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The Role of Trade Credit in the Spanish Agrogood Industry

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  • Alarcon, Silverio
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    Abstract

    Trade credit is an important way of firm financing. Its habitual practice and the excessive enlargement of the payment periods deteriorate profitability of firms and even could affect the performance of the financial system. In spite of the relevance of this issue there are few empirical researches with Spanish firms. This work intends to fill this gap and to shed light on the factors related to the extension of trade credit in a set firms of the agrofood industry. In the theoretic and empirical literature different motives have been proposed to explain the extension of trade credit: a mechanism to reduce transaction costs, a financial alternative to the bank system and an additional tool to improve commercial activities. To contrast these ideas a panel of 388 firms for the period 1998-2005 has been taken, and static and dynamic regression models have been estimated by using robust methods to heteroskedasticity, autocorrelation and endogeneity of the explanatory variables. The results confirm that trade credit receivable is associated with more active firms and with cheaper bank financing. Furthermore, a negative link with the size of the firm and a positive relationship with short-term liabilities, accounts payable and bank debts, are encountered. These findings are consistent with commercial perspectives, rather than a pure financial view, in the sense that small and financial distressed producers extend trade credit as a way of promoting products and increasing sales.

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    Bibliographic Info

    Paper provided by European Association of Agricultural Economists in its series 2008 International Congress, August 26-29, 2008, Ghent, Belgium with number 43861.

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    Date of creation: 2008
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    Handle: RePEc:ags:eaae08:43861

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    Keywords: trade credit; agrofood industry; firm panel data; Agribusiness;

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    1. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
    2. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September.
    3. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    4. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-41, December.
    5. Emery, Gary W., 1987. "An Optimal Financial Response to Variable Demand," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(02), pages 209-225, June.
    6. Giuseppe Marotta, 2005. "When do trade credit discounts matter? Evidence from Italian firm-level data," Applied Economics, Taylor & Francis Journals, vol. 37(4), pages 403-416.
    7. Nadiri, M Ishaq, 1969. "The Determinants of Trade Credit in the U.S. Total Manufacturing Sector," Econometrica, Econometric Society, vol. 37(3), pages 408-23, July.
    8. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    9. Van Horen, Neeltje, 2004. "Trade Credit as a Competitiveness Tool;Evidence from Developing Countries," MPRA Paper 2792, University Library of Munich, Germany, revised Mar 2005.
    10. Mitchell A. Petersen & Raghuram G. Rajan, 1996. "Trade Credit: Theories and Evidence," NBER Working Papers 5602, National Bureau of Economic Research, Inc.
    11. 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.
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