Teh, Chee Ghee (2010) The determinants of trade credit extension and the problem of late payment in the Malaysian manufacturing sector / Teh Chee Ghee. PhD thesis, University of Malaya.
Abstract
This study investigates the determinants of trade credit extension and the association between late payment from trade debtors and profitability in the Malaysian manufacturing sector. It is based on exploratory data analysis and ordinary least squares (OLS) regressions on a crosssectional sample of 383 and 287 public-listed manufacturing companies, respectively, using audited financial statements for the financial year ending 2007/2008.Investment in accounts receivables is even higher than in inventories in the Malaysian manufacturing sector. Contrary to previous studies, this study finds that large companies,manufacturers with higher liquidity and with higher collateral assets extend less trade credit, indicating that the listed manufacturing sector has the market power in trade credit extension and uses trade credit as a price discrimination tool. However, when experiencing from late collection of payment, these listed manufacturers seek more liquidity security coverage by tightening their credit extension irrespective of how lucrative trade credit is as a price discrimination tool in business. This study finds based on average days sales outstanding, 60% of the companies in the manufacturing sector experienced late payment from customers and such a delay in payment has a significant inverse effect on profitability. An alternate measurement of late payment and credit management performance using days overdue based on the Pareto principle is introduced and tested along with the existing common measurements – average days overdue and days sales outstanding. By shortening the cash conversion cycle via a reduction in the number of days sales outstanding and/or days overdue, companies can improve their profitability. Owing to the tendency of customers to delay payment to suppliers, the results also show that Pareto days overdue is a better measure of late payment in Malaysia, an emerging market in the Asian region.This study contributes to the limited empirical literature on late payment. It focuses on the manufacturing sector and is also one of the early studies in trade credit management using the Pareto 80:20 rules to derive the days overdue from secondary data, which provides openings for further comparative studies across sectors or countries using empirical data.
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