Do firms chase trade credit target?

Abstract

This study applies a partial-adjustment model to examine the dynamics of trade credit and to test the hypothesis that firms actively move toward an optimal (target) level of trade credit. The results indicate that typical firms close approximately 70% of the gap between its actual and target trade credit each year, supporting the idea that firms have a target level of trade credit. In addition, the estimated speed of adjustment supports the dynamic version of trade off framework where firms consider of the cost of adjustments when making adjustment decisions.