Trade Credit, Business Group Affiliation, and Cash Holdings: Evidence from Bangladesh

Abstract

This paper investigates the impact of trade credit on corporate cash holding. Based on the precautionary theory this study argues that firms with higher trade credit are likely to have greater cash holdings. Secondly, this study tests whether the nexus of trade credit and corporate cash holding varies between business group affiliated firms and standalone firms. To test the hypotheses, this study used a sample of 1002 firm-year observations for the period of 2011-2019. Ordinary Least Square (OLS) regression model is used to examine the hypotheses. Further, the two-step system Generalized Method of Moments (GMM) and Heckman two-stage self-selection are used to address possible endogeneity in our analysis. Consistent with the arguments this study finds that trade credit is positively and significantly associated with corporate cash holding. Second, cash holding is significantly lower for firms affiliated with business groups compared to standalone firms. The finding of the present study has important implications for working capital management in emerging markets where family firms and business group affiliated firms are dominant over standalone firms. Moreover, this study presents a unique feature of a developing market where trade credit financing is playing a significant role compared to external debt financing.