Abstract
Using a database of more than 1,300 firms from six countries in the MENA region, we study the impact of financial development on the relationship between trade credit on the one hand and bank credit access and firm-level characteristics, especially financial health, on the other hand. Trade credit use increases with the difficulty for gaining access to bank credit, and indicators of the quality of the firm’s financial structure negatively influence the use of trade credit. Additional investigations tend to suggest that increased financial development significantly reduces the substitution relationship between trade credit and bank credit and more generally decreases the influence of most firm-level determinants for trade credit usage. These results are plausibly explained by a demand-driven story: when bank credit access gets increasingly difficult, or when financial health deteriorates, the demand for trade credit increases. Similarly, when financial development increases, firms have better access to bank credit, and impact of this variable (or financial health proxies) on the demand for trade credit becomes less or not significant.
References
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- 1
Complementarity between bank and trade credits implies positive correlations between their variations or at least, that, the decrease in one (because of, for example, a more difficult access to bank credit) does not necessarily induce an increase in the other one (in that case, a more intensive use of trade credit).
- 2
The positive link between finance and economic growths is challenged in recent contributions (Arcand, Berkes, and Panizza 2012; Rousseau and Wachtel 2011). But the level of financial development in countries of interest in our study is much lower than the threshold at which Arcand et al. (2012) find that financial development starts having a negative effect on growth.
- 3
One should note that trade credit is a form of financing that is not specific to developing or emerging countries. It is a widespread source of short-term external financing in the United States and Europe. In fact, most empirical studies addressing this question focus on developed countries, often using data from the United States (Elliehausen and Wolken 1993; Petersen and Rajan 1994, 1997; Nilsen 2002) or Europe (Crawford 1992a, 1992b; Breig 1994; Deloof and Jegers 1996, 1999; Marotta 1997, 2001; Wilson, Singleton, and Summers 1999; Wilson and Summers 2002), and mainly highlighting problems of financial constraints, and advantages in terms of transaction costs or cash flow to explain the demand for trade credit.
- 4
These surveys are available at http://www.enterprisesurveys.org/
- 5
Algeria, Egypt, Iraq, Jordan, Lebanon, Morocco, Oman, Saudi Arabia, Syria, West Bank of Gaza, and Yemen.
- 6
No new survey is available for Oman.
- 7
The location was missing, and more importantly, the industrial categories were very rough, causing matching problems with the rest of the database.
- 8
Qualitatively identical trends can be observed for banking intermediation (i.e. the ratio of domestic credit provided by banking sector over GDP) and financial market development (i.e. the ratio of market capitalization over GDP). More details on these additional financial indicators are available upon request to the authors.
- 9
There were very few state-owned companies in the initial database (hardly more than 1.5% of the total, or around 40 firms). It was, therefore, not possible to conduct a sound empirical analysis of this subsample. For this reason, we withdrew them from the database.
- 10
Results are robust to alternative definitions of the dependent variable, like the ratio of payables over sales or the log of payables.
- 11
See, among others, Beck, Demirgüç-Kunt, and Levine (2000) and Beck (2002). Fisman and Love (2003) also use this ratio as an indicator of financial development.
- 12
Our results are robust to the use of alternative measures for firm size, such as the number (in natural logarithm) of employees or the logarithm of total sales. All results are available upon request to the authors.
- 13
See, among others, Delannay and Weill (2004) and Ge and Qiu (2007). Hadlock and Pierce (2010) show that age and size are useful predictors of financial constraints, and more exogenous than the widely used balance-sheet variables. The presence in the capital city is actually another proxy for information research costs and information asymmetry issues: the firms based in the capital city are closer to a larger set of banks (especially in developing countries, where banks are very concentrated in the main cities) and should, therefore, have less difficult access to bank credit
- 14
See, among others, the survey by Hubbard (1998).
- 15
Authors such as Petersen and Rajan (1997), Summers and Wilson (2002) and Gama, Mateus, and Teixeira (2008) for developed countries and Fafchamps, Pender, and Robinson (1995), Biggs, Raturi, and Srivastavac 2002 and Isaksson (2002) for developing countries in sub-Saharan Africa have shown that the use of trade credit increases with the size of the firm.
- 16
These are especially important, since the use of trade credit may vary substantially across sectors. The sample distribution of firms across 2-digit industries is available upon request to the authors. One could argue that trade credit terms are also country-specific. In Table 6, we report estimates with country dummies (see columns (c), (e), and (g)), with results identical to the ones produced by our main specification.
- 17
- 18
This is because of the incidental parameters problem, see Wooldridge (2002, 484) for more details on this matter.
- 19
Since our sample contains 2 or 3 years per firm (cf. Section 2.1), we are left with an insufficient time variance to perform a reliable random effect panel probit estimation. Basically, convergence is not achieved.
- 20
We thank one referee for bringing this point to our attention. In unreported estimates (available upon request), we did instrument the credit access variable with the same set of instruments than other regressors (second lags of continuous regressors, sectoral financial dependence*financial development and a dummy indicating if the manager of the firm is also the main shareholder, see below). In most cases, this led to smaller Durbin–Wu–Hausman statistics and higher p-values, indicating an even greater impossibility of rejecting the null of exogeneity. Therefore, the diagnostics regarding endogeneity reported in the article must be considered as rather strict and careful.
- 21
As an additional robustness check for the endogeneity of the credit access variable in eq. [2], we also implemented a treatment effects model for studying the effect of an endogenous treatment (here, the credit access) on another endogenous continuous variable (the volume of trade credit owed). Results are qualitatively identical to the ones presented here.
- 22
This also shows that our results are not driven by a particular country, which was also confirmed on by estimates dropping each country one by one.
- 23
Estimates were performed on complete specifications in order to minimize the possibility of an additional omitted variable bias, in a context where firm-level effects cannot be implemented. Results on specifications without the presence in capital city and age were not reported for the sake of space, but remain available upon request to the authors. They are qualitatively identical to those herein.
- 24
As previously indicated, the estimates implying financial development are performed on a specification without age and the presence in the capital city in the right-hand side variables in order to ensure that our analysis involves all six countries of the sample. We checked that our results remained robust when adding the presence in the capital city and the age of the firm. This check is available upon request to the authors.
- 25
These estimations are, thus, made without time dummy variables, since these are perfectly collinear with the private credit/GDP ratio.
- 26
These tests (standard tests based on Chi-square statistics) are shown solely for the key variables of interest, namely size, credit access, and financial variables. Tests of equality for other variables remain available upon request to the authors.
- 27
Due to insufficient observations on the third quartile, we decided to perform estimations on both the second and the third quartiles, under the name Intermediate.
©2013 by Walter de Gruyter Berlin / Boston
