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Determinants of trade credit : a study of listed firms in the Netherlands

Li, Xiuli (2011) Determinants of trade credit : a study of listed firms in the Netherlands.

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Abstract:This thesis investigates the determinants of trade credit relating to firm-specific characteristics based on listed firms in the Netherlands. There are 76 firms analyzed with 5-year observations from 2006-2010. Trade credit is the separation between delivery of goods and services and their payments to suppliers (Brennan et al., 1988). Because of its specific nature of not belonging to bank sectors, trade credit is not controlled by authorities (Nieuwkerk, 1979); its measurement is defined as accounts receivable (belonging to current assets) and accounts payable (belonging to current liabilities) in this thesis. According to Petersen & Rajan (1997), the motives of using trade credit are classified into three categories: financial advantage theory, price discrimination theory (commercial motives), and transaction costs theory (operational motives). The factors influencing the level of trade credit can be considered as macroeconomic and firm-specific factors. Demirguc-Kunt & Maksimovic (2001) explain that it is out of control of firms to improve macroeconomic factors. Therefore, only relationships between trade credit and factors relating to firms are investigated in this thesis. From our analysis results, we observe that older firms grant less trade credit and resort more to trade credit. Smaller firms grant more credit to customers as a way of marketing strategy to increase sales and build long-term relationship with customers; larger firms resort more financing to suppliers as their good reputation and large economic scales. It is observed that firms with high capacity of generating internal cash, offer less trade credit to customers and borrow less from suppliers. Firms with access to cheaper external financing, offer less credit to customers and resort less on financing from suppliers. With regard to sales growth and growth profit margin, firms offer more trade credit as a marketing strategy to increase sales as the costs of extra trade credit can be offset by high profit margin. The more short-term financing, the lower accounts receivable is in our analysis. Firms with higher turnover (low product quality), offer less trade credit as they are afraid of losing trade credit sales after product quality assessment. While relating to accounts payable, firms with high growth resort less financing from suppliers, because they have capability of obtaining external financing including short-term financing debt and long-term debt. In our analysis, the more current assets, the less accounts payable. The result for variable purchase appear to support the theory that describes the level of accounts payable is positively influenced by the amount of purchase of materials.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
Link to this item:http://purl.utwente.nl/essays/62672
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