunk costs than those low in need for cognition and these managers performed better than control group in the dimensions of resistance to framing, consistency in risk perceptions and resistance to sunk costs of decision-making competence (carnevale, inbar and lerner, 2011, p. 277). this study shows that cognitive enhancement affects decision-making competence positively. roth et. al. (2015) also stated that sunk costs effect is attenuated by time and older adults had a better performance in resistance to sunk costs than younger adults (roth, robbert and straus, 2015, p. 123). leadership style and decision-making are the influential factors in managers’ managerial performance. in flood et. al.’s study, it was seen that while authoritarian, laissez faire and transactional leadership styles related negatively with shared decision-making and team effectiveness, transformational leadership style had statistically significant and positive effects with shared decision-making and team effectiveness (flood, hannan, smith, turner, west and dawson, 2000, s. 414). dries and pepermans (2012) stated that analytical skills containing decision-making, problem solving, strategic insight and intellectual curiosity are best predictors of a future performance for a leader (dries ve pepermans, 2012, pp. 372-373). studies supported that leadership and decision-making are interrelated concepts. self-confidence is an important factor of decision-making competence and our study it also supports that it is required for a manager to be successful; however, overconfidence can lead to undesirable results. shipman and mumford (2011) found that confidence positively influenced leader performance interpersonally, overconfidence contributed to positive results and vision sharing, but that overconfidence had detrimental effects in cognitive activities like planning (shipman and mumford, 2011, pp. 661-662). it was seen in the study of doukas and petmezas (2007) that overconfident managers contributed to their institutions less than rational managers did and self-attribution bias induced managerial overconfidence (doukas and petmezas, 2007, p. 574). fabricius and büttgen (2015) pointed it out that overconfidence reduced risk awareness of project managers and therefore overconfidence caused managers to assess risks in a more optimistic framework (fabricius and büttgen, 2015, p. 258). the relationship between decision-making competence and managerial performance in this study shows partial relevance with precident studies. the dimensions of the two components when taken into account shows lack of corraboration with other researches. partial relevance for the study abstructed from the key findings are far from associating in the main level. moreover, relevance in research findings is valid within the constraints of regression analysis. in the upcoming years, more precise results will be obtained with the researches in which interested researchers examine conceptual structures in different sectors and different managerial levels. for this, instead of multi-scale forms, integrated scales of competence and performance can come up with more efficient results. 10 ertuğrul köse & hüner şencan http://ijcf.ticaret.edu.tr references allan, p. 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(2015). decision-making competence predicts domain-specific risk attitudes. frontiers in psychology, 6, 1-12. http://dx.doi.org/10.3389/fpsyg.2015.00540. http://dx.doi.org/10.1300/j066v18n04_04. http://www.ders.es/ http://dx.doi.org/10.1037/0022-0167.51.4.473. http://dx.doi.org/10.3389/fpsyg.2015.00540. international journal of commerce and finance, vol. 8, issue 1, 2022, 85-131 * prof.dr., istanbul commerce university, faculty of business administration, departmant of business administration istanbul, turkey, orcid: https://orcid.org/0000-0001-6414-8029, e-mail: tkarabulut@ticaret.edu.tr ** resarch assistant, istanbul ticaret university, faculty of business administration, , departmant of business administration, istanbul, turkey: orcid: https://orcid.org/0000-0003-1487-2283, e-mail: hnhatipoglu@ticaret.edu.tr 85 the research on women independent board directors in turkey ahu tuğba karabulut* hümeyra nur hatipoğlu** submitted: 14.10.2021 accepted: 18.03.2022 published: 24.06.2022 abstract the main aim of this study is to explore the profiles of women independent board directors in bist 100 companies and members of the association of woman on board of directors (awbd) in turkey. the structured in-depth interviews were conducted with nine women independent board directors. questions were asked related to their backgrounds, expectations, reasons and process of their appointments, their contributions to the companies, their positions on the board of directors, their relations with the chairmen and other directors, expectations of companies from directors, and pathways for women to be board directors. it is find out that they are appointed due to their qualifications such as education, experience, expertise and networks. they want to make contributions to their current companies and be appointed as directors of boards of other companies as well. they try to develop good relations with the chairmen and other directors of the board. also, they try to improve their performances. this study is a unique study with its approach and findings. its questions were developed by authors based on the literature review and their knowledge in the field. these comprehensive questions were not asked to women independent board directors before especially in turkey. thus, it reveals the woman independent board director selection process extensively in turkey for the first time. it is expected that this paper will make contributions to the field with its findings which highlight the selection process and opinions of woman independent directors. keywords: women independent board director, women board member, woman board directorship in turkey mailto:tkarabulut@ticaret.edu.tr mailto:hnhatipoglu@ticaret.edu.tr international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 86 1. introduction board of directors is a mechanism to protect the rights of shareholders. it selects, monitors, leads and lays off top managers of companies. it should lead ceo to make the right decisions to maintain the profitability and sustainability of the company. it should not be a mechanism to approve what the owners and board directors want. it should show alternatives to reach the best decisions. qualified people should be appointed as board directors. they should create a change with their backgrounds, educations, expertises and experiences. board directorship in bist100 companies is very prestigous position in turkey. there are few women independent board directors in bist 100 companies. there are also few women directors in bist 100. their reasons could be as follows: there are few women ceos, women try to balance their home and work duties, women do not have enough access to certain networks to develop relations with owners and the chairmen of companies, owners and the chairmen have a tendency to appoint board directors from people whom they know, who are like them so they will approve their decisions. the main aim of this study is to explore the profiles of women independent board directors in bist 100 companies and members of awbd (the association of woman on board of directors) in turkey. nine women independent board director participated in this research. six of them are independent directors in bist100 companies whereas three of them are members of awbd and independent directors in big companies in turkey. the research objectives are examining the woman independent board director selection process extensively, characteristics, qualification and backgrounds of women directors, the effect of women directors on the company performance, their roles on the boards, effects of their directorship positions on their private lives, and their career expectations on the boards. the existence of a low number of women independent board directors in turkey is the main motivation of this study. it is expected that this study will increase the number of women independent directors on the boards. an extensive study which reveals these issues related to women independent board directors has not been conducted in turkey before. 2. reasons for women directors an appointment of women independent directors is very important for diversity of the boards. it can bring fresh ideas, new perspectives and comprehensive approaches to board problems. women candidates deserve chances to be appointed for the diversity and better decision making on the board of directors. international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 87 the board plays the role of the guardian for shareholders in the classical view of corporate control (jensen and meckling, 1976). the board is responsible for organizational activities and works as an advisor for making strategic decisions (brunzell and liljeblom, 2014, p. 524). the composition of board of directors is significant within corporate governance to align interests of management and stakeholders. the board of directors is the most important internal control mechanism to control and monitor the management to prevent their opportunistic behaviours (fama and jensen, 1983; hermalin and weisbach, 2003). board diversity is an important issue within corporate governance and several studies explore the effect of diversity on company performance. although denmark has proceeded very far in the women liberalisation, this country has an androcracy structure in the board. carver (2002) claimed board diversity could be justified by referring to the concept of ownership and moral obligations in stewardship role of the board. this situation is related to the stakeholder theory. the role of board is maximising shareholder value and fulfilling a loyalty duty towards other stakeholders (rose, 2007, p. 404). empirical studies focused on how gender diversity affected company performance and board effectiveness from the economic viewpoint (rose, 2007; carter et al., 2003). gender diversity is an crucial issue in the academic literature and corporate governance. additionally, empirical studies examined the effects of gender diversity on company performance (rose, 2007; carter et al., 2003), and quantitative measures for board work (adams and ferreira, 2009) (brunzell and liljeblom, 2014, pp. 523-524). diversity brings together directors with different backgrounds on boards. different backgrounds let different opinions to be presented to examine an issue. when board directors are similar to each other, they will not trigger fresh thinking (what directors think, 2002). a diversity of views in terms of ethnicity and gender is important for the growth of the business. educational backgrounds of directors is significant due to their experiences, social contacts, and expertises. businesses can have a wider representation of their potential and current customers on the board of directors with diversity (arfken et al., 2004, pp. 179-184). when board directors have dispersed life experiences and backgrounds, a higher degree of diversity can improve the decision making processes by including new perspectives on several issues and exchanging different ideas (alvarez and mccaffery, 2000) (rose, 2007, pp. 405406). international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 88 several studies showed that women directors were preferered due to their talents and diverse perspectives so that boards could be more responsive to their stakeholders (credit suisse, 2012; catalyst, 2007; mckinsey, 2007). many companies in several countries prefer women board directors due to gender policies (adams, 2015) (ellwood and garcia-lacalle, 2018, 74). the goal of a board should be to provide rich perspectives by including people who have different experiences and backgrounds (the corporate board, 2000 as quoted on www.bni.com). board directors should have different genders, ages, ethnicities, educations, status, backgrounds and income levels. if directors have the same demographic characteristics, they can make unetical decisions and reach group thinking. when decisions and actions do not meet moral, ethical, expertise and business views of directors, analysis and right decisons can be made quickly with diverse board composition before harmful actions are critiqued by stakeholders and media. the board should not be a “rubber stamp” of ceo decisions, it should evaluate and assess decisions legally. boards have liabilities and duties to act in the best interests of stakeholders and plan and act according to societal expectations. if companies have heterogeneous boards, they can ensure that several ideas and views are represented at the top. usually senior women should be prefered on boards because women live longer than men and make purchasing decisions (arfken et al., 2004, 184). directors on the board should represent the profiles of customers of companies. board candidates are infrequently employed from official job opportunities in denmark. they are often recruited from a small group of business people. they communicate with each other. there is a “old boy’s network” where members share similar social norms and values. it is rational to affect the perceptions of the directors of the old boy’s network for a potential women director to convince them that she is sharing the same norms as the network’s members to get elected. this network is a serious impediment to improve the board diversity, as qualified “outsiders” are not included in the search process to find new board directors (rose, 2007, p. 407). janis (1982) believed that heterogeneity improved decision making by increasing access to several opinions and decreasing the propensity for group-think. kramer et al. (2006) found out that including women directors to boards leaded to more collaborative decision making for social support, mutual gains problem-solving, and better listening. women directors improved board independence due to their different leadership styles and experiences. although there international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 89 were women directors on more boards, their numbers were only one or few per companies. there were few companies with many women directors (colaco et al., 2011, p. 126). there are several reasons to recruit women nonexecutive directors: (a) increasing diversity of opinions on the boardroom (catalyst, 1995a), (b) bringing strategic input to the board (bilimoria, 2000), (c) influencing leadership and decision making styles (rosener, 1990), (d) being women mentors and role models (catalyst, 1995a), (e) improving company image to stakeholders, (f) their availability and capabilities for directorships (mattis, 1997), (g) not having competent male directors (burke and kurucz, 1998), and (h) ensuring "better" behaviors on the boardroom (across the board, 1994). women contribute to governance by reducing ceo dominance with their "power sharing" styles (bradshaw et al., 1992). woman directors, particularly outsiders lead independent views to the board (fondas, 2000) and present how intervention of one woman director can change the strategic direction of the company (selby, 2000). having women in key positions is related to long term competitive advantage and company success (cassell, 1997), forming inclusion culture through a diverse workforce (shultz, 1995; thomas, 1990) and adding value through their distinctive skills (green and cassell, 1996) are essential for ompanies as well. women directors can be younger than men directors so they can contribute the board with new strategies and ideas (burke, 1994; ibrahim and angelidis, 1994). the australian report of the industry task force on leadership and management (burton and ryall, 1995) argued that women directors were advantageous to a company economically because well-balanced boards with women directors reduced corporate failures. homogeneous groups could have homogenous ways to solve organizational problems: "group think" errors could not occur on heterogeneous board. women directors served as role models (catalyst, 1998a), mentors, and champions for high performing women, and monitor equity and social justice policies in recruitment (burke and mckeen, 1993) (burgess and tharenou, 2002, p. 40). daily et al. (1999) added that including women directors on boards would lead companies to access the full range of availlable intellectual capital. strong influence of women on consumer purchases, and workforce in us leaded companies to have a women perspective on their boards (crain and snyder, 1998) (burgess and tharenou, 2002, p. 41). international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 90 3. selection process volunteer women who would like to be independent board directors should have accesses to certain networks to meet with and convince owners or chairmen of companies who might prefer to appoint people who are like them and approve what they ask for. board of directors have two categories: executive board of directors and non executive board of directors. both of them have different assignment systems. executive board of directors are senior company executives who have places on the board because of their positions within the company. nonexecutive board of directors are people who work outside of the company and have positions on the board due to their experiences, expertises, or industry contacts. catalyst (1998b) defined inside directors as company officers who were board directors. kesner added that inside dierctors could be retired executives of the company (kesner, 1988). bilimoria and pinderit (1994) included relatives of current and former directors to the inside directors. executive directors get their positions through their career progresses by being promoted to be cfo, ceo etc. they inherit seats on the board automatically. the chairman or a nominating committee of the board usually invited and appointed nonexecutive director. the board can invite ceos of other companies on the other hand since the chairman or nominating committee select nonexecutive directors, they can prefer less qualified candidates. nonexecutive directorships are attractive to women for being board directors to bypass the traditional steps of becoming a ceo before being nominated to the board. burgess and tharenou (2000) revealed that women were appointed to boards as nonexecutive versus executive directors due to their older ages, higher education levels, and greater managerial advancements and suggesting more human capital. they had more experiences with other women directors and less mentor supports but were employed in less men managerial hierarchies. women nonexecutive directors were employed in larger organizations, public sectors and higher occupation types than executive directors were (burgess and tharenou, 2002, p. 41). mattis (2000) suggested that the definition of eligibility to be appointed should be changed and women who had senior management experiences should be considered for board positions. women candidates without other board appointments should be considered for board positions as well. broadening the candidate pool could increase opportunities for women (mattis, 2000). changes in the organizational policies and procedures are required to create change in the status and representation of women on boards (burgess and tharenou, 2002, p. 42). international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 91 ceos should be encouraged to acknowledge and support the importance of women and commit to create opportunities on the board for women (mattis, 2000). ibrahim and angelidis (1994) found out that there were differences between women and men for discretionary and economic components of the corporate social responsiveness orientation scale. women directors were more philanthropically driven than men directors whereas men directors were more economically driven than women directors. women and men directors were similar on the ethic and legal dimensions of corporate governance. social sensitivity of woman was the major reason for appointing women to boards (burgess and tharenou, 2002, p. 42). women should develop strong alliances and networks to support their directorship promotion. established social networks of board directors propose men (izraeli and talmud, 1997). women can rely on strong ties with significant strategic allies. the connection with allies can include overlapping interests with mutual commitment, friendship and trust (izraeli and talmud, 1997). sheridan (2001) highlighted the importance of networks to facilitate board appointments. the director selection process is usually informal through networking and personal recommendation (huse, 1998), instead of relying on a standardized process or objective criteria. developing more formal guidelines for nominating committees can avoid to select people who are similar to the current directors who are mostly men. formal guidelines can be issued to advertising agencies and executive search companies while companies look for candidates for board positions (mattis, 2000). building and maintaining contacts with ceos and other board directors are important for women who wants to be appointed as board directors. according to a study conducted by sheridan (2001), 35% of women who served longest on boards of public companies were appointed through ceo recommendation and 33% of them were appointed by another board director’s recommendation. 