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Trade Receivables Policy of Distressed Firms and Its Effect on the Costs of Financial Distress

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  • Carlos A. Molina
  • Lorenzo A. Preve

Abstract

"This paper studies the trade receivables policy of distressed firms as the trade-off between the firm's willingness to gain sales and the firm's need for cash. We find that firms increase trade receivables when they have profitability problems, but reduce trade receivables when they have cash flow problems. We also find that a firm that significantly cuts its trade receivables when in financial distress will experience an additional drop of at least 13% in sales and stock returns over the previously documented 20% average drop for financially troubled firms. Moreover, the performance decline of a firm in financial distress is significantly higher if the firm cuts trade receivables than if it does not." Copyright (c) 2009 Financial Management Association International.

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Bibliographic Info

Article provided by Financial Management Association International in its journal Financial Management.

Volume (Year): 38 (2009)
Issue (Month): 3 (09)
Pages: 663-686

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Handle: RePEc:bla:finmgt:v:38:y:2009:i:3:p:663-686

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Cited by:
  1. TSURUTA Daisuke, 2009. "Customer Relationships and the Provision of Trade Credit during a Recession," Discussion papers 09043, Research Institute of Economy, Trade and Industry (RIETI).
  2. Justyna Franc-Dabrowska & Malgorzata Porada-Rochon, 2013. "Threat of Insolvency of Private Sector Companies on the Example of Poland, Czech Republic and Slovakia," Diversity, Technology, and Innovation for Operational Competitiveness: Proceedings of the 2013 International Conference on Technology Innovation and Industrial Management, ToKnowPress.

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