Product differentiation, market dynamics and the value relevance of trade payables: Evidence from UK listed firms

Abstract

This paper provides a comprehensive evidence on how product and market dynamics affect the value relevance of trade payables. Using a sample of 2,559 UK listed firms over the period 2005-2014, we find a positive relationship between trade payables and firm performance. Our evidence suggests that trade payables increase (decrease) performance in firms with differentiated products and demand uncertainty (larger market share). We demonstrate that the relative value relevance of bank credit versus suppliers' credit is dependent on the nature of the product, the level of sales volatility, and market share. We use an innovative approach to assess the robustness of our results to omitted variable bias.

Stochastic Frontier Modelling of Working Capital Efficiency Across Europe

“…Specifically, the results show that a 10 % increase in firms' cash holdings will lead to a 0.008 % increase in WCE. The plausible explanation may be that firms with cash holding do not need to over-depend on suppliers' credit, which tends to be more expensive (Abdulla et al, 2017;Afrifa et al, 2018). Moreover, firms with cash holding can easily optimise their trade payables because they have the means to pay for goods and services upfront if there is a need to reduce the level of suppliers' credit.…”

“…Firms with ST bank credit are expected to improve their WCE by avoiding the expensive suppliers' credit (Chen et al, 2019). Although trade credit is essential to firms, especially financially constrained firms (Fabbri and Menichini, 2010;Molina and Preve, 2012), it is also more expensive than bank credit (Kestens et al, 2012;Afrifa et al, 2018). Access to bank credit may also cause optimality in trade receivables because of the direct association between bank credit and credit to customers (Fabbri and Klapper, 2016).…”

Trade credit and cost stickiness

“…As there is no consensus on which is the best proxy for trade credit measurement, and the majority of studies use more than one trade credit measure as a proxy, we use three different measures in this study that have been widely used in prior studies. The trade credit measures used are: (i) the ratio of accounts payable to cost of goods sold ( TC1 = AP/COGS ; Love et al , 2007; Molina and Preve, 2012; Wu et al , 2012; Garcia‐Appendini and Montoriol‐Garriga, 2013; Shenoy and Williams, 2017; Afrifa et al , 2018); (ii) the ratio of accounts payable to sales ( TC2 = AP/SALE ; Aktas et al , 2012; Ferrando and Mulier, 2013), and (iii) the ratio of accounts payable to purchase ( TC3 = AP/PURCHASE ; Agostino and Trivieri, 2019), where purchase is COGS plus the changes in inventory.…”

“…Suppliers can finance a firm’s resources by extending trade credit (Petersen and Rajan, 1997) or, in other words, customers can delay payment to suppliers in order to finance their operations (Cao et al , 2018). Although trade credit is a more expensive form of finance than bank loans (Guariglia and Mateut, 2006; Yang, 2011; Lin and Chou, 2015; Afrifa et al , 2018), many firms around the globe use trade credit as their main source of finance, which begs the question as to why firms prefer this source. To answer this, a number of theories, namely financing advantage theory, transaction cost theory, as well as signalling and information asymmetry theory, have been used in prior literature to explain the usage of trade credit.…”

“…In this study we investigate the association between trade credit and cost stickiness, and whether this association, if any, is moderated by agency problem, product market competition and customer concentration. Trade credit is the major source of external finance for many firms around the globe (Demirgüç‐Kunt and Maksimovic, 1999; Wilson and Summers, 2002; Fabbri and Klapper, 2016; Abdulla et al , 2017; Afrifa et al , 2018). Accounts payable, the major component of trade credit, comprises 25 percent of total liabilities, 35.36 percent of current liabilities and 9 percent of total sales in our sample of US firms spanning 1977 to 2017.…”