Trade credit as a shock absorber? The effects of the financial crisis on the use of trade credit by Dutch manufacturing firms

Grave, T. (2011) Trade credit as a shock absorber? The effects of the financial crisis on the use of trade credit by Dutch manufacturing firms.

Abstract:The purpose of this study was to investigate the relation between the creditworthiness of a firm and its trade credit usage during the financial crisis, by using ANOVA-analysis and ordinary least square regressions. First by focusing on the aggregate pattern in the usage of trade credit by Dutch manufacturing firms. Secondly the study focused on creditworthiness indicators to see whether a creditworthy firm has different trade credit behaviour compared to less creditworthy firms during the financial crisis. Many firms suffer from the reluctance to extend credit by the financial sector. The banking sector use more strict criteria for extending loans according to the Dutch Central Bank (2009). As a result of this shortage firms try to obtain finance through other sources. One of their options is trade credit. A firm creates trade credit when it does not immediately pays its supplier for delivered goods. It is common to separate deliveries from payments. Petersen and Rajan (1997) introduce three explanations for the use of trade credit: suppliers have a financial advantage, trade credit is a way to price discriminate and trade credit lowers transaction costs. In the context of the financial advantage and price discrimination theory, it was Meltzer in 1960 which was the first to introduce trade credit as a channel to redistribute obtained bank credit to less creditworthy customers. The objective of this research is to find evidence of the existence of a trade credit channel to offset the reluctance of the capital market during the current financial crisis. In this study ANOVA-analysis and Ordinary Least Square regressions were conducted. The data were obtained from the balance sheets of 53 Dutch manufacturing firms. The period of analysis was 2005-2009, three years before the start of the crisis and two years during the crisis. The study proposed three regression models: trade receivables, trade payables and net trade credit. The results of this study were contrary to the expected patterns. First, the aggregate pattern of trade credit usage was downward. Most firms reduced the amount of trade credit extended (trade receivables) and obtained (trade payables). Contrary theory suggested an increase in trade credit usage during recessions of periods of monetary contraction. Probably the extreme and global impact of the financial crisis caused the opposite pattern. At some point in a crisis bank lending is cut to an extent that the redistribution of credit through the trade credit channel constipates. Secondly, the heterogeneous firm responses (based on the creditworthiness of a firm) did not indicate that trade credit is able to offset the reduced availability of bank loans. This study presented no substantial prove that the creditworthiness of a firm to a crisis predicts heterogeneous responses in trade credit usage of firms. This research illustrated the decrease in trade credit overall during the financial crisis. Theoretical it is illogical that the decrease in trade credit is demand-driven: i.e. a reduction in the supply of trade credit is the cause of the observed decrease in trade credit. Since the availability of external capital diminished in the financial crisis, it would be logical that the demand for an alternative like trade credit increases. Therefore it is interesting to investigate what causes the supply to dry up in a severe global financial crisis. Contrary to recessions and monetary contractions where net trade credit indeed increased. Moreover it would be interesting to see in the future how to trade credit recovers from this decline during the financial crisis.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
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