Effect of Credit Rating on Trade Credit: Empirical Evidences from Pakistani Non-financial sector

Abstract

The study investigated how non-financial businesses use trade credit in the context of borrowing restrictions in developing economies. Despite the tremendous changes in the trend, trade credits still have huge usage. Buyers and suppliers have moved from traditional trading systems to advancing automated and sophisticated business methods. Multi-dimensional aspects of business strategy also include trade credits. Trade credit has a huge change in supply and demand. Trade credit is used as the main source of financing in almost all regions of the world. World-renowned companies have access to financial lending, but they prefer trade credit because it provides them an edge against collateral held at financial institutions. This research includes some factors like trade credit and credit rating. In this study has unbalanced panel data from non-financial sector of Pakistan. The data range consists of 2008 to 2016 for 38 non-financial firms. Here, by using the fixed effect model examined how credit rating affects the trade credit supply and demand in case of large and small firms. The results show that account receivables and payables both increase in the case of large firm credit rating. They can easily use the trade credit process. In case of small firms, they also join this process or trade credit agreement for smoothing their business function, but they feel some difficulties from both sides.