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Purpose – The purposes of the study are to: contribute evidence on the role played by ordinary commercial firms in providing finance to other firms by granting trade credit to customers; and test some theories about the motives of small and medium‐sized firms in extending such trade credit. Design/methodology/approach – The Generalised Method of Moments is applied to an unbalanced panel of small and medium‐sized firms in the Canary Islands (Spain). Analysis of data from a unique database is used to obtain consistent estimations and to test some proposed hypotheses about the determinants of extending trade credit. Findings – The study finds that: firms with greater access to financial markets can serve as a credit channel for clients that have difficulties in obtaining institutional financing (thus supporting the theory of financial advantage with respect to trade credit); firms can reduce transaction costs through financing clients (thus confirming that “transaction motives” are significant in granting trade credit); and that trade credit between firms known to each other reduces problems associated with information asymmetry in financial arrangements. Research limitations/implications – The findings represent correlated inferences, rather than proven causal relationships. Moreover, some results are interpretive in nature; more detailed data and analyses could assist in investigating the relationships noted here. Originality/value – The paper contributes to the scarce empirical literature about the motives for granting trade credit by small and medium‐sized firms. This is also the first study to analyse this behaviour from a dataset of firms in the Canary Islands (Spain).
International Journal of Managerial Finance – Emerald Publishing
Published: Apr 4, 2008
Keywords: Credit; Trade; Companies; Spain
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