Doctor of finance banking thesis summary research on factors affecting trade credit of vietnamese enterprises

1 INTRODUCTION  Research on the impact of trade credit on the enterprises’ performance - The impact of trade payables on business performance Most of the analyses suggest that trade payables have a positive effect on the firm's performance, i.e., appropriating capital for as long as possible, as long as it does not affect a firm's credit rating (Lazaridis and Tryfonidis, 2006; Gul et al., 2013; Makori and Jagongo, 2013; Ukaegbu, 2014) However, no studies point out that the trade payables have a negative impact on firm's performance There are analyses confirm that business performance negatively affects the enterprise's accounts payable To explain this, the studies suggested that when operating efficiency decreases, profitability is low, so prolonging payment terms for suppliers, leading to increased payables These studies can be mentioned as Deloof (2003), Padachi (2006), Akinlo (2011), Sharma and Kumar (2011), Mansoori and Muhammad (2012), Vahid et al (2012) Additionally, pieces of research find no association between these two variables such as Garcıa-Teruel and Solano (2007), Gill et al (2010) Thus, the research scope of the topic will not analyze the effect of payables on business performance Since previous studies, all show that the payables have a positive impact on firm performance thanks to its low cost of capital It means that occupying payables increases firm’s profitability consequently helps to enhance operational efficiency - The impact of customer receivables on business performance There are two schools of thought in analyzing the influence of customer receivables on business performance The first stream proves that the customers receivable have a beneficial impact on the business’s operational efficiency, i.e the longer days of collection is, the higher the profit margin is, thereby enhance the firm’s operational efficiency Such studies can be mentioned as Akinlo (2011), Sharma and Kumar (2011) On the contrary, most other studies have suggested that increasing the number of days to collect money from consumers will make profits decrease, at the same time business efficiency will reduce This means that the number of days of sales is inversely related to profitability These studies include Deloof (2003), Lazaridis and Tryfonidis (2006), Padachi (2006), Garcıa-Teruel and Solano (2007), Gill et al (2010), Mansoori and Muhammad, (2012), Vahid et al (2012), Gul et al (2013), Makori and Jagongo (2013), Ukaegbu (2014) There is only one study by Martínez-Sola et al (2012) showed that a nonlinear relationship exists between customer accounts receivable and firm value Accordingly, when accounts receivable are kept below the optimum amount of receivables, the benefits of trade credit will prevail, and an increase in receivables will result in a rise in corporate value Conversely, when the receivable is held higher than the optimal receivable, it will reduce firm value Research gap Currently there are no studies in Vietnam that comprehensively consider the internal factors affecting Vietnamese listed firms’ trade credit in general and by industry sector specifically In addition, the provision for bad debts might affect customer receivables that has not been tested by any study Besides, the general concern accepted that the business's operational goal is to maximize the value of assets for the owners To achieve the goal, companies must improve their operational efficiency Hence, businesses need to know how trade credit affects operational efficiency to adjust the factors affecting trade credit to improve operational efficiency Therefore, it is necessary to have a study to examine the factors affecting trade credit and analyze the impact of customer receivables on the performance of listed companies At the same time, it discovers the optimal level of customer receivables for Vietnamese listed companies in The necessity of research In the current economy, in order to facilitate the business process, the companies often let customers buy goods with deferred payment for a certain period This has nearly become the market’s law Businesses selling products will offer trade credit to customers firms purchasing goods will obtain trade credit from the seller, respectively However, the granting or receiving of trade credit will depend on various subjective and objective factors This issue has also received the researchers’ attention around the world such as Petersen and Rajan (1997), Niskanen and Niskanen (2006), Bougheas et al (2009), GarcíaTeruel and Martínez-Solano (2010a), etc Nevertheless, the