Business Cycle,Industry Cyclicity And The Dynamic Adjustments Of Trade Credit Granted By Firms—with The Discussion On The Effects Of Liquidity Risk

Trade credit refers to certain type of credit relationship offered by a supplier in routine business activities mainly due to the delay between the goods delivery or the service provision and the relevant payments.The trade credit provided by a supplier to his customer is so called trade credit supply,which indicates investments in accounts receivable,notes receivable,prepayments etc.in the seller's financial statements.On the one hand,the provision of trade credit can help the suppliers enhance the competitiveness of their products,expand the market shares,promote sales and profits growth,and gain managerial performance improvements finally.On the other hand,over-investing in accounts receivable can also imply enormous costs for the suppliers in terms of opportunity costs,accounts managements and bad debts.High levels of sells on credit will dry up the liquidity of a company gradually,slow down the speeds of its working capital turnover,and lead to negative effects on the firm's value at last.Even worse,illiquidity transmissions may end up with a serious credit crisis through the supply chain step by step.Therefore,managers must try to adjust their business trade policies in time and keep a reasonable scale of trade credit lending to maximize the positive effects of trade credit granting.The existing literature offers various theories explaining the motivations and affecting factors of trade credit using with a static method.Other research papers are mostly involved in figuring out the relationships between trade credit and monetary policies,or the interaction mechanism between commercial credit and bank credit.It is a real new perspective that to adopt a dynamic method to testify the adjustment speed of trade credit with the effects of business cycle,industry cyclicity and liquidity risk.Based on the unbalanced panel data of all the A-shares listed companies in China from 2000 to 2015,a dynamic approach is adopted to conduct empirical research on the partial adjustment effects of trade credit granted by firms in China with a systematic GMM estimation method.At first,the intentions of this paper are introduced,which is composed of four parts,mainly including the background,significance,methodology and contributions.Then,a fully literature review is given in the second part.Previous research mostly sticks in the fields of motivations and affecting elements of trade credit offering.The paper provides a brief comment summary at the end of this part.The next part of this paper is a theoretical one,which states some theoretical analysis on the interaction mechanisms between economic fluctuations,industry periodicity,liquidity risk and dynamic adjustments of trade credit.Five theoretical hypothesizes are come up in the basis of the forward part.In the fourth part,this paper mainly describes the principles of the dynamic adjustment model we adopted and shows what variables are chosen.The fifth section is a central part of the whole paper,in which it summarizes the descriptive statistics of all variables and testifies the five hypotheses mentioned before one by one.In this part,data samples are divided into two groups in accord with the economic growth condition and industry cyclicity to see the differences of dynamic adjustment speed between them.Sample data is also divided into another two groups by the liquidity risk suffered by a company.Finally,research conclusions and related policy recommendations are obtained according to the empirical results we got in the fifth part.The empirical results reveal that firms do exist an optimal level of accounts receivable and in order to converge to that optimal level managers will take some decisions after weighing the advantages and disadvantages of additional trade credit.In addition,this paper finds that the adjustment speed of trade credit granted by firms is significantly influenced by business cycle,industry cyclicity and liquidity risk suffered by firms.The trade credit adjustment speeds of firms which are belonged to cyclical industries are slower than those non-cyclical industries.When the macro-economy is in the upstream stage,the trade credit granted by firms adjusts significantly faster.Taking the liquidity risk suffered by the firms into consideration,the firms suffering higher liquidity risk will adjust their trade credit levels more frequently,which means the adjustment speed of high liquidity risk firms are faster.According to the results obtained last part,this paper try to end with some trade credit policy recommendations which we think is practical.First of all,when making trade credit policy,managers must take both the macro and micro factors into consideration.Only place the realistic condition of the company in a complex macro and micro environment,can reasonable trade credit decisions be made.Secondly,through the analysis of cyclical industry characteristics,the result shows that the adjustment speed of trade credit in a cyclical industry is significantly slower than a noncyclical industry one.Therefore,a company in cyclical industries should adjust its trade credit level more frequently and intensely to respond to the changes of the macroeconomic environment and its own financial situation.Last but not the least,the liquidity risk faced by a company influences its trade credit policies in a large degree.Accordingly the company manager should not only pay close attention to the changeable macro and micro environment,but also the quality of accounts receivable.For the low quality accounts receivable with a high probability to default,managers should take timely measurements to guarantee the liquidity safety.