Trade receivable policy, corporate value and cash holdings :|evidence from the United States

Abstract

The aim of this thesis is to analyze the impact of trade receivable policy on corporate value and cash holdings of listed US firms. Trade receivable policy is proxied by share of trade receivables in total assets at firm level and an indicator variable that proxies the credit quality of trade receivables (TRQI). These variables are treated as endogenous variables to address omitted variables bias issue in all estimations. Based on a sample of 2,737 non-financial, non-utility firms that are listed in US for the time period from 2010 to 2016, we provide empirical evidence that level of investment in trade receivables has negative impact on corporate value and that this relationship is non-linear. Furthermore, the negative impact of investment in trade receivables is stronger and exists for firms with low profitability, whereas this impact is weaker and statistically insignificant for firms with high profitability. Therefore, the tendency of low-profitable firms to invest more in trade receivables, in an effort to improve their profit margins by acquiring new customers as documented by several related studies in trade credit literature, destroys corporate value. This thesis also provides empirical evidence regarding the impact of a worsening in TRQI on corporate value and cash holdings. The findings support our hypothesis that a deterioration in the credit quality of trade receivables leads to loss of corporate value. Moreover, as credit quality of trade receivables worsens firms tend to hold more cash, which is in line with the precautionary motive for holdings cash.