“The firm’s trade credit risk taking process

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Electronic copy available at: http://ssrn.com/abstract=1805227
“The Firm’s Trade Credit Risk Taking Process
A Panel Data Probit Estimation, From European Western Countries” 1

Justino Manuel de Oliveira Marques a
Assistent Professor



a Contact Data:

Justino Manuel de Oliveira Marques
e-mail: jmom@iesf.pt

Instituto de Estudos Superiores Financeiros e FiscaisAvenida Sanatórios, Edifico Heliântia
4405-604 Vila Nova de Gaia
Portugal
Telefono: 00351227538800
Teelfax: 00351227624590
e-mail: info@iesf.pt




September 2010

1 This is the 2 nd of 4 essays from a Research Project called: “Essays on Corporate Finance Towards (Financial)
Management Efficiency”.Electronic copy available at: http://ssrn.com/abstract=1805227


2
2

“The Firm’s Trade Credit Risk Taking Process
A Panel Data Probit Estimation, From European Western Countries”

Abstract:

On this investigation it is confirmed the main relevance of firm’s trade credit duration gap
ratio when faced to different stages of firm’s income statement represented by gross coverageratio and net coverage ratio (the higher risk taking probability) and coverage ratio (the lower
risk taking probability). It innovatibly ratifies trade credit duration gap ratio as a firm’s trade
credit risk taking instrument, instead of the days to pay accounts payable or the days sales
outstanding alone and also confirms transactions cost theory with financial predictions,both
insert in firm’s financing motives and pricing motives theory. On this issue, there are a very
few investigations to analyse the trade credit duration gap ratio itself and none on the trade
credit risk taking which is an innovator and useful approach taking into account prior and
most recent findings related to each issue of the mentioned trade credit durationgap ratio.
Specifically, our newly findings corroborate that when trade credit duration gap ratio is closer
to coverage ratios the low trade credit risk taking probability is. Trade credit risk taking is
higher when trade credit duration gap is faced to core business gross and net coverage ratios.
In turn, the inclusion in the models the innovative assetsstructure (instead the simple and
traditional tangibility measured by fixed assets) and negative working capital as control
variables contribute to increase trade credit risk taking probability. More over, another control
risky variables, represented by return of sales and equity volatilities, increase trade credit risk
taking probability as well. These results confirm trade creditrisk taking as a reliable firm’s
internal risk variable and ratifies the existence of costs hierarchy, a substitution effect of trade
debt mainly by short term financing and an absortion role of negative working capital effects
by short term financing. Our newly findings also confirm that pecking order predictions are in
the first explanatory line when trade credit duration gapis faced to coverage and gross
coverage ratios, that is to say, when it is present to firm’s financial and variable costs as
much increase as decrease trade credit risk taking probability. Results also ratifies that trade
credit duration gap is an important and new source of firm’s internal risk taking when faced to
financial and core business coverage ratios and thatruns well in the short term and obey to
both financing and pricing motives. From our point of view, there is a suplementary
importance related to their apply on macroeconomic and public budgeting purposes towards a
new organizational behaviour, risk approaches to meet firm’s risk taking and costs hierarchy.
Because of the reasons exposed before, this investigation is very...
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