research’s findings are controversial as the factors affecting trade credit vary significantly between countries and industries In addition, as we already know, companies granting trade credit to customers will be able to speed up sales, reduce inventory, and increase revenue At the same time, buyers who are offered trade credit will have a source of goods for production and business without immediate payment However, maintaining a lot of receivables will not be healthy for companies Since companies will face credit risk when implementing the sell-on strategy, namely the risk of losing money if customers don’t pay for the products when due Meanwhile, trade credit is mostly financed by short-term bank loans and offen used from payables that supplier’s capital is occupied by the firms Therefore, it would also costs if the company’s trade credit strategy is ineffectual So the question is how much trade receivable firms should allow their customers occupy is optimal to maximine operational efficiency and firm value From there, the factors affecting the trade credit will be adjusted appropriately As businesses give trade credit to consumers, the company is at a proactive position, so it can determine the amount of money that might be employed by customers in a short time space The firm is in a passive role when it takes advantage of the supplier’s trade credit, so it cannot decide on its own how much trade payable it hopes to obtain These businesses should only concern about what they can assist to benefit from the suppliers’ capital, but not reduce the companies’ credit rating and credibility Then, the enterprises can operate sustainably and enhance performance efficiency Simultaneously, in the reality of Vietnam, trade credit is being used considerably by companies in the business processes Nevertheless, the factors influencing trade credit and the impact of trade credit Vietnamese enterprises’ performance in general and by industry sectors in particular has been not comprehensively studied Afterward, the driving factors are adjusted appropriately to maximize operating efficiency and firm value Hence, the topic “Research on factors affecting trade credit of Vietnamese enterprises” is selected as the research purpose Literature review  Studies on factors affecting companies’ trade credit Factors influencing trade credit include operational years, size, net cash flow, short-term finance, short-term borrowing ratio, financial cost, sale growth, asset turnover, short-term asset ratio, gross profit margin, inventory ratio, and liquidity (Nadiri, 1969; Long et al., 1993; Petersen and Rajan, 1997; Ng et al., 1999; Danielson and Scott, 2004; Niskanen and Niskanen, 2006; Bougheas et al., 2009; García-Teruel and Martínez-Solano, 2010a; Vaidya, 2011; Khan et al., 2012; Phan Đinh Nguyen Truong Thi Hong Nhung, 2014; Shi et al., 2016; Tran Ai Ket, 2017) However, each study has various factors affecting trade credit whereas the degree and direction of these factors are also distinct 3 general and Vietnamese listed industry groups in particular to maximize the business performance Currently, there are no studies in Vietnam and in the world that mention this issue So, it can be considered as a research gap Objectives of the study - Thesis’s general objective: to examine factors affecting trade credit of Vietnamese firms This is the foundation on which propose recommendations to improve the trade credit management of Vietnamese companies - To accomplish the general goal, the thesis offers the following specific objectives: + Complete theoretical analysis framework on trade credit of enterprises + Analyze and assess the current situation of factors affecting trade credit of Vietnamese listed companies in general and Vietnamese listed industry groups in particular + Analyze and assess the current situation of the impact of trade credit on the performance of Vietnamese listed companies in general and Vietnamese listed industry groups in particular + Recommendations are proposed to improve the management of trade credit for Vietnamese listed companies Research subjects and scope of the study 5.1 Research subjects The subjects of study is the enterprise's trade credit The thesis only focuses on the subjective factors belonging to the business affecting trade credit, in which trade credit is understood to be trade receivables (short-term) and trade payables When studying the impact of trade credit on the performance of Vietnamese listed companies, the thesis only focuses on researching the impact of customer receivables on the performance of Vietnamese listed enterprises 5.2 Research scope - Research space: Vietnamese