Researchon factors affecting trade credit of Vietnamese enterprises

8 Variable Symbol Scale Expectations for the sign Studies have been done that have corresponding scales Short-term finance STLEV Average short-term debt/ Sales +/- García-Teruel and Martínez- Solano (2010a), Vaidya (2011), Phan Dinh Nguyen and Truong Thi Hong Nhung (2014), Shi et al. (2016) Financial cost FCOST Financial cost/ (Average payables - Average payables to sellers) - García-Teruel and Martínez-Solano (2010a) Net cash flow CFLOW (Profit after tax + Depreciation) / Sales +/- García-Teruel and Martínez- Solano (2010a) Asset turnover TURN Sales/(Average total assets - Average customer receivables) +/- García-Teruel and Martínez-Solano (2010a) Gross profit margin GPROF Gross margin/ Sales + Petersen and Rajan (1997), García-Teruel and Martínez- Solano (2010a) Inventory ratio INVEN Average inventory/ Sales - Bougheas et al. (2009), Vaidya (2011) Liquidity LIQ Average Cash and Short- term investments/ Average short-term debt +/- Nadiri (1969) Source: Author's synthesis Model 2: Examining the factors affecting the trade payables of the enterprise PAYit = β0 + β1GROWTHit + β2SIZEit + β3LAGEit + β4STFINDit+ β5FCOSTit + β6CFLOWit +β7CURRASit +β8INVENit +β9LIQit +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 Variable Symbol Scale Expectations for the sign Studies have been done that have corresponding scales Dependent variable Seller payables rate PAY Average seller payables/ Average total assets Petersen and Rajan (1997), Niskanen and Niskanen (2006) and García-Teruel and Martínez-Solano (2010a), Tran Ai Ket (2017) Independent variables 9 Sale growth GROWTH (Sales year t – Sales year t-1)/ Sales year t-1 + 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) Size SIZE Ln (Total Revenue) +/- Martínez-Sola et al. (2012) Years of operation LAGE Ln (1 + Years of operation) +/- 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) Short-term borrowing ratio STFIND Average short-term borrowings / Average total assets - García-Teruel and Martínez- Solano (2010a), Phan Dinh Nguyen and Truong Thi Hong Nhung (2014), Tran Ai Ket (2017) Financial cost FCOST Financial cost/ (Average payables - Average payables to sellers) + García-Teruel and Martínez-Solano (2010a) Net cash flow CFLOW (Profit after tax + Depreciation) / Sales - García-Teruel and Martínez- Solano (2010a) Short-term asset ratio CURRAS Average short-term assets / Average total assets + García-Teruel and Martínez- Solano (2010a) Inventory ratio INVEN Average inventory/ Sales +/- Bougheas et al (2009), Vaidya (2011) Liquidity LIQ Average Cash and Short- term investments/ Average short-term debt - 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 2 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: 10 Table 2.3. Describe the variables used to test the nonlinear relationship between customer accounts receivable and business performance Variable Symbol Scale Expectations for the sign Studies have been done that have corresponding scales Dependent variable Return on Assets ROA Profit after tax / Average total assets Wang (2002), Forghani et al. (2013), Bagh et al. (2016) Return On Equity ROE Profit after tax / Average equity Wang (2002), Forghani et al. (2013), Bagh et al. (2016) Independent variables Customer receivables rate REC Average customer receivables/ Total average assets + Niskanen and Niskanen (2006); Martínez-Sola et al. (2012); Khan et al. (2012), Tran Ai Ket (2017) The squared customer receivables ratio (REC)2 Square of (Average customer receivables / Average total assets) - Martínez-Sola et al. (2012) Sale growth GROWTH (Sales year t – Sales year t-1)/ Sales year t-1 + Geroski et al. (1997); Claver et al. (2002); Samiloglu and Demirgunes (2008); Martínez- Sola et al. (2012); Yazdanfar (2013) Size SIZE Ln (Total Revenue) +/- Martínez-Sola et al. (2012); Yazdanfar (2013) Financial Leverage LEV Average Liabilities / Average Equity - Goddard et al. (2005); 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 isthegreatest.Therefore,thestudyexpectedpositivesignforvariableREC(β1> 0) and negative sign for variable REC2 (β2 <0). This reversal point is the optimal customer receivables and is equal to - β1/2β2. Model 4: Examining the impact of the change in customer receivables on the business performance Vit =β0 +β1(DEVIATIONit)+β2(GROWTHit)+β3(SIZEit)+β4(LEVit)+εit (4) 11 DEVIATION: it represents the deviation from the optimal receivable level, calculated by taking the absolute value of the residual in the first model. DEVIATION is used to determine whether deviations from target receivables affect the performance of Vietnamese businesses. At the same time, we removed the two REC and REC2 variables in the third model and replaced the DEVIATION