Page 20 - Special Topic Session (STS) - Volume 4

STS556 Nitin Kumar et al.
small firms in US stood at 7.3 per cent versus 18.5 per cent for larger firms.
Likewise, there existed predominance of trade credit amongst bigger firms,
with accounts payables to sales ratio being only 4.4 per cent for small firms
compared to 11.6 per cent for larger firms. For firms operating in UK’s
manufacturing sector over 1993-2003, Bougheas et al. (2009) reported
account receivables to sales of 17 per cent whereas account payables to sales
stood at 10 per cent. Using Euro area firm-level data Casey and O'Toole (2014)
found highest usage of trade credit in Ireland, a country which has
simultaneously experienced a severe banking crisis and sovereign debt
funding crisis with 75 per cent of firms opting for alternative finance. As per
Ghosh (2015), trade credit usage as percentage of total funding was roughly
16 per cent for Indian manufacturing firms during 1993–2012. The study
discusses empirical methodology in Section 2. Analysis and results are
provided in Section 3 and Section 4 concludes the findings.

2. Methodology
The study is based on information of non-government and non-financial
public limited companies collated from their annual reports/balance sheets as
carried out in Company Finance Division, Reserve Bank of India database on
corporate sector. The state-owned and financial sector firms have been
excluded from analysis due to their varied social objectives and separate
regulatory structure. Our database is a balanced panel of 979 firms from 2003-
04 to 2016-17 i.e. fourteen years annual figures. Account receivables (AR) and
account payables (AP) normalized by assets constitute our dependent
variables. The common set of explanatory variables are stock of inventory
(INV) that is critical parameter that may drive trade credit in either direction
and act as collateral to obtain trade credit and has been found to have positive
relation with accounts payables by Cunat (2007) and negative effect on
account receivables Bougheas et al. (2009). Size of firm (SIZE) is captured by
natural logarithm of real sales, is a proxy for creditworthiness and reputation
of a firm (Petersen and Rajan, 1997). Impact of profitability is measured by
return on assets (ROA). Leverage is a vital financial indicator measured as debt
to asset ratio (DEBT) that captures financial soundness/riskiness of firm. Bank
borrowing (BORR) is defined as bank borrowings to total borrowings of a firm.
Current assets to total assets (CATA) has been included to measure liquidity.
GDP growth rate (GR_RATE), GDP deflator (INF) and weighted average call
money rate (INT_RATE) are taken as macroeconomic indicators for macro
growth, inflation and interest rate respectively. The lagged dependent variable
and possible endogeneity of regressors renders ordinary least square
estimation producing biased estimates due to correlation between lagged
dependent variable and errors. So, Generalized Method of Moments (GMM)
estimator developed for dynamic panel data, introduced by Arellano and Bond

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