13% of women who had multiple directorships were appointed through the assistance of other board directors’ assistance and executive search firms (13%) (burgess and tharenou, 2002, pp. 42-44). motivation to attain power positions can be improved by women role models (waldman, galvin, and walumbwa, 2013) who are in top positions, they can motivate women for their development (gibson, 2004, 2003) through admiration and idealization (kelan and mah, 2014). professional identification is a key for women to find out their role models which could be imitated (sealy and singh, 2010). the lack of women role models is a reason for the small numbers of women in managerial positions (sealy and singh, 2010). people seek role models similar in race or gender (kelan and mah, 2014; eriksson-zetterquist, 2008; sealy and singh, 2010) (gabaldon et al., 2016, p. 375). international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 92 women who have higher profiles and are publicly recognized have attained more directorship positions compared to women with lower profiles (mcgregor, 1997). mcgregor suggested that women who wanted to be appointed as directors should formulate a planned and conscious strategy to create a public image. women who needed visibility and public relations promoting strategies should establish their public profiles (pollak, 2000) (burgess and tharenou, 2002, p. 43). visibility motivates and encourages women to attain leadership positions (pande and ford, 2011). visibility in the media is another way to increase the public profiles of women candidates (gabaldon et al., 2016, p. 374). creating a public image requires an understanding of media for self-promotion. mcgregor (1997) stated that women who wanted to be appointed as board directors could follow these strategies: developing negotiation and lobbying skills, attracting media coverages, developing contacts with journalists, public speaking, becoming skilled communicators, using talkback and letters to the newspaper editors, entering public debates, and participating in professional and business forums (burgess and tharenou, 2002, p. 43). few women have top management line experience in operations and marketing. training and development will aid women who want to be directors compensate for their lack of experiences. leadership experiences with profit and loss responsibilities of women will be helpful to be appointed as board directors (pollak, 2000) (burgess and tharenou, 2002, p. 43). pollak (2000) suggested that women who sought board directorship positions should obtain international experiences and board experiences even in ngos (burgess and tharenou, 2002, p. 44). women should self-promote, volunteer, and have the self-confidence to take initiatives. mcgregor (1997) presented activities for a proactive approach as focusing on resumes, documenting achievements, answering public advertisements, participating in professional trainings for being a director, attending shareholder meetings, corresponding with the board chairmen, forming alliances and networking (burgess and tharenou, 2002, p. 43). 4. role of women on boards roles of women independent board directors should be improved on the boards. they should involve commitees to make more contributions to companies. they should initiate projects to enter into different markets, launch new products, improve corporate governance, develep international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 93 better networks with stakeholders etc. they should be volunteer to be more active and participate in commitees. they should also perform well in these comittees to be more visible to be long term board directors and get directorships on the boards of other companies. bradshaw and wicks (2000) found out that women directors adjusted their strategies to influence other board directors depending on their statuses on the board, the board’s composition and nature, and the discussed issue. although women directors used several strategies to be effective on board meetings, they explained that some decisions were made outside board meetings (selby, 2000; bradshaw and wicks, 2000). women directors used building alliances, lobbying, and networking as strategies to gain board positions. they believed that working hard, demonstrating their willingness to work hard and their commitment to men directors leaded them to be successful on board directorship positions (bradshaw and wicks, 2000) (burgess and tharenou, 2002, p. 43). brunzell and liljeblom (2014, p. 523) revealed that companies with nomination committees had more gender diverse boards as indications of a more positively contribution of women board directors in risky companies. bilimoria and pinderit (1994) believed that women directors were under-utilized on the more central and substantive board subcommittees. they were usually allocated to corporate social responsibility and public affairs areas. companies should use full abilities and skills of women directors on the central and core committees dealing with governance issues (bilimoria and piderit, 1994; mattis, 2000). increasing visibility of women directors in core board governance roles will enhance the value of women directors (mattis, 2000) (burgess and tharenou, 2002, p. 42). board committees are important forums for exercising power. bilimoria and pinderit (1994) announced that women were less likely to be nominated to the compensation finance, and executive committees. on the other hand, women were more likely to be nominated to the public affairs committees. stern and westphal (2010) stated that directors engaged in higher levels of ingratiation toward another director could receive a board position in a company where that other director served on the nominating committee. nielsen and huse (2010) found a positive correlation between women representation and strategic control of the board. higher sensitivity (bradshaw and wicks, 2000) and more handson management style (pearce and international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 94 zahra, 1992) of women directors may enhance multi-faceted discussion of alternatives for better strategic decision making (brunzell and liljeblom, 2014, p. 525). resource dependency theory (pfeffer and salancik, 1978) is based on the idea that women resources can provide essential benefits to companies which may provide opportunities to attain top positions. women are prefered for public affairs committees more and executive committees less (peterson and philpot, 2007). having women in charge of audit committee chairs can reduce audit fees for companies because women are considered to improve the effectiveness of internal control activities (ittonen et al., 2010) (gabaldon et al., 2016, p. 374). 5. barriers for appointment of women directors men dominate corporate boardrooms in western countries (sheridan, 2001; burke and mattis, 2000; daily, certo and dalton, 2000; vinnicombe et al., 2000; burgess and tharenou, 2000; mcgregor, 2000; holton, 1995). women have limited access to board positions compared to men since power and authority are assumed vested in men more than in women (schein and davidson, 1993; burton, 1991; schein, 1973) (sheridan, and milgate, 2005, p. 847). women believe that high visibility is significant to access board positions. family affiliation with the company is more important for women compared to men to be directors. women’s management under-representation has attracted significant attention (oakley, 2000; o’sullivan and sheridan, 1999; alimo-metcalfe, 1994; schein and davidson, 1993; still, 1993; marshall, 1986; kanter, 1977; schein, 1973) with factors limiting access of women to management positions. these factors can be considered as stereotypes (orser, 1994) “like promoting like” (kanter, 1977), the unequal division of labour in the household (itzen, 1995), exclusion of women from informal networks (ibarra, 1993) and especially the exclusion from “old boys networks” and biases against women in organisational processes (connell, 2001; powell, 1999; collinson and hearn, 1996; calas and smircich, 1992; acker, 1990, 1998; marshall, 1986; kanter, 1977). these studies revealed how the complex interplay of organization, gender, and systemic factors (fagenson, 1993) leaded to the privileging of men in companies and provided a framework for the unequal representation of women and men in top management positions. women’s poor representation in ceo positions cause their poor representation on boards. there are studies which reflect women’s views for their access to board positions (burgess and tharenou, 2002; sheridan, 2001; vinnicombe et al., 2000; daily et al., 1999; burke, 1996, 1997, 2000; holton, 1995; mattis, 1993) (sheridan, and milgate, 2005, p. 848). international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 95 there are supply and demand problems for appointing women candidates to board positions. on the supply side, limited number of qualified women candidates can be considered for board positions due to family conflicts, values, attitudes, and expected gender roles (gregory-smith et al., 2014; bygren and gähler, 2012). on the demand-side discrimination can set back women candidates to the board positions (gabaldon et al., 2016, p. 372). supply-side barriers can be divided into three categories: work family conflict, identification with gender role expectations, and gender differences in attitudes and values (pande and ford, 2011; terjesen et al., 2009). differences between genders in terms of attitudes and values can create motivational differences between women and men to attain leadership positions (eagly, 2005). women are less hungry for power than men (schuh, et al., 2014), less hard achievers, and less power-oriented (adams and funk, 2012). women can have more conservative behaviors on boards and decision making (baixauli-soler et al., 2015) (gabaldon et al., 2016, p. 372). board selectors can assume that women do not have the adequate knowledge or expertise (ragins et al., 1998; becker, 1964). women face the stereotype of being less effective or underprepared than their men counterparts (mensi-klarbach, 2014; nielsen and huse, 2010). women have unconventional backgrounds so they have different types of human capital (ruigrok et al., 2007; hillman et al., 2002). not having any or sufficient board experience is considered as the main barrier for women (groysberg and bell, 2013) for independent directorships. women can have alternative experiences as directors on the boards of small companies or ngos. women can compensate their reduced board experience with international experience and formal education (singh et al., 2008). women appointed to all-male canadian boards have a specialized skill by being specialists or insiders in canada (dunn, 2012). women’s reduced access to networks is another important problem for accessing leadership positions (mcguire, 2002; ragins et al., 1998; ibarra, 1992; kanter, 1977). creating professional women networks can be solution to this problem however such communities provide less visibility, recognition, endorsement and fewer leadership opportunities (ely et al., 2011) (gabaldon et al., 2016, p. 374). gender differences in attitudes and values make women less visible than men for leadership positions (mateos de cabo et al., 2011). there should be women role models, training and mentoring programs available for women with professional aspirations. there should be policies to reduce work-family conflicts (gabaldon et al., 2016, p. 374). international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 96 rigidities in the external environments of companies may create structural barriers for women on corporate boards (cook and glass, 2014; north, 1990). countries with higher numbers of women board directors have more women in senior management positions and smaller gender pay gaps (terjesen and singh, 2008) (gabaldon et al., 2016, p. 374). 6. the effect of women directors on company performance it is observed that women board directors have positive effects on company performance. therefore, more women independent board directors should be appointed on board directorship positions. women directors have a positive effect on qualitative tasks such as strategic and corporate social responsibility (csr) controls (bilimoria, 2000; selby, 2000; rosener, 1990, 1995). women can broaden discussions on strategic and csr control issues (williams, 2003; burgess and tharenou, 2002; ibrahim and angelidis, 1994). background diversity of board directors leads to improved decision making (ruigrok et al., 2007). board tasks are grouped into strategy tasks, control tasks, and service tasks (stiles and taylor, 2001; zahra and pearce, 1989). strategy tasks are the boards’ initiatives to develop a company, control tasks are board tasks done on behalf of external actors, and service tasks are what the boards do on behalf of internal actors (huse, 2005, 2007) (huse et al., 2009, p. 583). boards which have gender diversity are more effective in spain (lucas-pérez et al., 2015) and the netherlands (lückerath-rovers, 2013). voluntary approaches to gender equality on boards proceed in line with corporate governance principles in most countries (seierstad and opsahl, 2011). nomination committees affect gender diversity on boards (kaczmarek, kimino, and pye, 2012). the presence of women can affect corporate reputation (de anca and gabaldon, 2014; bernardi, bosco, and columb, 2009), csr actions (boulouta, 2013; bear, rahman, and post, 2010), and corporate sustainability (galbreath, 2011) (gabaldon et al., 2016, p. 376). huse et al. (2009, p. 581) evaluated the relation of board effectiveness and board control tasks including board involvement of corporate social responsibility in norwegian companies. they (2009, p. 581) found out that contributions of women board directors varied depending on the board tasks. several studies revealed positive relations between women and company performance (catalyst, 2004, 2005; daily and dalton, 2003; erhardt et al., 2003; singh et al., 2001) (huse et al., 2009, p. 582). international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 97 when there are more risks in the external environment of the companies, there is a positive relation between women presence on boards and company performance because tasks should be completed on time (adams and ferreira, 2007). magnanelli et al. (2020) examined the relation between women directors and company performance. magnanelli et al. (2020) highlighted possible reasons of the relation between women presence on boards and company performance as follows: higher diligence by women directors, disclosure and transparency, critical mass theory, and greater social sensitivity of women lead to better strenghts, attitudes, and experiences which lead to better monitoring and decision making. magnanelli et al. (2020) stated that women directors were more effective in monitoring than male directors so there was a relation between presence on boards and company performance (karuna, 2020, pp. 163-164). women chairs and chief executives have a positive effect on social outcomes without harming financial management. one third of voting directors of nhs boards were women whereas and one third of nhss were chaired by a women (ellwood and garcia-lacalle, 2018, 73-74). colaco et al. (2011, p. 122) found out that that women directors were more active in corporate governance activities than men directors on boards. there is a relation between board diversity and company value and profitability. fields and keys (2003) found out that cultural diversity leaded to a better performance. carter et al. (2003) and erhardt et al. (2003) found a positive relationship between presence and percentage of women on boards and company value. shrader et al. (1997), yap et al. (2004), and bonn (2004) found a positive relation between the percentage of women directors and company performance. parsons and krishnan (2008) found a positive relation between gender diversity in management and earnings quality. kesner (1988) added that since women directors were like outsiders both substance and appearance, their presence on the boardroom could have a positive and powerful effect on the decision-making process. hillman et al. (2007) explained that reflecting alternative perspectives, valuable insight into consumer behavior, and accessing to different networks were benefits of having women directors on the board. sonnenfeld (2004) believed that a board comprised of directors with several past experiences could encourage more robust and more dissent decision making. a heterogeneous board with men and women from different ages, tenures, experiences could provide independence (colaco et al., 2011, p. 125). international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 98 gender-diverse boards are more severe monitors (adams and ferreira, 2009), and have higher board attendance rates (adams and ferreira, 2009) (brunzell and liljeblom, 2014, p. 524). some studies found a lower number of women directors in riskier companies (hillman and cannella, 2007; adams and ferreira, 2004). francoeur et al. (2008) found out that the return on equity was remarkably higher in low-risk companies when women board representation was high. on the other hand, according to their results this situation can not be observed in mediumand high-risk companies (brunzell and liljeblom, 2014, p. 526). sweetman (1996) believed that women directors added value to a company by their participations to company boards. cassell (1997) believed that women directors were included to the boards due to changing labor demographics. the appointment of women directors was related to increased profitability in us (catalyst, 1995a) (burgess and tharenou, 2002, p. 41). 