Credit Quality of Trade Receivables and Its Impact on Cash Holdings and Firm Value

Abstract

This paper aims to define a variable that indicates the credit quality of trade receivables and test its impact on corporate cash holdings and corporate value. Based on a sample of publicly listed firms from the United States, we provide evidence that as the credit quality of trade receivables deteriorates, firms tend to keep higher levels of cash. This finding is in line with the precautionary motive for holding cash. Additionally, when trade receivables credit quality gets worse, corporate value is reduced. In all regressions, we treat trade receivable policy variables as endogenous because of concerns regarding omitted variables bias. Moreover, we provide the first large-sample US evidence about the negative and non-linear impact of investment in trade receivables on corporate value. We utilize system GMM in all estimations. The major contribution of this study to the accounting and trade credit literature is the introduction of a variable that aims to denote the credit quality of trade receivables and the empirical evidence about the impact of deterioration in trade receivables credit quality on cash holdings and corporate value. This study also extends the literature by delivering the first large-sample evidence for the US regarding the nature of the relationship between investment in trade receivables and corporate value.