Businesses carry out various activities in order to produce the economic goods and services society needs and to offer them to those who need them. When considering basic business functions, these business activities can be grouped under five functions: supply, production, marketing, management, and financing. As one of these five functions of enterprises, financing involves providing the financial resources a business needs in order to produce.

While finance means the money, funds, and capital from which individuals and institutions can benefit, financing covers the ways money and capital are provided. Firms generally wants to compensate for financing the resources they need primarily with their own equity. However, when their own funds are insufficient for the investment and growth targets companies plan, an additional external financing requirement arises.

When considering balance sheet equity, achieving a balance is desired when financing assets. The desire is to benefit from current resources when financing current period activities and from long-term resources when financing fixed assets. The formation and distribution of long-term resources provides information about an enterprise’s capital structure. However, adding up a business’ short-term liabilities provides information about the business’ financial structure.

When deciding about capital structure, which expresses the equity capitalization and debt rates that will provide the capital a business needs, the aim is to determine the capital structure that has the lowest costs for financing resources. For this purpose, the Modigliani and Miller (1958) model has been developed to determine enterprises’ optimal capital structure. The Modigliani and Miller model is quite important in terms of answering a critical question about how changes in enterprises’ financial structures affect market values and average capital costs.

Modigliani and Miller’s (1958) ignored tax effects, with their subsequent study from 1963 being a continuation of their 1950 study in which they explain the relationship between capital costs and corporate tax. According to them, the only advantage debt has for a business is that it saves interest expenses regarding tax payments and thus increases that business’ market value. Therefore, Modigliani and Miller’s approach, which argues that the market value will remain constant for all debt ratios, becomes invalid when considering the tax savings provided by interest expenses.

In the Modigliani and Miller model, the value of the leveraged firm will exceed the value of the unleveraged firm due to the amount of the interest tax shield when including corporate tax. At the same time, the difference between these values will widen as the amount of debt usage increases. However, having full debt in the capital structure only by deducting the tax effect is impossible in practice. This situation can be explained through financing and investment decisions, as a shortage of money and abandonment of certain planned profitable investments are likely to occur due to the amount of obligatory payments being at excessive debt levels. This will cause investors’ average income expectations and the business’ market value to decrease as the debt ratio rises.

When evaluating annual average data, this study shows the financial leverage ratios of the companies in the Borsa Istanbul Full (BIST-TÜM) Index for the 2008- 2020 period in Turkey to have experienced an increasing trend. This shows that businesses have been providing financing for the resources they need through foreign resources. Implementing the financial expense restriction regarding expense and cost items such as interest, commission, exchange rate difference, maturity difference, and profit share concerning the foreign resources does not allow the 10% deduction from the tax base corresponding to the portion of expense and cost items exceeding the equity amount for enterprises whose foreign resources exceed their own resources. The regulations regarding financial expense restrictions are expected to result in an improvement on the balance sheets of enterprises operating in Turkey by encouraging equity financing. This study aims to reveal the effects that financial expenditure restrictions have on enterprises’ capital structure. In this context, the study will first present examples of financial expense restrictions in selected countries. Using balance sheet and income statement data, the debt/equity ratio and net financing expense/EBITDA ratio are seen to have been used in the financial expense restrictions applied in the relevant countries. After 2020, the provisions of financial expense restrictions began being applied once they were enacted into law in Turkey in 2021. This study then evaluates the effects these applications have had on enterprises’ capital structures. The study concludes with the evaluations that financial expense restrictions will have positive effects on enterprises’ financial policies and that enterprises’ market values will in parallel also be positively affected. Future studies can analyze whether the aim expected from the regulations regarding financial expense restrictions was realized in the following periods and whether the regulation was effective or not by using data from BIST companies’ financial statements.