Firm’s Life Cycle and Trade Credit

Safarzadeh, Mohammad Hossein; Arjmand, Fatemeh; Mahdigholi, Mina

doi:10.22099/jaa.2023.46354.2290

Firm’s Life Cycle and Trade Credit

Document Type : Research Paper

Authors

¹ Assistant Professor in Accounting, Shahid Beheshti University, Tehran, Iran

² MA in accounting, Ershad Damavand University, Tehran

³ M.A of Accounting, Ershad-Damavand University, Tehran, Iran

10.22099/jaa.2023.46354.2290

Abstract

1- Introduction
Trade credit is one of the most important sources of short-term financing for companies. The existing literature states that firms use more trade credit when they have external financing issue, suffered a liquidity shock, or have a high risk of insolvency (Chen et al., 2017). Firm’s life cycle plays an important role in determining firm’s growth and development. Existing studies classify life cycle into different stages, including introduction, growth, maturity, decline and shake out (Dickinson, 2011). Introduction stage companies are relatively younger, smaller and less profitable. They have access to fewer resources (Helfat and Petraf, 2003) and face uncertainty in cash flows, information asymmetry, and high level of risk (Dickinson, 2011; Hassan and Habib, 2017). These companies experience higher cost of capital (Hasan et al., 2015) and it is predicted that these companies are prone to using more trade credit. Growing companies are characterized by rapid sales growth, improved profitability, and higher level of innovation. At this stage, cash flow uncertainty, information asymmetry and capital costs are reduced, all of which increase their access to external financing (Dickinson, 2011; Hassan et al., 2015) and therefore it is expected that they use less trade credit. Mature companies are characterized by stability, more resources and competitive advantage (Hassan and Cheong, 2018). These companies produce more operating cash flows and profits, and they are dealing with less cash flow risk, capital of cost and financial distress (Dickinson, 2011; Habib and Hassan, 2019). So, they will need less trade credit than previous stages. Finally, declining firms experience declines in sales, operating cash flow, profitability, and competitive advantage. Studies show that companies in the decline stage are dealing with higher cash flow risk, information risk, cost of capital and financial restrictions (Hasan et al., 2015; Al-Hadi et al., 2019) and therefore they expected to use more trade credit. The question that is raised is whether the use of trade credit by companies is different in the stages of the life cycle? The present research seeks to answer this question.

2- Hypothesis
H1: Firms use more trade credit in the introduction stage of the life cycle than in the shake out stage.
H2: Firms use more trade credit in the growth stage of the life cycle than in the shake out stage.
H3: Firms use less trade credit in the maturity stage of the life cycle than in the shake out stage.
H4: Firms use more trade credit in the decline stage of the life cycle than in the shake out stage.
H5: Firms in stages of introduction and decline, compared to the stages of growth and maturity, use more trade credit than firms in the shake out stage.

3- Methods
We base our sample on firms listed on TSE (Tehran Stock Exchange) during 2009-2021 period. The sample consists of 171 firms. The sample excludes: financial firms (like banks, investment firms, insurance firms, etc.), firms with missing data and firms that do not have fiscal year ending 12.29 or change the fiscal year end during the time period. The resulting sample is 1881 firm-year observations. Our basic methodology involves multiple regressions using Panel Data method. Models estimated with Generalized Least Square (GLS) method and controlling industry and year effect method as supplementary method. Variables definitions are coming below.
The dependent variable is trade credit. Trade credit is measured as ratio of accounts payable to cost of goods sold. This ratio was applied in previous research (Lau et al., 2007; Molina and Peru, 2012). The independent variable is life cycle stages. Dickinson's (2011) approach was applied to measure life cycle stages (following Hassan et al., 2021; Faf et al., 2016; Hassan and Chong, 2018; Koh et al., 2015). Dickinson used cash flow statement information to classify companies into life cycle stages.
Control Variables are firm size, market-to-book ratio, return on equity, debt ratio, fixed asset ratio, change in sales, cash holdings, age, financial constraints, and cash flow volatility.

4- Results
The results of the tests showed that the companies in the stages of introduction (H1), growth (H2) and decline (H4) use more trade credit than in the shake out stage, while trade credit in the maturity stage (H3) is not significantly different from the shake out stage. The results of supplementary tests also confirm the initial results.

5- Discussion and Conclusion
In less developed markets, where the financial network has low efficiency, financing through banking system is difficult, especially when a company has financial constraints. So, companies finance through other methods like trade credit. Therefore, investigating factors affecting trade credit in TSE has double importance. In this research, the impact of life cycle stages on trade credit was investigated. The results show a significant positive relationship between the stages of introduction, growth and decline with trade credit, while this relationship is not significant for maturity stage. The results are generally consistent with Akbar et al. (2022) and Hassan et al. (2021). According to the results, companies were recommended to determine their financial policies (short-term and long-term financing) according to the stages of the life cycle and long-term policies, and in this regard, avoid expensive financing as much as possible, especially in the introduction and decline stages of the cycle to avoid their lives so as not to increase the firm’s risk.

Keywords: Corporate Life Cycle, Trade Credit, Cash Flow Statement, Generalized Least Squares.

Keywords

20.1001.1.20089988.1401.14.2.11.4

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