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Article
Publication date: 1 April 1997

Peihwang Wei and Susan M.L. Zee

This paper tests the product quality theory of trade credit with 1993 year‐end data for Germany, Japan, United Kingdom, and United States. The results are inconsistent…

Abstract

This paper tests the product quality theory of trade credit with 1993 year‐end data for Germany, Japan, United Kingdom, and United States. The results are inconsistent with the transaction and financing theories of trade credit, since the evidence indicates that firms with high sales relative to their assets and firms with larger sizes extend less credit. However, the quality theory of trade credit is not uniformly supported by the data. Moreover, the evidence suggests wide variations of trade credit policies across countries and industries.

Details

Managerial Finance, vol. 23 no. 4
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 10 August 2021

Dmytro Osiichuk and Paweł Wnuczak

The authors document a persistent negative link between contemporaneous trade credit provision and subsequent firm-level operating performance.

Abstract

Purpose

The authors document a persistent negative link between contemporaneous trade credit provision and subsequent firm-level operating performance.

Design/methodology/approach

Textual analysis of firms' profile descriptions is used to study the role of market segmentation and product differentiation in intermediating the nexus between trade credit and corporate performance. The paper relies on dynamic panel regression modeling to investigate the postulated empirical relationships. This approach allows to address endogeneity issues and to test a number of different model specifications.

Findings

Despite fueling short-term sales growth, the more generous trade credit terms are found to be associated with lower post hoc margins and declining overall business profitability. The market share is not affected by firms' proclivity to provide trade credit suggesting that the latter may not be effectively used as a long-term growth enhancement strategy. Firms' similarity to their competitors is found to play a salient role in altering the magnitude of the discovered negative relationship.

Originality/value

The authors find that the intensity of intra-industry competition measured by firms' similarity to their competitors magnifies the discovered negative trade credit-performance nexus. Therefore, generous trade credit may play a more important role in solidifying client–supplier relationships on the more segmented markets with a higher degree of product differentiation.

Details

Asia-Pacific Journal of Business Administration, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1757-4323

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Article
Publication date: 16 July 2020

Hongkang Xu, Trung H. Pham and Mai Dao

The purpose of this study is to examine the influence of the readability of annual reports on firms’ ability to obtain trade credit from suppliers. Particularly, the…

Abstract

Purpose

The purpose of this study is to examine the influence of the readability of annual reports on firms’ ability to obtain trade credit from suppliers. Particularly, the authors conjecture that annual report readability helps firms obtain more trade credit from suppliers.

Design/methodology/approach

The authors use the Gunning Fog Index as the primary measure of annual report readability and the ratio of accounts payable to the book value of total assets as the measure of trade credit.

Findings

Results from the study of 4,754 firms during the 2004–2016 period indicate that suppliers extend more trade credit to firms with more readable financial reports. The authors’ results are robust to alternative measures of trade credit and annual report readability. The authors’ results remain robust when we control for firm fixed effects and potential endogeneity problems using the instrumental variable approach. A further test shows that the level of trade credit is higher for firms in business service industries, and that this relation is weakened when firms disclose less readable 10-K filings.

Originality/value

The authors’ findings provide new insight into the role of financial report readability in firms’ ability to obtain trade financing from suppliers. The authors’ results are also in line with the SEC’s encouragement that firms use plain English and easy language in financial reporting.

Details

Review of Accounting and Finance, vol. 19 no. 3
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 28 March 2020

Bai Liu, Yibo Wang and Yongyi Shou

The extant literature recognizes that trade credit is influenced by the power imbalance between buyers and suppliers but most studies focus on either buyer power or…

Abstract

Purpose

The extant literature recognizes that trade credit is influenced by the power imbalance between buyers and suppliers but most studies focus on either buyer power or supplier power. The purpose of this study is to investigate how buyer power and supplier power interact and jointly influence trade credit. Moreover, this study examines the moderating effects of political ties in an emerging economy context.

Design/methodology/approach

A research framework was developed by combining resource dependence theory and institutional theory to investigate the interactive effects of market power (i.e. market share and supplier concentration) and non-market power (i.e. political ties) on trade credit. The proposed hypotheses were empirically tested by a fixed effects model using secondary data from 2,433 listed firms in China.

Findings

The results show that a buyer firm's market share promotes trade credit but this effect is weakened by supplier concentration. Moreover, the buyer's political ties enhance the impact of market share on trade credit and attenuate the negative moderating effect of supplier concentration.