non-financial companies listed on HNX and HOSE - Research period: the 2013-2017 period Research questions - Research questions: + What factors affect the trade credit of businesses? + How is the situation of factors affecting trade credit of Vietnamese listed companies in general and Vietnamese listed industry groups in particular? + Is there an optimal level of customer receivables at which the Vietnamese listed companies have the highest performance? What is the ideal amount of account receivable of Vietnamese listed companies in general and by industry sectors in particular? - Management question: What are the recommendations to improve the trade credit management in Vietnamese listed companies? The contributions of the thesis Firstly the study inherits and builds a model measuring the factors affecting trade credit and add a new variable affecting trade credit, which is the provision for bad debts Specifically, an increase in the provision for bad debts causes costs to increase and profits to decrease, resulting in a decrease in the market value of the stock (Cheng et al., 2009) Therefore, in order not to reduce profits and stock value, listed businesses must increase revenue through accelerating sales by loosening trade credit policies for customers, making receivables increased The second contribution is to identify factors that influencing the trade credit of Vietnamese listed companies in general and industry groups in particular on both aspects, including accounts receivable from customers and accounts payable to the seller The factors impacting on customer receivables of listed companies are provision for bad debts, net cash flow, financial cost and inventory ratio The factors affecting the trade payables of listed companies are short-term loan ratio, net cash flow, ratio of short-term assets, inventory ratio, liquidity and firm size Moreover, it is noteworthy that the sale growth factor, unlike the previous studies, has no effect on trade credit of Vietnamese listed companies in general and industry groups in particular Thus, the motivation that makes the accounts receivable changed in Vietnam listed companies is not the increasing sales goal, but the more profound purpose is to increase profits since profit is the core goal of each enterprise If businesses only focus on increasing sales but not care about profits, it is very dangerous because the risks of not being able to recover money are very large In addition, whether Vietnamese listed companies use capital from suppliers more or less will not depend on sales, but mainly on cash flow, financial cost and the ratio of short-term loans The third contribution is to determine the impact of customer receivables on the performance of Vietnamese listed companies in general and Vietnamese listed industry groups in particular (infrastructure services industry, consumer services, consumer goods, and basic materials) in an inverted U shape It can be understood that in the initial increase of customer receivables, the more receivables increase the more effective the business is To a certain level of receivables, the more receivables from customers make the business performance decrease The point at which corporate performance reverses is called optimal customer receivables The fourth contribution is to determine the optimal customer receivables to maximize the operational efficiency of Vietnamese listed companies in general and for each industry sector in particular Specifically, the optimal level of customer receivables over total assets of Vietnamese listed companies is generally 25,07%; the infrastructure services industry is 15,10%, the consumer services industry is 17,42%; the consumer goods industry is 19,51% and the basic materials industry is 17,50% The fifth contribution is a recommendation to businesses and the government to help Vietnamese listed companies improve the efficiency of trade credit management For businesses acting as a trade credit providers, it is necessary to: (1) Pay attention to factors affecting customer receivables and current versus optimal customer receivables to make appropriate adjustments, (2) Establish an effective receivable management process For businesses acting as trade credit users, it is necessary to: (1) Strengthening the advantage of big business to use capital from suppliers, (2) Use more trade credit when commercial bank interest rates rise, (3) Depending on the characteristics of each business area, businesses can choose to use more trade credits, (4) When businesses have difficulties in cash flow and liquidity, businesses should use trade credit, (5) Calculate reasonable payment time to bring benefits