Stock liquidity and trade credit: Evidence from Indian firms

Abstract

The study examines the relationship between stock liquidity and the firms' extension and use of trade credit. In addition, this study examines the impact of financial constraints and dependence on external financing on the relationship between stock liquidity and trade credit. The study is based on secondary data of non-financial Indian companies obtained from Center for Monitoring of Indian Economy Prowess database, pertaining to a period of 18 years (2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016)(2017)(2018). This study employs two-step generalized method of moment's technique to arrive at results. Results of study confirm that firms with more liquid stock tend to provide more trade credit to their customers and also reduce the use of expensive trade credit financing from suppliers. Further, we find that higher stock liquidity is associated with significantly longer receivable period and shorter payable period for firms facing high financial constraints and also for firms with high external financial dependence.

Stock liquidity and corporate debt maturity structure: Evidences from Indian firms

“…They found that higher the sensitivity of stock to extreme liquidity risk the higher returns it may generate. Also, Shang (2020) and Altaf (2020) found that the firms with high stock liquidity tend to offer more trade credit to their customers and reduce the use of trade credit financing from suppliers.…”

Open account, import decision and financial constraints: A cross‐country firm‐level study

“…A considerable amount of research effort has been directed toward the link between an open account and exports in the theoretical and empirical literature, demonstrating that an open account positively influences extensive and intensive export (Fisman & Love, 2003), especially in financially-constrained firms. The role of financial constraints is well-documented in the literature on export decisions (Bellone et al, 2010;Qasim et al, 2021), investment decisions (Buch et al, 2014;Danzman, 2020;Sasidharan & Padmaja, 2018), global value chain participation (Reddy & Sasidharan, 2021), R&D activities (Howell, 2016), and trade credit usage (Altaf, 2020;Baker et al, 2020). In this vein, an open account serves as a quality signal that assists in reducing financial constraints.…”