IDEAS home Printed from https://ideas.repec.org/a/eco/journ1/2016-02-7.html
   My bibliography  Save this article

Determinants of Corporate Trade Credit: An Empirical Study on Korean Firms

Author

Listed:
  • Woo Sung Kim

    (Department of Business Administration, College of Business Administration, Konkuk University, 120, Neungdong-ro Gwangjin-gu, Seoul 05029, Korea)

Abstract

This study is designed to determine the motives for trade credit in Korean firms. Based on data collected from 14,660 firm-year observations running from 1992 to 2011 on the Korean Stock Exchange, this paper finds strong evidence on determinants of trade credit based on financial characteristics. The principal result is that older firms with larger size, lower growth, and higher profits tend to extend accounts receivable. This evidence, while consistent with the access to financing hypothesis, is difficult to reconcile with the growth hypothesis and price discrimination hypothesis. Second, this paper provides evidence that firms with larger size and greater leverage, as well as young firms, appear to use accounts payable. This finding, while consistent with the financial constraint hypothesis, is difficult to harmonize with the financing and growth hypothesis. The paper contributes to the argument about trade credit motives. It may help managers in making financial policy concerning improving firm value in the Korean market.

Suggested Citation

  • Woo Sung Kim, 2016. "Determinants of Corporate Trade Credit: An Empirical Study on Korean Firms," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 414-419.
  • Handle: RePEc:eco:journ1:2016-02-7
    as

    Download full text from publisher

    File URL: http://www.econjournals.com/index.php/ijefi/article/download/1804/pdf
    Download Restriction: no

