Financial Contagion and the Role of Firm Characteristics

Using the Borsa Istanbul sector indices, this study shows that the bi-directional interactions between banking sector and non-financial corporate sectors intensify in high-volatility periods. The findings differ across sub-sectors. For example, during times of financial stress, banks have more interaction with the sectors that produce to the domestic market and that have less access to international finance, as opposed to the exporting sectors and sectors with external integration. Taking into account firm-level balance sheet characteristics, further suggest that, FX balance sheet mismatch, low export ratio, high leverage ratio and trade debt strengthen the degree of financial contagion.