Empirical Evidence of Trade Credit Uses of Brazilian Publicly Listed Companies

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1 Avalable onlne at BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept Emprcal Evdence of Trade Credt Uses of Brazlan Publcly Lsted Companes Rchard Sato * E-mal address: Escola de Admnstração de Empresas de São Paulo/Fundação Getulo Vargas São Paulo, SP, Brazl. Márca Lma Bandera E-mal address: Escola de Admnstração de Empresas de São Paulo/Fundação Getulo Vargas São Paulo, SP, Brazl. ABSTRACT Whle trade credt may be used as a substtute for bank loans, we fnd emprcal evdence that lsted frms do use bank debt and trade credt as two complementary sources of fnancng n lne wth recent theoretcal papers (e.g. Bas & Goller, 1997) and evdence found n other emprcal works (e.g. Alphonse, Ducret, & Sévern, 2006). By usng a sample of 263 publcly-lsted companes from 2006, our fndngs emprcally support that trade credt may be used as () a sgn of the frm s qualty, and () a way of facltatng access to bank debt as trade credt seems to be a substtute for bank debt. Key words: trade credt; publc-lsted companes; sources of fnancng; debt. Receved 19 December 2008; receved n revsed form 29 September Copyrght 2010 Brazlan Admnstraton Revew. All rghts reserved, ncludng rghts for translaton. Parts of ths work may be quoted wthout pror knowledge on the condton that the source s dentfed. * Correspondng author: Rchard Sato EAESP/FGV, Avenda 9 de Julho, 2029, Bela Vsta, São Paulo, SP, , Brazl.

2 Emprcal Evdence of Trade Credt Uses of Brazlan Publcly-Lsted Companes 243 INTRODUCTION Trade credt s credt extended by supplers to buyers, partcularly durng sales negotatons. Schwartz (1974) reports that trade credt s a complement to bank debt and captal market debt. It dmnshes the effcency of an aggregate monetary control, but on the other hand t mtgates dscrmnatory effects caused by a restrctve monetary polcy, whch tends to affect manly small and medum szed enterprses [SME]. Because of ths credt constrant, trade credt s vewed as a fnancal source of greater mportance n countres where fnancal nsttutons and captal markets are not fully developed. It does not mean, however, that credt extenson (or trade credt) s not relevant n countres wth well-developed fnancal nsttutons such as the US or Germany. Trade credt s also vewed as an mportant source of fnancng for SME, snce these frms normally have less access to sources of fnancng (and are also more affected by restrctve monetary polces). However, trade credt s much used by large frms. In our sample, for example, trade credt use represents around 8% of total debt, or 1/3 of frms fnancng (excludng corporate debt). Despte the relevance of trade credt to Brazlan frms, there s no lterature about ths source of fnancng usng Brazlan data. Ths study ams to fll ths gap. Another nnovaton ntroduced by the present study s the focus on Brazlan-lsted frms. It s reasonable to expect, therefore, that they have at least the same access to bank loans as prvate frms. In addton, publc lsted frms have access to publc debt whle prvate frms do not. Nevertheless, the complex procedures for accessng these other sources of fnancng, the proportonally larger fnancng needs of publc frms and ther need to dversfy ther fnancng suggest that trade credt may be just as (or almost as) useful for publc, large frms as t s for smaller ones. Ths study nvestgates trade credt from the vewpont of both suppler and buyer based on a sample of Brazlan publc frms data. We test the hypothess of Alphonse, Ducret and Sévern (2006) who argue that credt ratoned frms would use trade credt as complementary and alternatve source of fnancng, whle frms not facng credt ratonng would use t only as an alternatve source. The analyss of trade credt supply (the suppler vewpont) focuses on frms access to credt. The remander of ths paper s organzed as follows. The lterature revew and hypotheses are presented n Second Secton, data descrpton n Thrd Secton and the emprcal results and the dscusson of results n Fourth Secton 4. Ffth Secton concludes. LITERATURE REVIEW Frms justfy supplyng trade credt on the bass that, n the absence of such fnancng, clents who do not have access to credt from fnancal nsttutons wll not buy ther products (Nadr, 1969). Emery (1984) argues that trade credt provson boosts sales, representng a strategy to reduce frms nventores wthout prce cuts. In ths sense, ths strategy would avod costs assocated wth prce reducton and preserve the frms dscretonary prcng ablty, as ponted out by Petersen and Rajan (1997). An nstrument that facltates ths practce s the trade bll, whch can be dscounted n advance. Another relevant aspect of trade credt s that t plays a role as a product guarantee when a suppler s reputaton s not well known, snce clents can observe the qualty of products before effectvely payng for them (Smth, 1987; Long, Maltz, & Ravd, 1993). Wlner (2000) addtonally argues that, for a suppler that reles on a specfc customer, t may be n the suppler s long term nterests to grant trade credt to ths customer even f the suppler s sufferng BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

