The Impact of Financial Distress on Trade Credit in Indonesian Stock Exchange

Angelica Marcia T Marcia T,Bernardus Y Nugroho

doi:10.33642/ijbass.v5n10p1

Abstract

This study examines the use of trade credits by firms that are in a state of financial distress. Trade credit is short-term financing that can be useful for firms in financial distress. The purpose of this study is to analyze the effect of financial distress on trade credit. The study sample was taken from non-financial firms listed on the Indonesian Stock Exchange (IDX) from 2007 to 2016. The research method is panel data regression by using the estimation model of the fixed-effect model and random effect. This study found that firms in financial distress tend to increase the use of trade credit. This is reflected from the results of research showing the positive and significant coefficients on the variable financial distress on the ratio of trade payable to the cost of goods sold and the ratio of trade payable to equity. Based on the results of the study it can be explained that firms that are in a state of financial distress have a larger current liability, its source from short-term financing.

Highlights

Financial distress is defined as a process of financial decline that occurs before a firm experience’s bankruptcy or liquidation (Platt and Platt,2002)
This study focused on the impact of financial distress on the use of trade credit
The financial distress variable indicates that the lowest value is 0 and the median value is 0, implying that firms undergoing financial distress are in the smallest sample out of 76 firms annually

Summary

Introduction

Financial distress is defined as a process of financial decline that occurs before a firm experience’s bankruptcy or liquidation (Platt and Platt,2002). Financial distress is when the cash flow is not enough to cover the current liabilities (such as trade credit or interest) and the firm is forced to do corrective actions (Wruck 199) in Ross et al, 2015). An attempt the firm can do to fix the financial situation is by identifying a funding source to enable the business to run smoothly. Types of short-term financing are (1) accruals, (2) trade payable/trade credit, (3) short-term bank loans, (4) commercial paper (Margaretha,2005). These four types of financing may be able to fund a firm’s business activities, especially for firms that are undergoing financial distress

Objectives

Methods

Results

Conclusion