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Financial Constraints and the Use of Trade Credit: Evidence from Pakistan

https://doi.org/10.26794/2587-5671-2024-28-1-166-176

Abstract

The purpose of this study is to identify whether financially constrained firms use trade credit (payables and receivables) as a channel to finance their operations. The previous literature mainly investigated the role of trade credit in various aspects of a firm’s performance. We argue that, since firms with limited financial capabilities usually have limited or no access to the long-term debt market, they can better be expected to rely on short-term financing, such as trade credit. We use Kaplan and Zingales index (KZ Index 1997) to measure the level of firms’ financial constraints. The fixed-effects panel regression methodology was applied to a sample of non-financial firms listed on Pakistan Stock Exchange over eleven years from 2009 to 2019. The results of this article show that financially constrained firms use trade credit as a financing channel for their operations. We further found that firms with higher profit margins use more trade credit while those that have higher assets turnover use fewer loans.

About the Authors

M. Younis
COMSATS University Islamabad
Pakistan

Muhammad Younis PhD Scholar, Department of Management Sciences

Islamabad, Wah Campus



M. J. Khan
COMSATS University Islamabad
Pakistan

Majid Jamal Khan — PhD, Assoc. Prof., Department of Management Sciences

Wah Campus



M. Y. Khan
COMSATS University Islamabad
Pakistan

Muhammad Yar Khan — PhD, Assoc. Prof., Department of Management Sciences

Wah Campus



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For citations:


Younis M., Khan M.J., Khan M.Y. Financial Constraints and the Use of Trade Credit: Evidence from Pakistan. Finance: Theory and Practice. 2024;28(1):166-176. https://doi.org/10.26794/2587-5671-2024-28-1-166-176

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