Investigation of Trade Credit Patterns in Effect with Bank Loan Availability

Abstract

This research paper attempts to investigate the behavior of non-financial firms towards the use of trade credit. State owned firms are considered as more credit worthy and the bank loan is easily available to them. We hypothesized that the state owned firms do not face any problem to obtain bank loans. According to trade credit literature the firms with better access to bank loans have a better capacity to grant goods on credit. We have also hypothesized that the bank loan availability makes the non-financial firms able to increase the level of trade credit supply. On the other hand, the bank loan availability makes the non-financial firms able to decrease the level of trade credit demand. We have applied Pooled Ordinary Least Square to estimate the relationship between bank loan availability and the behavior of firms towards the use of trade credit. The results of the study explain that bank loan is easily available to state owned firms and they are also interested to extend more trade credit to their buyers. Most of our results are in line with the theories of trade credit and the previous empirical findings.