3 Rchard Sato, Márca Lma Bandera 244 temporary fnancal dstress. In ths sense, the author verfed that large buyers faced wth credt restrants may use ther poston (as a large costumer) to obtan trade credt from ther supplers. Although these reasons justfy the nterest of non-fnancal frms n extendng trade credt, t s stll nterestng to ask why they do so n the presence of fnancal frms specalzng n sellng credt. The answer s drectly related to rsk mtgaton by non-fnancal frms n relaton to banks. Accordng to Petersen and Rajan (1997), the explanaton s mostly related to nformatonal advantages that supplers experence, compared to banks, due to ther busness relatonshp wth ther clents (The supplers vsts to ther clents may provde useful hnts about nventores, employee redundancy, clents complants and other problems that the buyer may eventually face). Frst, supplers may obtan nformaton about ther customers n the natural course of busness, hence n a more tmely and less costly way than banks. As Cook (1997) ponts out, ths can be explaned by the fact that supplers vst ther customers on a regular bass: n such vsts, supplers representatves (salespeople, commercal managers) get n touch wth buyers employees and representatves of other frms, obtanng nformaton about ther relatonshp wth the buyer. Another facltatng factor s that supplers and buyers frequently belong to related ndustres, whch makes t easy for the supplers to have a good assessment of ther customers market condtons. Moreover, Petersen and Rajan (1997) pont out that the frequency and volume of purchases provde a relevant sgnal about the customer s stuaton. The busness relatonshp also provdes the supplers wth a montorng advantage. Man and Smth (1992) state that, faced wth a lkely default, the suppler can cut futures sales. Ths atttude can be harmful and even trgger the frm s shutdown, especally f there are few alternatve supplers of that nput. On the other hand, retalaton from fnancal nsttutons does not have as mmedate an effect as the supplers actons. Knowng that supplers retalaton can lead to ther shutdown, buyers have an extra ncentve to avod defaultng on trade credt. Furthermore, Buckart and Ellngsen (2004) argue that goods are more dffcult to dvert than cash, that s, supplers can overcome moral hazard easer than banks. The last advantage mentoned by Petersen and Rajan (1997) has to do wth the nature of collateral assets. In case of default, lenders can seze the buyers nventory of goods: however, gven the nature of ther actvtes, such assets are less valuable to banks than to supplers (see also Frank & Maksmovc, 2004 and Longhofer & Santos, 2003). All the advantages of non-fnancal frms are related to rsk mtgaton, snce these frms can reduce nformatonal asymmetry. Fnally, t s mportant to explan why frms use trade credt even f t s consdered more costly than other forms of credt. There are two man reasons for the nterest n ts use: (1) trade credt s an alternatve source of fnancng, especally when frms are credt constraned and (2) t s vewed as a sgn of good qualty of frms, makng t easer for them to access bank loans. Burkart and Ellngsen s (2004) model predcts that, n the case of wealthy frms, the use of trade credt has a negatve relatonshp to wealth. Moreover, accordng to these authors, the least wealthy frms use bank loans and trade credt up to ther lmt. Cunnnghan (2004) emprcally verfes Burkart and Ellngsen s model (2004). By defnng wealth as net ncome before tax, she found that, for medum-wealth frms, as the lmt of bank credt ncreases, trade credt s less used; and for low-wealth frms, they are drectly proportonal, whch suggests that ths type of frm exhausts both lmts of bank credt and trade credt. Petersen and Rajan (1997) found that credt constraned frms use more trade credt, whle frms wth more access to credt from fnancal nsttutons extend more credt to ther customers; these results were further corroborated by Bas and Goller (1997), who also suggest that trade credt can mtgate nformaton asymmetry problems. As explaned n the prevous secton, supplers have advantage by obtanng nformaton about ther buyers n comparson to banks, and hence access to trade credt would work as a sgn of the frm s good qualty, facltatng ther access to bank loans. The results of Cook (1997) support ths ratonale for a country wth less developed fnancal nsttutons (Russa). BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

4 Emprcal Evdence of Trade Credt Uses of Brazlan Publcly-Lsted Companes 245 Alphonse et al. (2006) verfy ths sgnalng role of trade credt, usng data for the US and smultaneous equatons (due to the endogenety problem between bank debt and trade credt). They argue that frms wth good relatonshps wth banks would use trade credt only as a substtute source of fnancng (substtuton hypothess), whle credt ratoned frms would use t as both, a substtute and complementary source of fnancng, but at dfferent tmes. These authors suggest that, credt constraned frms would frst use trade credt as complementary source of fnancng (complementary hypothess). Banks would consder ths nformaton and become more wllng to lend to these frms (reputaton hypothess). Hence, these frms would later use trade credt and bank loans as substtute sources (substtuton hypothess). HYPOTHESES, DATA AND METHODOLOGY In order to nvestgate trade credt from the pont of vew of both supplers and customers, ths study has been structured nto two parts. The frst ams to test hypotheses 1, 2 and 3 (descrbed below), whch are related to the trade credt use (vewpont of the customer) and ts relaton to bank debt. These hypotheses were tested by Alphonse et al. (2006) for SME and are tested n ths paper on publcly-lsted companes. The second part s composed of hypothess 4, whch are related to trade credt offer (vewpont of the suppler). Hypothess 1: Substtuton Hypothess. Trade credt s an optonal source of fnancng to a bank loan. Bas and Goller (1997) state that snce trade credt carres nformaton owned by the suppler about ts customer, t should mtgate the nformatonal asymmetry between frms and banks. Followng ths ratonale, trade credt would play a sgnalng role, facltatng the frm s access to bank credt for credt ratoned frms. In ths sense, trade credt would be an optonal source of fnancng for both classes of frms (credt ratoned and non-ratoned). In spte of the fact that publc frms have ther nformaton dsclosed (balance sheets, fnancal statements and other types of nformaton), supplers have access to superor nformaton, even before they are publshed. Therefore, we expect that the use of trade credt can favor access to bank loans also for publc frms and the accounts payable/total assets ndcator s negatvely related to total debt/total assets. In order to test trade credt usage, we use the model of Alphonse et al. (2006). Hypothess 2: Complementary Hypothess. Trade credt s a complementary source of fnancng to bank debt for credt ratoned frms. Accordng to the nformatonal and strategc advantages mentoned above, supplers could be nterested n grantng credt even to credt ratoned frms. In such a case, the frm s accounts payable s expected to have a postve relatonshp wth bank debt. Hypothess 3: Reputaton Hypothess. Credt ratoned frms that use more trade credt should have easer access to bank debt than those that use less trade credt. Accordng to the reputaton hypothess, t s expected that the coeffcent of total debt s negatve and sgnfcant for both classes of frms (frst equaton) and accounts payable s postve and sgnfcant only for frms n worse fnancal health (second equaton). The varable used as a proxy for credt constrant by frms s the bankruptcy predcton score adjusted by Sanvcente and Mnard (1998) for Brazlan frms. Table 1 summarzes hypotheses 1 to 3. BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