7. information about women board directors in the world media, retailing and service sectors have more women board directors. however, companies in production and high tech sectors should appreciate women independent board directors to represent their customer base, bring diversity and make better decisons on board of directors. half of canadian ceo’s think there should be more women on boards of directors (blackwell, 2002). women board directors are more common in soft industries such as media, retailing, and service. male-oriented industries such as automotive, engineering, construction, mining, and manufacturing have the lowest inclusion of women directors. some of the women directors are included to the boards due to their family ties (bratten, 1998). the number of women board directors has been in increasing in fortune 500 (krotz, 1999) and sandp 500 companies (gutner, 2001). however, womens’ movement to the top is at snail’s pace and there are more women directors in insurance, retail and utility companies compared to technology, health care and biotech companies (board of director’s network, catalyst, 2001). the situation of women on corporate boards in uk is parallel to that in us. companies hesitate to take advantage of the talent of women directors and diversity. senior level women directors are accepted where as younger men directors are accepted on the boards in uk (arfken et al., 2004, 181). publishing companies have the highest percentage of women board directors where as internet companies have the lowest percentage of women board directors (finer, 2002). poole (2001) believed that the number of women directors would increase only if more company officers, international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 99 shareholders, and directors realized the critical importance of board diversity. he (2001) added that boards should reflect the customer demographics. allison (2002) stated that discrimination for board positions increased during tough economic times because more white men needed jobs. she (2002) added that women directors had less tenure and were layed off due to cyclical phenomenon (arfken et al., 2004, 182). although companies in developed countries have more women directors on their boards compared to companies in developing countries, there is still a long way to create equal chances to women to reach directorship positions in the world. there is an increasing pressure from both investors (burgess and tharenou, 2002) and society (grosser and moon, 2005) to appoint women directors on corporate boards. the number of women on board positions has increased over the last decade (burke and mattis, 2005; singh and vinnicombe, 2003, 2004; daily et al., 1999) (huse et al., 2009, p. 582). several authors conducted studies about women board directors in us (hafsi and turgut, 2013; jurkus et al., 2011; gul et al. 2011; bear et al., 2010; carter et al., 2010; manner, 2010; adams and ferreira, 2009; farrell and hersch, 2005; carter et al., 2003; bliss and potter, 2002), canada (francoeur et al., 2008), norway (torchia et al., 2011; huse et al., 2009) and spain (campbell and minguez-vera, 2008). 30% of companies have women board directors in norway whereas 15% of companies have women board directors in us (huse et al., 2009; hafsi and turgut, 2013) (ellwood and garcia-lacalle, 2018, 75). according to a study, 26% of ftse 100 companies had women board directors, 31% of them had women non-executive directors and 10% of them had women executive directors, 0.3% of them had women chairmen, 0.05% had women ceo in 2015 (davies, 2015) (ellwood and garcia-lacalle, 2018, 73-74). singh et al. (2001) conducted a survey of women directors in uk boards. they (2001) revealed that although women representation increased over the years, the proportion of companies that had at least one women director decreased by july 2000. they (2001) added that same decrease happened in the us (rose, 2007, p. 407). 82% of the 50 most profitable companies in the fortune 500 list in us have at least one women director, and the largest 10 companies have women directors on their boards (catalyst, 1995b). international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 100 most of the largest 20 companies have at least one women board director in australia (korn/ferry international, 1997) (burgess and tharenou, 2002, p. 41). 8. in-depth interviews 8.1. methodology the main aim of this study is to explore the profiles of women independent board directors in bist 100 companies and members of the association of woman on board of directors (awbd) in turkey. for this reason, researchers conducted structured in-depth interviews with nine women independent board directors. they asked them 38 qualitative questions. questions were asked related to their backgrounds, expectations, reasons and process of their appointments, their contributions to the companies, their positions on the board of directors, their relations with the chairmen and other directors, expectations of companies from directors, and pathways for women to be board directors. this study is a unique study with its approach and findings. its questions were developed by authors based on the literature review and their knowledge in the field. the in-depth interview method was used due to not having enough women independent directors in turkey to be respondents in the survey method. also, by using in-depth interviews, researchers were able to get more detailed data from respondents. the in-depth interview method is used to examine the women independent board director selection process, the effect of women directors on the company performance, their roles on the boards, effects of their directorship positions on their private lives, and their career expectations on the boards. thus, it reveals the woman independent board director selection process extensively in turkey for the first time. it is expected that this paper will make contributions to the field with its findings which highlight the selection process and opinions of woman independent directors. these comprehensive questions were not asked to women independent board directors before especially in turkey. after preparing all questions, researchers sought women independent board directors in bist100 companies in public disclosure platform and as members of awbd. these directors were determined by reviewing the board directors of bist 100 companies and contacting with awbd. researchers sent an invitation to 26 women independent board directors to contribute to this research via e-mail. nine of them accepted this invitation. thus, this study was conducted on nine women independent directors. six of them are independent directors in bist100 companies whereas three of them are members of awbd international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 101 and independent directors in big companies in turkey. thus, in total, researchers conducted nine structured in-depth interviews with women independent board directors between june-july 2021. the results of the structured in-depth interviews are given in detail in the following pages. qualitative research is used for this study to gather comprehensive and specific information about the subject. the limitation of this study is the data was gathered from only nine women independent board directors who are on the boards of bist 100 companies and members of awbd. there were also time and budget restrictions. 8.2. application it is started by searching demographic information about the interviewees. according to the answers given to the demographic questions; most of the women independent board directors have business administration bachelor degrees, experiences in the fields of banking and credit, play active roles in the audit and corporate governance committees. the findings of this study are as follows: 1. can you introduce yourself? 2. how many years have you been an independent board director in this company? 3. are there other companies which you are in their boards? if so, how many years have you been on their boards? 4. is there another company or non-governmental organization in which you have directorship on their boards? if so, which ones? 5. are you member of any committees on the board of directors? if so, what are your duties there? 6. how many hours do you spend per month for your position on the board of directors, including meetings and additional studies? what kind of additional studies are you doing there? international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 102 table 1. information about women directors in te rv ie w e e u n d e r g ra d u a te d e g re e g ra d u a te d e g re e t e n u re (y e a r) e x p e ri e n c e f ie ld m e m b e rs h ip o n b o a rd c o m m it te ss t im e s p e n t (h o u r) b o a rd p o si ti o n in o th e r c o m p a n ie s b o a rd p o si ti o n in n o n g o v e rn m e n ta l o rg a n iz a ti o n s 1 busines administra tion 2 compliance audit, corporate governance, credit 20 2 3 2 finance and maths 2 credit credit 26 1 3 3 business administra tion mba 4 months manda head of corporate governance, audit and internal controlling 27 2 4 pharmacy 2,5 pharmacy strategic planning, risk management 63 3 5 business administra tion mba 3 credit and marketing audit and risk management 14 1 6 business administra tion history 4 audit audit, corporate governance unce rtain 1 7 economics hrando rg. develop ment 6 hrm, purchasing, strategic planning audit, risk, corporate governance 36 1 5 8 business administra tion 3 banking audit, corporate governance, risk management, pricing 100 1 1 9 business administra tion 11 banking, manda credit, corporate governance, compensation 108 1 3 source: created by the authors women independent board directors had experiences in the relevant (credit, risk, corporate governance, etc.) fields and business management. at the same time, they were known by middle or top level managers of the companies before they were appointed as board directors. managers of the companies knew about their experiences, expertises, personalities and approaches so they trust in them. thus, they were offered to become independent board directors. the findings of questions 7 and 8 are as follows (see table 2): international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 103 7. which qualifications of you were more effective to become an independent director on the board? how did you acquire these qualifications? 8. why do you think you were offered to become an independent board director? table 2. qualifications of the women board directors in te rv ie w e e t e n u re m a n a g e m e n t e x p e ri e n c e f in a n c ia l l it e ra c y k n o w -h o w n e tw o rk b e a c q u a in te d w it h b u si n e ss c o m m u n ic a ti n g t a le n t q u e st io n in g t a le n t d e ta il e d i n si g h t g lo b a l / d if fe re n t v ie w p o in t 1 x x x x 2 x x x x x x x 3 x x x x x x x 4 x x x x x 5 x x x 6 x x x x 7 x x x x x x x 8 x x x 9 x x x x x source: created by the authors interviewees became independent board directors by developing relationships with top-level managers and networks, becoming members of associations, and using headhunters. however, using headhunters is not common in turkey. instead, it is more common to become a board director through associations and networks. the findings of the questions 9 to 13 are as follows: 9. how did your process to become an independent director on the board of directors happen? 10. did you make any network to become an independent board director? 11. did anyone help you to become an independent board director? if so, how did you meet with them? how often do you see each other? are they directors on the boards of this company or other companies? 12. how did you meet with the chairman of the board of directors? how did you introduce yourself to become an independent board director? how did you develop a relationship with her/him to become an independent board director? 13. has the chairman of the board recommended or included you to the board? international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 104 interviewee 1: i had no extra effort for making a network. i was included on the board of directors with co-decision of the ceo, the cfo, and the chairman of the board. interviewee 2: i worked in mutual projects with this company in my previous job. i have been working with both the cfo and the ceo of this company since 1993. the cfo and the ceo recommended me to be an independent board director to the chairman and he approved it. my experience shows that this process is carried out for people who are known by the managers of the company. interviewee 3: the rate of using a headhunter is pretty low for an appointment of an independet board director in turkey, mostly it is carried out by developing a network and direct connections. there is a recommendation mechanism. the chairman of the board of directors recommended me to the board. also, i networked for becoming an independent director of the board of the directors. when the directors on the board decided to include me to the board, it was voted in the general assembly meeting of the company as well. if it had not been accepted in the general assembly meeting, i would not have been the independent director. interviewee 4: my process of becoming an independent director on the board of directors started with a network. people who have known me from the health sector recommended me to the chairman and he asked them to invite me to meet with him. the headhunter system is not well developed in turkey. interviewee 5: since the founder family of the company has known me due to my previous consultancy experience, they called me and offered me the position directly. i did not make any network for becoming an independent director. interviewee 6: i did not make any network for becoming an independent director of board of directors. i have known the top managers of the company from my audit experience, they also have known my work discipline and experiences. after the board of directors offered the position to me, i took the required permissions from the company which i worked for. after it was accepted, my process was completed by getting an approval in the general assembly meeting and from the capital markets board (cmb). the whole process was carried out based on the corporate governance principles. international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 105 interviewee 7: i met the chairman and directors on the board of directors. the position was offered to me by the headhunter and awbd. i did not make any network for becoming an independent director. being in awbd provides a specific network. the chairman of the board of directors recommended me to be an independent director through the committees. interviewee 8: i was appointed as an independent director by the recommendation of the chairman and directors of the board. since the company is in the stock exchange market, the approval was obtained from cmb. since the banking regulation and supervison agency (brsa) is the supervisory institution of the sector, the approval was obtained from the brsa as well. then, the approval was obtained in the general assembly meeting and i was appointed as an independent director. i did not make any network for becoming an independent director. i have been known as an experienced employee and a manager in the group companies. since i worked there for many years, i have known the chairman. the chairman of the board of directors and general manager recomended me as an independent board director to the board. interviewee 9: directors of the board offered the positon to me directly. when i was the ceo and the cfo in my previous company, i had close relations with this company. i did not make any network for becoming an independent director of board of directors. the chairman of board and i worked in several manda projects. big companies care about credibility. i mean this experience is very important for becoming an independent director. in line with the answers of the interviewees to the questions, the process of becoming an independent board director is shown in figure 1. people become independent board directors according to this flowchart step by step. international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 106 figure 1: flowchart for admission to board of directors process source: created by the authors when women participate on boards as directors, diversity, equity, and different views increase. and, it is beneficial for the companies. additionally, women directors play important roles in the strategic decision-making process due to their experiences, being open-minded, and seeing details. their contributions and duties on the board are as follows in detail: 14. why did you agree to become an independent director of the board of directors? 15. what are your duties on the board of directors? 16. which subjects do you make contributions on the board? have you ever been a pioneer in any project on the board? as an independent director of the board of directors, which areas do you ensure the company to focus on and give importance to? i.e: exports, strategic cooperation etc. an offer to the candidate is made by the chairman of the board, c-level executives or board directors candidate accepts the offer candidate voting on the board of directors approval of board of directors cmb aproval (in publicly traded companies) general meeting approval candidate rejects the offer international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 107 17. as a women board director, do you make sure that the board gives importance to social responsibility activities? women independent directors explained why they accepted to be directors of the boards as follows: they concluded that they could obtain more information and knowledge in the relevant business field, achieve personal development, long-term strategic and questioning perspective, transfer their experiences and make contributions to the board and its committees, and keep in touch with the business world. interviewee 8 states that this is “an honored occupation”. interviewee 3 adds that, “it is not about doing the job in terms of age and experience; i think it is time to transfer. board of directors is a platform where i can do that.”