Does trade credit really help relieving financial constraints?

2019 ◽  
Vol 26 (1) ◽  
pp. 198-215
Author(s):  
Stefania Cosci ◽  
Roberto Guida ◽  
Valentina Meliciani
Keyword(s):  
Financial Constraints ◽  
Trade Credit

scholarly journals Can Trade Credit Maintain Sustainable R&D Investment of SMEs? — Evidence from China

2019 ◽  
Vol 11 (3) ◽  
pp. 843 ◽  
Author(s):  
Langzi Chen ◽  
Zhihong Chen ◽  
Jian Li
Keyword(s):  
Developing Countries ◽  
Panel Data ◽  
Propensity Score ◽  
Information Asymmetry ◽  
Financial Constraints ◽  
Trade Credit ◽  
Small And Medium Enterprises ◽  
Medium Enterprises ◽  
D Investment

Due to the long-term nature and information asymmetry, SMEs (Small and Medium Enterprises) experience serious financial constraints that affect their R&D investments. This article examines the effect of trade credit maintaining sustainable R&D investment of SMEs under financial constraints. Using the panel data of Chinese SMEs from 2002–2014, it was found that although the R&D investments of SMEs are restricted by financial constraints, trade credit can maintain the sustainability of enterprises’ R&D investment. Private enterprises are more reliant on trade credit, which can be intensified during periods of monetary tightening. Considering the counterfactual framework and the endogenous problems, the empirical results were also robust when using propensity score matching. To summarize, this article develops a new explanation for maintaining sustainable R&D investment of SMEs under financial constraints in developing countries.

scholarly journals The Insurance Value of Trade Credit

2019 ◽  
Vol 11 (7) ◽  
pp. 87
Author(s):  
Mario Eboli ◽  
Andrea Toto
Keyword(s):  
Financial Markets ◽  
Financial Constraints ◽  
Trade Credit ◽  
Credit Rationing ◽  
Financial Policy ◽  
Positive Probability ◽  
Optimal Amount ◽  
Liquidity Constraint ◽  
Manufacturing Sectors ◽  
Liquidity Shock

The extensive use of trade credit in all manufacturing sectors, despite its high cost, is an apparent puzzle that economists explain in terms of asymmetric information problems affecting financial markets. The financial constraints arising from credit rationing and limited access to stock markets suffice to induce firms to resort to trade credit as a supplemental source of funding. Nonetheless, empirical evidence shows that also large and liquid firms facing no binding financial constraints use substantial amounts of trade credit. We address this issue by modelling the financial policy of a firm that does not face a binding liquidity constraint but the risk of being constrained in the future. We characterise the optimal amount of trade credit held by such a firm, and we show that a positive probability of facing a liquidity constraint leads the firm to fund its inventories with trade credit, even if cheaper sources of funds are available. The rationale is that trade credit provides implicit coverage against liquidity risk. Therefore, the optimal amount of trade credit grows with the expected size of a possible liquidity shock and with the likelihood of its occurrence.

scholarly journals Trade credit, firm profitability, and financial constraints

2019 ◽  
Vol 15 (5) ◽  
pp. 744-770 ◽  
Author(s):  
Huan Cong Hoang ◽  
Qin Xiao ◽  
Saeed Akbar
Keyword(s):  
Design Methodology ◽  
Financial Constraints ◽  
Trade Credit ◽  
Optimal Level ◽  
Empirical Literature ◽  
Costs And Benefits ◽  
Optimal Point ◽  
Content Type ◽  
Firm Profitability ◽  
The Relationship

Purpose The purpose of this paper is to investigate the non-linear association between trade credit and profitability of small and medium-sized enterprises (SMEs). Moreover, this paper analyses whether the above relationship varies according to financial constraints of SMEs. Design/methodology/approach The authors use panel data methodology to conduct investigations for a sample of 1,509 non-financial listed SMEs from nine countries or territories located in the East Asia and Pacific region, namely, China, Vietnam, Malaysia, Thailand, Japan, South Korea, Taiwan, Singapore and Hong Kong, over the period from 2010 to 2016. Findings This study indicates that trade credit receivable (TCR) and trade credit payable (TCP) have an inverted U-shaped relationship with SMEs’ profitability, which implies the existence of an optimal trade credit level that balances between costs and benefits to maximize their profitability. This result suggests that managers should try to keep the level of trade credit investment as close to the optimal point as possible to avoid the case that their profitability reduces when they move away from this point. Moreover, this study also finds that the optimal trade credit level is sensitive to the financial constraints of SMEs. In particular, optimal level of more financially constrained firms is lower than that of less financially constrained firms. Originality/value A number of contributions that this study makes to the existing literature are presented as follows. First, the paper takes account of the possible presence of a concave relationship between trade credit and SMEs’ profitability, largely ignored by the existing empirical literature. Second, it demonstrates this association in terms of both aspects of trade credit, including TCR and TCP. Third, the study investigates the effect of the different level of financial constraints faced by SMEs on the relationship between trade credit and their profitability.