variable, then regressed the DEVIATION variable in the fourth model. H22: When the receivables are higher or lower than the target receivables, they reduce theefficiencyofVietnameseenterprises,ieβ1 <0. The research hypothesis is summarized in Table 2.4 with the expectation of the sign as follows: Table 2.4. Describe the variables used to test the effect of change in customer receivables on the performance of the business Variable Symbol Scale Expectations for the sign Studies have been done that have corresponding scales Dependent variable Return on Assets ROA Profit after tax / Average total assets Wang (2002), Forghani et al. (2013), Bagh et al. (2016) Return On Equity ROE Profit after tax / Average equity Wang (2002), Forghani et al. (2013), Bagh et al. (2016) Independent variables Deviation from optimal receivables DEVIATION Absolute value of residuals in model 1 - Martínez-Sola et al. (2012) Sale growth GROWTH (Sales year t – Sales year t-1)/ Sales year t-1 + Geroski et al. (1997); Claver et al. (2002); Samiloglu and Demirgunes (2008); Martínez- Sola et al. (2012); Yazdanfar (2013) Size SIZE Ln (Total Revenue) +/- Martínez-Sola et al. (2012); Yazdanfar (2013) Financial Leverage LEV Average Liabilities / Average Equity - Goddard et al. (2005); Martínez-Sola et al. (2012) Source: Author's synthesis 2.2. Data collection methods and processing data 2.2.1. Data sources Data used in the study were collected from two sources, which are primary and secondary - Primary data: obtained from in-depth interviews with business leaders about factors affecting the trade credit management of listed companies in Vietnam and the impact of trade credit on the performance of Vietnam's listed companies. 12 - Secondary data: obtained from the financial statements of Vietnamese listed companies excluding financial sector on the HNX and HOSE provided by the General Statistics Office of Vietnam with the high reliability. 2.2.2. Data analysis method  Qualitative method The method used in this study is a method of in-depth interviews in the form of semi- structured firms’executiveaboutthefactorsaffectingtrade credit management in Vietnamese listed companies. The main objective of the survey is to assess the current situation of using trade credit policies and the factors affecting the granting and use of trade credit of Vietnamese listed companies. At the same time, the survey tests whether trade credit has an impact on the performanceofVietnameselistedcompanies.Thesurvey’sfindingswillsupporttheacademic world the manner to explain quantitative empirical research results about the current situation of factors affecting trade credit and the impact of trade credit on the performance of Vietnamese listed companies. Since then, the thesis proposes suitable recommendations to improve the management of trade credit for listed companies in Vietnam.  Quantitative method The study uses multivariate linear regression models and tabular data for Vietnamese listed companies with the support of Stata 14.0 software. The thesis uses Random Effects Model (REM), Fixed Effects Model (FEM), Feasible Generalized Least Squares (FGLS) and Generalized Method of Moments (GMM). The author uses necessary tests to select the appropriate model, as well as detecting and correcting model defects such as F-test, Hausman test, VIF coefficient, Wald test, Breusch test -Pagan test, Wooldridge test, Hansen test and Arellano-Bond test. In particular, the author uses the GMM model - this is a modern estimation method that allows to overcome many defects of the model such as heteroscedasticity, autocorrelation and endogenous phenomena in the model. 2.3. Research data 2.3.1. Qualitative research data Qualitative research data includes in-depth interviews of listed companies. The author stops interviewing when the information is saturated and there is no new information available. Number of interviews was 21, including 2 enterprises in infrastructure services, 2 enterprises in technology industry, 3 enterprises in industry, 4 enterprises in consumer services, 4 enterprises in consumer goods, 4 enterprises in basic materials and 2 enterprises in the health sector in Hanoi, Ho Chi Minh City, Da Nang and Binh Dinh. Time for each interview lasted about 35-60 minutes. 2.3.2. Quantitative research data Quantitative research data includes the financial statements of 326 non-financial joint stock companies listed on the HNX and HOSE, provided by the General Statistics Office of Vietnam in the 2013-2017 period with approximate 1630 observations in 7 industry groups including: basic materials, industry, consumer goods, health care, consumer services, infrastructure services and technology. 