Trade Receivables Policy of Distressed Firms and its Effect on the Costs of Financial Distress

39 Pages Posted: 16 Mar 2006

Date Written: January 2006

Abstract

This paper studies the trade receivables policy of distressed firms as the trade off between the firm's willingness to gain sales and the firm's need for cash. We find that firms increase trade receivables when they have profitability problems prior entering financial distress, but reduce trade receivables when they have cash flow problems in financial distress. We also find that a firm that significantly cuts its trade receivables when in financial distress will have an additional 7% drop in sales and stock returns over the previously documented 24% average drop for a firm in financial distress. Moreover, the performance decline of a firm in financial distress is significantly higher if the firm cuts trade receivables than if it does not.

Keywords: Trade Credit, Trade Receivables, Financial Distress

JEL Classification: G31, G33

Suggested Citation

Molina, Carlos Alberto and Preve, Lorenzo A., Trade Receivables Policy of Distressed Firms and its Effect on the Costs of Financial Distress (January 2006). Available at SSRN: https://ssrn.com/abstract=891624 or http://dx.doi.org/10.2139/ssrn.891624

Carlos Alberto Molina (Contact Author)

IESA ( email )

IESA, dept of Finance
Av. IESA, San Bernardino
Caracas, DF 1010
Venezuela
+58-212-555.4551 (Phone)
+58-212-555.4446 (Fax)

HOME PAGE: http://www.iesa.edu.ve/profesores-e-investigacion/profesores/P088

Lorenzo A. Preve

IAE Business School, Universidad Austral ( email )

Mariano Acosta s/n y Ruta 8
CCN°49
Pilar, Buenos Aires 1629
Argentina
+54(2322) 48-1055 (Phone)

HOME PAGE: http://www.iae.edu.ar/LPreve

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