The Firm’s Trade Credit Risk Taking Process – A Panel Data Probit Estimation, from European Western Countries

Abstract

On this investigation it is confirmed the main relevance of firm’s trade credit duration gap ratio when faced to different stages of firm’s income statement represented by gross coverage ratio and net coverage ratio (the higher risk taking probability) and coverage ratio (the lower risk taking probability). It innovatibly ratifies trade credit duration gap ratio as a firm’s trade credit risk taking instrument, instead of the days to pay accounts payable or the days sales outstanding alone and also confirms transactions cost theory with financial predictions, both insert in firm’s financing motives and pricing motives theory. On this issue, there are a very few investigations to analyse the trade credit duration gap ratio itself and none on the trade credit risk taking which is an innovator and useful approach taking into account prior and most recent findings related to each issue of the mentioned trade credit duration gap ratio. Specifically, our newly findings corroborate that when trade credit duration gap ratio is closer to coverage ratios the low trade credit risk taking probability is. Trade credit risk taking is higher when trade credit duration gap is faced to core business gross and net coverage ratios. In turn, the inclusion in the models the innovative assets structure (instead the simple and traditional tangibility measured by fixed assets) and negative working capital as control variables contribute to increase trade credit risk taking probability. More over, another control risky variables, represented by return of sales and equity volatilities, increase trade credit risk taking probability as well. These results confirm trade credit risk taking as a reliable firm’s internal risk variable and ratifies the existence of costs hierarchy, a substitution effect of trade debt mainly by short term financing and an absorption role of negative working capital effects by short term financing. Our newly findings also confirm that pecking order predictions are in the first explanatory line when trade credit duration gap is faced to coverage and gross coverage ratios, that is to say, when it is present to firm’s financial and variable costs as much increase as decrease trade credit risk taking probability. Results also ratifies that trade credit duration gap is an important and new source of firm’s internal risk taking when faced to financial and core business coverage ratios and that runs well in the short term and obey to both financing and pricing motives. From our point of view, there is a supplementary importance related to their apply on macroeconomic and public budgeting purposes towards a new organizational behaviour, risk approaches to meet firm’s risk taking and costs hierarchy. Because of the reasons exposed before, this investigation is very innovative, a complement of prior research on trade credit and useful to future developments on trade credit and risk management policies. But research related to other management concerns like corporate governance, capital structure, financial distress and technology effects among others, for further investigations will be useful, and on each activity sector and different countries or groups of countries will be remarkable as well.