Levels Of Trade Credit Research Articles

Trade credit and corporate profitability: Evidence from EU‐based SMEs

AbstractThis study provides empirical evidence about the impact of granting trade credit to customers on the profitability of EU‐based SMEs over 2012–2019. Results show an inverted U‐shaped relationship between corporate performance and trade credit – proxied by receivables, meaning a positive relationship between creditors and customers for low levels and a negative relationship for high levels of trade credit. This evidence is concentrated on firms with less financial flexibility, for which any deviation from the maximum point of investment in trade credit represents a negative impact on its performance due to payment delay or even a default event. Results are robust to potential endogeneity issues.

Trade credit supply and financial distress outcomes: evidence from Australian voluntary administrations

PurposeThe objective of this study is to investigate the relationship between trade credit supply and financial distress outcomes, considering the role that trade credit plays as a substantial source of liquidity for distressed companies. Specifically, it examines whether there is an association between trade credit supply and the outcomes experienced by companies that undergo the voluntary administration (VA) insolvency procedure under Australian corporate law.Design/methodology/approachThe study examines a sample of companies that were listed on the Australian Securities Exchange and entered VA between 2002 and 2019. Ordered logistic regression is used to determine the relation between trade credit and VA outcomes. The VA outcomes considered are as follows: (1) company liquidation, (2) orderly dissolution through an agreement with creditors, or (3) an agreement with creditors for reorganization of all or part of the company's business.FindingsThe findings show that trade creditors' willingness to supply credit is influenced by their rational expectations about the future prospects of financially distressed customers. Higher levels of trade credit and an increase in trade credit supply prior to VA are associated with a greater probability of achieving a reorganization versus a liquidation or dissolution outcome.Originality/valueThere is no apparent prior study investigating the connection between trade credit supply and outcomes for distressed companies entering insolvency administration. Therefore, this study provides novel evidence on the role of trade credit in the context of financial distress. Understanding the relationship between trade credit supply and outcomes is particularly significant considering that many jurisdictions offer distressed companies the opportunity to pursue reorganization under their insolvency laws. Examining financial distress and trade credit in the Australian creditor-friendly context expands on existing research. Prior research has predominantly relied on data from the United States, which has debtor-friendly bankruptcy law. Consequently, these studies may lack generalizability to jurisdictions with creditor-friendly law such as Australia.

Firm-level trade credit responses to COVID-19-induced monetary and fiscal policies: International evidence

This paper provides preliminary evidence of the effects of fiscal and monetary policies designed to mitigate and contain the adverse economic impacts of COVID-19 on supplier-customer relationships during the first two quarters of 2020. We compare the impacts of various intervention policies on corporate trade credit for a sample of 14,623 firm-quarter observations, representing 56 countries, after controlling for quarter-, country-, industry-, and firm-fixed effects. We find that, overall, the monetary interventions are associated with lower levels of trade credit, while fiscal interventions increase the use of trade credit. Our results suggest that trade credit is lower in periods of less-restrictive bank credit. This finding has important policy implications for governments as they attempt to help financially constrained businesses survive the pandemic.

Controllable carbon emissions in an inventory model for perishable items under trade credit policy for credit-risk customers

The incorporation of credit risk and environmental regulations has been attended to considerably in the literature of inventory models; however, papers rarely developed a model considering both of these issues concurrently. Thus, jointly incorporate these two challenges makes sense to address the mentioned gap in the literature and outline insights for future works in practice. This study develops an inventory model for deteriorating items which (a) items deteriorate continuously and have their specific expiration dates; (b) carbon is emitted due to ordering and warehousing operations when a cap-and-tax policy is regulated and emissions can be controlled by investing in green technology; (c) two levels of trade credit is offered when the customer must pay a prepayment. The purpose of this study is to compare the retailer's total profit for different values of upstream and downstream trade credit periods to achieve efficient pricing and replenishment decisions. An algorithm is developed to find the optimal value for the investment in green technology. Numerical experiments and sensitivity analysis are elaborated to validate the mathematical formulation. Finally, findings are summarized and managerial implications are addressed.

