The Determinants of Trade Credit: Evidence from Indian Manufacturing Firms
Rajendra R. Vaidya
DOI: 10.4236/me.2011.25079   PDF   HTML     6,558 Downloads   11,616 Views   Citations


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 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.

Share and Cite:

R. Vaidya, "The Determinants of Trade Credit: Evidence from Indian Manufacturing Firms," Modern Economy, Vol. 2 No. 5, 2011, pp. 707-716. doi: 10.4236/me.2011.25079.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] M. A. Petersen and R. G. Rajan, “Trade Credit: Theories and Evidence,” The Review of Financial Studies, Vol. 10, No. 3, 1997, pp. 661-691. doi:10.1093/rfs/10.3.661
[2] R. Cunningham, “Trade Credit and Credit Rationing in Canadian Firms,” Bank of Canada Working Paper 49, 2004.
[3] C. Ng, J. Smith and R. Smith, “Evidence on the Determinants of Credit Terms in Inter firm Trade,” Journal of Finance, Vol. 54, No. 6, 1999, pp. 1109-1129. doi:10.1111/0022-1082.00138
[4] R. G. Rajan and L. Zingales, “What Do We Know About Capital Structure? Some Evidence from International Data,” Journal of Finance, Vol. 50, No.5, 1995, pp. 1421-1460. doi:10.2307/2329322
[5] M. Kohler, E. Britton and T. Yates, “Trade Credit and the Monetary Transmission Mechanism,” Bank of England Working Paper ISSN 1368-5562, 2000.
[6] I. Uesugi and G. M. Yamashiro, “How Trade Credit Differs from Loans: Evidence from Japanese Trading Companies,” RIETI Discussion Paper Series 04-E-028, 2004.
[7] M. Deloof and M. Jegers, “Trade Credit, Corporate Groups and the Financing of Belgian Firms,” Journal of Business Finance and Accounting, Vol. 26, No.7, 1999, pp. 945-966. doi:10.1111/1468-5957.00281
[8] Reserve Bank of India, “Reserve Bank of India Bulletin,” Mumbai, March 2010.
[9] Reserve Bank of India, “Report of the Working Group on Discounting of Bills by Banks,” Mumbai, 2000.
[10] Reserve Bank of India, “Basic Statistical Returns of Sche- duled Commercial Banks in India,” Mumbai, 2010.
[11] S. Bougheas, S. Mateut and P. Mizen, “Corporate Trade Credit and Inventories: New Evidence of a Trade-Off from Accounts Payable and Receivable,” Journal of Banking and Finance, Vol. 33, No. 2, 2009, pp. 300-307. doi:10.1016/j.jbankfin.2008.07.019
[12] A. H. Metzler, “Mercantile Credit, Monetary Policy and Size of Firms,” The Review of Economics and Statistics, Vol. 42, No.4, 1960, pp. 429-437. doi:10.2307/1925692
[13] A. Guariglia and S. Mateut, “Credit Channel, Trade Credit Channel and Inventory Investment: Evidence from a Panel of U.K. Firms,” Journal of Banking and Finance, Vol. 30, No. 10, 2006, pp. 2835-2856. doi:10.1016/j.jbankfin.2005.11.002
[14] S. Mateut, S. Bougheas and P. Mizen, “Trade Credit, Bank Lending and Monetary Policy Transmission,” Euro- pean Economic Review, Vol. 50, No. 3, 2006, pp. 603- 629. doi:10.1016/j.euroecorev.2005.01.002
[15] M. J. Brennan, V. Maksimovic and J. Zechner, “Vendor Financing,” Journal of Finance, Vol. 43, No. 5, 1988, pp. 1127-1141.
[16] R. Schwartz, “An Economic Model of Trade Credit,” Jour- nal of Financial and Quantitative Analysis, Vol. 9, No. 4, 1974, pp. 643-657. doi:10.2307/2329765
[17] B. Biais and C. Gollier, “Trade Credit and Credit Rationing,” Review of Financial Studies, Vol. 10, No. 4, 1997, pp. 903-937. doi:10.1093/rfs/10.4.903
[18] N. Jain, “Monitoring Costs and Trade Credit,” Quarterly Review of Economics and Finance, Vol. 41, No. 1, 2001, pp. 89-110. doi:10.1016/S1062-9769(00)00063-6
[19] M. Burkart and T. Ellingson, “In-Kind Finance: A Theory of Trade Credit,” American Economic Review, Vol. 94, No. 3, 2004, pp. 569-590. doi:10.1257/0002828041464579
[20] V. Cunat, “Trade Credit: Suppliers as Debt Collectors and Insurance Providers,” The Review of Financial Studies, Vol. 20, No. 2, 2007, pp. 491-527. doi:10.1093/rfs/hhl015
[21] Y. W. Lee and J. D. Stowe, “Product Risk, Asymmetric Information and Trade Credit,” The Journal of Financial and Quantitative Analysis, Vol. 28, No. 2, 1993, pp. 285- 300. doi:10.2307/2331291
[22] G. Emery, “An Optimal Financial Response to Variable Demand,” Journal of Finance and Quantitative Analysis, Vol. 22, No. 2, 1987, pp. 209-225. doi:10.2307/2330713
[23] Y. Miwa and J. M. Ramseyer, “Trade Credit, Bank Loans and Monitoring: Evidence from Japan,” CARF Working Paper F-054, 2005.
[24] J. Nilsen, “Trade Credit and the Bank Lending Channel,” Journal of Money Credit and Banking, Vol. 34, No. 1, 2002, pp. 226-253. doi:10.1353/mcb.2002.0032
[25] A. Demirguc-Kunt and V. Maksimovic, “Firms as Financial Intermediaries: Evidence from Trade Credit Data,” World Bank Research Working Paper No. 2696, 2001.
[26] J. Van Horne, “Financial Management and Policy,” Prentice Hall, UK, 1995.
[27] D. Roodman, “Xtabond2:Stat Module to Extend Xtabond Dynamic Panel Data Estimator,” Center for Global Development, Washington, 2005.
[28] M. J. Athey and P. S. Laumas, “Internal Funds and Corporate Investments in India,” Journal of Development Economics, Vol. 45, No. 2, 1994, pp. 287-303. doi:10.1016/0304-3878(94)90034-5
[29] A. Ganesh_Kumar, K. Sen and R. R. Vaidya, “Outward Orientation, Investment and Finance Constraints: A Study of Indian Firms,” Journal of Development Studies, Vol. 37, No. 4, 2001, pp. 133-149. doi:10.1080/00220380412331322071
[30] R. Lensink, R. van der Molen and S. Gangopadhay, “Business Groups, Financing Constraints and Investment: The Case of India,” Journal of Development Studies, Vol. 40, No. 2, 2003, pp. 93-119. doi:10.1080/00220380412331293787

Copyright © 2022 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.