to businesses For the Government should: (1) Build a strong the legal framework in trade credit relations, (2) Take control of macro issues like inflation and interest rates, (3) Establish trade credit information center for businesses, (4) Establish and facilitate the debt trading market 5 The structure of the thesis Besides, the introduction, and conclusion, the thesis content includes chapters: Chapter 1: Theoretical framework of trade credit and the factors affecting enterprises’ trade credit; Chapter 2: Research method; Chapter 3: The current situation of trade credit of Vietnamese enterprises; Chapter 4: Results of the test of factors affecting trade credit of Vietnamese enterprises; Chapter 5: Research discussions and recommendations that there is a non-linear relationship between customer receivables and firm value Accordingly, when customer receivables are kept below optimal levels, the benefit from trade credit will prevail, an increase of customer receivables leads to a rise of firm value Conversely, when customer receivables are kept above the optimal level of receivables, it will reduce the value of the business Thus, providing trade credit can bring pros and cons to the company Therefore, the businesses need to balance the benefits and costs when providing trade credit The trade credit’s gain include: (1) increasing sales and profits; (2) strengthening long term business relationships with customers; (3) being a part of the company's pricing policy to stimulate demand; (4) being an investment strategy to find customers; (5) generating interest income for buyers' late payments In addition to the benefits, trade credit also brings disadvantages such as: (1) financial risk; (2) increasing cost of credit management Therefore, the relationship between customer receivables and business value will become negative at a high level of customer receivables This is because the cost of trade credit will outweigh the benefits at a too high level of customer receivables (Martínez-Sola et al., 2012) 1.2 Factors affecting the trade credit of the business 1.2.1 The objective factors The objective factors affecting trade credit include a country's monetary policy, financial system development and legal infrastructure; the development of financial markets and financial intermediaries; macroeconomic growth; characteristics of the business line 1.2.2 The subjective factors The subjective factors affecting trade credit include: years of operation, size, net cash flow, short-term finance, short-term borrowing ratio, financial cost, sale growth, asset turnover, shortterm asset ratio, gross profit margin, inventory ratio and liquidity 1.3 Theories applied to research the trade credit of the business - Theory of customer receivables management - Theory of seller payables management - Theory of the trade-off between risk and expected return CHAPTER 1: THEORETICAL FRAMEWORK OF TRADE CREDIT AND THE FACTORS AFFECTING ENTERPRISES’ TRADE CREDIT 1.1 Trade credit of the business 1.1.1 The concept of trade credit Trade credit is the credit between enterprises in the buying and selling process Specifically, the vendor agrees to the customers to get the products with delay payment conditions within a certain period This investment is recognized as the buyers’ account receivable with the sellers, and this capital appropriation is recognized as the accounts payable in the balance sheet of the purchaser 1.1.2 Characteristics of trade credit - The object of trade credit is commodities, not cash - The manufacturers are the organizations involving in the trade credit relationship - The credit scale is usually small - Credit periods are usually short 1.1.3 The purpose of forming trade credit There are three motivations behind the emergence of trade credit which are finance, cash flow management, and sales (García-Teruel and Martínez-Solano, 2010a) These motives are rooted in theories: financial advantage theory, transaction costs theory, price discrimination theory (Petersen and Rajan, 1997) 1.1.4 The role of trade credit - Accelerate the process of goods’ distribution, reduce storage costs of credit vendors and shorten business cycle of purchasers - Save expenses and speed up the money circulation - Fostering business growth and economic development 1.1.5 The impact of trade credit on business performance 1.1.5.1 The impact of trade payables on business performance Most of pieces of research suggest that trade payables have a beneficial effect on the firm's efficiency, i.e., appropriating payables for as long as possible, whenever it does not affect a firm's credit rating There are no studies, however, reveal that the trade