Abbreviated or Micro-Entity Accounts? Effect of Financial Reporting Format on the Availability of Trade Credit

The purpose of this study was to investigate the association between the financial statement format (abbreviated or micro) and the level of trade credit. To test this relationship, we used a sample of 76,490 company-year observations of small companies in Belgium over the period of 2017–2019. We found that micro-entity accounts are negatively associated with the level of trade credit. Hence, our results provide evidence that more detailed financial statements are associated with higher levels of trade credit. In addition, we show that suppliers increase their reliance on the financial statement format when companies have lower inventory levels. Our results provide additional insights into the value of financial statements of small companies in the context of trade credit decisions. This study is set within the wider context of the simplification measures taken by the European Union (EU) to reduce the administrative burdens for small companies. The recent policy measures have further extended the debate on financial reporting regulation for small companies. A primary topic in this context is the discussion of the value of publicly available financial information in a small company context.

Do firms chase trade credit target?

This study applies a partial-adjustment model to examine the dynamics of trade credit and to test the hypothesis that firms actively move toward an optimal (target) level of trade credit. The results indicate that typical firms close approximately 70% of the gap between its actual and target trade credit each year, supporting the idea that firms have a target level of trade credit. In addition, the estimated speed of adjustment supports the dynamic version of trade off framework where firms consider of the cost of adjustments when making adjustment decisions.

Does Risk Disclosure Matter for Trade Credit?

In this paper, we examine the impact of risk disclosure practices on trade credit. We hypothesize that risk information could reduce information opacity that arises between companies and their suppliers. We collected annual reports for Tunisian listed companies for the period 2008–2013. This gives us 146 firm-year observations. We find that risk disclosure has a positive impact on the level of trade credit. Our paper offers a new empirical evidence on the role of risk disclosure in reducing information asymmetry and increase companies’ access to short-term external funds. Our study provides managerial implications for firms, suppliers, and regulatory authorities.

Trade credit and firm profitability: Empirical evidence from India

AbstractWe investigate the association between trade credit and firm profitability among large, Bombay Stock Exchange (BSE) listed Indian corporations, identify an optimal trade credit level, and analyse how financial constraints influence the relation between trade credit and firm profitability. We use a sample of six broad non‐financial sectors, constituting over 60 industrial sub‐sectors, presented in panel form, and apply regression analysis to examine the relationship between trade credit and firm profitability. The findings suggest an inverted U‐shaped relationship between trade credit and firm profitability and support an optimal receivables and payables level. Trade credit is profitable for firms until the associated benefits exceed the costs. Breaching the optimal level affects firm profitability. The extent of the financial constraints influences the optimal level of trade credit. Knowing the relation between trade credit and firm profitability may induce managers to form proactive trade credit management policies and help investors assess firm profitability and operational risk. However, given that our study involves only large, BSE‐listed firms, generalizing the findings to other companies and settings requires caution.

Pilot CEOs and trade credit

By using a pilot license as a proxy for the sensation-seeking personality trait, we examine the relation between sensation-seeking CEOs and trade credit. With a sample of pilot CEOs and non-pilot CEOs from U.S. listed firms from 1993–2016, we find strong evidence that firms led by pilot CEOs are more likely to use trade credit than those led by non-pilot CEOs. The positive relation between pilot CEOs and trade credit is more pronounced for firms with high investment growth opportunities. The results are consistent with our conjecture that firms with pilot CEOs tend to have a higher level of trade credit, especially when they need capital to finance long-term investment activities to satisfy the CEOs’ desire for sensation. Our findings establish a link between a CEO personality trait and trade credit and suggest that this CEO personality trait might be a relevant factor in determining purchaser firms’ use of trade credit.

Annual report readability and trade credit

Purpose The purpose of this study is to examine the influence of the readability of annual reports on firms’ ability to obtain trade credit from suppliers. Particularly, the authors conjecture that annual report readability helps firms obtain more trade credit from suppliers. Design/methodology/approach The authors use the Gunning Fog Index as the primary measure of annual report readability and the ratio of accounts payable to the book value of total assets as the measure of trade credit. Findings Results from the study of 4,754 firms during the 2004–2016 period indicate that suppliers extend more trade credit to firms with more readable financial reports. The authors’ results are robust to alternative measures of trade credit and annual report readability. The authors’ results remain robust when we control for firm fixed effects and potential endogeneity problems using the instrumental variable approach. A further test shows that the level of trade credit is higher for firms in business service industries, and that this relation is weakened when firms disclose less readable 10-K filings. Originality/value The authors’ findings provide new insight into the role of financial report readability in firms’ ability to obtain trade financing from suppliers. The authors’ results are also in line with the SEC’s encouragement that firms use plain English and easy language in financial reporting.

