Explaining the Determinants of Trade Credit: An Empirical Study in the Case of Saudi Arabian's unlisted Firms

Abstract

This paper empirically investigates the determinants of trade credit of 403 unlisted Saudi firms over the period from 2000 to 2004. The data show that trade credit is a crucial component in the liability portfolios of unlisted Saudi firms. Moreover, we employ fixed-effects panel estimation to control for firm-specific, time-invariant heterogeneity. Our results provide strong support for the idea of substitution effect between traditional debt and debt provided by suppliers. Moreover, the results reveal that older firms tend to have a lower level of trade credit and larger companies tend to have higher levels. Consistent with the pecking order hypothesis, profitability is negatively correlated with the level of trade credit. The findings also suggest that firms with abundant current assets receive more financing from their suppliers. However, the number of growth opportunities appears to influence the level of trade credit only in small- and medium-sized companies where a significant negative relationship is observed.

Keywords: Trade credit, Saudi Arabia, panel data, availability of financial resources, credit worthiness, profitability, liquidity and growth opportunities.