Increase in Money Supply Amplifies the Secondary Sources of Finance: Evidence from Pakistani Non-Financial Firms

Abstract

An increase in money supply is a signal to expand the financing system in the economy; thus, non-financial firms with access to capital markets and financial institutions stand by side and play a significant role in this situation. This study aims to investigate the impact of money supply increases on the capacity of secondary sources of financing and to achieve the goals of expansionary monetary policy. In 2011, 399 non-financial firms were listed on the Pakistan Stock Exchange, after excluding those firms that did not provide complete information between our selected periods excluded from the sample. Data from 156 non-financial firms were finally used for analysis. Panel data have been collected from the non-financial firms of Pakistan. After applying the Fixed Effects Model, the results provide evidence that an increase in the money supply in the economy of Pakistan would lead to an enhancement in the financing channels, like trade credit. This study explores the relationship between monetary policy adopted by the central bank and the use of trade credit. Collectively, the results also favor positive relationships between access to the capital market and trade credit patterns. This study recommends that during the time of monetary expansion, firms with better access to financial institutions were more willing to enhance credit sales. For future research, it suggests comparing the use of trade credit during the tight and expansionary monetary policy.