payables have an adverse impact on firm's performance There are a few studies confirming that company’s performance negatively affects the enterprise's accounts payable Since a reduction of efficiency and low profitability causes the expansion of payment period toward the suppliers, thus the account payables rises 1.1.5.2 The impact of customer receivables on business performance Pertaining to the previous studies, the impact of customer receivables on the operational performance can be positive or negative Only one study by Martínez-Sola et al (2012) showed CHAPTER 2: RESEARCH METHODS 2.1 Proposed research model and research hypothesis 2.1.1 Research model of factors affecting trade credit of enterprises To answer the research question about factors affecting trade credit of enterprises, the author uses models on the basis of the inheritance and development from the previous studies, especially the study of García-Teruel and Martínez-Solano (2010a) Specifically: Model 1: Examining the factors affecting the customer receivables of the enterprise REC it = β0 + β1PROVIit + β2GROWTHit + β3SIZEit + β4LAGE it + β5STLEV it + β6FCOST it + β7CFLOWit + β8TURNit+ β9GPROFit + β10INVENit+ β11LIQ it+ εit (1) Of which: PROVI is Provisions for doubtful debts This is a new variable added to the model by the author Currently in Vietnam, the provision for bad debts is made accordance with “Circular 48/2019/TT-BTC dated 08/08/2019 of the Ministry of Finance guiding the appropriation and handling of provisions for devaluation of inventories, loss of investments, bad debts and warranty for products, goods, services, construction works at enterprises” 7 Provisions are seen as expenses of the business Therefore, if the enterprise makes a provision, it will be reduced a part of corporate income tax payable However, for many listed companies, provision reduces corporate profits and affects the market value of shares (Cheng et al., 2009) So corporations will try to increase revenue to cover the losses or potential loss to not to affect the market value of the stock Therefore, if the provision for bad debts increases, it indicates that the risk of the business is likely to rise, so the enterprise will limit granting trade credit to customers However, the growth in provision for bad debts may also increase customer receivables Because if the provision for bad debts goes up, it reduces profits and stock value Hence, the enterprises raise the adoption of trade credit strategy, leading to an increase of customer receivables, stimulating revenue and profit Thus, the study does not have a straightforward forecast for the relationship between the provision for doubtful debts and the receivables This will be verified experimentally The research hypothesis is summarized in Table 2.1 with the expectation of the sign as follows: Table 2.1 Describe the variables measuring the factors affecting customer receivable Variable Dependent variable Customer receivables rate Independent variables Provision for bad debts Symbol REC PROVI Scale Expectations Studies have been done that have for the sign corresponding scales Average customer receivables/ Total average assets Absolute value of the average provision for bad debts/ Total average assets Niskanen and Niskanen (2006); Martínez-Sola et al (2012); Khan et al (2012), Tran Ai Ket (2017) +/- (Sales year t – Sales year t-1)/ Sales year t-1 +/- SIZE Ln (Total Revenue) +/- LAGE Ln (1 + Years of operation) Sale growth GROWTH Size Years of operation + Petersen and Rajan (1997), Niskanen and Niskanen (2006), García-Teruel and MartínezSolano (2010a), Khan et al (2012), Phan Dinh Nguyen and Truong Thi Hong Nhung (2014), Shi et al (2016) Martínez-Sola et al (2012) Petersen and Rajan (1997), Niskanen and Niskanen (2006), García-Teruel and MartínezSolano (2010a), Khan et al (2012), Shi et al (2016), Tran Ai Ket (2017) Variable Short-term finance Symbol STLEV Financial cost FCOST Net cash flow CFLOW Asset turnover TURN Gross profit margin GPROF Inventory ratio INVEN Liquidity LIQ Scale Average debt/ Sales short-term Financial cost/ (Average payables Average payables to sellers) (Profit after tax + Depreciation) / Sales Sales/(Average total assets Average customer receivables) Gross margin/ Sales Average inventory/ Sales Average Cash and Shortterm investments/ Average short-term debt Expectations Studies have been done that have for the sign corresponding scales +/- García-Teruel and MartínezSolano (2010a), Vaidya (2011), Phan Dinh Nguyen and Truong Thi Hong Nhung (2014), Shi et al (2016) - García-Teruel and Solano (2010a) Martínez- +/- García-Teruel and Solano (2010a) Martínez- +/- García-Teruel and