. besides the mentioned reasons in the above, interviewees explained which reasons influenced their acceptance of the board directorship. these reasons are managing by corporate governance principles and embracing transparent and fair management style based on principles. the companies conduct social responsibility activities sufficiently, thus women directors stated that even if they do not initiate projects directly, they support their activities. contributions of the women directors to the board are presented as follows: table 3. contributions of the women directors to the board in te rv ie w e e contributions 1 increasing the ratio of women directors up to 30% on the board, expanding into foreign markets 2 risk management, bad debt projects 3 financial efficiency, projects related to factories, corporate governance issues 4 determining strategies for the transformation plan, following issues, innovation, new product, making new collaborations, increasing employee motivation and loyalty, improving performance, fringe benefits, wage balances 5 strategy formulation, human resources management, risk management 6 financial statements, internal control, financial control 7 risk management, audit, governance 8 corporate governance, audit, risk management, compensation 9 digitilazation, different working systems due to covid-19 source: created by the authors international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 108 according to the answers to questions 18 and 19; board directorship has many benefits. some specific contributions are as follows: being more flexible on some issues, seeing the decisionmaking processes more closely, having real sector experiences, developing networks, improving managerial knowledge, becoming an active listener, improving a vision, gaining a strategic perspective and a decision-making perspective, learning to be dynamic and behaving appropriately in large organizational structures. 18. what are the contributions of your board directorship to you? 19. in which areas your board directorship did improve you? regarding the contribution of board of directors to the interviewees, the following answers were gathered: interviewee 1: “i can say that directorship on the board taught me to be some more flexible on some issues. it has increased my knowledge in a wider range from personnel issues to credit volume calculation, expansion of operations, competition or misconduct. it helped me to meet with employees from different levels of the company.” interviewee 2: “you can see the decision-making processes more closely with the position of directorship on the board of directors. you always stay up-to-date on the changing issues about banking. i can observe the real sector experience and network. my directorship on the board of directors has improved my managerial knowledge.” interviewee 3: “i am developing my active listener side with my directorship on the board of directors. in particular, i am observing the dynamics of the family business, i am learning to use the appropriate approach for developing relations and making discussions with the family members and other directors on the board. i am improving myself for saying the right thing in the right place and at the right time, making effective communication, doing strategic thinking. i am gaining a skill to overview the company from the board level.” interviewee 4: “i have become more patient with my directorship position on the board of directors. employees fulfill the orders of their managers at the execution levels. i overview the company at the board level. international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 109 interviewee 5: “i learn from other directors of board of directors, and my directorship position improved my vision. it improved my knowledge and horizons in the fields of industry and investments.” interviewee 6: “my directorship position on the board of directors brought a new strategic perspective, a decision-making perspective for the management of a large group. i learned to be dynamic and behave appropriately in a large organizational structure.” in addition, interviewee 6 states that the covid 19 pandemic affects directors and managers positively to be more dynamic and make decisions quickly. interviewee 7: “my directorship position contributed me to observe different sectors, learn more, and transfer my experiences. it taught me to learn the dynamics of different sectors and gain experiences for managing crises and risks.” interviewee 8: “my directorship position on the board of directors provided me to learn innovations and technological developments in our sector. also, it has made a significant contribution to me in terms of improving my professional knowledge and learning about organizational effectiveness and efficiency needs with the committee studies” interviewee 9: “while you are a director on the board of directors on executive duty, you can see what is going on around you. you recognize the pros and cons very well. you gain competence to ask the unasked questions, scan the organization and determine organizational priorities. the biggest contribution was in terms of technology. it has developed me in areas such as artificial intelligence, digital infrastructure, etc. now i can work better with young people. young people are also mentoring to me”. interviewees stated that they had some difficulties with time management, orientation to organizational structures, and gaining sectoral knowledge. however, they have overcome these problems by working hard. on the other hand, there is no discrimination between women and men directors. women directors stated that they had the power to convince the chairman and other directors. answers to questions 18 to 27 are presented in detail: 18. as an independent director on the board of directors, do you have the power to persuade or sanction other directors? where do you get your power from? 19. as an independent director on the board of directors, are your suggestions generally accepted? international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 110 20. how can you evaluate your relationship with the chairman of the board? 21. how are your relations with other board directors? 22. are your relations same with women and men directors? are you meeting with them besides board meetings? 23. what are the difficulties you face as a women independent board director? did you exceed them? if so, how did you do that? 24. have you faced discrimination as a woman board director? 25. do you think the men directors on the board of directors hold meetings among themselves without you? if so, do you have to approve the decisions they made by themselves? 26. is there more cooperation or disagreement between women directors than men directors? 27. are values of women and men directors same? 89% (8 women directors) of women independent board directors state that they have the power of sanction and persuasion over other directors. all of them state that their suggestions are generally accepted on the board meetings. reasons of persuasion and sanction power are technical knowledge, trust, industry experiences, duties, responsibilities, experiences, credibility, visibility, expressing the correct ideas, the egalitarian structure of the board of directors, and approaching the issues from different perspectives. all the directors state that they have respectful, open, transparent and positive relationships with both the chairmen and other directors. they don’t meet with the chairmen and other directors besides the board meetings. they have similar relations with women and men directors. in addition, interviewee 4 explains the required time for a relationship to reach at the optimum point with the following expression: “when you are a woman, the chairman and other directors test your capabilities twice. they examine you cautiously. the appropriate approach is trying to get to know you, once they know you much better, they benefit your experiences more. it took international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 111 two years for me to establish healthy relationships with the chairman and other board directors. the chairmen and board directors have prejudices for women directors.” interviewee 2 states the cooperation among women, “of course there are compliments among women directors, but we don’t form groups or have a great social intimacy.” interviewee 9 adds that “there is more cooperation among women directors. women understand women much better, they support each other more. i pay attention, if there are two women directors on the board meeting, they immediately go and sit next to each other.” on the contary, all of the interviewees state that there is no negative discrimination in terms of gender on the board of directors, men directors do not hold meetings with each other without informing women directors. even if men directors have meetings with each other, women directors are not obligated to accept the decisions they get in these meetings on the board meetings. while 8 interviewees state that values of women and men directors are same, interviewee 1 say that “in terms of values of women and men board directors, their priorities and perspectives are different. women directors give more importance to ethics, social justice and honesty,". interviewee 1: as a director on the board of directors, i have problems with time at specific issues. when i go to a company whose structure i do not know, i gather information about and improve my knowledge on the issues which i don’t know by making one-to-one meetings with the managers who are working there. interviewee 2: as a director on the board of directors, it was difficult to understand operations of a new company and characteristics of other directors, so i called managers and other directors and asked them questions when i needed it. interviewee 3: there is more cooperation among women directors than men directors. women are more hardworking, pay more attention, and give more importance to the issues. women care more about their work and take it more seriously. interviewee 4: as for the difficulties i faced on the board of directors, … it takes some time for people and an organization to be open to you and establish transparent communication. interviewee 5: sometimes when we discuss issues in which the family has different views in the board meetings, i have difficulties. international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 112 interviewee 6: the airport management is a specific field, you need to know the sector. general managers of each company held orientation meetings for board directors. since we started after this orientation meetings, we started much more comfortably. interviewee 7: you are responsible for the success and failure of the company, and take certain legal responsibilities. interviewee 8: i have not encountered any particular difficulties in my directorship on the board of directors. there were times when i just worked hard to adapt to new issues related to my position. interviewee 9: there can be last-minute board meetings. but, i want to examine the files related to that issue in details before the meetings. i have difficulty at that time. i meet with other women directors beforehand about the projects or issues and we exchange ideas with each other to overcome this problem. 28. do you think the presence of women directors on the board of directors positively affects the performance of the company? if so, why? 29. does the company give importance to equality, education, expertise, technology knowledge, network, experience in sectors and functions etc. while choosing directors to the board if so, which ones does it give importance? 30. are performances of other directors and yours evaluated systematically on the board of directors? if so, how and how often? all interviewees believe that the presence of women directors on the board of directors affects the company performance positively. interviewee 4 add that “women can manage without their egos, they have talents to observe the issues from different perspectives. also, they have a higher level of empathy, comprehension, and social intelligence than men.”, interviewee 7 add that “women directors are chosen and included to the board carefully, but men directors are included to it randomly. for this reason, the carefully chosen women directors have higher qualifications than men directors.” international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 113 interviewee 1: when we choose directors to the board, we focus on their educations and experiences. in terms of board performance, there is a standard format which measures how the board of directors works. there is a survey which includes 20-30 questions. it helps to understand whether decisions are taken and processes are implemented by the board of directors comprehensively. the board performance is measured annually. the board of directors conducts self-evaluation for itself. interviewee 2: while the company is choosing the director to the board, it gives importance to her knowledge, experience, and execution. she should be sufficient to question the issues. in terms of a board performance, there is no formal evaluation but the company gives feedbacks to the directors. interviewee 3: while choosing the director to the board, all of the directors have prominent qualifications. while family members who are directors know the sector better, independent directors are included to the board based on their expertises. they should not be away from the technology and other issues. there is no systematic performance evaluation on the board of directors. interviewee 4: the company does not make professional choices while it is choosing directors. they evaluate the candidates based on their adaptability to the chairman and other directors. they don’t select the directors based on their qualifications. adaptability, getting acquainted with the family and experience are improtant but qualifications are not important. there is no systematic performance evaluation for the board of directors. interviewee 5: when they choose a director for the board of directors, they give importance to equity, education, network, knowledge of technology and sector of the company, experience on company functions and other fields, etc. there is no systematic performance evaluation for the directors. interviewee 6: we evaluate our self-performances and performance of the board in the director evaluating committee annually. fields for development are determined and directors evaluate performances of each other. interviewee 7: while choosing a director to the board, organizational needs become important. the digital transformation becomes more important for the boards. performances of the directors are evaluated systematically on the board of directors. performances of the board and directors are evaluated on the board. international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 114 interviewee 8: while choosing a director for the board, they give importance to an equity, fields of experiences, especially banking and business experiences. interviewee 9: while choosing a director of the board, they ae looking for past experiences and successes of the candidates. they ask the following questions: has she taken place in bank committees? what kind of special experience does she have? does she have a natural network? also, the most important subject is adaptation. does she answer questions in a short period? we consider education, equity, etc. in terms of performance evaluation. no targets are given, however, directors are evaluated at the end of the year. what kind of relations do we have with the executive committee? do we understand the strategy of the company? can we provide support when it is requested? are searched. also, the chairman plays an important role in the evaluation. the following questions were asked about the effects of board directorship on private lives and the future plans of women directors. according to the interviewees, women directors think to stay on the board until the legal period ends. also, they want to be directors on boards of other companies if possible. in addition, their directorship positions do not affect their personal lives. 31. did your board directorship changes your business and private lives? if so, what kind of changes did it make? 32. how long will you remain on the board of directors of your current company? 33. do you consider to be on the board of other companies? did you get a proposal for that? all directors state that they can complete six years as an independent director in their current companies and then they can become directors on the boards of other companies if it is proposed to them. regarding to the changes occcured due to board directorship in their private and business lives, directors express the following opinions: interviewee 1: “my self-confidence has increased in the business life, i look at the cases more broadly. the time i devote to my private life has shorten.” interviewee 2: “it required me to stay out of some aspects of my job, it did not make any difference in my private life. i was a very busy person before as well.” international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 115 interviewee 4: “directorship on the board brought me a slower paced life. it also gave me the opportunity to balance my work life with my private life. it brought me more calmness, patience, and work-life balance.” interviewee 5: “sometimes timing of my positional duties coincides with my private life in urgent matters.” interviewee 9: “there is more time left for my private life with this independent board directorship. it did not change my private life. however, we become easily accessible all the time with remote work.” other interviewees state that their directorship positions have not changed their work and private lives. 34. why do you think turkish companies have few women directors? 35. what should be done for women to become independent board directors? which qualifications should they have? 36. would you like other women independent directors to be appointed to the board of directors? do you advise and persuade the chairman and directors of the board for that? most of the directors state that there are few women board directors due to the lack of women executives at top management levels such as ceo and cfo. in addition, interviewee 9 continued: “when i was the… manager, we selected and directed some women. these women did not want to leave their comfort zones when high-level assignments were opened…we mostly offered specific duties abroad, but women did not want to go.” it has been stated that one of the reason for having low number of women directors on the board is not the supply problem. interviewee 3: “there is enough supply, and we are reviewing it at awbd. however, networks of men are more active, men want to talk and agree among themselves.”