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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.

Suggested Citation

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

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    Cited by:

    1. 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.
    2. Kutsuna, Kenji & Smith, Janet Kiholm & Smith, Richard & Yamada, Kazuo, 2016. "Supply-chain spillover effects of IPOs," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 150-168.
    3. repec:gam:jsusta:v:10:y:2018:i:4:p:947-:d:137863 is not listed on IDEAS
    4. repec:eco:journ3:2017-04-18 is not listed on IDEAS
    5. El Ghoul, Sadok & Zheng, Xiaolan, 2016. "Trade credit provision and national culture," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 475-501.
    6. repec:eee:corfin:v:45:y:2017:i:c:p:203-219 is not listed on IDEAS
    7. repec:eee:jbfina:v:89:y:2018:i:c:p:192-208 is not listed on IDEAS
    8. TSURUTA Daisuke, 2017. "Working Capital Management during the Global Financial Crisis: Evidence from Japan," Discussion papers 17045, Research Institute of Economy, Trade and Industry (RIETI).
    9. Oliveira, Mauro & Kadapakkam, Palani-Rajan & Beyhaghi, Mehdi, 2017. "Effects of customer financial distress on supplier capital structure," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 131-149.
    10. 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.
    11. Tsuruta, Daisuke, 2015. "Bank loan availability and trade credit for small businesses during the financial crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 40-52.
    12. repec:eee:corfin:v:46:y:2017:i:c:p:391-410 is not listed on IDEAS
    13. 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).
    14. Altunok, Fatih & Mitchell, Karlyn & Pearce, Douglas, 2015. "The trade credit channel and monetary policy transmission: empirical evidence from U.S. panel data," MPRA Paper 66273, University Library of Munich, Germany.

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