Page 26 - Special Topic Session (STS) - Volume 4

STS556 Nitin Kumar et al.

L1.GR_RATE -0.001 -2.9E-04 -0.002* -0.002** -0.001** -0.002***

(0.001) (8.6E-04) (0.001) (7.6E-04) (5.1E-04) (4.3E-04)
Wald 173*** 149*** 213*** 352*** 2212*** 2009***

Statistics
Separate regressions have been repeated to evaluate if the trade credit
ratios depict significant variation for constrained vis-à-vis unconstrained firms
(Table 3). It is found that for unconstrained firms higher bank borrowings is
leading to higher accounts payables. For accounts receivables higher
borrowings translates to higher accounts receivables for constrained firms
whereas the relationship is inverse for unconstrained firms. Last but not least,
we analyze the impact of firms' financial distress on trade credit behavior
broadly. In this regard, foremost, firms are classified into two groups viz., non-
distress or distress using the criteria adopted by Shriavstava. et. al. (2008). The
predicted probability values so obtained using logit regression included as an
additional explanatory variable in model to assess its impact on trade credit
operations. The regression results exhibiting the impact of distress indicator
reveals a significant positive effect of financial distress on accounts payables
(Table 3). The finding indicates that higher possibility of bankruptcy may lead
a firm to greater risk taking by increasing its trade payables liability. However,
as regards accounts receivable, although the relationship is negative, it is
insignificant implying inconclusive effect of distress in case of accounts
receivable.

4. Discussion and Conclusion
Trade credit has been a convenient source of financing especially for firms
constrained by formal sources of borrowing. Applying dynamic panel
generalized method of moment methodology it is found that pecking order
theory is strongly validated with net earnings being preferred source of
financing compared to trade credit that is a more expensive source of
financing. Bank borrowing is complementing trade credit receivables for the
sample of firms. Macro indicators like growth rate, inflation and interest rate
are significant for trade credit decisions. It is found that for unconstrained
firms higher bank borrowings is leading to higher accounts payables. For
accounts receivables higher borrowings translates to higher accounts
receivables for constrained firms whereas the relationship is inverse for
unconstrained firms. The finding further indicates that higher possibility of
bankruptcy may lead a firm to greater risk taking by increasing its trade
payables liability. However, as regards accounts receivable, although the
relationship is negative, it is insignificant implying inconclusive effect of
distress in case of accounts receivable.

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