The impact of trade payables on cash holdings: The moderating role of financial development

Abstract

Cash is one important source of financing for corporate operations, and studies have shown that firms keep cash for several important reasons. Nonetheless, it is costly to maintain it at high levels, because firms are likely to forgo productive investment opportunities that could enhance firm value. Meanwhile, trade payables are the funding provided by suppliers for a short period and usually be regarded as one of the most critical sources of external financing. In the sense that cash is expensive to retain inside a firm, there could be a substitution effect between cash and trade payables. The study of the linkage between the two factors should be highly relevant in the context of a developing market, where information asymmetry and inadequate institutional quality make it challenging for firms to have access to external financing provided by the financial market. Using a sample of listed non-financial firms in Vietnam, this study investigates the relationship between trade credit and cash holdings, with the consideration of the moderating effect of financial development. The empirical finding suggests that payables are negatively related to cash holdings levels, confirming the potential substitution effect between the two sources. Therefore, the finding suggests that firms make use of the funding provided by their trading partners to disgorge cash for other purposes. We further expect that financial development might help to alleviate the constraints implied by the substitution effect between the two factors. However, we find that financial development does not play a role of altering this negative relationship between the two factors. The findings remain unchanged to a number of robustness check strategies. Based on the findings, this study offers several implications to relevant stakeholders.