5 Rchard Sato, Márca Lma Bandera 246 Table 1: Testng Hypotheses and Related Varables Hypothess Frm Classfcaton Equaton Varable Expected Sgnal Authors 1 - Substtuton Hypothess Better and worse fnancal health 1 Total Debt/ Total Assets - Nelsen (1994) and Petersen and Rajan (1995) 2 - Complementary Hypothess Better and worse fnancal health 2 Accounts Payable/ Total Assets + Bas and Goller (1997) and Buckart and Ellngsen (2004) Better and worse fnancal health 1 Total Debt/ Total Assets Reputaton Hypothess Worse fnancal health 2 Accounts Payable/ Total Assets + Alphonse et al. (2006) Better fnancal health 2 Accounts Payable/ Total Assets NS* * NS = Not sgnfcant. Hypothess 4: the greater the access to fnancal sources, the larger the trade credt granted, snce the frm s not an ndspensable suppler. Petersen and Rajan (1997), based on a sample of small frms data, found that the easer ther access to credt, the more wllng they were to supply trade credt. Publc frms have access to both bank loans and publc debt. Moreover, snce they have to dsclose ther fnancal statements, they may be consdered more transparent than prvate frms, whch facltates ther access to bank loans. Hence, one can expect that publc frms have more access to fnancng sources than small and medum szed enterprses. We therefore expect that aggregate ndebtedness would not be as relevant to publc frms ncreasng ablty to grant credt than t s to prvate frms. Furthermore, larger frms tend to be less dependent on ther supplers than SME and for ths reason they grant less concessons to ther buyers (Wlner, 2000). Based on ths ratonale, we expect the level of total ndebtedness not to be relevant, or even to have a negatve relatonshp wth trade credt supply n the case of publc frms. Damond (1991) states that frms that ssue corporate bonds have better reputatons than others. Therefore, we expect that such a reputaton would amplfy the effect of non-dependence, hence bonds to total assets rato s expected to be more sgnfcant than both other loans to total assets and total debt to total assets ratos. Estmaton Method and Varables Descrpton Analyss of Trade Credt Use A smultaneous equatons model s appled to capture key features concernng the two-way relatonshp between trade credt and bank debt. There are two equatons (Equatons 1 and 2) n ths system, one related to the use of trade credt, and one related to the use of bank debt by frms. BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

6 Emprcal Evdence of Trade Credt Uses of Brazlan Publcly-Lsted Companes 247 The frst equaton attempts to explan cross sectonal varatons n the use of trade credt by frms as measured by the accounts payable over total assets rato. Accordng to the substtuton hypothess, ths rato should be nversely related to the amount of debt defned as total loans dvded by total assets. Ths equaton also ncludes varables related to the transacton use of trade credt. These varables are the rato of current assets over total assets, a measurement of the sale growth and the (log of) total ncome. We expect these varables to be postvely related to the amount of trade credt use. We also control for ownershp, ndustry and age of the company. ACPAY GROWTH 6 TDEBT 1 PROFIT 7 CURR 2 OWNER 8 INCOME 3 SIZE 9 AGE 4 IND 10 SQRAGE 5 _ 1 11 IND _ 2 (1) used for testng hypotheses 1 and 3. BANK DLEASE 6 ACPAY 0 1 DSTOCK 7 PROFIT 2 IND 8 OWNER 3 _ 1 9 IND _ 2 SIZE 4 DEPR 5 (2) used for testng hypotheses 2 and 3. ACREC 0 1SIZE 2AGE 3GROWTH 4GR _ PROFIT (3) TDEBT LOANS BONDS 5 used for testng hypothess In order to test hypotheses 1 to 4, we use a number of proxes to provde emprcal evdence of trade credt ether as a substtuton of bank loan or a complement of bank loan. Tables 2 and 3 summarze the major control varables and ther related hypotheses for trade credt use and supply respectvely. The varables are descrbed below. Based on Alphonse et al. (2006), we use the rato of accounts payable/total assets (ACPAY) as a proxy for trade credt. Access to other forms of credt are represented by bank debt to total assets (BANK) and total debt to total assets (TDEBT). Accordng to the substtuton hypothess, the sgnal of the coeffcent for the total debt to total assets rato s expected to be negatve. The complementary hypothess predcts that the coeffcent for the rato accounts payable/total assets should be postve. Ferrs (1981) argues that uncertanty of delvery tme augments nventory needs for goods and money, whch contrbute toward ncreasng the varaton n payments and revenues. Ths ratonale s related to the transacton theory of trade credt use. The varables related to ths theory are current assets to total assets (CURR) and sales growth between 2005 and 2006 (GROWTH). These varables are drectly related to workng captal, as well as accounts payable; therefore, one can expect a postve relatonshp between them. The other varable used s the log of total ncome (INCOME). A proxy for ndustry (IND_1 and IND_2) was ncluded to control for nature of product effects, as ponted out by Gannett, Burkart and Ellngsen (2007). Both varables are bnary; IND_1 represents commodty frms whereas IND_2 represents servce frms. Followng Alphonse et al. (2006), the rato of earnngs before tax to total assets (PROFIT) was used as proxy for retaned earnngs (these authors arguee that ths may not be the best measure for retanng earnngs; however, t works suffcently well as a proxy for ths varable). Accordng to the peckng order theory, the greater the frm s retaned earnngs, the lower ts dependence on external fnance (Myers, 1984). Also based on ther work, we use the frm s age as a representatve of the degree of nformatonal asymmetry and of the frm s opacty, such as the amount of retanng earnngs, fnancal resources needs and other ssues. Hence, a predcton about the relatonshp between age and accounts payable would be problematc. The measure used was the log of the frms ages (AGE) and the square of the log of the frms ages (SQRAGE). BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

