Trade credit dynamics during business cycles
Hautala, Perttu (2017-01-23)
Trade credit dynamics during business cycles
Hautala, Perttu
(23.01.2017)
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Turun yliopisto. Turun kauppakorkeakoulu
Kuvaus
siirretty Doriasta
Tiivistelmä
Trade credit refers to the payment time extended by the supplier to the customer for settling the payment for specific goods after delivery. Regardless of its simple nature, trade credit is a well-established method of financing for modern business. In fact, trade credit is among one of the most used methods of short term financing today. The nature of trade credit has been argued to be counter-cyclical, meaning that the use of trade credit increases during economic downturns and decreases during economic upswings. Moreover, trade credit has been argued to be especially important for small- and medium sized enterprises (SME). Considering the scarcity of previous research related to trade credit, the dynamics of trade credit is a fascinating research subject.
The purpose of this thesis has been to analyze the relationship between the use of trade credit and the business cycle, and how this dynamic depends on the company’s position in the value chain. To analyze the relationship between trade credit and a business cycle, a novel sample of SMEs was collected from the euro-area. This extensive sample covers 50 526 companies from 12 different countries from the euro-area, over a time period of 10 years. Moreover, the sample was categorized according to the value chain context, by using the forward–backward linkage measurements, based on the Eurostat product by product input¬–output tables from 2006–2014. For the inferential analysis, a panel linear regression model was adopted, as the sample exhibits both a time aspect as well as a cross-sectional aspect, well suited for a panel regression. The time period of 2006–2015 was chosen as a backdrop for the study as the turbulent economic situation gives a good representation of a business cycle.
The results of the analysis showed that there is indeed a statistically significant negative relationship between the use of trade credit and the business cycle, which supports the hypothesis that trade credit is used as a substitute for other forms of finance. The results also found that the use of trade credit is more substantial in the upstream of the value chain in the context of European SMEs. Furthermore, two novel findings were found from the analyses: first, the results indicated that in 2009–2010 there was an increase in collection periods in the manufacturing tiers of the value chain, which was not evident in the trading end of the value chain. This might indicate a propagating liquidity shock as hypothesized in previous literature. Second, the results indicated a steady decreasing trend in the use of trade credit, independent of the business cycle.
The purpose of this thesis has been to analyze the relationship between the use of trade credit and the business cycle, and how this dynamic depends on the company’s position in the value chain. To analyze the relationship between trade credit and a business cycle, a novel sample of SMEs was collected from the euro-area. This extensive sample covers 50 526 companies from 12 different countries from the euro-area, over a time period of 10 years. Moreover, the sample was categorized according to the value chain context, by using the forward–backward linkage measurements, based on the Eurostat product by product input¬–output tables from 2006–2014. For the inferential analysis, a panel linear regression model was adopted, as the sample exhibits both a time aspect as well as a cross-sectional aspect, well suited for a panel regression. The time period of 2006–2015 was chosen as a backdrop for the study as the turbulent economic situation gives a good representation of a business cycle.
The results of the analysis showed that there is indeed a statistically significant negative relationship between the use of trade credit and the business cycle, which supports the hypothesis that trade credit is used as a substitute for other forms of finance. The results also found that the use of trade credit is more substantial in the upstream of the value chain in the context of European SMEs. Furthermore, two novel findings were found from the analyses: first, the results indicated that in 2009–2010 there was an increase in collection periods in the manufacturing tiers of the value chain, which was not evident in the trading end of the value chain. This might indicate a propagating liquidity shock as hypothesized in previous literature. Second, the results indicated a steady decreasing trend in the use of trade credit, independent of the business cycle.