Determinants and effects of trade credit financing: Evidence from the maritime shipping industry

• Published date: 01 June 2024
• Author: Elisavet Mantzari,Anna Merika,Christos Sigalas
• Date: 01 June 2024
• DOI: http://doi.org/10.1111/eufm.12448

DOI: 10.1111/eufm.12448

ORIGINAL ARTICLE

Determinants and effects of trade credit

financing: Evidence from the maritime

shipping industry

Elisavet Mantzari

1

|Anna Merika

2

|Christos Sigalas

3

1

Department of Accounting, University

of Birmingham, Birmingham, UK

2

School of Business and Economics,

Department of Accounting, Economics

and Finance, Deree—The American

College of Greece, Athens, Greece

3

School of Business and Economics,

Department of Maritime Transport &

Logistics, Deree—The American College

of Greece, Athens, Greece

Correspondence

Christos Sigalas, School of Business and

Economics, Department of Maritime

Transport & Logistics, Deree—The

American College of Greece, 6 Gravias St,

15342, Athens, Greece.

Email: csigalas@acg.edu

Abstract

This paper investigates the factors and effects of trade

credit, as an alternative source of capital, by employing

a generalized method of moments instrumenting for

endogeneity based on a panel data set of public

maritime shipping companies and compatible compa-

nies in other industries. Our study shows that the

magnitude of trade credit is affected by profitability,

financial leverage, company size, cost of capital,

financial distress, institutional ownership, corporate

power, corporate liquidity, asset intensity, and corpo-

rate growth. It also suggests that trade credit affects

financial performance, equity value, and risk. These

empirical findings yield important implications for

principal financial officers, as discussed herein.

KEYWORDS

asset‐intensive companies, sources of capital, trade credit, trade

debit, trade working capital

JEL CLASSIFICATION

G3, L91, M41

Eur Financ Manag. 2024;30:1385–1421. wileyonlinelibrary.com/journal/eufm © 2023 John Wiley & Sons Ltd.

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The authors would like to gratefully thank the two anonymous referees and the editor for their helpful comments and

insightful suggestions on former versions of this paper.

1|INTRODUCTION

The decision about the level of working capital has been well recognized as an important

financial management function (Sagner, 2010) influenced by firms' specific business contexts

and comparative advantages (Chauhan, 2019). Working capital management is concerned with

the ability of a firm to identify and finance an optimal level of investment in inventories and

accounts receivable that is not covered by accounts payable, thus attaining a desired balance

between risk and performance (Lefebvre, 2020). Although the factors affecting working capital

management have been extensively studied (Prasad et al., 2019), the determinants and the

effects of net working capital have not been sufficiently investigated. Net working capital is

calculated as current trade assets, such as trade receivables and inventory, minus current trade

liabilities, such as accounts payable (Moussa, 2019). Therefore, the difference between working

capital and net working capital is that the latter does not include any nontrade current assets,

such as cash and cash equivalents, and nontrade current liabilities, such as a current portion of

long‐term debt.

Net working capital, apart from working capital management, can be used to measure the

extent to which a company has lent capital, that is, provided credit, to its customers or has

borrowed capital, that is, received credit, from its suppliers. Trade credit, that is, borrowing

money from suppliers, is a source of capital in the form of short‐term financing for firms

(Andrieu et al., 2018; Cosci et al., 2020), while working capital allocations have been also found

to be quite persistent, suggesting that trade credit can also be a long‐term source of capital

(Chauhan, 2019). Trade credit is a key element of firms' operations and acts as an important

source of finance, since firms often use trade credit as a substitute or complement to other

traditional financing sources, such as debt and equity issuance (Atanasova, 2007; Petersen &

Rajan, 1997; Seifert et al., 2013; Yazdanfar & Öhman, 2016).

Maritime shipping is an interesting setting to explore trade credit financing because it is a

capital‐intensive industry (Andrikopoulos et al., 2022). Specifically, maritime shipping

companies are offering transportation services through ownership of vessels. Vessels are very

expensive assets, requiring substantial capital for their acquisition (Sigalas & Papadakis, 2022).