7 Rchard Sato, Márca Lma Bandera 248 Lke frms age, frms sze can be a proxy for some frms characterstcs, for example: more transparency (Berger & Udell, 1998), more credtworthness (Petersen & Rajan, 1997) or fewer fnancng obstacles (Beck, Demrgüç-Kunt, Laeven, & Maksmovc, 2006). Therefore, t s dffcult to predct the sgn of log of total assets (SIZE), the varable used as a proxy for frm s sze, n both analyses. Deprecable assets (DEPR) play a collateral role. When frms credtworthness can be observed by lenders, low-qualty borrowers have to pledge collateral to obtan loans, whle hghqualty borrowers do not (Boot, Thakort, & Udell, 1991). Two dummy varables are ncluded as control varables due to the nformatonal asymmetry (Akerlof, 1970) and consequent sgnalng effects (Spence, 1973) regardng frms qualty/credtworthness. DLEASE takes the value of 1 f the frm uses captal lease and zero otherwse, whereas DSTOCK assumes a value of 1 f the frm benefts from loans from stockholders and zero owtherwse. The varable GROWTH, related to the transacton theory, s expected to have the same sgnal as n the frst equaton (postve), as a stronger growth would demand more workng captal, mplyng an ncrease n fundng needs. The ownershp share of the prncpal owner (OWNER) was ncluded as a proxy for dfferences n fnancng patterns (Holmes & Zmmer, 1994). In order to nvestgate the reputaton hypothess, the sample was dvded by ther fnancal health, and the two equatons analysed jontly. The relaton of total debt (TDEBT) s expected to be negatve for both classes of frms, whle the relaton between accounts payable (ACPAY) and bank debt would be postve and sgnfcant for credt constraned frms and non-sgnfcant for frms n good fnancal health. Ths corroborates the ratonale that n a frst stage of credt ratonng, frms use trade credt to substtute bank loans; at a later stage, banks would become wllng to grant credt to frms that have had access to trade credt. Table 2: Control Varables and Related Hypotheses of Trade Credt Use Varables Expected Sgnal (Equaton 1) Expected Sgnal (Equaton 2) Reference CURR + Transacton Use (Schwartz, 1974) INCOME + Transacton Use (Schwartz, 1974) AGE + Frm Transparency (Berger & Udell, 1998); Peckng Order (Myers, 1984) GROWTH + + Transacton Use (Schwartz, 1974) PROFIT - Peckng Order (Myers, 1984) OWNER + + Fnancng Patterns (Holmes & Zmmer, 1994) SIZE - + Frm Transparency (Berger & Udell, 1998) DEPR - Collateral Theory (Boot et al., 1991) DLEASE + DSTOCK + Asymmetrc Informaton (Akerlof, 1970); Sgnalng (Spence, 1973) Asymmetrc Informaton (Akerlof, 1970); Sgnalng (Spence, 1973) BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

8 Emprcal Evdence of Trade Credt Uses of Brazlan Publcly-Lsted Companes 249 Analyss of Trade Credt Supply The analyss of trade credt supply s based on the model of Petersen and Rajan (1997), and some of the varables were redefned accordngly. We use the rato accounts recevable/total assets (ACREC) as a proxy for trade credt supply. The log of book value of total assets was used to measure frm s sze (SIZE). The frms age (AGE) has the same defnton (log of (1+frm age)). Petersen and Rajan (1997) assert that both sze and age of frms ndcates ther credtworthness, hence they would be postvely related to trade credt supply. The rato of gross proft to sales (GR_PROFIT) ndcates the ncentve that a frm has to sell. Snce trade credt s supposed to ncrease sales, we expect that the greater the gross proft, the greater the ncentve the frm has to nvest n actons that ncrease sales. For ths reason, gross proft should have a postve relatonshp wth accounts recevable. Sales growth (GROWTH) has the same defnton as n the prevous secton and t should have a negatve relatonshp wth accounts recevable, snce frms growth may affect workng captal management and therefore cause a declne n frms ablty to supply trade credt. TOTAL DEBT s the rato of total debt to total assets. BONDS s the volume of corporate bonds. LOANS s defned as the dfference between total debt rato and bonds rato. As prevously explaned, larger frms are less dependent on ther supplers and thus they would grant fewer concessons to ther buyers. Therefore, contrary to small enterprses, debt ratos are expected to be negatve, or at least not sgnfcant n the case of publc frms. We assume that a better reputaton of frms that ssue publc debt ntensfes ths effect of non-dependence and for ths reason bonds rato coeffcent should be more sgnfcant than the other debt ratos. Table 3 summarzes control varables and ther expected sgns and related hypotheses. Table 3: Control Varables and Related Hypotheses of Trade Credt Supply Varables Expected Sgnal Reference SIZE + Credt worthness (Petersen & Rajan, 1997) AGE + Credt worthness (Petersen & Rajan, 1997) GROWTH - Prce Dscrmnaton (Schwartz, 1974) GR_PROFIT + Prce Dscrmnaton (Schwartz, 1974) DATA AND SUMMARY STATISTICS The sample conssts of 263 nonfnancal publc frms. The dataset ncludes annual nformaton from 2006, as provded by Economátca and the webste of the Securtes and Exchange Commsson of Brazl (Comssão de Valores Mobláros [CVM]). The former was used to obtan fnancal data (from consoldated balance sheets and fnancal statements) and ndustry classfcaton. The latter provded fnancng data, avalable n the Notes to the Fnancal Statements and the foundaton year of frms (used to calculate frm age). The dffcultes n obtanng nformaton on bank loans and foundaton year mposed some constrants on the sample, causng dfferences n the number of observatons among the equatons. Frms are not oblgated to report ther fnancng source; therefore, ths led to a reducton n the number of observatons used n the second equaton, where the rato of bank loans to total debt appears as the dependent varable. BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