Peer influence on trade credit

We examine the influence of peer firms on trade credit policies of listed firms in the United States. We posit and find evidence that firms mimic their peers in formulating trade credit policies. The findings are more pronounced for firms that operate in highly competitive product markets and an uncertain information environment. Our results show that firms not only mimic peers in similar circumstances but also imitate their more and less successful peers. We find that the benefits of mimicking peers' trade credit policies increase initially, but for firms that already maintain high levels of trade credit, these benefits diminish faster as the intensity of mimicking increases. Our results are robust to different methods of selecting peers, sampling, different proxies, and estimation techniques.

Government contracts and trade credit

This study examines the association between government contracts and firms' use of trade credit. Firms with government contracts may demand less trade credit because of their lower operational risk, higher firm performance, stronger capacity to generate internal funds, and better access to other sources of financing. On the other hand, government contractors could receive more trade credit extensions from suppliers. We examine a sample of U.S. listed firms from 2000 to 2016 and find that firms with government contracts have a lower level of trade credit. We also find that government contractors make quicker payments for trade credit contracts than other firms. Moreover, we provide empirical evidence of government contractors' lower levels of operational risk and higher firm performance, which may enable government contractors to generate adequate internal funds for their operations or to obtain other forms of financing at a lower cost and thus lower their demand for trade credit. Incremental to prior research, our study suggests that having government contracts is one of the factors determining trade credit and firms' financing decisions.

Trade credit and cost stickiness

AbstractUsing a large sample of US data, we examine the relation between trade credit and cost behaviour and further investigate the moderating effects on this relation of agency problem, product market competition, and customer concentration. We find that firms using high levels of trade credit exhibit lower cost stickiness and this is prevalent in the high agency problem sub‐sample. In addition, in a non‐competitive market, where the agency problem arises owing to lack of competition, trade credit plays an external monitoring role by attenuating cost stickiness. However, high customer concentration curtails this monitoring ability.

Corporate social responsibility and trade credit

Prior studies show that higher corporate social responsibility (CSR) performance lowers firms’ cost of debt and equity financing. Using a sample of 16,463 U.S. firm-year observations that represent more than 2455 individual firms over the 1996–2016 period, we investigate the relation between all aspects of CSR and trade credit. We provide strong and robust evidence that higher overall CSR scores are related to a higher level of trade credit. A further examination reveals positive associations between trade credit and the four CSR individual components (i.e., the environment, employee relations, community, and diversity). Taken together, our results highlight the important signaling role that CSR plays in increasing the suppliers’ willingness to extend trade credit. Our study also has an important supply chain implication that emphasizes the role of CSR in designing contracts between buyers and suppliers and the level of trade credit for buyer firms with CSR investments.

Religion, national culture and cross-country differences in the use of trade credit

PurposeThe purpose of this paper is to investigate whether religion or national culture can explain previously observed cross-country variation in trade credit.Design/methodology/approachUsing the firm-level SME data from 35 European countries, religion and cultural factors of Hofstede and Schwartz, the authors provide new evidence on the determinants of the cross-country variation in trade credit.FindingsThe results indicate that religion and national culture are associated with trade credit. The authors find that the levels of trade credit are higher in Catholic countries than in Protestant ones and that peoples’ religiousness has an impact on trade credit only in Catholic countries. The authors also find that Hofstede’s cultural dimensions, such as power distance and uncertainty avoidance, are positively associated with trade credit.Practical implicationsOverall, authors’ findings indicate that religion and national culture are important determinants of trade credit management, and that the association between commonly used cultural values and trade credit depends on the religious, legal, and financial environment.Originality/valueTo the best of authors’ knowledge, this is the first study to research the relationship between national culture and trade credit.

Some modified mathematical analytic derivations of the annual total relevant cost of the inventory model with two levels of trade credit in the supply chain system

Several recent studies in supply chain system and related areas explored various economic order quantity (EOQ) models for noninstantaneous deteriorating items with imperfect quality and trade credit financing. In particular, in the year 2007, Teng et al investigated an EOQ model in which the supplier offers the retailer the permissible delay period M and the retailer, in turn, provides the trade credit period N (with ) to his/her customers. The main purpose of this article is twofold: (a) It modifies the annual total relevant cost TVC(T) in the study of Teng et al and presents the correct derivations of TVC(T) by applying mathematical analytic tools and techniques. (b) It exposes some logical and mathematical problems in the proof of Theorem 1 in Teng et al. It also corrects and overcomes all of the errors and shortcomings by systematically presenting the complete and mathematical solution procedures in order to locate all optimal solutions for the model in Teng et al.