Solano (2010a) Martínez- + +/- Petersen and Rajan (1997), García-Teruel and MartínezSolano (2010a) Bougheas et al (2009), Vaidya (2011) Nadiri (1969) Source: Author's synthesis Model 2: Examining the factors affecting the trade payables of the enterprise PAY it = β + β1GROWTHit + β 2SIZEit + β 3LAGE it + β 4STFINDit+ β5FCOST it + β6CFLOWit + β7CURRASit + β8INVENit +β9LIQ it + εit (2) The research hypothesis is summarized in Table 2.2 with the expectation of the sign as follows: Table 2.2 Describe the variables measuring the factors affecting trade payables Expectations Studies have been done that Variable Symbol Scale for the sign have corresponding scales Dependent variable Petersen and Rajan (1997), Seller Niskanen and Niskanen (2006) Average seller payables/ PAY payables and García-Teruel and Average total assets rate Martínez-Solano (2010a), Tran Ai Ket (2017) Independent variables Sale growth GROWTH (Sales year t – Sales year t1)/ Sales year t-1 10 + Size SIZE Ln (Total Revenue) +/- Years of operation LAGE Ln (1 + Years of operation) +/- Short-term borrowing ratio STFIND Average short-term borrowings / Average total assets - Financial cost Net cash flow Short-term asset ratio Inventory ratio Liquidity Financial cost/ (Average payables Average payables to sellers) (Profit after tax + CFLOW Depreciation) / Sales Average short-term assets / CURRAS Average total assets FCOST INVEN LIQ Average inventory/ Sales Average Cash and Shortterm investments/ Average short-term debt + + +/- Petersen and Rajan (1997), Niskanen and Niskanen (2006), García-Teruel and Martínez-Solano (2010a), Khan et al (2012), Phan Dinh Nguyen and Truong Thi Hong Nhung (2014), Shi et al (2016) Martínez-Sola et al (2012) Petersen and Rajan (1997), Niskanen and Niskanen (2006), García-Teruel and Martínez-Solano (2010a), Khan et al (2012), Shi et al (2016), Tran Ai Ket (2017) García-Teruel and MartínezSolano (2010a), Phan Dinh Nguyen and Truong Thi Hong Nhung (2014), Tran Ai Ket (2017) García-Teruel and MartínezSolano (2010a) García-Teruel and MartínezSolano (2010a) García-Teruel and MartínezSolano (2010a) Bougheas et al (2009), Vaidya (2011) Nadiri (1969) Source: Author's synthesis 2.1.2 Model to study the impact of customer receivables on business performance To answer the research question of the impact of customer receivables on the performance of Vietnamese listed companies, the author inherits and develops from the research model of Martínez-Sola et al (2012) to set up models, including: Model 3: Testing the non-linear relationship between customer accounts receivable and business performance Vit = β0 + β1(RECit) + β2(RECit2) + β3(GROWTHit) + β4(SIZEit) + β5(LEVit) + εit (3) The research hypothesis is summarized in Table 2.3 with the expectation of the sign as follows: Table 2.3 Describe the variables used to test the nonlinear relationship between customer accounts receivable and business performance Expectations Studies have been done that Variable Symbol Scale for the sign have corresponding scales Dependent variable Return on Profit after tax / Wang (2002), Forghani et al ROA Assets Average total assets (2013), Bagh et al (2016) Return On Profit after tax / Wang (2002), Forghani et al ROE Equity Average equity (2013), Bagh et al (2016) Independent variables Niskanen and Niskanen (2006); Average customer Customer Martínez-Sola et al (2012); REC receivables/ Total + receivables rate Khan et al (2012), Tran Ai Ket average assets (2017) The squared Square of (Average (REC)2 customer receivables / Martínez-Sola et al (2012) customer receivables ratio Average total assets) Geroski et al (1997); Claver et al (2002); Samiloglu and (Sales year t – Sales year Sale growth GROWTH + Demirgunes (2008); Martínezt-1)/ Sales year t-1 Sola et al (2012); Yazdanfar (2013) Martínez-Sola et al (2012); Size SIZE Ln (Total Revenue) +/Yazdanfar (2013) Financial Average Liabilities / Goddard et al (2005); LEV Leverage Average Equity Martínez-Sola et al (2012) Source: Author's synthesis H21: The impact of trade receivables on the performance of Vietnamese listed companies is non-linear (inverted U shape) This means that the relationship between customer accounts receivable and performance of the listed Vietnamese companies will not be monotonous (concave) Specifically, there is a positive relationship when customer receivables are low and there is a negative relationship when customer receivables are high At the same time, there is an optimal level of customer receivables where the performance of Vietnamese listed companies is the greatest Therefore, the study expected positive sign for variable REC (β 1> 0) and negative sign for variable REC2 (β2