9 Rchard Sato, Márca Lma Bandera 250 In order to control for the nature of the good effect, the frms n the sample were splt accordng to a smple classfcaton: commodtes, servces and others (1). Table 4 shows the dstrbuton of frms n the sample accordng to the ndustry for the two equatons. Table 5 presents descrptve statstcs. Panel A shows fnancal data of the sample used to analyze trade credt use, whle Panel B shows the same data of the sample used to analyze trade credt offer. The dfferences n total sample between panel A and panel B are due to unavalable data of some varables n each analyss, thus elmnatng frms from one sample and not from the other. Table 4: Dstrbuton of Sample by Industry Ths table reports the dstrbuton of frms n the sample by Industry Classfcaton: Commodtes (mnng, petroleum and gas, steel and metallurgy), servces (commerce, buldng constructon, transportaton and servces, electrc energy, telecommuncatons, software and data) and others (machnery and ndustral equpments, non-metallc mnerals, wood and paper, chemcals, electrc equpment, textles, automobles and motorcycles, food and beverage, other ndustres). Frst equaton BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept Second equaton Industry Number of frms Percentage Number of frms Percentage Commodtes % % Servces % % Others % % Total % % Source: Economátca Tools for Investment Analyss. (n.d.). Retreved October 2, 2007, from Table 5: Descrptve Statstcs Ths table reports fnancal data, n US$ mllons, of total sample and splttng the sample nto frms that use less trade credt (below medan) and frms that use more trade credt (above medan) - panel A and splttng the sample nto frms that grant less trade credt (below medan) and frms that grant more trade credt (above medan) - panel B. Panel A: Trade Credt Use Mean TOTAL BELOW MEDIAN ABOVE MEDIAN Medan Standard Devaton Mean Standard Devaton Mean Standard Devaton Total Assets , , , , Equty , , , , Net Revenue 1, , , , , , EBIT , , Net Income , Total Debt , , Workng Captal , Total Assets , , , Equty , , , Contnues

10 Emprcal Evdence of Trade Credt Uses of Brazlan Publcly-Lsted Companes 251 Table 5 (contnued) Panel B: Trade Credt Offer Mean TOTAL BELOW MEDIAN ABOVE MEDIAN Medan Standard Devaton Mean Standard Devaton Mean Standard Devaton Net Revenue 1, , , , , EBIT , , Net Income , Total Debt , , Workng Captal , Source: Economátca Tools for Investment Analyss. (n.d.). Retreved October 2, 2007, from Both groups of frms that offer and use less trade credt present hgh standard devaton, whch denotes hgh varaton n data,.e. they seem not to follow a specfc pattern of sze (total assets and equty), proftablty (net revenue, earnngs before nterest and taxes (EBIT) and net ncome), debt and workng captal. Ths evdence, along wth the analyss of the mean, shows that both groups seem to present smlar characterstcs (standard devatons and means). In spte of the medan values demonstratng some dfferences (for nstance, total assets n panel B s almost twce the total assets n panel A), the medan values compared to mean values demonstrate that these dfferences are not so ample as they seem to be. The comparson between mean and medan also shows that half of the sample presents much lower fnancal-economc data than the other half. It turns out to be evdent by the great dfference between mean and medan values. Both groups of frms that offer and use more trade credt portray lower standard devatons. Moreover, such groups had greater dfferences n relaton to the means when compared to the other group from the same panel. Accounts recevable and accounts payable are part of current assets and current labltes respectvely. Ths means that they are related to workng captal. Hgh varaton n workng captal, n ts turn, may denote dffcultes n ts management and t s expected that frms wth hgh varaton n ths measure offer less trade credt. On the other hand, one can expect frms wth hgh varaton n workng captal to use more trade credt, even though that has not been confrmed by the descrptve analyss. Frms that offer more trade credt have on average lower total assets, equty, EBIT, net ncome, total debt, and workng captal, whch s consstent wth the ratonale that smaller frms have to make greater efforts to sell. EMPIRICAL ANALYSIS Table 6 reports ndrect least squares regresson appled to a smultaneous equaton system. Ths method s appled when there s weak endogenety and t allows the use of dfferent groups of varables n a smultaneous equaton system (Vnce, 2000). In order to test the endogenety, predcted and resdual values are estmated from the frst regresson (equaton 1) and ncluded n the second regresson. The coeffcent of resduals was sgnfcant at level 1%, whch ndcates that there s endogenety between trade credt and bank debt. BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

11 Rchard Sato, Márca Lma Bandera 252 Table 6: The Determnants of Accounts Payable and Bank Debt The table reports coeffcents estmated usng the ndrect least squares method, appled to a smultaneous equaton system. The ndependent varables are: the rato of accounts payable to total assets (ACPAY), total debt to total assets (TDEBT), current assets to total assets (CURR), log of total ncome (INCOME),frm s age and square of frm s age (AGE and SQR_AGE), sale s growth between 2005 and 2006 (GROWTH), pre-tax earnngs to total assets (PROFIT), ownershp share of prncpal owner (OWNER), log of total assets (SIZE), deprecable assets to total assets (DEPR), the dummes proxes for the use of captal lease (LEASE), for the use of loans from stockholders (STOCK) and the dummes for ndustry control (IND_1 and IND_2). Varables Expected Sgnal Accounts Payable/ Total assets Bank debt/ Total assets Constant *** (-0.24) (5.59) TDEBT *** (-3.83) CURR *** (3.74) Varables Expected Sgnal Accounts Payable/ Total assets Bank debt/ Total assets INCOME *** (3.46) ACPAY ** (2.45) AGE (1.51) SQR_AGE (-1.19) GROWTH (0.79) (-0.36) PROFIT - / *** (-3.88) OWNER (1.50) (-1.48) SIZE - / ** ** (-2.92) (-2.12) DEPR * (-1.70) DLEASE (-0.14) DSTOCK (0.49) IND_ ** (2.02) (-0.79) IND_ *** (1.58) (-3.99) N. obs F-test 9.42*** 7.64*** R Note. ***, ** and * ndcates the coeffcent s sgnfcantly dfferent from zero at the 1%, 5% and 10% level respectvely. BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

