Page 19 - Special Topic Session (STS) - Volume 4

STS556 Nitin Kumar et al.

Trade credit – An empirical analysis of Indian

firms
Nitin Kumar, Arvind Shrivastava, Purnendu Kumar
Reserve Bank of India, Mumbai, India

Abstract
The paper examines determinants of trade credit for Indian firms. The dataset
builds on annual firm specific variables and macro indicators spanning from
2004 to 2017 to understand their impact on extending and usage of trade
credit amongst Indian firms. Applying dynamic panel framework it is found
that inventory management and macro indicators are significant in
determining trade credit for Indian firms. Larger firms are found to be leading
suppliers of trade credit. Pecking order theory is clearly validated with net
earnings being preferred over trade credit that is a more expensive source of
finance. Significant decline is trade credit business is evidenced post crisis.
Analysis of trade credit ratio has also been performed across constrained/
unconstrained firms that show variation. Trade credit behavior for distressed
firms has also been examined. Distressed firms are evidenced to be involved
in greater risk behavior having higher accounts payables liability.

Keywords
bank borrowing, firm distress, macro economy, panel data, generalized
method of moments

JEL Classification: G3, G21, E4, C23

1. Introduction
Trade credit liabilities and assets in the form of account payables and
account receivables are critical financing instruments depicting sources and
uses of funds for firms. Trade credit is a short-term cash management tool
wherein a firm can be seen both as a supplier and customer together.
Literature supports the view that suppliers lend more liberally to borrowers
especially during downturns due to availability of superior information about
credit worthiness of borrowers overcoming moral hazard problem of lending
(Smith, 1987; Biais and Golliers, 1997; Petersen and Rajan, 1997; Burkart and
Ellingsen, 2004). In inefficient and less developed financial systems exhibiting
tightened credit and monetary policies, firms may have to seek alternative
sources of funds. Despite being costly post discount period, trade credit is vital
option of finance. However, limited attention is provided to trade credit size
and analysis. Employing global firm level datasets for later part of 1980s,
Petersen and Rajan (1997) reported that accounts receivable to sales ratio for

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