. interviewee 4: “they do not want to include women directors to the board. there is supply, they can find qualified women candidates. there are 300 women in awbd, there is also a sabancı university pool. in other words, there are around 1000 women who can become directors on the board of directors right now.” international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 116 other reasons are male-dominated society structure, men do not want to make room for women, women's inability to establish networks and collaborations, willingness to include recognized ex-ceos and cfos to the board, not being systematic and not selecting candidates based on their qualifications, lack of an institutional structure, women take more breaks from work in career steps due to education, marriage, and children. as for what should be done for women to become independent board directors: interviewee 1: “…women directors should do their jobs best and contribute to the success of the company in the best way. they should show themselves with their studies and contributions; defend their opinions without hesitations in all environments. it is necessary to bring innovations and have a clear vision.” interviewee 2: “women should be qualified to be independent board directors, prepare themselves, and understand functions of the board of directors well.” interviewee 3: “women should choose a sectoral or functional field. they need to know what kind of contributions they can make to the company. it is necessary for a candidate to estimate her possible contributions and target the potential companies. she should observe the targeted company regularly, share her observations with the top management of the company, express her potential contributions to the company to the top management, be a good listener, and acknowledge that she can learn from them as well. interviewee 4: “women can participate to the awbd program. apart from this, women should see the big picture, manage risks, open collaborations, propose innovations, manage transformations, and contribute to the visions of the companies.” interviewee 5: “women should develop networks. they should educate themselves on governance issues such as strategies and risks of companies.” interviewee 6: “women should have sectoral knowledge, experiences and strategic perspectives. it is not about women's competencies, it is about men not making room for women.” international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 117 interviewee 7: “women have to go through a process to become independent board directors. there are programs which prepare women to the board at the top level, it should be considered.” interviewee 8: “it is very important for women to stay sharp and determined in their career plans. they need to both manage their time more efficiently and increase their awarenesses about support which they can gather from their environments. they should strive to have knowledge and equipments in the areas of their expertises, have goals, and seek to reach higher positions in line with these goals.” interviewee 9: “women should be more flexible and have natural networks which are formed by their experiences. they should work in ngos and volunteer projects. also, women should improve themselves, leave their comfort zones and do mentoring bilaterally”. in addition, all of the participants agree that they recommend and want to recommend women directors to the board of directors. however, they state that their opinions are not asked in some cases. interviewee 7 approaches the subject from a different perspective, she expresses the negative impact of other women on the promotion of women with the following words: “women have queen bee syndrome and do not want other women to get promoted.” 9. conclusion and discussion the structured in-depth interviews were conducted with nine women independent board directors. it is fnd out that they are appointed due to their qualifications such as education, experience, expertise and networks. they want to make contributions to their current companies and be appointed as directors of boards of other companies as well. they try to develop good relations with the chairmen and other directors of the board. also, they try to improve their performances. being a women independent board director requires to develop networks with owners and the chairmen of bist 100 companies in turkey. volunteers should access to certain networks and develop relations with whom they will facilitate their appointment processes. owners and the chairmen should appreciate the diversity for decision making on the board of directors. they should be open minded to appoint women directors and do not try to appoint people who will approve what they ask for. it is expected that the number of women independent board directors will increase when qualifications of women will improve, they have accesses to certain networks to be appointed and their efforts are appreciated by owners and the chairmen of companies. it is expected that this study will make contribution to the field international journal of commerce and finance ahu tuğba karabulut & hümeyra nur hatipoğlu 118 with its approach and findings. it can increase the number of women independent directors on the boards. an extensive study which reveals these issues related to women independent board directors has not been conducted in turkey before. literature review shows that, these comprehensive questions were not asked to women independent board directors especially in turkey. thus, this study is a unique study with its approach and findings. the findings of the study reveal the profiles, characteristics, qualifications and backgrounds of women directors, their approaches to be appointed, the effect of women directors on the company performance, their roles on the boards, the effect of their directorships on their private lives, and their career expectations on the boards. thus, these women independent directors could be role models to other women who would like to be appointed as board directors. also, it could encourage companies to appoint women independent directors to their boards. there is no quota system for turkish companies to appoint women directors to their boards. however, companies which are listed in the corporate governance index try to appoint women directors to have at least 25% of their total board directors. this approach is expected to be followed by other companies as well. references acker, j. 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(1989). boards of directors and corporate financial performance: a review and integrative model. journal of management, 15 (2), 291-334. international journal of commerce and finance, vol. 8, issue 2, 2022, 130-179 * 1 i̇stanbul ticaret university, faculty of business administration, departmant of business administration istanbul, turkey, orcid: orcid.org/0000-0001-6414-8029, prof. dr., tkarabulut@ticaret.edu.tr ** i̇stanbul ticaret university, faculty of business administration, departmant of business administration istanbul, turkey, orcid: orcid.org/0000-0002-1603-2520, res. asst., nyavuz@ticaret.edu.tr a study of green human resources management (ghrm) practices in the strategic management perspective ahu tuğba karabulut* nihan yavuz aksakal** submitted: 12.08.2022 accepted: 28.10.2022 published: 01.11.2022 abstract the recent increase in environmental problems has made it necessary for organizations to create environmental strategies. “green culture” becomes even more important, especially if the raw materials used, the production process and the product itself can harm the environment. as environmental awareness, sustainability and environmental responsibilities become more and more important, organizations include environmental elements in their strategies. the effective and efficient carry out of environmental strategies in the organization is possible with the support of managers and the participation of employees. green human resources management (ghrm) takes an active role in the environmental and sustainability goals of organizations and the hr department turns into a key strategic unit. it’s important for the whole organization that human resources management and practices gain a “green” dimension. this study aims to reveal the relation between strategic management and ghrm and its practices. the research was designed with qualitative features. in-depth interviews were used in the research. the results of the study have revealed that green human resources management practices are carried out even if green human resources management are not directly involved in the strategic management process. in addition, it has revealed which green human resources management practices are used in the organizations. keywords: strategic management, green human resources management, in-depth interview, environment management, sustainability. mailto:orcid.org/0000-0001-6414-8029 mailto:tkarabulut@ticaret.edu.tr mailto:nyavuz@ticaret.edu.tr international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 131 1.introduction according to victor (2001), in the 21st century, the interest in environmental problems is increasing in all fields in the world (ahmad, 2015: 2). haden et al. (2009) define the environmental management as the process of creating innovation throughout the organization on issues such as sustainability, waste reduction and social responsibility by adopting environmental goals and strategies integrated with the organizational goals and strategies (jabbour, 2011: 98). therefore, properly combining environmental thinking in an organization with its operations and vision can lead employees to environmental practices and initiatives (acquah et al., 2021: 269). human resources are very important for the implementation of organizational strategies and policies. the initiation and implementation of green initiatives, and the spread of green culture cover all employees in the organization and at this point the top management plays an important role (yusliza et al., 2019). it is stated that as a result of the support given by the top management to environmental problems, green practices in the organization are perceived positively among the employees and result in sustainable environmental performance (haldorai et al., 2022: 2). the support of the top management on environmental issues creates the necessary resources for the successful implementation of green human resources management (ghrm) (haldorai et al., 2022: 2). from this point of view, teixeira et al. (2016) emphasize the importance of organizational human resources strategies being compatible with environmental targets (bag and gupta, 2020: 1097). in this regard, the role of the human resources department and its practices are considered very important. it is suggested that with human resources practices, employees can be motivated on environmental management in the organization. if human resources practices such as recruitment, training, performance evaluation, culture, learning and teamwork include environmental issues, environmental management can become proactive in the organization (jabbour, 2011: 98-99). it is stated that in order to be a “green worker”, an individual must take on four roles: “preservationist, conservationist, non-polluting and maker”. the preservationist seeks to international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 132 protect the environment from harm or adverse changes. the conservationist is very careful in using the environment so that the natural environment can last for a long time until future generations. it has non-polluting behaviors which prevent pollution of the environment. it tries to prevent the pollution of water, air and atmosphere through toxic substances and wastes. maker tries to create gardens and similar natural spaces. it is claimed that these four roles are important for a “green employee” and these green employees are nature lovers (opatha and arulrajah, 2014: 102-103). for this reason, ghrm is very important in terms of the performance of the organization and its relationship with the environment through green employees. this study aims to address ghrm within the framework of the strategic management process. firstly, a review of the available literature on ghrm is presented. then, related studies in the literature about the concept of green human resources management are included and synthesized with research methodology. qualitative research was used in the research. in-depth interviews were conducted with human resources managers of 7 international companies in the energy sector and research findings were presented. the article ends with the discussion of the results of the research and recommendations for future researches. 2. literature review 2.1.strategic management perspective strategic management which consists of four basic elements: environmental scanning, strategy formulation, strategy implementation, evaluation and control (wheelen et al., 2018: 46), is a set of managerial decisions and actions which enable to reveal the long-term performance of the organization (wheelen et al., 2018: 37). the purpose of environmental scanning, which is the observing, evaluating and spreading information from external and internal environments, is to identify internal and external elements which can be used in strategic decisions in the organization. with the swot analysis made on this subject, the strengths and weaknesses, opportunities and threats of the organization are determined (wheelen et al., 2018: 46). international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 133 strategy formulation consists of research, analysis and decision-making processes in order to gain the competitive advantage. strategy formulation consists defining the competitive advantages of the organization, describing weaknesses which affect the organization’s ability for growing, creating its mission, setting achievable goals, and determining policy guidelines (wheelen et al., 2018: 48). the strategy implementation process is the step in which strategies and policies are put into practice. various elements such as culture, structure and/or management system in the organization may change during the implementation of the strategy. (wheelen et al., 2018: 52). the evaluation and control process is monitoring organizational activities and performance results in order to compare the current performance with the targeted performance. managers at various levels of the organization use the information obtained to take “corrective action” and solve the problems. the evaluation and control process can also identify weaknesses in the strategic plans which emerged and were solved in the previous stages of the strategic management process. from this point of view, the evaluation and control phase can enable the whole process to start again (wheelen et al., 2018: 53). “human resources”, which was seen as a cost element with fordist-taylorist thought until the 1980s, gained a strategic importance with globalization, international competition, rapidly changing technology and modern management models. it is argued that behind the mentioned strategic importance of human resources management is its contribution to organizational performance and the competitive advantage it provides to the organization (bayat, 2008: 73). it is seen that organizations which have competitive advantages in the international arena with globalization interpret the human element differently and emphasize the increasing importance of human resources on the basis of their success (tikici and akdemir, 2002: 861) (öğüt et al., 2004: 282). “human resources” can be the key factor in achieving sustainable competitive advantage for the organization. from this point of view, it is thought that the long-term single resource advantage may be in the field of qualified human resources (wheelen et al., 2018: 189). international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 134 human resource management practices play a supportive role in achieving environmental sustainability goals throughout the organization (dubois and dubois, 2012) (sathasivam et al., 2021: 124). jackson et al. (2011) state that in terms of corporate environmental management practices, it is necessary to consciously contribute to the strategic planning activities of human resources management and its practices (shah, 2019: 772). from this perspective, green human capital is seen as a main strategic resource in terms of providing sustainable competitive advantage for organizations (yong et al., 2019) (agyabeng-mensah and tang, 2021: 1379). ghrm, on which more research has been conducted in recent years, has an important role in the sustainable development strategies of organizations (pham et al., 2019: 845). green human resources management practices integrate the strategic human resource management dimensions of the organization as well as human resources management practices compatible with environmental objectives (gholami et al., 2016) (pham et al., 2019: 847). in terms of human resources, strategic management is considered as the execution and maintenance of human resources activities parallel with the organizational strategy to achieve organizational goals (zehir, et al., 2016; armstrong, 2009) (yıldırım et al., 2020: 36). the first steps of strategic management and human resources management practices are to determine the strategic direction. in order to ensure this match, it is important for human resources managers to understand the business culture and ethical rules by considering the mission, vision and values. human resources management should also clarify its goals, values and ethical principles while determining its strategies and policies for its own department in line with the business strategy (yıldırım et al., 2020: 37). external and internal environmental analyzes play important roles in human resource planning as well as in the strategic management process (wheelen and hunger, 2012). information from internal and external environments is very important for organizations to make strategic plans. at the same time, organizational competencies, strengths and weaknesses, threats and opportunities are also shaped according to internal and external environmental analysis. at this point, human resources management department managers create strategies international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 135 which are compatible with the business strategy by considering internal and external environmental analyzes (mondy and martocchio, 2016) (yıldırım et al., 2020: 37-38). after the strategies are developed, action plans are started to be implemented by cooperating with the middle and lower management levels under the responsibility of the top management. in the strategy implementation phase, the establishment of the organizational structure suitable for strategies, the selection and training of human resources capable of fulfilling the strategies, the selection of the appropriate management units and leaders, and the appropriate organizational climate environment should be prepared (ülgen and mirze, 2004-2005) (kaya, 2010: 33). the competencies of the human resources department are shaped according to strategic goals of the organization. according to strategic goals of the organization, elements and systems such as communication, job design, recruitment, training-development, performance measurement and rewarding can be affected. the systems and practices of the organization which are compatible with the strategic orientation also affect the results of human resources management practices (yıldırım et al., 2020: 39). 