The Declining Trade Credit Ratio Puzzle

Abstract

Despite the importance of trade credit as a source of financing there is a significant and persistent decline in this form of short-term borrowing and lending over the 1979 to 2018 interval. We find that the median firm’s accounts receivable ratio decreased by 52 percent while accounts payable ratio fell by 47 percent. The decline in firms’ trade credit over time is systematic as it is present in most industries and sub-samples of firms classified on different characteristics. Further, firms’ trade credit ratios are significantly less than predicted ratios based on firm-specific characteristics and industry factors and this deficiency is becoming larger, that is, more negative, over the sample period. The pattern in trade credit ratios persists after controlling for changes in macro factors implying that the declining trade credit ratio represents a puzzle.

Keywords: Capital Structure, Trade Credits, Short-Term Borrowing and Lending

JEL Classification: G32, G20