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Cash flow volatility and trade credit in Asia

Chris Harris (Department of Finance, Elon University, Elon, North Carolina, USA)
Scott Roark (Department of Finance, Boise State University, Boise, Idaho, USA)
Zhe Li (Department of Business Administration, Bemidji State University, Bemidji, Minnesota, USA)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 1 March 2019

Issue publication date: 20 March 2019

1089

Abstract

Purpose

The purpose of this paper is to identify the relation between cash flow volatility and trade credit offered by firms in developing Asian economies.

Design/methodology/approach

The study conducts country fixed effect regressions testing the relationship between cash flow volatility and firm investment in trade credit. The relationship is then examined with all firms separated into two groups based on firm size, and then again comparing the relation before and after the 2008 finasncial crisis.

Findings

Higher levels of cash flow volatility are negatively related to the amount of trade credit offered. The negative relationship with cash flow volatility is greater amongst smaller firms that may have less access to external sources of capital. Additionally, the negative relationship is greater following the 2008 financial crisis.

Practical implications

Trade credit plays an important role in the business process, particularly in developing economies. However, these firms may not be able to maintain their investment in trade credit when experiencing greater levels of cash flow volatility. These results are especially pronounced after the 2008 financial crisis and for small firms.

Originality/value

This study identifies an important connection between cash flow volatility and firm investment in trade credit among firms in developing Asian economies.

Keywords

Citation

Harris, C., Roark, S. and Li, Z. (2019), "Cash flow volatility and trade credit in Asia", International Journal of Managerial Finance, Vol. 15 No. 2, pp. 257-271. https://doi.org/10.1108/IJMF-02-2018-0062

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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