12 Emprcal Evdence of Trade Credt Uses of Brazlan Publcly-Lsted Companes 253 We verfed the presence of heteroskedastcty, dentfed by the Breusch-Pagan / Cook-Wesberg test, at level 1% (ch-square was for the frst equaton and for the second equaton, n trade credt use analyss; and n the analyss of trade credt offer, the ch-square was ). For ths reason, the procedure of Whte was employed n all regressons n order to obtan consstent standard errors. The frst equaton seeks to nvestgate the substtuton hypothess. The rato accounts payable to total assets presents a sgnfcantly negatve relatonshp wth the rato of total debt to total assets, confrmng the complementary hypothess for publc frms. Almost all other results corroborate the fndngs of Alphonse et al. (2006). Among the varables related to trade credt transacton use, the log of total ncome and the current assets to total assets rato are sgnfcantly and postvely related to trade credt, whle sales growth does not present a sgnfcant coeffcent. Sze, proxy for frm opacty (the larger the frm the less opaque t s) presents a negatve relatonshp wth trade credt, consstent wth the statement that supplers have superor nformaton about ther buyers. Unlke the results obtaned by Alphonse et al. (2006), whereas the rato earnngs before taxes to total assets was sgnfcant, the ownershp share of prncpal owner was not. The frst rato captures some aspects of the retaned earnngs mpled process. Accordng to the peckng order theory, a frm prefers to use ts own resources to fund ts projects before searchng for external fnancng. Ths mples that the more retaned earnngs a frm has, the lower ts dependence on external fundng. Therefore, the negatve relatonshp between accounts payable and earnngs before taxes corroborates the peckng order theory. The second rato mght be connected to dfferent fnancng possbltes just between small frms that are growth and non-growth orented. Publc frms are owned by many shareholders, whch can have other frms. Therefore the ownershpshare of the prncpal owner was not expected to be sgnfcant. Age also presents no sgnfcant coeffcent. The second equaton ntends to examne the complementary hypothess, whch states that bank debt and trade credt act as complementary fnancng sources. The sgnfcantly postve relatonshp between accounts payable (proxy for trade credt) and bank debt ratfy the complementary hypothess to publc frms. Unlke the studes usng small frms data (for nstance, Bas & Goller, 1997; Alphonse et al. 2006), sze was sgnfcantly negatve when related to bank debt. One possble reason s that the need for fnancng s proportonal to the frms sze, and bank loans would not satsfy ths large fnancng demand. Moreover, large frms can have access to cheaper fnancng sources. Therefore, the larger the frm, the lower the bank debt to total debt rato. Another dfferent result s the negatve relatonshp between deprecable assets and bank debt. Deprecable assets are more lkely to be fnanced by long term fnancng, whch would be the case of other sources of fnancng, especally of corporate bonds. The dummes for leasng (f the frm uses lease captal) and stockholder loans (f the frm benefts from loans from stockholders) do not present sgnfcant coeffcents. On the whole, these fndngs for publc frms confrm the study by Alphonse et al. (2006), except for some peculartes of large frms. They ratfy the substtuton and complementary hypotheses to ths type of frm. In order to test the reputaton hypothess, the sample was splt nto two parts, accordng to the medan of a score created by Sanvcente and Mnard (1998) to predct bankruptcy. These results are presented n Table 7. Panel 1 reports the regresson usng frms whose score s below the medan and panel 2, the regresson of those whose score s above. BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

13 Rchard Sato, Márca Lma Bandera 254 Table 7: The Determnants of Accounts Payable and Bank Debt Reputaton Hypothess The table reports coeffcents estmated usng the ndrect least squares method, appled to two smultaneous equaton system. The frst panel (1) s the regresson of frms wth score lower than the medan and the second (2) s the regresson of frms wth bankruptcy score above the medan. The ndependent varables: the rato of accounts payable to total assets (ACPAY), total debt to total assets (TDEBT), current assets to total assets (CURR), log of total ncome (INCOME),frm's age and square of frm's age (AGE and SQR_AGE), sales growth between 2005 and 2006 (GROWTH), pre-tax earnngs to total assets (PROFIT), ownershp share of prncpal owner (OWNER), log of total assets (SIZE), deprecable assets to total assets (DEPR), the dummes proxes for the use of captal lease (LEASE), for the use of loans from stockholders (STOCK) and the dummes for ndustry control (IND_1 and IND_2). Varable Accounts Payable/ Total assets (1) (2) Bank debt/ Total assets Accounts Payable/ Total assets Bank debt/ Total assets Constant *** *** (1.24) (4.70) (-1.17) (5.00) TDEBT *** * (-4.11) (-1.67) Varable Accounts Payable/ Total assets Bank debt/ Total assets Accounts Payable/ Total assets Bank debt/ Total assets CURR 0.127*** 0.080** (3.77) (2.08) INCOME *** (1.21) (2.83) ACPAY 2.224** (2.14) (1.48) AGE (-0.18) (1.33) SQR_AGE (0.10) (-0.67) GROWTH (-0.90) (-0.22) (0.37) (-0.40) PROFIT *** (-4.10) (-1.14) OWNER (1.35) (-1.59) (-1.36) (-0.10) SIZE *** ** * (-1.39) (-2.80) (-2.30) (-1.81) DEPR ** (-2.57) (1.40) DLEASE BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept Contnue