2.2.green human resources management (ghrm) green human resources management (ghrm) includes the environment in its human resources policies and practices in order to achieve the sustainability goals of the organization and increase the environmental awareness of the employees (acquah et al., 2021: 269). ghrm is seen as an element of the green philosophy that which deals with the role of human behavior in environmental management (jackson and seo, 2010) and sustainable development (o’donohue and torugsa, 2016) (mishra, 2017: 763). jabbour, santos, and nagano (2008) mention the role of education, teamwork, non-financial rewards and organizational culture in the improvement of environmental performance (tang et al., 2018: 33). the purpose of ghrm applications is to improve the sustainable environmental performance of the organization (arulrajah et al., 2015: 2). international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 136 studies indicate that functions such as recruitment and selection, training, performance management, wage and reward systems, and employee involvement are included in green human resources management practices (jabbour et al., 2010; jackson et al., 2011; renwick et al., 2013; zibbaras and coan, 2015) (tang et al., 2018: 33). 2.2.1.green recruitment and selection the green recruitment and selection process is the recruitment and placement of candidates who have high potentials to contribute to environmental issues in connection with the organization (tang et al., 2017) (jamal et al., 2021: 6). this process begins during job analysis and design (opatha, 2013) (bombiak and marciniuk-kluska, 2018: 6). job description with green features includes duties and responsibilities in green human resources management perspective (renwick et al., 2008) (yusliza et al., 2019: 2057). in an organization with green human resources management practices, candidates’ attitudes towards the environment are also taken into account (jackson and seo, 2010; renwick et al., 2013) (bombiak and marciniuk-kluska, 2018: 6). in this direction, organizations can select and attract candidates with green awareness (milkovich and boudreau, 2000) (tang et al., 2018: 33-35). job descriptions which require employees’ knowledge about environmental management and encourage them to expand their knowledge are included in the job analysis of organizations which care about environmental performance (jabbour, 2011: 99). in green job design and analysis, it is recommended to include duties related to environmental protection in job descriptions, green competencies in all positions, and establish positions responsible for environmental corporate governance (bangwal and tiwari, 2015; arulrajah et al., 2015; renwick et al., 2013; opatha, 2013; ahmad, 2015; mathapati, 2013; opatha and arulrajah, 2014) (bombiak, 2019: 1651). environmental aspects of the candidate/employee can be emphasized in the green recruitment process and job descriptions. in this context, it is suggested that questions about the candidate’s environmental knowledge, values and beliefs can be asked to the candidate (renwick et al., international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 137 2013) (tang et al., 2018: 35). at this point, person-organization harmony is very important for both the candidate and the organization. when willness and jones (2013) look at the subject from the perspective of the green employer brand, it is argued that when candidates perceive harmony between their values and organizational values, they can be happy to work in an organization with a positive environmental reputation (tang et al., 2018: 35). the green recruitment process, on the other hand, consists of the recruitment process to reveal environmental values and attract candidates who are competent in ecology to the organization. in this regard, the use of methods such as minimizing paper consumption in the recruitment process is also seen as a part of the green recruitment process (bombiak and marciniukkluska, 2018: 6). factors such as including environmental factors and values in job advertisements in the green recruitment and selection process, reflecting the organization’s commitment to the environment, including questions about the environment in recruitment interviews, and giving priority to candidates with environmental knowledge and experience are considered important by various authors (bangwal and tiwari, 2015; arulrajah et al., 2015; renwick at al., 2013; opatha, 2013; ahmad, 2015; mathapati, 2013; opatha and arulrajah, 2014) (bombiak, 2019: 1651). 2.2.2.green training and development the green education and development process includes activities to protect the environment and achieve environmental goals, and provide employees with various skills and competencies about the environment (jabbour, 2011). it is suggested that training activities can increase employees’ awareness, knowledge and skills on environmental issues (fernandez et al., 2003) (tang et al., 2018: 35). international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 138 the green training and development process is considered important (del brío et al., 2008) in raising the awareness of the employees about the environment and implementing the environmental strategy and policies of the organization (unnikrishnan and hegde, 2007) (yong et al., 2019: 215). in the green training and development process, it is considered important to analyze training needs, organize trainings about the environment, and enable employees to develop green competencies (bangwal and tiwari, 2015; arulrajah et al., 2015; renwick at al., 2013; opatha, 2013; ahmad, 2015; mathapati, 2013; opatha and arulrajah, 2014) (bombiak, 2019: 1651). trainings given in the digital platform can be given on security, energy efficiency, waste management, recycling as well as green management issues (hosain and rahman, 2016: 57). it is stated that providing the education process in a digital environment will contribute to the development of “green culture” (hosain and rahman, 2016: 57). 2.2.3.green performance management green performance management evaluates the performance of employees within the framework of environmental management (jabbour et al., 2008) (tang et al, 2018: 36). green performance appraisal is the process of evaluating the performance of employees on environmental issues and giving feedback on this issue (jabbour et al., 2010: 1057) (yong et al., 2019: 215). while green targets play a key role in green performance management, it is also important to raise awareness of employees about the environment (hosain and rahman, 2016: 57). it is considered important to carry out environmental audits in the green performance management process, add environmental issues to the performance evaluation process, determine the goals and responsibilities for ecological initiatives, and provide regular feedback to employees about environmental targets (bangwal and tiwari, 2015; arulrajah et al., 2015; renwick at al., 2013; opatha, 2013; ahmad, 2015; mathapati, 2013; opatha and arulrajah, 2014) (bombiak, 2019: 1651). international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 139 2.2.4.green career management although there are many studies in the literature on ghrm, green career management is often not included in the studies. the complexity of career progression, green jobs and green competencies in green human resources management can be seen as the reason for this. the study by diritsky (2014: 70) includes information on typical occupation areas, job titles, education requirements. lab technician, construction equipment operator, plant operators, urban forester and plant curator, engineering technician, electricians, wind turbine service technician, construction manager, environmental science and protection technician, chemical technician, logistic technicians, ındustrial production, operations manager, route manager, engineering drafter and automotive service technician (diritsky, 2014: 70) are suggested as some of the occupations in this field. it is argued that there is no exactly a specific career path for sustainability-related jobs and many employees in sustainability-related jobs are the responsibility of the collaborator (hamilton, 2012: 4). it is argued that careers and education should be reformed and changes should be aligned with the needs of green organizations. it is stated that new standards will help to systematize the skills of the green workforce, and new occupations such as green collar occupations will help green industries grow (scully-russ, 2013: 9-10). 2.2.5.green pay and reward the green pay and reward function aims to motivate employees to contribute to environmental goals; consists of financial and non-financial rewards (jabbour et al., 2013; mandip, 2012) (tang et al, 2018: 36-37). the green behaviors of the employees are seen as helping the organization to reach its green goals (alhaddi, 2015). and for this reason, green payment can be seen as a motivation tool for employees (jabbour et al., 2010) (khan et al., 2017: 3). a study conducted with uk-based organizations on this subject reveal that employees are rewarded for exhibiting green behavior. it is also stated that financial rewards can motivate employees on environmental issues (delmas and pekovic, 2013) (khan et al., 2017: 3). international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 140 it is recommended that reward packages can be designed to reward green competence and green behavior. it is stated that bonuses may be given to employees who take care of issues such as using the workplace cleaner, paying attention to health and safety standards, and reducing paper usage (hosain and rahman, 2016: 58). 2.2.6.green employee relations and green employee involvement it is important for employees to take an active role in environmental issues such as reducing waste and pollution and using resources effectively (florida and davison, 2001). effective participation of employees in environmental practices is considered important in preventing pollution and evaluating environmental opportunities (renwick et al., 2013). in this context, in order to measure the participation of employees in green culture, tang et al. (2018: 37) reveal five different elements: “a clear green vision, a green learning environment, various communication channels, green practices and promoting green participation”. in addition, it is stated that the human resources department can encourage employees’ participation in environmental practices through training and reward systems (pellegrini et al., 2018) (roscoe et al., 2019: 739). it is considered important to ensure that taking part in environmental issues for employees (in green activities), supporting ecological initiatives of employees, making corporate recommendations for the solution of environmental problems and sharing information with employees regarding green employee engagement (bangwal and tiwari, 2015; arulrajah et al., 2015; renwick at al., 2013; opatha, 2013; ahmad, 2015; mathapati, 2013; opatha and arulrajah, 2014) (bombiak, 2019: 1651). 3.methodology 3.1.the aim, importance and the development process of research it is stated that when companies green their activities and include them in their missions and strategies, employees will be more likely to work in an environmentally friendly way (harvey et al., 2013). (haddock-millar et al., 2016: 193). aligning greening with the corporate strategy international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 141 is a key point in improving environmental sustainability in organizations (haddock-millar et al., 2016: 194). it is claimed that the participation and motivation of the top management and employees and the integration of the environment with the strategy are effective on the environmental performance of the organization (brı´o et al., 2007). haden, oyler, and humphreys (2009) emphasize that integrating the environmental objectives with the strategic objectives of the organization results in an effective environmental management system. it is very important to include environmental goals and strategies in the organization's strategic development goals (ahmad, 2015: 4). it is argued that environmental culture lays the groundwork for the implementation of ghrm as a strategic aspect of the organization (shafaei et al., 2020). in this direction, organizations should offer different hrm practices in line with their strategic goals (labella-fernández, 2021: 2). environmental and sustainability strategies will be successful when they are well aligned with human resources practices. in this regard, human resource management and practices play very important roles. it is argued that as ghrm associates “employees” with environmental sustainability, it helps to bridge the gap between the existing and required skilled workforce for the successful implementation of environmental management systems (mishra, 2017: 764). again with a parallel view, ghrm is accepted as a holistic perspective to align employees with the environmental strategy of the organization (mathapati, 2013: 2). green hr policies aim to develop an environmentalist corporate culture (mathapati, 2013: 3). the responsibility of hr managers here is to include the green human resources philosophy in the human resources policies, which is the corporate mission statement (mathapati, 2013: 4). as a study reveals, with a strategic approach to reward management, there is an evidence that organizations have developed reward systems to encourage practices related to environmental management (renwick et al., 2013: 13). research on the effective implementation of environmental practices in organizational strategy is quite limited. this study is considered important to fill this gap. therefore, this study aims to address ghrm within the framework of the strategic management process. international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 142 considering the importance of literature review and ghrm practices, the following hypothesis is put forward in this study. hypothesis: ghrm practices and organizational strategy are interrelated. 3.2.sampling and data gathering the research was designed as an exploratory research and qualitative. the data were obtained by an in-depth interview technique. the in-depth interviews were conducted between february 2022 and april 2022. each in-depth interview lasted between 45 minutes and 1 hour on average. the sample of the research consists of 7 human resource management experts from the fuel and energy sector. an in-depth interview is a qualitative research method which is conducted with a small number of participants and tries to reveal perspectives of the participants through intensive individual interviews (boyce and neale, 2006: 3). in-depth interview analyzes relationships between categories by creating categories from the data obtained from the participants. (charmaz, 1990: 1162) (dworkin, 2012: 1319). it is stated that in-depth interviews are supportive in obtaining in-depth information on the thoughts and behaviors of the participants or in researching new topics in details (boyce and neale, 2006: 3). in the in-depth interview, it is stated that 5 to 50 participants will be sufficient for the sample (morse, 2000: 1) (dworkin, 2012: 1319). in-depth interview is suggested to consist of the stages of planning, developing a tool, collecting data, analyzing data and revealing findings (boyce and neale, 2006: 3). the data was analyzed by the content analysis method. at the beginning of the interview, approval was obtained to record the interviews with participants. in the research, it has been tried to reveal the existence of green culture in companies, starting from the framework of the international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 143 strategic management process. it is investigated whether green human resources management are applied in companies and if so, what kind of applications are made. data were collected by an in-depth interview method, one of the qualitative research methods. 25 questions were asked to the participants through a semi-structured questionnaire. the reason for using this method is allowing researchers to delve deeper into the subject and gather comprehensive information. the universe of the research includes international organizations operating in the fuel and energy sector in turkey. the sustainability reports of fuel and energy sector companies were examined and companies which give importance to the concepts of green human resources management, environmental management and sustainability were selected as a sample. seven human resources management experts who agreed to be interviewed constitute the sample of the study. the reason for focusing on the fuel and energy industry is that concepts such as green culture and green management, environment and sustainability are the main focus of the research. green culture becomes more important, especially if the used raw materials, the production process and the product itself can harm the environment. one of the sectors most related to issues such as environment and sustainability is the fuel and energy industry. in order for the sample to provide the sufficient information on ghrm, the annual reports of the companies were examined. the number of distributor companies in the fuel sector has been reached from the september 2021 report of the epdk. there are nearly 50 distributor companies in the fuel sector in turkey. for this reason, the main population of the study is these 50 companies. however, with the time and cost constraints in order to examine the importance given to environmental, sustainability and “green” issues in the companies’ annual reports researchers interviewed with human resources management experts of seven companies as the sample of this research. 