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An Analysis of Trade Credit Behaviour of Indian Firms

Author

Listed:
  • Nitin Kumar
  • Arvind Shrivastava
  • Purnendu Kumar
  • M. Ishaq Bhatti

Abstract

Trade credit transactions are quite common for businesses. The article carries out the trade credit analysis for an emerging economy, namely Indian corporate sector employing rich information dataset covering multiple industries such as manufacturing, services, construction and others, since the period of financial crisis including both firm specific and macro-economic factors. The annual dataset spans 13 years from 2006 to 2018 covering the crisis period. Applying dynamic panel framework, it is found that the inventory management and macro indicators are significant in determining trade credit for Indian firms. While trade payable is chiefly driven by raw material inventory, firms having reasonable stock of raw or finished goods inventory are less likely to offer trade credit. Large-sized firms are found to be both leading consumers and suppliers of the trade credit. The pecking order theory is clearly validated with net profits being preferred over the trade credit that is a more expensive source of finance. Credit from formal financial sources is found to act as a substitute to trade credit borrowing. JEL: G3, G21, E4, C23

Suggested Citation

  • Nitin Kumar & Arvind Shrivastava & Purnendu Kumar & M. Ishaq Bhatti, 2021. "An Analysis of Trade Credit Behaviour of Indian Firms," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 22(1), pages 132-154, March.
    • Handle: RePEc:sae:soueco:v:22:y:2021:i:1:p:132-154
    DOI: 10.1177/13915614211009659
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    References listed on IDEAS

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    More about this item

    Keywords

    Trade credit; corporate finance; bank borrowing; macro economy; panel data; generalized method of moments;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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