14 Emprcal Evdence of Trade Credt Uses of Brazlan Publcly-Lsted Companes 255 Table 7 (contnued) The table reports coeffcents estmated usng the ndrect least squares method, appled to two smultaneous equaton system. The frst panel (1) s the regresson of frms wth score lower than the medan and the second (2) s the regresson of frms wth bankruptcy score above the medan. The ndependent varables: the rato of accounts payable to total assets (ACPAY), total debt to total assets (TDEBT), current assets to total assets (CURR), log of total ncome (INCOME),frm's age and square of frm's age (AGE and SQR_AGE), sales growth between 2005 and 2006 (GROWTH), pre-tax earnngs to total assets (PROFIT), ownershp share of prncpal owner (OWNER), log of total assets (SIZE), deprecable assets to total assets (DEPR), the dummes proxes for the use of captal lease (LEASE), for the use of loans from stockholders (STOCK) and the dummes for ndustry control (IND_1 and IND_2). (1) (2) Varable Accounts Payable/ Total assets Bank debt/ Total assets Accounts Payable/ Total assets Bank debt/ Total assets BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept (0.53) (-0.73) DSTOCK 0.172* (1.81) (-1.23) IND_ *** (3.08) (-1.21) (0.97) (0.66) IND_ * ** (1.55) (-2.00) (1.50) (-2.02) N. obs F-test 15.37*** 7.06*** 2.67*** 1.74* R Note. ***, ** and * ndcates the coeffcent s sgnfcantly dfferent from zero at the 1%, 5% and 10% level respectvely. Accordng to the substtuton hypothess, the negatve relatonshp between total debt and accounts payble s vald for both groups of frms. Therefore, the sgnfcant results for both classes of frms corroborate the substtuton hypothess and the fndngs of Alphonse et al. (2006). Accordng to Bas and Goller (1997), trade credt s a result of credt ratonng and a sgnal that facltates access to bank debt. Based on ths statement, Alphonse et al. (2006) affrm that trade credt does not play an mportant role when frms have a long bankng relatonshp (reputaton hypothess) and therefore the complementary hypothess should only be confrmed n case of frms wth less access to bank loans. It mples that the accounts payable coeffcent should only be sgnfcant for frms wth worse fnancal health. Our results confrm the reputaton hypothess. Therefore, despte publc frms beng less opaque than SME, trade credt s supposed to make access to bank loans also for publc frms facng credt constrants easer. Ths s explaned by the fact that supplers have access to mportant nformaton about ther customers before they become publc. Another relevant result s the sgnfcance of the dummy proxy for stockholder loans use (Panel 1),.e., stockholder loans also facltate access to bank loans when frms are credt constraned. Comparng Tables 6 and 7, we can verfy that current assets are relevant for both classes of frms n obtanng trade credt. On the other hand, the sgnfcance of gross proft and sze s explaned by frms wth greater fnancal health; although these factors have low senstvty to accounts payable. Furthermore, the sgnfcance of proft s explaned by frms wth worse fnancal health. Ths s consstent wth the fndngs of Evans (1998) and Wlner (2000), who say that dependent supplers extend more credt when the buyer s n fnancal dstress. The analsys of trade credt use shows that t can be as (or almost as) useful for publc frms as for SME n a country wth a fnancal system that s not fully developed. Therefore, trade credt use can

15 Rchard Sato, Márca Lma Bandera 256 act as a complementary or substtute source of fnancng, as well as a good sgn of a frm s qualty, facltatng the frm s access to fnancng. Table 8 shows the OLS regresson results. Its objectve was to nvestgate the access to credt and trade credt offer and, addtonally, provde some evdence concernng the behavor of excelent reputaton frms n grantng credt extenson to ther customers. Table 8: The Determnants of Bank Debt and Corporate Bonds on Accounts Recevable The table reports coeffcents estmated usng OLS method. The ndependent varables are: log of total assets (SIZE), frm's age (AGE), sale's growth between 2005 and 2006 (GROWTH),gross proft to sales (GR_PROFIT), total debt to total assets (TDEBT), total debt rato mnus corporate bonds rato (LOAN) and volume of corporate bonds to total assets rato (BONDS). Varables Expected Sgnal 1 2 Constant 0.255*** 0.258*** (3.22) (3.24) TDEBT *** (-3.49) LOAN ** (-2.46) BONDS *** (-3.78) SIZE (-1.37) (-1.47) AGE *** 0.022*** (2.82) (2.82) GROWTH *** 0.058*** (2.62) (2.67) GR_PROFIT *** *** (-3.66) (-3.60) N. obs F-test 7.07*** 6.13*** R Note. ***, ** and * ndcate the coeffcent s sgnfcantly dfferent from zero at the 1%, 5% and 10% level respectvely. The fndngs related to ndebtedness of unvarate analyses perssted after beng controlled by other varables. Unlke small frms, the more ndebted the less the publc frm supples credt. As explaned above, ths result may be related to the fact that larger frms are less dependent on ther buyers, whch means they would not need to nvest n supplers n the way that small frms do. As a result, they use loans to nvest n other projects. Another explanaton s that the customers of publcly-lsted frms may have access to other forms of fnancng. Furthermore, Damond (1991) found that corporate bonds are ssued only by frms wth a greater reputaton. Ths s mostly explaned by ther characterstc of allowng less montorng and by the fact that publc ssues usually nvolve large amounts of captal. We argue that ths greater reputaton may augment frms market power, decreasng ther dependence BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

16 Emprcal Evdence of Trade Credt Uses of Brazlan Publcly-Lsted Companes 257 on ther customers. For ths reason, when total debt s dvded nto corporate bonds and other loans, the former have a negatve relatonshp wth stronger and sgnfcant trade credt coeffcent. CONCLUDING REMARKS Ths paper nvestgates the use of trade credt by ether fnancng ther clents as well as suppler fnancng by Brazlan publc frms. The ratonale presented by Alphonse et al. (2006) provdes the bass for the analyss of trade credt usage; the emprcal tests of ther hypothess usng Brazlan publc frms data confrm the hypotheses of substtuton and complementarness, that s, trade credt represents both a substtute (for all frms classes) and complementary (for credt ratoned frms) source of fnancng n relaton to bank loans, ncreasng the possbltes of fnancng for large frms. After spltng the sample nto frms wth poorer and better fnancal health, the substtuton hypothess was verfed for both classes of frms, whle the complementary hypothess was ratfed only for less credtworthy frms. The results provde emprcal evdence to support the reputaton hypothess,.e., trade credt seems to sgnal a frm s good qualty, facltatng access to bank loans. Despte publc frms beng more transparent than small (and prvate) frms, supplers have access to relevant nformaton about ther buyers even before they become publc. Therefore, trade credt can also facltate access to credt for publc frms. Addtonally, we provde emprcal evdence about trade credt supply. Our results reveal that, n the case of publc frms, an ncrease n ndebtedness leads the frm to supply less trade credt to ts clents. One possble explanaton s that, unlke small frms, publc frms are usually less dependent on ther supplers, therefore, they make fewer concessons to ther clents (Frank & Maksmovc, 2004). Another possble explanaton s that ther clents may have access to sources of fnancng other than trade credt. When the debt s splt nto corporate bonds and other loans, ths result s more sgnfcant for corporate bonds, whch ndcates that a frm s good reputaton ntensfes the effect of low dependence on buyers. Ths type of loan s related to a frm s reputaton whch, lnked to less dependence of large frms, may be related to an ncrease n the frm s market power, and for ths reason these frms would make fewer concessons to ther customers than the others. The man contrbuton of ths paper s the verfcaton that of trade credt use and ts relevance for large frms n Brazl, wtnessed n the sample of publcly-lsted companes,.e., not only SME, but large Brazlan frms have the dsadvantage of a lack of bank loans. We suggest, for future reseach, the use of a sample of SME and large frms n order to compare the use of trade credt between these types of frms. ACKNOWLEDGEMENTS Rchard Sato wshes to acknowledge the fnancal support of the CNPq / PRONEX / FAPERJ / GV Pesqusa. NOTE 1 Although smpler than the classfcaton used by Gannett et al. (2007), ths categorzaton accounts for the man dstnctons between frms; there was no sngle domnant category wthn the others group, whch suggests that an addtonal group would not be necessary. BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

