The declining trend in trade credit ratios: The impact of firm-specific and macro factors

Despite the importance of trade credit as a source of financing, there is a significant and persistent decline in this form of short-term borrowing and lending over the 1979 to 2018 interval. The median firm's accounts receivable decreased by 52% while accounts payable ratio fell by 47%. The decline is systematic, as it is present in most industries and sub-samples of firms classified on different characteristics. Further, firms’ trade credit ratios are significantly less than predicted ratios based on firm-specific characteristics and industry factors, and this deficiency, which is pervasive, becomes more negative over time. However, changes in macroeconomic factors such as financial shocks, interest rates, changes in monetary policy and corporate tax rates, credit available in the economy, and the transition from manufacturing to technology-oriented economy, explain the deficiency as well as the time pattern.