An Empirical Investigation of Trade Credit Use

This paper investigates empirically the theoretical motivations for the use of trade credit by firms for purchases. The extent to which trade credit is used for purchases and the accounts payable to total assets ratio, i.e. the demand for trade credit, are modelled here as a function of transaction costs motivations, financing motivations, operational considerations, seller compliance issues, supplier marketing, and environmental issues, while controlling for firm characteristics such as size and industry. This paper expands on previous studies (see Chant & Walker (1988), Elliehausen & Wolken (1993) Petersen & Rajan (1997), Deloof & Jegers (1999) and Wilson, Singleton & Summers(1999)) by considering a wider range of motivations for trade credit demand. It also complements them by considering firms of similar size in a different country (by comparison with Elliehausen & Wolken) and firms of different sizes in the same country (by comparison with Wilson, Singleton & Summers). We find that the use of trade credit is widespread, and that it is generally perceived as a cheap financing option. Although the availability of credit is not a major influence on supplier choice the customer-supplier relationship can influence supplier offerings, leading to benefits for firms which develop the relationship. This in turn may influence the firm’s purchasing behaviour at the pre-sales stage, leading to a concentration of purchasing activity. The level of a firm’s trade credit use is found to be significantly influenced by transaction costs, financing, operational issues, marketing activities by suppliers, the firm’s investment in trade debtors and firm size.