Abstract

Previous studies have suggested that the use of trade credit varies by country. This paper focuses on whether the rule of law or capital market development can explain observed differences in working capital levels in small and medium size enterprises (SMEs) from 13 EU countries. Our findings indicate that the legal score has a negative impact on working capital measured with the cash conversion cycle (CCC), working capital to total assets and accounts receivable. This implies that the working capital levels are lower and working capital management is thus more efficient in countries with safer legal systems and better investor protection. We also find that operating in a market-based capital system has a negative effect on the CCC. This implies that firms operating in countries with a market-based system as opposed to a bank-based system have better opportunities to manage their working capital. Overall, these findings indicate that country-level legal instruments explain much of the cross-country differences observed in working capital. The results also suggest that working capital practices and the extent to which trade credit is used are a product of the legal system and the financial systems in place in each country. If the financial system changes, the trade credit practices can also be expected to change.

Full Text
Published version (Free)

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call