Cash holding, trade credit and access to short-term bank finance

Abstract

Since 1988, cash holding of the UK companies has increased from 10.6% to 16.4% of total assets. To explain this increase, we develop a panel vector autoregression and analyse the dynamics between cash holding and its closest substitutes, trade credit and short-term bank finance. Impulse response functions confirm the signalling theory, as trade credit facilitates access to bank finance. Firms experiencing liquidity shocks resort to cash or trade credit but not to bank finance. Cash holding improves access to trade credit. Additional cash and trade credit trigger a slowdown of the cash conversion cycle explained by agency theory. Cash-rich firms have accumulated more cash than predicted because of an unexpected decline in short-term debt, stressing the role of banks in explaining the increase in cash holding.

Liquidity-Profitability Tradeoff Existence in Turkey: An Empirical Investigation Under Structural Equation Modeling

“…Since ROA includes the all short and long term financing alternatives especially for current assets, it completely reflects the outcome of applying P-WCM in terms of profitability. As discussed in Kling et al (2014), cash holdings increase the ability of firms to cover possible operating loses emerged especially by liquidity shocks and to reach current liabilities in better conditions as an alternative of financing current assets, for example suppliers are more willing to provide trade credit to firms with higher liquidity positions. Also, as discussed in Jung and Kim (2008) study, stockpiling of liquid assets provides incentives for firms to increase their leverage because cash holdings decrease potential financial distress costs and increase target debt-equity ratios.…”

Corporate cash holdings: Causes and consequences

“…A variety of techniques have been employed to estimate structural models e.g., three-stage least squares (e.g. Acharya et al, 2007;Liu et al, 2015), full information maximum likelihood (D'Mello et al, 2008), panel vector autroregression (Kling et al, 2014), and simulated method of moments (Nikolov and Whited, 2014).…”

Why do firms invest in accounts receivable? An empirical investigation of the Malaysian manufacturing sector

“…It is one of the most important forms of finance, exceeding the short-term business lending of the entire banking system (Lee and Stowe, 1993;Ng et al, 1999;Wilson and Summers, 2002;Aaronson et al, 2004;Boden and Paul, 2014). Kling et al (2014) examine the link between trade and short-term bank credit and provide evidence that they are complementary, a finding that was also supported by both Bias and Gollier (1997) and Burkart and Ellingsen (2004). Trade credit is therefore an important source of trade liquidity, as well as a useful source of money supply.…”