17 Rchard Sato, Márca Lma Bandera 258 REFERENCES Akerlof, G. A. (1970). The market for "lemons": qualty uncertanty and the market mechansm. The Quarterly Journal of Economcs, 84(3), Alphonse, P., Ducret, J., & Sévern, E. (2006, February). When trade credt facltates access to bank fnance: evdence from US small busness data. [Workng Paper]. Unversté de Nancy, Unversty of Valencennes and Unversty of Llle. Beck, T., Demrgüç-Kunt, A., Laeven, L., & Maksmovc, V. (2006). The Determnants of Fnancng Obstacles. Journal of Internatonal Money and Fnance, 25(6), Berger, A. N., & Udell, G. F. (1998). The economcs of small busness fnance: the role of prvate equty and debt markets n the fnancal growth cycle. Journal of Bankng and Fnance, 22(6-8), Bas, B., & Goller, C. (1997). Trade Credt and Credt Ratonng. The Revew of Fnancal Studes, 10(4), Boot, A., Thakor, A., & Udell, G. F. (1991). Secured Lendng and default rsk: equlbrum analyss, polcy mplcatons and emprcal results. Economc Journa, 101(406), Burkart, M., & Ellngsen, T. (2004). In-knd fnance: a theory of trade credt. The Amercan Economc Revew, 94(3), Cook, L. D. (1997). Trade credt and bank fnance fnancng small frms n Russa. Journal of Busness Venturng, 14(5/6), Cunnnghan, R. (2004). Trade credt and credt ratonng n canadan frms [Workng paper s 04-49], Bank of Canada, Ottawa, ON, Canada. Damond, D. W. (1991). Montorng and reputaton: the choce between bank loans and drectly placed debt. The Journal of Poltcal Economy, 99(4), Economátca Tools for Investment Analyss (n.d.). Retreved October 2, 2007, from Emery, G. W. (1984). A pure fnancal explanaton for trade credt. The Journal of Fnancal and Quanttatve analyss, 19(3), Evans, J. D. (1998). Are lendng relatonshps valuable to equty holders n chapter 11 bankruptcy? Ph.D. Dssertaton, Georga State Unversty, Atwems, Georga, USA. Ferrs, S. J. (1981). A transactons theory of trade credt use. The Quaterly Journal of Economcs, 96(2), Frank, M. Z., & Maksmovc, V. (2004). Trade credt, collateral, and adverse selecton [Mmeo], College Park, Baltmore, USA. Gannett, M., Burkart, M., & Ellngsen, T. (2007). What you sell s what you lend? Explanng trade credt contracts [Workng paper nº 71/2005]. Socal Scence Research Network. Retreved September 7, 2007, from Holmes, S., & Zmmer, I. (1994). The nature of the small frm: understandng the motvatons of growth and non-growth orented owners. Australan Journal of Manangement, 19(1), BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

18 Emprcal Evdence of Trade Credt Uses of Brazlan Publcly-Lsted Companes 259 Long, M. S., Maltz, I. B., & Ravd, S. A. (1993). Trade credt, qualty guarantees, and product marketablty. Fnancal Management, 22(4), Longhofer, S., & Santos, J. (2003). The paradox of prorty. Fnancal Mangement, 32(1), Man, S. L., & Smth, C. W., Jr. (1992). Accounts recevable management polcy: theory and evdence. The Journal of Fnance, 47(1), Myers, S. (1984). The captal structure puzzle. Journal of Fnance, 39(3), Nadr, M. I. (1969). The determnants of trade credt n the U.S. total manufacturng sector. Econometrca, 37(3), Petersen, M., & Rajan, R. G. (1995). The effect of credt market competton on lendng relatonshps. The Quaterly Journal of Economcs, 110(2), Petersen, M. A., & Rajan, R. G. (1997). Trade credt: theores and evdence. The Revew of Fnancal Studes, 10(3), Sanvcente, A. Z., & Mnard, A. M. A. F. (1998). Identfcação de ndcadores contábes sgnfcatvos para prevsão de concordata de empresas [Workng paper nº FLWP ]. Insttuto Braslero de Mercado de Captas, São Paulo, SP, Brazl. Schwartz, R. A. (1974). An economc model of trade credt. The Journal of Fnancal and Quanttatve Analyss, 9(4), Smth, J. K. (1987). Trade credt and nformatonal asymetry. The Journal of Fnance, 42(4), Spence, M. (1973). Job market sgnalng. The Quaterly Journal of Economcs, 87(3), Vnce, W. (2000). Two-stage least-squares regresson. UCLA: academc technology servces, statstcal consultng group. Retreved March 28, 2008, from Wlner, B. S. (2000). The explotaton of relatonshps n fnancal dstress: the case of trade credt. The Journal of Fnance, 55(1), BAR, Curtba, v. 7, n. 3, art. 2, pp , July/Sept. 2010

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