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The Determinants of trade credit: Evidence from Indian manufacturing firms

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  • Rajendra R. Vaidya

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    (Indira Gandhi Institute of Development Research)

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    Abstract

    Trade credit (accounts receivable and accounts payable) is both an important source and use of funds for manufacturing firms in India. This paper empirically investigates the determinants of trade credit in the Indian context. The empirical evidence presented suggests that strong evidence exists in support of an inventory management motive for the existence of trade credit. Highly profitable firms are found to both give and receive less trade credit. Firms with greater access to bank credit offer less trade credit to their customers. On the other hand, firms with higher bank loans receive more trade credit. Holdings of liquid assets have a positive influence on both accounts receivable and accounts payable.

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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2011-012.pdf
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    Bibliographic Info

    Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2011-012.

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    Length: 21 pages
    Date of creation: Jul 2011
    Date of revision:
    Handle: RePEc:ind:igiwpp:2011-012

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    Keywords: Trade Credit;

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    1. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-41, December.
    2. Athey, Michael J. & Laumas, Prem S., 1994. "Internal funds and corporate investment in India," Journal of Development Economics, Elsevier, vol. 45(2), pages 287-303, December.
    3. 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.
    4. Guariglia, Alessandra & Mateut, Simona, 2006. "Credit channel, trade credit channel, and inventory investment: Evidence from a panel of UK firms," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2835-2856, October.
    5. Yoshiro Miwa & J. Mark Ramseyer, 2005. "Trade Credit, Bank Loans, and Monitoring: Evidence from Japan," CARF F-Series CARF-F-054, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    6. Simona Mateut & Spiros Bougheas & Paul Mizen, . "Trade Credit, Bank Lending and Monetary Policy Transmission," Discussion Papers 05/01, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    7. Marion Kohler & Erik Britton & Tony Yates, 2000. "Trade credit and the monetary transmission mechanism," Bank of England working papers 115, Bank of England.
    8. Jeffrey H. Nilsen, 1999. "Trade Credit and the Bank Lending Channel," Working Papers 99.04, Swiss National Bank, Study Center Gerzensee.
    9. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, 06.
    10. Jain, Neelam, 2001. "Monitoring costs and trade credit," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(1), pages 89-110.
    11. Lee, Yul W. & Stowe, John D., 1993. "Product Risk, Asymmetric Information, and Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(02), pages 285-300, June.
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    Cited by:
    1. Nakhoda, Aadil, 2012. "The influence of financial leverage of firms on their international trading activities," MPRA Paper 35765, University Library of Munich, Germany.

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