Originality/value

This study contributes to the trade credit and supply chain power literature by identifying the interactive effects of market share, supplier concentration and political ties in trade credit. It advances our understanding of how trade credit is jointly determined by a variety of factors in emerging economies.

Details

Industrial Management & Data Systems, vol. 120 no. 4
Type: Research Article
ISSN: 0263-5577

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Article
Publication date: 5 March 2018

Candida Bussoli and Francesca Marino

The purpose of this paper is to investigate the use of trade credit in a sample of small and medium enterprises in Europe, before and after the outbreak of the subprime…

Abstract

Purpose

The purpose of this paper is to investigate the use of trade credit in a sample of small and medium enterprises in Europe, before and after the outbreak of the subprime financial crisis and the sovereign debt crisis (2006-2013). This study aims to verify whether trade credit is an alternative source of funding compared to other sources of financing. In addition, it tests whether firms that grant extended payment terms to their customers demand delayed accounts payable terms from their suppliers.

Design/methodology/approach

The empirical analysis is conducted on a sample of European SMEs that were observed over the period immediately before and after the outbreak of the subprime crisis (2008) and the sovereign debt crisis (2010-2011). A panel data analysis is conducted using the generalized method of moment.

Findings

The results suggest that SMEs with a high probability of insolvency use trade credit more extensively. Distressed and weaker SMEs are less able to match accounts receivable to accounts payable. Finally, the evidence suggests that during the financial crises, the substitution hypothesis is weakened and liquidity shocks are propagated through trade credit channels.

Originality/value

This study contributes to the extant literature as very few studies have analyzed intercompany financing for European SMEs during periods of financial crisis. The results suggest that supporting trade credit channels, through timely injections of liquidity to companies, could reduce the impact of both financial and intercompany credit crunch on SMEs.

Details

Journal of Small Business and Enterprise Development, vol. 25 no. 2
Type: Research Article
ISSN: 1462-6004

Keywords

Content available
Article
Publication date: 13 November 2019

Le Khuong Ninh and Truong Diem Kieu

The purpose of this paper is to investigate the determinants of the amount of trade credit granted to shrimp farmers in Ca Mau.

Abstract

Purpose

The purpose of this paper is to investigate the determinants of the amount of trade credit granted to shrimp farmers in Ca Mau.

Design/methodology/approach

Based on the literature review, the authors proposed six hypotheses on the determinants of the amount of trade credit granted to shrimp farmers. Data collected from 120 shrimp farmers in Ca Mau were used to test the proposed hypotheses.

Findings

Two out of six determinants, i.e. the size of input order (a pulling factor) and the competition among input suppliers (a pushing factor), are significantly positively associated with the amount of trade credit granted to shrimp farmers. No impact of the other determinants was found. The findings imply that shrimp farmers should join cooperatives to enhance access to trade credit and mitigate the risk for input suppliers.

Originality/value

This paper sheds light on the fact that trade credit is still granted to such risky buyers as shrimp farmers, which has not been explored by previous studies.

Details

Journal of Economics and Development, vol. 21 no. 2
Type: Research Article
ISSN: 2632-5330

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Article
Publication date: 5 June 2017

Godfred Adjapong Afrifa and Ernest Gyapong

The purpose of this paper is to extend the literature on trade receivables and trade payables by examining the determinants of net trade credit.

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1107

Abstract

Purpose

The purpose of this paper is to extend the literature on trade receivables and trade payables by examining the determinants of net trade credit.

Design/methodology/approach

To do that, a sample of 67,047 firms in the UK with 443,190 firm year observations is used.

Findings

The results are robust to unobserved heterogeneity and industry effects. The evidence suggests that firms with more inventories, market share and are financially distressed invest less in trade credit. Moreover, higher operating cash flow, annual sales growth, export propensity, access to bank credit and larger firms lead to higher investment in trade credit.

Originality/value

Additionally, the paper broadens the scope of the literature by analysing the determinants of net trade credit around the financial crisis and industry competitiveness.

Details

International Journal of Managerial Finance, vol. 13 no. 3
Type: Research Article
ISSN: 1743-9132

Keywords

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Article
Publication date: 13 May 2019

Zheming Liu, Saixing Zeng, Xiaodong Xu, Han Lin and Hanyang Ma

The purpose of this paper is to investigate how revelations of corporate misconduct are associated with trade credit. Specifically, it investigates how this association…

Abstract

Purpose

The purpose of this paper is to investigate how revelations of corporate misconduct are associated with trade credit. Specifically, it investigates how this association varies in different regions, in different types of industries and in response to companies’ subsequent charitable donations.