3.3.data analysis and reliability the data collected in the research was analyzed by the content analysis method. the content analysis is used to convert systematically collected data into quantitative form such as frequency and percentage for research purposes. content analysis is a method which provides flexibility and is used to make valid inferences according to the researcher’s theoretical and international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 144 basic interests and the problem being examined (rosengren, 1981; weber, 1990) (yavuz, 2020). content analysis, which allows for the creation of new opinions, starts with accessing similar source data through coding or keywords. it continues with bringing the concepts together and making classifications according to a certain methodology. after the scanning, the data set created is examined. categories such as the content, order, and number of repetitions of the coding are being developed. the findings are associated with the research purpose, organized and deep interpretations are given (cıgara, 2019) (yavuz, 2020: 2675). due to the confidentiality of personal data, the names of the participants and their organizations were not given. participants are given as p1, p2, p3, etc.. audio recordings of the interviews were decoded. directly relevant and repeated answers of the participants were revealed. similar meaningful expressions in the answers were coded. in the next step, the expressions and codings of the participants were analyzed. possible researcher bias can be reduced by involving participants in the process of checking and validating the results. the method applied by involving participants in the research process is known as member checking or participant validation. member checking is used to confirm, support or assess the trustworthiness of qualitative results (doyle, 2007) (birt et al. 2016). in this study, participant validation was carried out to ensure validity and reliability. in this direction, after the data collection, the data were summarized and the participants were asked to express their opinions about the accuracy. in addition, an expert review was conducted by two field experts for the entire research process. in order to ensure the consistency of this study, a similar attitude was displayed in the interviews with all the participants, and the questions were asked in the same way and in the same order. in the creation of questions to obtain information about the strategic management process associated with the green culture of companies wheelen and hunger’s (2012) strategic management model was used. in order to reveal the practices related to green human resources management in the interview questions, in-depth interview questions were created based on the green human resources scale used by öner (2021) in his doctoral thesis. international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 145 3.4.data solutions table 1. gender of participants participants gender p1 woman p2 man p3 man p4 woman p5 woman p6 man p7 woman there are two main issues in this study, namely the strategic management process and green human resources management. the strategic management process consists of four main themes, the purpose of environmental scanning, strategy formulation, strategy implementation and the evaluation and control process. ghrm consists of six main themes: green recruitment and selection, green training and development, green performance management, green career management, green pay and reward and employee relations and green employee involvement. the main themes and sub-themes coded as a result of processing (filtering) the data of the participants are given in table 2. international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 146 table 2. sub-themes of the sample main themes t h e p u r p o se o f e n v ir o n m e n ta l sc a n n in g s tr a te g y f o r m u la ti o n s tr a te g y i m p le m e n ta ti o n t h e e v a lu a ti o n a n d c o n tr o l p r o c e ss g r e e n r e c r u it m e n t a n d s e le c ti o n g r e e n t r a in in g a n d d e v e lo p m e n t g r e e n p e r fo r m a n c e m a n a g e m e n t g r e e n c a r e e r m a n a g e m e n t g r e e n p a y a n d r e w a r d e m p lo y e e r e la ti o n s a n d g r e e n e m p lo y e e in v o lv e m e n t sub-themes sustainability p4, p3 p1, p2, p3,p4, p5,p6, p7 p7, p2, p3 p4 reducing waste generation and zero emissions p2, p6 p2 p5, p4 effective use of resources p7 p7 p4 society and environmental awareness p2 p4, p6, p3 p3, p4 p7 p7 harm reduction p1, p6 renewable energy sources p5 international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 147 digital hr applications p1 p6, p1 online interviews, tests and training p5, p1, p4, p7 environmental trainings p5, p3, p7 p3, p6, p7 occupational health and safety p2, p3, p6 p7 p5, p1,p6, p4 volunteering p7 p7 not a direct performance criterion p1, p2, p3, p4, p5, p6 not a direct career planning criterion p1, p2, p3, p5, p6 spiritual reward p1, p2, p4, p6, p7 feedback and ppinion on the platform p1, p4, p7, international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 148 meetings p4, p6, p7 projects about csr and environmental p3, p5, p6 table 3. interview questions and codings interview questions codings 1. do you give importance to nature and environmental circumstances in external and internal environment analysis (swot)? sustainability reducing waste generation and emissions effective use of resources environmentally friendly activities environmental risk harm reduction energy and water efficiency renewable energy sources 2. do you include environmental activities in your company’s mission and vision? zero emissions society and environmental awareness international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 149 respect for the environment environmental protection and sustainable values 3. do you include environmental activities in your company’s objectives? renewable energy sources zero emissions sustainable activities occupational health and safety effective use of resources 4. do you include environmental activities in your company’s strategies and policies? low-carbon business investments sustainability focused on people and the environment carbon emission reduction activities energy efficiency 5. do you include environmental activities in your human resources strategies? is it in line with your corporate strategies? sensitivity towards the environment and society sustainability volunteering practices for social responsibility digital hr applications international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 150 6. are there practices for green human resources in your company’s corporate culture? making working conditions safe and secure environmental trainings digital hr systems online interviews, tests and training human rights policies 7. do you direct your employees in leadership practices towards green human resources and environmental practices? executive interviews field trips leading projects announcement by mail/news 8. do you include green human resources and environmental regulations in your organizational structure? ohs team e-transformation applications quality and environment team health, safety, environment and security team sustainability presidency 9. do you allocate resources to green human resources practices in terms of resource allocation? and does your budget allocate expenses for this issue? job creation for green growth international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 151 digital hr and electronic hr systems investments volunteering activities budgets occupational health and safety investments and budgets 10. do you control and evaluate the process in terms of environmental practices? emission calculations activity reports sustainability reports waste management applications e-transformation applications legal regulations internal audits and reports 11. do you include environmental duties and responsibilities in employee job descriptions and job requirements? available on select departments and teams technical based job descriptions and job requirements 12. do you use environmental corporate image in job postings to attract environmentally conscious candidates? energy emphasis company introduction international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 152 global energy transformation zero carbon emissions 13. are there questions to measure the environmental knowledge and awareness level of the candidate in the recruitment interviews? environmental awareness social responsibility volunteering values 14. do you use electronic platforms for job interviews and candidate recruitment-selection processes? reducing paper consumption digital form and tests e-trainings online interviews 15. do you develop training programs to raise environmental awareness for employees in the orientation process on environmental management? environmental education ohs training introducing the company’s environmental projects hazardous wastes etc. trainings 16. do you develop special training programs for the environment? are you trying to raise environmental awareness of your your employees via these programs? do you expect your employees to do applications in this direction? environmental management practices trainings waste management trainings international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 153 ohs trainings health, safety, environment and security training energy efficiency trainings 17. are there individual or team/department based environmental performance criteria among the performance criteria? volunteering awareness criteria for field workers only competency and technical assessment 18. is there an assessment of environmental sensitivities of your employees in career planning? goal-oriented approach equality and fairness sustainability goals leadership traits 19. is there an assessment of environmental performance achievement of your employess in promotions or appointments? an indirect effect no effect effective for specific departments 20. has an award system been developed in your company for those who bring innovative suggestions on environmental issues? has a monetary or non monetary reward system been developed for the realization of environmental goals? spiritual reward earn points with the recommendation platform a piggy bank of ideas 21. do you involve employees in an environmental strategy formulation and decision-making? get feedback quarterly international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 154 satisfaction surveys opinion on the platform communication meetings occupational health and safety board representatives company newspaper environmental projects participation 22. what kind of environmental practices do you have regarding occupational health and safety? security management system respiratory mask use training ohs talks saving energy and consumables accident-incident notification tracking, suggestion records 23. has a suitable environment been created for employees in your company regarding environmental issues? (creating waste bin, brochures, recycling areas, etc.) separation of garbage battery waste bins hazardous waste, electronic waste, packaging waste, etc. international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 155 reducing the use of paper cups etc. reducing paper usage waste warehouses warning signs and texts 24. do you direct your employees to team work in order to raise environmental awareness and sensitivity? volunteering social responsibility projects environmental awareness 25. do you apply a flexible working system to reduce the negative effects of your business on the environment? hybrid system remote work for training and meetings working remotely on a specific day flexible working hours it is seen that the answers given by the majority of the participants to the first question are generally focused on sustainability, environmentally friendly activities, efficient use of resources, renewable energy sources, and reducing environmental damage. all of the participants state that the company they work for gives importance to nature and environmental conditions in the swot analysis. it’s stated that they use methods such as preparing action plans, making improvement studies, not avoiding the necessary investments, and performing data analysis. some notable statements of the participants are as follows: international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 156 “..especially in the swot analysis, external environmental risks are an important topic for us within the scope of risks. maximum attention is paid to legal regulations. analyzes are made taking into account environmental effects and performance.” (p3, man) “we are aware of our responsibility within the scope of the social and environmental impact caused by our operations. in this context, we pay particular attention to our weaknesses.” (p4, woman) “it is important to reduce energy efficiency, water efficiency, emissions, and waste generation. awareness raising efforts to reduce consumption are one of our strengths. we are doing analysis on this. but at the same time, these concepts can also be counted among our weaknesses due to the damage to the environment. zero accident target is one of the aspects we want to strengthen.” (p6, man) according to the answers given by the participants to the second question, companies include statements about the environment in their missions and visions, although not directly. some notable statements of the participants are as follows: “the environment is not directly involved in the mission and vision; however, our company values include "respect to the environment.” (p5, woman) “the mission and vision are not directly related to the environment. however, we have the value of "social and environmental awareness.” (p6, man) “…the firm now presents itself as an integrated energy company with a direct zero-emissions goal. however, the term "environment" is not included in the mission and vision.” (p2, man) “yes. we have the themes of “energy orientation” in our vision and “sustainable value and environmental protection” in our mission.” (p3, man) international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 157 according to the answers given by the participants to the third question, companies include various environmental activities in their objectives. below are some notable statements of the participants outside of the coding: “yes. due to the high environmental impact of the sector in which we operate, we carry out biodiversity, effective use of resources projects and environmentally sensitive investments.” (p7, woman) “yes, we care a lot about renewable energy sources, especially in recent years.” (p1, woman) “combating the climate crisis, reducing carbon emissions, using resources in a sustainable way, energy efficiency, clean technologies, protecting water and human rights are among the activities we care about.” (p5, woman) according to the answers given by the participants to the fourth question, companies include environmental statements in their strategies and policies. some notable statements of the participants are as follows: “due to the sector in which we do business, our product is a very risky product in terms of the environment. therefore, the company considers environmental activities as its main strategy.” (p2, man) “human and environment-oriented sustainability is at the core of our strategy.” (p3, man) “yes, we are constantly updating our environment, occupational health and safety, quality and energy policies to make them a long-term strategic approach.” (p7, woman) according to the answers given by the participants to the fifth question, companies include environmental expressions in their hr strategies. some notable statements of the participants are as follows: international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 158 “in line with the company strategy, we aim for a dynamic hr strategy that is sensitive to the environment and society. we care most about sensitivity and education in this regard.” (p4, woman) “we become more sensitive with the digitalization of hr and social responsibility projects. we reduce the paper load. we conduct online interviews and assessments. i can evaluate them within the hr strategies for the environment.” (p1, woman) “we are looking for talents who are in line with the vision of the " the energy company of the future". we prefer candidates who have a sustainability understanding. we care about volunteering in projects.” (p5, woman) according to the answers of the participants to the sixth question, there are green human resources management practices, albeit partially. some notable statements of the participants are as follows: “in-class trainings are given in digital environment.” (p5, woman) “making working conditions healthy and safe, reducing occupational diseases and occupational accidents, complying with legal regulations, creating environmental trainings and awareness projects are among the practices we do.” (p6, man) “in fact, we support the company strategy as hrm here. in the welcome kit of newly hired personnel, we present environmentally friendly products such as gifts with less paper waste and recyclable materials, glass bottles, and cloth bags. we want the employee to be aware of this situation.” (p1, woman) “there is no direct, but there are indirect applications. ohs and social responsibility projects, environmental trainings, online interviews, tests and forms are among these examples.” (p7, woman) international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 159 according to the answers given by the participants to the seventh question, it is stated that the leaders try to direct the employees to environmental practices. some notable statements of the participants are as follows: “managers go to the field and tour the stations. they might see something risky or notice something about security.” (p2, man) “hearing something from a president or ceo can motivate employees more. that's why our leaders take active roles.” (p1, woman) “our managers often conduct motivating interviews to raise awareness of the employees as required by the sector and make their promotions to increase participation in environmental projects.” (p4, woman) according to the answers given by the participants to the eighth question, it is revealed that there are generally responsible units or individuals for environmental regulations. some notable statements of the participants are as follows: “there is a health, safety, environment and security team.” (p2, man) “there is a quality and environment team. there is also the sustainability department. they create the necessary strategies and projects for the management of environmental risks. apart from that, there are suggestion boxes in the company.” (p7, woman) “the ohs team is a particularly responsible department. applications such as etransformation applications are also one of the environmental regulations in the organizational structure.” (p6, man) according to the answers of the participants to the ninth question, they generally do not allocate resources directly for green human resources