International evidence on the determinants of trade credit provision

PurposeThe purpose of this paper is to examine whether the level of financial credit available in a country influences the level of trade credit provided to customers.Design/methodology/approachThe authors examine the association between the supply of trade credit and the availability of country-level private financial credit using multivariate regression models that account for country-level heterogeneity, macroeconomic conditions and firm-specific characteristics. The data set is a pooled sample of publicly traded firms incorporated in 66 countries.FindingsSupporting the re-distributional view of trade credit, robust results suggest that suppliers incorporated in countries with increased access to financial credit provide increased trade credit to their customers. Further results indicate significant differences in trade credit usage across geographical regions. Consistent with existing research using samples of US firms, the use of trade credit is correlated with firm-level measures of financial constraints and product market dynamics.Originality/valueThe authors provide one of the first studies to examine differences in trade credit extension across a large number of countries.

Uncertain multi-item supply chain with two level trade credit under promotional cost sharing

Abstract In this paper, we have extended the Tsao’s (2010) and Huang et al.’s (2012) investigations incorporating higher level of trade credit and imprecise constraints on resources after correcting the mistakes in their formulations. Here, the multi-item two level supply chain model is formulated without/with budget constraint of the retailer. Customers’ credit period is introduced to boost the base demand of the items. It is established that if the supplier shares a part of the promotional cost then the channel profit as well as the individual profits increase. It is also established that the customers’ credit period has sufficient significance in the supply chain. In their formulation Tsao as well as Huang et al. considered some holding costs for the supplier. But according to the model, the supplier does not hold any product, i.e., the supplier’s holding cost should be zero. Also the interest earned and the interest paid by the retailer and the supplier are not properly calculated in their study. In the present study, these mistakes are corrected. In addition, when the available budget of the retailer is uncertain in the sense of fuzzy or rough, the optimum profits of the said models are evaluated and presented. Models with imprecise constraints are transferred to equivalent crisp constraints following suitable techniques. Existence of the optimal solution of the unconstrained crisp model is established analytically. These models are solved by Generalized Reduced Gradient (GRG) method using LINGO 14.0 software and/or Particle Swarm Optimization (PSO) technique. The models with imprecise inventory costs involve imprecise objectives and in those cases marketing decisions are made using PSO in two approaches – Direct approach, i.e., no crisp equivalents of the imprecise objectives are used for solving the models and another is Expected value (of the objectives) optimization approach. The models are illustrated with some hypothetical numerical examples. Some managerial implementations are also derived.

Economic order quantity models with upstream partial trade credit and downstream full trade credit

Traditional EOQ models are assumed that it is upstream full trade credit and down steam partial trade credit. In most business transactions, this assumption is debatable. In this note, this paper establishes a new EOQ model under two levels of trade credit, in which the supplier offers to the retailer a partial trade credit period for payments even if the order quantity is less than W, and simultaneously the retailer in turn provides a full trade credit period to its customers. Furthermore, we assume that the trade credit period (N) offered by the retailer to the customers is less than or equal to the trade credit period (M) offered by the supplier. And the retailer starts earning revenue from time N to time (T + N), not from time 0 to time T. Six theorems are developed to determine retailer’s optimal ordering policies and numerical examples are given to illustrate these theorems.

Determination of the optimal ordering policy for the retailer with limited capitals when a supplier offers 2 levels of trade credit

In this article, we consider and investigate the cases when the retailer's capitals are restricted and when the supplier offers another kind of 2‐level trade credit. This means that the supplier offers 2‐level trade credit for the retailer to settle the account and the retailer's capitals are restricted, so the retailer decides to pay off the unpaid balance as follows: Firstly, the retailer decides to pay off the unpaid balance at the end of the first credit period if the retailer can pay off all accounts and, in addition, the retailer can use the sales revenue to earn interest throughout the replenishment cycle time. Secondly, the retailer decides to pay off all accounts either after the end of the first credit period, but before the second credit period, or after the second credit period if the retailer cannot pay off the unpaid balance at the end of the first credit period. Additionally, the delay will incur interest charges on the unpaid and overdue balance due to the difference between the interest earned and the interest charged. Consequently, the main purpose of this article is to characterize the optimal solution processes and (in accordance with the functional behavior of the cost function) to search for the optimal replenishment cycle time. Finally, numerical examples are given to illustrate the theoretical results which are proven in this article by means of mathematical solution procedures.