eThesis - School of Business electronic theses

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Purpose of the Study

Extensive previous research exists on the use of trade credit during tight monetary policy. Several studies have found evidence of a trade credit channel when monetary policy triggers bank credit rationing, but prior research on trade credit during financial crises is still limited. The results of Love et al. (2007) from large firms in developing markets suggest the use of trade credit may behave differently in a severe credit crunch than during times of tight monetary policy. This study broadens the previous research on trade credit use by concentrating on both large and small firms in a developed financial market during a crisis, and asks whether the use of trade credit changes during a financial crisis, and whether firms’ vulnerability to the crisis affects this potential change.

Data

The analysis is based on a panel data of 1,084 manufacturing firms in the U.K. collected from Orbis database. The firms are versatile in terms of size and public listing. The research period ranges from 2004 to 2008, in which the last two years are treated as crisis years and the previous years are included for comparison.

Results

The results show robust evidence of a declining use of trade credit in 2008 and some limited evidence of a decline already in 2007. There is no support for a trade credit channel. Firm size is found to be positively related with the provision of trade credit in 2008, but the magnitude of the effect is small in relation to the overall negative effect of the year. Larger firms seem to be decreasing their provision of trade credit less than smaller firms, but size is also positively related to change in obtained trade credit during both 2007 and 2008.