Design/methodology/approach

The authors empirically tested various hypotheses using a sample of 2,725 Chinese A-share listed companies from 2009 to 2014 based on signaling theory. Fixed effect models underpinned the methods used.

Findings

The authors found that corporate misconduct has a significant negative impact on an irresponsible company’s trade credit received and granted, and the negative impact is heterogeneous for different regions and industries. There is no evidence that charitable donations mitigate the effect on the trade credit of irresponsible companies following revelations of corporate misconduct.

Practical implications

The results suggest that listed companies in China should obey national and local laws and regulations if they wish to avoid the risk of significant trade credit loss. If a company’s violation of these laws and regulations is disclosed, making charitable donations is not an effective strategy for safeguarding trade credit.

Originality/value

This study enriches understanding on the consequences of corporate misconduct and extends the literature on trade credit. It fills a research gap by identifying the impact of corporate misconduct on trade credit.

Details

Chinese Management Studies, vol. 13 no. 3
Type: Research Article
ISSN: 1750-614X

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Article
Publication date: 1 March 2013

Xueliang Han, Xiao Wang and Huijie Wang

As the information asymmetry and credit rationing are existing, SMEs are finding it difficult to gain bank credit. Trade credit, as a one off substitution, gives another…

Abstract

Purpose

As the information asymmetry and credit rationing are existing, SMEs are finding it difficult to gain bank credit. Trade credit, as a one off substitution, gives another access to SME finance. The purpose of this paper is to examine the effects between inter‐corporate relationships (including the direct‐relationship and indirect‐relationship) and trade credit.

Design/methodology/approach

Following the mainstream of qualitative and quantitative research, this paper examines the relationship between SMEs and their analysis of the commercial credit financing. In the empirical research, through text‐analysis to build the variable of “the number of unions that enterprises take part in”. First, find the relate union through “baidu and googel” by the keywords of enterprise's name and the Union; then two persons select and determine which the enterprise may take part in and calculate the number. For that which cannot make sure, ask the third person. Learning from the HHI‐index, the paper calculates according to the amount and times of the enterprise related transactions to build the variable of “the concentration of enterprises related transactions”. Based on three years panel data (from 2007 to 2009) of 196 small and medium listed companies, this paper establishes the empirical models and examines the effects between inter‐corporate relationship and trade credit through the random effect model.

Findings

The paper finds that: SMEs must pay attention to inter‐enterprise relationship management. Without the power and status owned by large enterprises, SMEs have to learn how to survive in the complex and changing environment. The managers of SMEs have to develop their skills to manage the inter‐enterprise relationship. It finds the effects between inter‐enterprise relationship and trade credit seem like a “U” shape. SMEs should take part in associations wittingly and establish the relationship with the others, as all economic activities are embedded in the social network. This research shows that participating in the business associations, especially provincial associations, has a positive impact to gain trade credit.

Originality/value

This paper breaks through the traditional SMEs' financing theories. In this paper, the individual level theories have been extended to the organizational level. This paper also expands the study of the social capital theory and gives a more tolerable empirical test.

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Article
Publication date: 4 April 2008

Olga María Rodríguez‐Rodríguez

The purposes of the study are to: contribute evidence on the role played by ordinary commercial firms in providing finance to other firms by granting trade credit to…

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1292

Abstract

Purpose

The purposes of the study are to: contribute evidence on the role played by ordinary commercial firms in providing finance to other firms by granting trade credit to customers; and test some theories about the motives of small and medium‐sized firms in extending such trade credit.

Design/methodology/approach

The Generalised Method of Moments is applied to an unbalanced panel of small and medium‐sized firms in the Canary Islands (Spain). Analysis of data from a unique database is used to obtain consistent estimations and to test some proposed hypotheses about the determinants of extending trade credit.

Findings

The study finds that: firms with greater access to financial markets can serve as a credit channel for clients that have difficulties in obtaining institutional financing (thus supporting the theory of financial advantage with respect to trade credit); firms can reduce transaction costs through financing clients (thus confirming that “transaction motives” are significant in granting trade credit); and that trade credit between firms known to each other reduces problems associated with information asymmetry in financial arrangements.

Research limitations/implications

The findings represent correlated inferences, rather than proven causal relationships. Moreover, some results are interpretive in nature; more detailed data and analyses could assist in investigating the relationships noted here.

Originality/value

The paper contributes to the scarce empirical literature about the motives for granting trade credit by small and medium‐sized firms. This is also the first study to analyse this behaviour from a dataset of firms in the Canary Islands (Spain).

Details

International Journal of Managerial Finance, vol. 4 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

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