The moderating effect of age on firm’s internal determinants of trade credit of listed firms in Kenya

Abstract

Trade credit is one of the main sources of funding for global companies. The importance of trade credit can also be seen from the proportion of investment that is financed through it. Despite the potential importance of trade credit, limited attention has been paid to its role and use, especially in developing countries. The main aim of the study was to establish the determinants of trade credit and moderating role of the age of the firms listed in Nairobi securities exchange. The study specifically determined the effect of debt levels, collateral, liquidity and inventory on firm trade credit. The study further determined the moderating effect of firm age on determinants of trade credit. The study was guided by both the transaction cost and the credit substitution theories and adopted an explanatory research design. The study was based in firms listed on the Nairobi securities exchange for the period 2012 to 2013 and used document analysis to collect secondary data from the company’s annual report. Data were analysed through the use of descriptive statistics such as means and standard deviation while inferential statistics methods included correlation and moderated multiple regression techniques. The study findings indicated that debt levels (β 1 = 0.5422, ρ<0.05), liquidity (β 3 = -0.0275, p < 0.05) and inventory (β 4 = - 0.0399, p < 0.05) have a significant effect on firm trade credit with an explanatory power of 56% (R 2 = 0.5695, p< 0.05), while collateral (β 2 = -0.1363, ρ > 0.05) have an insignificant effect. On the other hand, firm age has a significant moderating effect on the relationship between determinants and trade credit. In particular, firm’s age has significant interaction effect on debt level (β 6 = -2.3609, p < 0.05), the interaction effects on liquidity (β 8 = -2.4649, p < 0.05). Therefore, firms need to establish a well- defined trade-credit granting criteria to assess the creditworthiness of the buyers to avoid default risk or late payment by buyers. Firms should be cautious while pledging an asset as collateral since the bank has exclusive access to pertinent information. Also, firms should hold liquid assets to meet their financial obligations. There is also a need for firms to transform the raw material supplied into finished goods so that suppliers’ advantage in repossessing and selling supplied goods is reduced. The study also contributes to credit substitution theory by indicating the possibility of using internal equity or external debt financing that cannot be undervalued in the market.