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Why do firms invest in accounts receivable? An empirical investigation of the Malaysian manufacturing sector

Devi, Susela; Paul, Salima Yassia; Paul, Salima; Guermat, Cherif; Devi, Suzela

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Authors

Susela Devi

Salima Yassia Paul

Salima Paul

Suzela Devi



Abstract

© 2018, Emerald Publishing Limited. Purpose: The purpose of this paper is to investigate the factors that influence Malaysian manufacturing sector investment in accounts receivable (AR), an asset seen by many as one of the riskiest in any company’s balance sheet. Design/methodology/approach: The authors test several theories, related to AR, using a cross-section of 262 listed manufacturing firms over a period of five years (2007-2011). Both fixed and random effect approaches are adopted to deal with potential heterogeneity across firms. Findings: The results show that investment in AR in Malaysia are influenced by firm size, short-term finance, sales growth and collateral. Profit, liquidity and gross margins have no role in affecting the decision of trade credit granting to customers. The results are inconsistent with previous studies. Size and short-term finance have a negative, rather than positive, impact. Liquidity and gross margins have no, rather than positive, effect. While profit and sales growth are predicted to feature a U-shaped relationship with investment in AR, the former is insignificant while the latter is strictly increasing. The only factor found to be consistent with prior studies is collateral. Research limitations/implications: The results have two principal implications. First, policy makers should not take a holistic view of the trade credit market. Given that policy makers aim to improve liquidity and trade, they should design policies that are not only country specific but also sector specific. As is clear from our results, what holds for other countries or sectors may not necessarily be true for the Malaysian manufacturing sector. This has important implications for policy makers in emerging economies. Practical implications: Investment in AR, in the Malaysian manufacturing sector, is impacted by many of the factors implied by either theory or empirical evidence. However, the main finding in this paper is that the Malaysian manufacturing sector is rather different. First, while liquidity and gross margin have been found to have a positive and significant effect on AR helping hand theory in prior studies, the results show that these two factors play no role in influencing the level of AR in the Malaysian manufacturing sector. Social implications: Unlike the experience in developed economies, firms in our sample that have access to short-term finance are less likely to grant trade credit. This suggests that the helping hand theory does not hold as far as the Malaysian manufacturing firms are concerned: firm that have better access to short-term finance in Malaysia do not use trade credit to pass on the benefit to their customers by granting them trade credit. Originality/value: It is unclear why firms invest in AR given the high risks of uncollectability as well as tedious, time-consuming and costly legal process for debt recovery compared to firms from more developed economies. This paper examines the reasons business-to-business lending, through AR, is widespread in Malaysia and investigates the factors that affect this decision despite the risk involved. To our knowledge, this is the first study to date that looks at the factors that influence AR level in the Malaysian manufacturing sector.

Citation

Devi, S., Paul, S. Y., Paul, S., Guermat, C., & Devi, S. (2018). Why do firms invest in accounts receivable? An empirical investigation of the Malaysian manufacturing sector. Journal of Accounting in Emerging Economies, 8(2), 166-184. https://doi.org/10.1108/JAEE-01-2017-0005

Journal Article Type Article
Acceptance Date Nov 25, 2017
Online Publication Date May 8, 2018
Publication Date May 8, 2018
Deposit Date Nov 26, 2017
Publicly Available Date Mar 29, 2024
Journal Journal of Accounting in Emerging Economies
Print ISSN 2042-1168
Electronic ISSN 2042-1176
Publisher Emerald
Peer Reviewed Peer Reviewed
Volume 8
Issue 2
Pages 166-184
DOI https://doi.org/10.1108/JAEE-01-2017-0005
Public URL https://uwe-repository.worktribe.com/output/903001
Publisher URL https://doi.org/10.1108/JAEE-01-2017-0005
Additional Information Additional Information : This is the author's accepted manuscript. The final published version is available here: https://doi.org/10.1108/JAEE-01-2017-0005.

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