Determinants of Trade Credit Extended by Manufacturing Firms Listed in Pakistan

Abstract

This paper investigates the determinants of trade credit extended by listed manufacturing firms in Pakistan. Dynamic panel model is estimated by applying system GMM one step and two step estimators on the financial data of 327 manufacturing firms listed in PSX Pakistan for the period 2005 to 2015. Results of the study reveal that trade credit policies of firms are dynamic instead of static. Firms have the target level for trade credit extended and make partial adjustment over time to reach at its optimal level. However, the speed of making adjustments is relatively low due to high cost of making adjustments. Positive and significant relationship of trade credit extended with credit received from suppliers and banks indicates that listed manufacturing firms are following the credit redistribution hypothesis. Further, it is also observed that sales growth and market power of firms have significant and negative effect whereas inventory and relative liquidity position have significant and positive effect on the trade credit extended by listed manufacturing firms. Overall findings of the study suggest that managers should consider changes in the financial characteristics of their firms while making partial adjustments in the trade credit policy. For future research, investigation of the effects of customers' characteristics and financial development on the trade credit extended by listed manufacturing firms is proposed.