DETERMINANTS OF TRADE CREDIT FINANCING: CASE OF MANUFACTURING FIRMS LISTED IN PAKISTAN

Abstract This paper investigates the determinants of trade credit financing used by listed manufacturing firms in Pakistan. For this purpose, balanced panel data are used that consist of 327 manufacturing firms listed on KSE Pakistan and time period from 2005 to 2013. Results of system GMM estimator applied on dynamic panel data set reveal that trade credit financing used by listed manufacturing firms is significantly affected by its first lag, trade credit extended to customers, availability of short term bank credit, their sales growth, profitability, creditworthiness, collateral and financial leverage. Positive coefficient for first lag of trade credit financing shows that firms’ trade credit financing is dynamic. The speed of making adjustment in trade credit financing is found relatively high due to low cost of making adjustment. Findings of this study has managerial implication for trade credit financing decision of listed manufacturing firms. For future research, investigation of the effect of financial development on trade credit financing behavior of firms is proposed.