Firm’s Optimal Inventory Decision under Financial Constraints: A Multi-Period Model Based on Trade Credit

2012 ◽  
Vol 482-484 ◽  
pp. 942-948 ◽  
Author(s):  
Zong Fang
Keyword(s):  
Probability Distribution Function ◽  
Financial Constraints ◽  
Trade Credit ◽  
Optimal Decision ◽  
Cumulative Probability ◽  
Short Term ◽  
Financial Decisions ◽  
Myopic Policy ◽  
Inventory Decision ◽  
Period Model

It is better for a firm to make his operational and financial decisions integrated than separately, especially when he faces financial constraints. This paper tries to find out how a firm makes his optimal inventory decision under trade credit, which bridges financial and operation decision as an integrated part of goods exchange, and is an important short-term finance. Following the method developed by Li et al. (2005) and Hu et al. (2010), this paper derives a myopic policy for a firm who orders from his same supplier repeated in an infinite setting. The optimal decision for each period is related to his demand’s density function, cumulative probability distribution function. And there are several directions for further study.

scholarly journals Corporate Financial Constraints and Internal Capital Markets: Evidence from Emerging Countries

2016 ◽  
Vol 6 (1) ◽  
pp. 25 ◽  
Author(s):  
Mine Ugurlu ◽  
Ayse Altiok-Yilmaz ◽  
Elif Akben-Selcuk
Keyword(s):  
Capital Markets ◽  
Financial Constraints ◽  
Trade Credit ◽  
Business Groups ◽  
Emerging Countries ◽  
Internal Capital Markets ◽  
Financing Constraints ◽  
Positive Relation ◽  
Internal Capital ◽  
Cash Flow Sensitivity

This paper investigates whether the internal capital markets of business groups mitigate the financial constraints of affiliated firms,and affect their financing policies.It aims to extend the evidence on internal capital markets to emerging countries where financing constraints are prevalent, and adds to the literature on trade credit by revealing that the distressed group-affiliated firms rely less on trade credit than their non-affiliated counterparts despite the positive relation between trade credit and distress. Group firms that have high investments in prior periods use less trade credit in the subsequent periods than non-affiliated firms. The study rests on panel data regressions covering 3906 firms from six emerging countries for the 2006-2012 period. The findings indicate that the Q-sensitivity of the investments of affiliated firms is lower than that of their unaffiliated counterparts in all countries and that the investment cash flow sensitivity of affiliates is lower in five countries, strongly indicating that group-affiliated firms are financially less constrained. The distressed group firms use significantly lower leverage than distressed unaffiliated firms despite the positive relation between distress and leverage. Group firms in high–Q industries invest less than unaffiliated firms. This paper contributes to the existing literature on internal capital markets by expanding the scope to emerging countries where market imperfections and financing constraints are more pronounced, and provides strong evidence for the role of business groups, prevalent in most emerging countries, in mitigating the constraints on the investments and financing choices of the group-affiliated firms. 

scholarly journals Effects of financial distress and financing constraints on trade credit provisions

2020 ◽  
Vol 28 (4) ◽  
pp. 545-566
Author(s):  
Igbekele Sunday Osinubi
Keyword(s):  
Financial Distress ◽  
Financial Constraints ◽  
Trade Credit ◽  
Financing Constraints ◽  
Financial Constraint ◽  
Significant Positive Effect ◽  
Content Type ◽  
Negative Effect ◽  
The Uk ◽  
Positive Effect

PurposeExisting studies that documented the effect of financial distress on trade credit provisions did not include measures financial constraint. It is possible that financial distress is tie to financial constraints, and both financial distress and financial constraints mutually reinforce each other in their effects on trade credit provision. The purpose of this study is to evaluate the effects of financial constraint and financial distress on trade credit provisions in the UK FTSE 350 listed firms.Design/methodology/approachThis study employs panel data in the estimation of the determinants of accounts payables and accounts receivables of the UK FTSE 350 firms from 2009 to 2017.FindingsThis study finds that financial distress has significant positive effect on accounts payables and a significant negative effect on accounts receivables. Financial constraints have significant negative effect on accounts payables and a significant positive effect on accounts receivables.Practical implicationsTrade creditor desiring to maintain an enduring product-market relationship grant more concessions to customer in financial distress. The amount of trade credit that sellers provide to financially constrained firm is an increasing function of the buyer's creditworthiness. The urgent cash needs of financially distressed firms lead them to sell trade receivables to factoring company leading to reduction in trade receivables. Firm facing external financing constraints increase trade credit to customers in anticipation of cash flow inflow to enhance liquidity.Originality/valueThis study shows that financial distress and financial constraints mutually reinforce each other in their effects on trade credit provisions, and firm's financing condition contributes to divergence in trade credit policies.

scholarly journals Working capital management, company performance, and funding barriers on Indonesian Firms

2020 ◽  
Vol 5 (1) ◽  
pp. 49
Author(s):  
Liza Handoko ◽  
Chessia Violeta
Keyword(s):  
Financial Constraints ◽  
Trade Credit ◽  
Corporate Performance ◽  
Company Performance ◽  
Financial Constraint ◽  
Working Capital ◽  
Optimal Point ◽  
Investment Level ◽  
The Impact ◽  
The Relationship

<p>The purpose of this study is to examine the relationship between investment in working capital measured by trade credit and corporate performance in 463 companies in Indonesia between 2007 and 2017. This research confirms the non-linearity inverted U shape of the link between working capital and corporate performance. It suggests that there is an optimal point of investment that is beneficial for the company. This research also examines the impact of financial constraint and investment level on working capital. Our finding shows that companies that experience financial constraints have lower investment levels than those without financial constraints. </p>

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