The Motives of Trade Credit Usage and the Importance of Risk Perception for Decision-Making Behavior
Date of Award
Doctor of Philosophy
Dr. C. James Hueng
Trade credit, transaction motive, financing motive, risk perception, risk asset share, retirement account
The objective of this study is to discuss two motives of trade credit usage for large and small firms. To examine one of the motives–transaction motive—the study models a circulation mechanism in trade credit. The nature of the mechanism is such that firms are motivated to balance their trade credit inflows (accounts payable) with their outflows (accounts receivable). An empirical test is therefore needed to examine this issue. The findings in Chapter 1 support the theory of transaction motive that firms with more bank tolerance are more likely to advance the flow of trade credit to their clients. In particular, a one-unit increase in trade credit acceptance would raise the credit lending by approximately 0.44 units. Meanwhile, the financially healthy firms with positive net cash flow are better able to lend trade credit to their clients. As one of the contributing factors, bank lending is positively and significantly related to trade credit lending.
To refine and extend the literature on trade credit allocation, the study moves to a focus on financing motive of trade credit in a presence of transaction motive. The two forces (transaction and financing) either aid or resist the flow’s movement from suppliers to clients, and the resistance to the movement is thereby seen as a diversion for self-financing. This study generates two models measuring in-stream credit flows and diversion, in response to the two different motives. From the estimation of seemingly unrelated regression equations (SURE), the findings in Chapter 2 show that (1) borrowing constraint as the major driving force results in a diversion toward self-financing in small firms, and (2) large firms are less financing-constrained, and as a result advance more trade credit flows from suppliers to clients.
Meanwhile, a study on risk perception was conducted. Investors who perceive risk awareness get ready to cope with uncertainty and changes in their financial account. Risk perception, as an extension of the Expected Utility (EU) framework, will lead to a better understanding of participation in risky financial activity. An evaluation of risk perception is carried out in the following aspects: (1) health risk (2) inflation pressure (3) economic depression. A binary logistic model is employed to measure the effect of these risk perception factors on the odds ratios of risky asset investment. This study on people nearing retirement shows that a person’s capacity to perceive risk from surroundings, either in a statistical sense or in an economic context, is closely related to the risky asset share in pension plans.
Zhao, Kun, "The Motives of Trade Credit Usage and the Importance of Risk Perception for Decision-Making Behavior" (2012). Dissertations. 78.