    File URL: http://www.econjournals.com/index.php/ijefi/article/view/1804/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    2. Carole Howorth & Beat Reber, 2003. "Habitual late payment of trade credit: an empirical examination of UK small firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(6-7), pages 471-482.
    3. Barclay, Michael J. & Marx, Leslie M. & Smith, Clifford Jr., 2003. "The joint determination of leverage and maturity," Journal of Corporate Finance, Elsevier, vol. 9(2), pages 149-167, March.
    4. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, vol. 94(3), pages 569-590, June.
    5. Michael Nwidobie Barine, 2012. "Working capital management efficiency and corporate profitability: Evidences from quoted firms in Nigeria," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 2(2), pages 1-8.
    6. Ferrando, Annalisa & Mulier, Klaas, 2013. "Do firms use the trade credit channel to manage growth?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3035-3046.
    7. Carlos A. Molina & Lorenzo A. Preve, 2012. "An Empirical Analysis of the Effect of Financial Distress on Trade Credit," Financial Management, Financial Management Association International, vol. 41(1), pages 187-205, March.
    8. Mian, Shehzad L & Smith, Clifford W, Jr, 1992. "Accounts Receivable Management Policy: Theory and Evidence," Journal of Finance, American Finance Association, vol. 47(1), pages 169-200, March.
    9. Mariassunta Giannetti & Mike Burkart & Tore Ellingsen, 2011. "What You Sell Is What You Lend? Explaining Trade Credit Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1261-1298.
    10. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3-4), pages 573-588.
    11. Love, Inessa & Preve, Lorenzo A. & Sarria-Allende, Virginia, 2007. "Trade credit and bank credit: Evidence from recent financial crises," Journal of Financial Economics, Elsevier, vol. 83(2), pages 453-469, February.
    12. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    13. Nadiri, M Ishaq, 1969. "The Determinants of Trade Credit in the U.S. Total Manufacturing Sector," Econometrica, Econometric Society, vol. 37(3), pages 408-423, July.
    14. Nicholas Wilson & Barbara Summers, 2002. "Trade Credit Terms Offered by Small Firms: Survey Evidence and Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(3‐4), pages 317-351, April.
    15. Michael S. Long & Ileen B. Malitz & S. Abraham Ravid, 1993. "Trade Credit, Quality Guarantees, and Product," Financial Management, Financial Management Association, vol. 22(4), Winter.
    16. Katrien Kestens & Philippe Van Cauwenberge & Heidi Vander Bauwhede, 2012. "Trade credit and company performance during the 2008 financial crisis," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 52(4), pages 1125-1151, December.
    17. Nicholas Wilson & Barbara Summers, 2002. "Trade Credit Terms Offered by Small Firms: Survey Evidence and Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(3&4), pages 317-351.
    18. Jyrki Niskanen & Mervi Niskanen, 2006. "The Determinants of Corporate Trade Credit Policies in a Bank‐dominated Financial Environment: the Case of Finnish Small Firms," European Financial Management, European Financial Management Association, vol. 12(1), pages 81-102, January.
    19. Carlos A. Molina & Lorenzo A. Preve, 2009. "Trade Receivables Policy of Distressed Firms and Its Effect on the Costs of Financial Distress," Financial Management, Financial Management Association International, vol. 38(3), pages 663-686, September.
    20. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 573-588, April.
    21. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," The Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-937.
    22. Bougheas, Spiros & Mateut, Simona & Mizen, Paul, 2009. "Corporate trade credit and inventories: New evidence of a trade-off from accounts payable and receivable," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 300-307, February.
    23. Matthew D. Hill & G. Wayne Kelly & G. Brandon Lockhart, 2012. "Shareholder Returns from Supplying Trade Credit," Financial Management, Financial Management Association International, vol. 41(1), pages 255-280, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dary, Stanley K. & James, Harvey S., 2019. "Does investment in trade credit matter for profitability? Evidence from publicly listed agro-food firms," Research in International Business and Finance, Elsevier, vol. 47(C), pages 237-250.
    2. Duong Phuong Thao Pham & Thi Cam Ha Huynh, 2020. "The Impact of Trade Credit Investment on Manufacturing Firms' Profitability: Evidence from Vietnam," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 68(4), pages 775-796.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Afrifa, Godfred Adjapong & Gyapong, Ernest & Monem, Reza M., 2018. "Product differentiation, market dynamics and the value relevance of trade payables: Evidence from UK listed firms," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(3), pages 235-253.
    2. Abdulla, Yomna & Dang, Viet Anh & Khurshed, Arif, 2020. "Suppliers' listing status and trade credit provision," Journal of Corporate Finance, Elsevier, vol. 60(C).
    3. Altunok, Fatih & Mitchell, Karlyn & Pearce, Douglas K., 2020. "The trade credit channel and monetary policy transmission: Empirical evidence from U.S. panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 226-250.
    4. Afrifa, Godfred Adjapong & Tingbani, Ishmael & Adesina, Oluseyi Oluseun, 2022. "Stochastic frontier modelling of working capital efficiency across Europe," Technological Forecasting and Social Change, Elsevier, vol. 184(C).
    5. Mateut, Simona & Mizen, Paul & Ziane, Ydriss, 2015. "Inventory composition and trade credit," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 434-446.
    6. Cristina Martínez-Sola & Pedro García-Teruel & Pedro Martínez-Solano, 2014. "Trade credit and SME profitability," Small Business Economics, Springer, vol. 42(3), pages 561-577, March.
    7. Abudu Braimah & Yinping Mu & Isaac Quaye & Alhassan Abubakar Ibrahim, 2021. "Working Capital Management and SMEs Profitability in Emerging Economies: The Ghanaian Case," SAGE Open, , vol. 11(1), pages 21582440219, February.
    8. Maria Cristina Arcuri & Raoul Pisani, 2021. "Is Trade Credit a Sustainable Resource for Medium-Sized Italian Green Companies?," Sustainability, MDPI, vol. 13(5), pages 1-19, March.
    9. H. Kent Baker & Debidutta Pattnaik & Satish Kumar, 2022. "Trade credit and firm profitability: Empirical evidence from India," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 3934-3953, October.
    10. Cao, Zhangfan & Chen, Steven Xianglong & Lee, Edward, 2022. "Does business strategy influence interfirm financing? Evidence from trade credit," Journal of Business Research, Elsevier, vol. 141(C), pages 495-511.
    11. Jory, Surendranath R. & Khieu, Hinh D. & Ngo, Thanh N. & Phan, Hieu V., 2020. "The influence of economic policy uncertainty on corporate trade credit and firm value," Journal of Corporate Finance, Elsevier, vol. 64(C).
    12. D'Mello, Ranjan & Toscano, Francesca, 2020. "Economic policy uncertainty and short-term financing: The case of trade credit," Journal of Corporate Finance, Elsevier, vol. 64(C).
    13. Quoc Viet Pham & Tran Quang Phuc Pham, 2020. "Does Trade Credit Spur Firm Performance? A Case Study in Vietnam," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(3), pages 215-227.
    14. Belinda L. Del Gaudio & Gabriele Sampagnaro & Claudio Porzio & Vincenzo Verdoliva, 2022. "The signaling role of trade credit in bank lending decisions: Evidence from small and medium‐sized enterprises," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(1-2), pages 327-354, January.
    15. Abdulla, Yomna & Dang, Viet Anh & Khurshed, Arif, 2017. "Stock market listing and the use of trade credit: Evidence from public and private firms," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 391-410.
    16. Casey, Eddie & O'Toole, Conor M., 2014. "Bank lending constraints, trade credit and alternative financing during the financial crisis: Evidence from European SMEs," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 173-193.
    17. Bougheas, Spiros & Mateut, Simona & Mizen, Paul, 2009. "Corporate trade credit and inventories: New evidence of a trade-off from accounts payable and receivable," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 300-307, February.
    18. Michael Machokoto & Daniel Gyimah & Boulis Maher Ibrahim, 2022. "The evolution of trade credit: new evidence from developed versus developing countries," Review of Quantitative Finance and Accounting, Springer, vol. 59(3), pages 857-912, October.
    19. Markus Mättö & Mervi Niskanen, 2021. "Role of the legal and financial environments in determining the efficiency of working capital management in European SMEs," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5197-5216, October.
    20. Mariarosaria Agostino & Francesco Trivieri, 2014. "Does trade credit play a signalling role? Some evidence from SMEs microdata," Small Business Economics, Springer, vol. 42(1), pages 131-151, January.

    More about this item

    Keywords

    Trade Credit; Accounts Receivable; Accounts Payable;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eco:journ1:2016-02-7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ilhan Ozturk (email available below). General contact details of provider: http://www.econjournals.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.