management; however, it is stated that a certain investment has been made indirectly. some notable statements of the participants are as follows: international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 160 “there is no budget with the title of green human resources management. however, there is a budget allocated for waste bins, occupational health and safety, and environmental projects.” (p7, woman) “indirectly yes. we started to use electronic information management system. to reduce paper consumption, employee overtime and labor costs. in this process, a certain budget and resources were allocated.” (p6, man) “there is no specific title about it. but the budget allocated for the digitalization of hr can be the answer to this question. we allocate a budget for the complete digitalization of the recruitment process. booklets, orientation, exit process, etc. are completely online.” (p1, woman) according to the answers given by the participants to the 10th question, it is revealed that all companies control the process in terms of environmental practices and make evaluations in certain periods. below are some notable statements of the participants: “yes. we follow the evaluation and feedback of all applications. for example, when we do afforestation projects, we always measure paper savings, the number of trees planted, and how much water is given to nature. in addition, we monitor how much we reduce paper consumption with e-transformation applications.” (p6, man) we constantly share sustainability and annual reports with the public. at the same time, we try to evaluate the process by calculating air emissions.” (p4, woman) “we develop applications for efficient use of natural resources, materials and waste. at the same time, we take care to comply with the legal regulations by checking them frequently. we are making internal reports on this issue.” (p3, man) according to the answers of the participants to the 11th question, it is revealed that they usually add environmental duties and responsibilities to the job descriptions and job requirements of certain departments. some notable statements of the participants are as follows: international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 161 “yes, for a job directly related to the environment. but we do not use it in job descriptions of jobs which are not directly related to the environment.” (p3, man) “yes for the department of health, safety and environment and ohs team.” (p7, woman) according to the answers given to the 12th question of the participants, it is understood that the majority of them do not use the environmental image in job advertisements, but use them as advertisements or visuals. “we use it not in job postings, but in advertisements.” (p1, woman) “we use visuals to highlight the energy”. (p4, woman) according to the answers given by the participants to the 13th question, it is revealed that companies follow different strategies. while some companies try to reveal environmental awareness in their recruitment questions, some companies ask environmental questions only to candidates who will work in the relevant departments. some companies state that they ask questions to get to know the candidate for environmental awareness, not as an evaluation criteria. some notable statements of the participants are as follows: “it is asked to candidates who will work in departments directly related to the environment. however, we do not ask if there will be recruitment for different departments.” (p7, woman) “we don't ask for elimination factor. but we prefer the candidate to be conscious and sensitive. that's why we talk about social responsibility, volunteering, environmental projects in which candidates participate.” (p6, man) “our values include the environment. environmental awareness and sensitivity are important. that's why we have questions about the environment.” (p2, man) according to the answers given by the participants to the 14th question, all companies benefit from the electronic platforms in different ways in the recruitment process. some notable statements of the participants are as follows: international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 162 “we implement processes to reduce paper consumption in order to ensure recycling”. (p4, woman) “we conduct online interviews and tests”. (p3, man) “we use e-forms and e-tests. most of our training processes are conducted online.” (p5, woman) according to the answers given by the participants to the 15th question, it is revealed that most companies add environmental training to their orientation programs. especially in this process, ohs trainings are more prominent. some notable statements of the participants are as follows: “we provide orientation and occupational health and safety trainings. different trainings for the environment such as using chemicals, hazardous wastes, sorting wastes and using masks are also provided. but these trainings are provided according to the department in which the personnel will work.” (p6, man) “i can say that there is an ohs training for the environment in our orientation program.” (p7, woman) according to the answers of the participants to the 16th question, most companies create special training programs for the environment. some notable statements of the participants are as follows: “yes, we provide training on environmental management, combating climate change, and energy efficiency.” (p7, woman) “we have occupational health and safety trainings on this subject.” (p3, man) “all employees get training periodically about subjects such as environmental effects and their dimensions, waste management, and efficient use of energy.“(p6, man) international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 163 according to the answers given by the participants to the 17th question, most companies state that there is no environmental criteria as a performance criteria. some participants report that the environmental practices are criterias only for departments working on environmental issues. some participants state that they only evaluate environmental practices in terms of awareness and volunteerism. some notable statements of the participants are as follows: “environmental practices are criterias of departments such as ohs, but we do not evaluate them in other departments.” (p4, woman) they are used for benchmarking of field workers. however, they are considered as a responsibility, not performance criterias for other employees.” (p2, man) “there is a difference between departments in this regard. for example, they are not performance criterias for the finance department. however, they are performance criterias in the smart systems or ohs departments.” (p5, woman) according to the answers of the participants to the 18th question, most of them state that environmental issues are not evaluated in their career planning. some notable statements of the participants are as follows: “career planning is based on job goals, leadership qualities and performance. not based on the environment….” (p1, woman) “performance criterias suitable for the main function of the department are taken into consideration.” (p3, man) “when measuring performance, environmental impacts are also taken into account. if the performance is good, career advancement, bonus etc. can have such consequences.” (p2, man) according to the answers given by the participants to the 19th question, most companies state that promotions are not made according to environmental issues. some notable statements of the participants are as follows: international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 164 “when we consider the performance, i can say that they have indirect effects.” (p2, man) “they exist for those who work directly related to the environment. competence and performance in the field are at the forefront in the promotion processes of other departments.” (p6, man) according to the answers given by the participants to the 20th question, most of the companies state that they do not give financial rewards; but they give moral rewards. some notable statements of the participants are as follows: “we can say that there are more spiritual rewards. like motivating employees for encouraging other employees...” (p4, woman) “yes, we have practices such as giving small plaques and awards. environmental projects or responsibilities can be scored with special tracking cards.” (p6, man) “it is not directly related to the environment, but there is an application where employees can enter their suggestions on any subject. in this application, employees can congratulate each other. there are symbolic rewards and spiritual rewards such as making people more visible..” (p1, woman) according to the answers of the participants to the 21st question, all companies include their employees in the decision-making processes in different ways. some notable statements of the participants are as follows: “we have a company newspaper about it. we publish the newspaper together with all our employees. that's how we involve employees in all processes, projects and decisions.” (p3, man) “we hold communication meetings with all our employees. we also have an occupational health and safety board. there are representatives from different departments and have roles on this board so that they can represent all employees.” (p4, woman) international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 165 “general feedback and comments are received from employees quarterly about new ideas, or things which are lagging and dissatisfiying. we also expect them to be effective in decisions by conducting satisfaction surveys.” (p1, woman) according to the answers of the participants to the 22nd question, there are various ohs practices in all companies. some notable statements of the participants are as follows: “there are different applications and units such as the accident-incident notification tracking system, the follow-up of health records, and the health-safety-environment department” (p7, woman) “there are various documents about the safety management system, ohs conversations, mask use, waste training and ohs.” (p3, man) “there are applications such as the use of safety clothing, ohs trainings, awareness studies about transformers.” (p6, man) according to the answers given by the participants to the 23rd question, an effort is made to create a suitable environment for the environment in all companies. some notable statements of the participants are as follows: “there are various applications such as energy saving, energy and consumables, waste sorting, battery waste bins. there are also places such as absorbent filters, hazardous waste facilities, and waste storage areas.” (p7, woman) there are applications of recycling bins, sorting paper, using products such as glass cups and cloth bags.” (p4, woman) we are trying to reduce plastic and harmful waste. apart from this, there are warning signs and writings in various parts of the office.” (p2, man) international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 166 according to the answers given by the participants to the 24th question, employees in all companies are involved in environmental decisions and practices. some notable statements of the participants are as follows: “yes, this is more volunteer based. we carry out social responsibility projects together with volunteers.” (p7, woman) “we accept the cooperation of all employees without any specific criteria to increase responsiveness.” (p1, woman) according to the answers given by the participants to the 25th question, flexible working practices are applied in all companies. some notable statements of the participants are as follows: “we practice remote working one day per week. and we provide working option besides core hours in working hours.” (p1, woman) “we apply it as a hybrid system. it's like 60% working in the office, 40% working from home. we work from home especially in situations such as meetings and training.” (p2, man) 4. conclusion and discussion as environmental awareness, sustainability and environmental responsibilities become more and more important, organizations include environmental elements in their strategies. “green culture” becomes even more important, especially if the raw materials used, and the production process and the product itself can harm the environment. however, research on the effective implementation of environmental practices based on the organizational strategy is quite limited. this study tries to reveal the relationship between organizational strategy and green human resources management and present ghrm practices. theoritical implications international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 167 this research deals with the strategic management process and ghrm together and helps the readers better understand the reflections of the strategic management process on ghrm. it is suggested that future research should look at ghrm in different sectors, as there is a lack of space in dealing with these two concepts together. this paper contributes to the ghrm literature by promoting the relationship between organizational strategy and ghrm. the organization's strategy on the environment is a key factor in ghrm practices. in this study, the focus is on environment, sustainability and green culture in the organization's strategy, mission, vision, goals and policies. as a result of this, ghrm practices and application evaluations of the organizations are presented. one of the interesting findings of this study is that even if the green culture is not directly involved in the missions, visions, goals, strategies, and policies of the organizations, they definitely do at least one green human resources management practice. from the answers of the participants, it is understood that they implement green human resources management practices with the indirect effect of environmental responsibility and sustainability. even if the green culture is not fully present in the organization, green human resources management practices can find a place in the organization’s objectives, strategies, policies or values with the awareness of environmental responsibility and sustainability. therefore, this study can broaden perspectives of researchers on ghrm. another interesting finding of this study is that the participants discussed digital hr applications and human resources information management systems by directly integrating them with green human resources management practices. the digitalization of systems, online interviews and online tests, the use of softwares, without mentioning the issue of digitalization are considered as green human resources management applications. another important result is that there is a unit or employees directly responsible for environmental responsibility and activities in almost every organization. organizations have generally established various units such as health-education-environment department, sustainability committees, etc. the “creation of positions responsible for environmental corporate governance” mentioned in the green recruitment process (bombiak, 2019: 1651) is international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 168 seen in all organizations where the participants work. from this, it is thought that they play an important role in positive activities towards the environment, raising awareness of the society and employees. in particular, zero emission and waste issues are seen in the foreground. in addition, minimizing paper consumption, exemplified by bombiak and marciniukkluska (2018: 6), is also seen in most of the organizations where participants work. according to the results, organizations and participants are aware of green human resources management. organizations generally do not include the environmental issues in their job postings. however, in the recruitment process (interviews), they give importance to the environmental awareness and environmental responsibility indirectly. it has been observed that "directing questions about the candidate's environmental knowledge, values and beliefs" mentioned in the study of tang et al. (2018) is also applied in many organizations. in the results of the research, especially the education and development function related to the environment become more important. the fact that occupational health and safety trainings are held in all companies makes a difference. in addition, due to the sector in which the sample is taken, there are trainings for increasing environmental awareness and minimizing damage to the environment and safety. when looking at career management and performance evaluation, employees are not evaluated based on a “green” criterion generally. the complexity of career progression, green jobs and green competencies in green human resources management can be seen as the reason for this. non-monetary rewards for creativity, idea generation and environmental awareness provide motivation for employees on environmental practices which support the strategic approach. in addition, the active role of managers in ghrm processes encourages and motivates employees. according to the results of this study, organizations implement the following practices as green human resources management practices: digital hr systems, e-tests, online interviews, environmental trainings (such as waste training, chemical substance training, etc.), ohs trainings, social responsibility and environmental projects, voluntary participation, awareness, and non-monetary awards. managerial implications international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 169 this study expects to help managers develop strategies which are aligned with environmental goals for improving understanding of how they can adopt environmental practices. employees play important roles in the sustainability process of organizations as they are the source of competitive advantage of the organization. in this direction, managers can adapt ghrm practices in line with environmental strategic goals. online interviews, digital hr processes, various environmental training contents, environmental practices in performance evaluation, environmental issues in the career planning process, monetary and non-monetary reward systems can play important roles. ghrm practices are tools for organizations to increase their social awarenesses about the environment and achieve sustainability. green hr practices adopted by organizations support the strategic sustainability of the organization. in this direction, managers should show full support by including the environmental sustainability of their organizations in their missions. the organization's environmental strategies and policies must be integrated into its human resources processes so that employees can focus on green practices. international journal of commerce and finance ahu tuğba karabulut & nihan yavuz aksakal 170 references acquah, i. s. k., agyabeng-mensah, y. and afum, e. 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