In addition, sizable capital expenditure is required to install abatement devices on vessels to

comply with environmental regulations (Sigalas, 2022). Alternative sources of capital, either

long‐term or short‐term, are therefore essential for maritime shipping companies. Although the

main sources of capital, that is, debt and equity, for maritime shipping companies operating in

a capital‐intensive industry have been widely researched (see Alexandridis et al., 2018; Drobetz

et al., 2013,2019), empirical research on trade credit, as an alternative source of capital, is

lagging behind. Some studies in the maritime shipping industry use net working capital as an

independent variable to investigate other phenomena, but not as a dependent variable to

empirically investigate trade credit as an alternative source of capital. For example, Ahrends

et al. (2018) use net working capital, as a determinant of maritime shipping companies' level of

corporate cash holdings. Likewise, Kotcharin and Maneenop (2020) utilize net working capital,

as one of the independent variables, to examine cash holding decisions of maritime shipping

companies under geopolitical risk. Along the same vein, Drobetz et al. (2016), among others,

employ the independent variable of net working capital to examine how cash flow shocks

influence maritime shipping companies' financing and investment decisions under various

economic conditions. Net working capital as a control variable was also used in the empirical

investigation of the relationship between institutional ownership and firm performance in

maritime shipping (Drobetz et al., 2021). Early studies in shipping have also used working

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capital to investigate the probability of default in high‐yield bonds (Grammenos et al., 2008).

Thus, there is a gap in transportation research for empirical studies focusing on the

investigation of trade credit as a source of capital for maritime shipping companies. This study

also addresses calls in working capital literature for more research in service industries that do

not produce goods and, therefore, may have low levels of inventories and account payables (see

Boisjoly et al., 2020). Maritime shipping, which offers seaborne transportation service, is a

typical case of a service industry.

The purpose of this study is to fill the gap in the interdisciplinary field of accounting,

finance, and transportation research, and empirically investigate the determinants of trade

credit, as well as the effects of trade credit. To the best of our knowledge, this is the first study to

explore the determinants and the effects of trade credit financing in public maritime shipping

companies. By compiling panel data of public maritime shipping companies as well as

comparable public companies operating in other industries for the period 2009–2021, we found

that profitability, financial leverage, company size, cost of capital, financial distress,

institutional ownership, corporate power, corporate liquidity, asset intensity, and corporate

growth are significant factors affecting the magnitude of trade credit. In addition, we found that

trade credit is an important factor conjointly affecting the financial performance, equity value,

and risk of the maritime shipping companies.

The rest of the paper is structured as follows: Section 2provides an overview of prior

empirical studies investigating the factors affecting the magnitude of net working capital as

well as the effects of net working capital. In Section 3, we present the two data sets used for our

empirical research, along with a third data set used in robustness tests, and the variables

employed in our econometric models. Section 4provides the econometric analysis of the

determinants of trade credit and trade debit, as well as the effects of trade credit for both

maritime shipping companies and comparable companies in other industries. The findings of

our empirical study are discussed in Section 5, and Section 6draws our concluding remarks.

2|LITERATURE REVIEW

2.1 |Determinants of net working capital

The firm‐level factors that influence net working capital have been investigated by scholars in

different disciplines, industries, and country contexts. However, most of these studies focus on

factors that influence working capital management instead of the magnitude of net working

capital, while part of literature provides mixed results.

To begin with, literature reports both a positive relationship between firm performance and

working capital (e.g., Abbadi & Abbadi, 2013; Gill et al., 2010; Mansoori & Muhammad, 2012;

Moussa, 2019; Nyeadi et al., 2018; Rehman et al., 2017; Saarani & Shahadan, 2012) and a

negative relationship between working capital and profitability (e.g., Azami & Tabar, 2016;

Baños‐Caballero et al., 2010,2013; Cao et al., 2022; Haron & Nomran, 2016; Zariyawati

et al., 2016).

Financial leverage is another factor that influences the magnitude of net working capital.

While some studies find a positive (Afrifa & Gyapong, 2017; Goel & Sharma, 2015; Naser

et al., 2013; Sardo & Serrasqueiro, 2022) or no significant relationship (Mansoori &

Muhammad, 2012), most studies find a negative association between financial leverage and

working capital (e.g., Abbadi & Abbadi, 2013; Chauhan & Banerjee, 2018; Chiou et al., 2006;

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