13 CHAPTER 3: THE CURRENT SITUATION OF TRADE CREDIT OF VIETNAMESE ENTERPRISES 3.1. Characteristics of business operations of listed companies on the Vietnamese stock markets 3.2. Trade credit situation of Vietnamese listed companies 3.2.1. Trade credit value scale 3.2.1.1. Account Receivables The proportion of accounts receivable from customers to the total assets in Vietnamese listed companies is significant as 18,68%. However, if we compared with the study of García- Teruel and Martínez-Solano (2010a), the ratio of trade receivables to total assets of Vietnam is still low compared to other countries, for example in Spain is 39,28%, Greece is 36,55%, France is 35,55%,... and Finland has the lowest rate of 19,18%. 3.2.1.2. Account Payables The average market payables accounted for 11,60% of total liabilities and equity. The technology industry has the highest account payable proportion with an average rate of 14,44%. Especially, in this industry, there are businesses that hold the account payable as 69,45% of total liabilities and equity. This is also the industry sector providing the most trade credit to customers in the whole market. However, the seller's capital appropriation rate in Vietnamese list companies is still much lower than in other countries in the world. 3.2.2. The current situation of the use of trade credit in Vietnam's listed companies The current situation of trade credit usage of Vietnamese listed companies is reflected through in-depth interviews with business leaders.  The usage levels of trade credit According to results being obtained from in-depth interviews, 100% of businesses use credit from suppliers. In general, Vietnamese businesses are now usually allowed to pay 30-60- 90 days deferred, rarely 120 days (DN1).  Reasons for using trade credit The majority of enterprises believe that the main reason of using trade credit is capital rotation.Inaddition,“thisactivityhelpsbusinesses obtain more capital and ensures business process”(DN20).  Factors affecting the use of trade credit (1) Prestige; (2) Cash flow and solvency; (3) Inventories; (4) Bank interest rate; (5) Discount rate for early payment; (6) Sales ability  The impact of the use of trade credit on business performance Most businesses said that commercial credit has a positive impact on business performance. AccordingtoDN1,“thelongeranenterpriseoccupies trade credit, the easier it is to turn the capital around, thus the enterprise will make many good policies and its profitabilitywillbebetter”. However, a few businesses hold a firm belief that the usage of trade credit is only “reluctant” since if the debt is too high, the reputation will decrease, the suppliers will stop providing the goods. This leads to there might be not enough materials for production and business (DN8) or firms need to import materials at the high prices, consequently lowering firm performance (DN14, DN21). 14 3.2.3. Trade credit policy of Vietnamese listed companies The current status of the trade credit policy of Vietnam's listed companies is expressed in the outcomes of the in-depth interviews with corporate executives.  The usage levels of the trade credit policy 100% of businesses use trade credit policy in sales activities.  Reasons for using the trade credit policy The main reason why businesses implement trade credit policy is the competition and to remain business relationships.  Factors affecting trade credit policy Revenue and profit; (2) Bank interest rate; (3) Inventories; (4) Ability to rotate capital, cash flows; (5) Industry features  Trade credit policy - Credit term and discount rate The credit term depends a lot on the industry, but it is usually between 30 and 120 days. - Credit requirements Normally, businesses currently use the 5C judgment to measure credit quality: Character, Capacity, Capital, Collateral and Condition. - Debt collection policy Debt collection policy is the policy which is related to the collection process of account receivables. Most of businesses believe that the debt collection process consists of the following steps: determining the amount of receivales should be claimed, classifying customers by the receivables’levels,choosingdebtcollectors, reminding collectors, reminding customers to pay when the due date is close and negotiating with consumers. If they still don’t pay the debt, company will ask for court intervention. - Payment discount Payment discount is the discount amount of money for early payment customers. It is a tool to encourage customers to pay account receivalles on time.  The impact of trade credit policy on business performance The majority of enterprises stated that trade credit policy has a positive impact on business performance. However, a few said that if they do not control their receivables well, bad debts will appear. Thereby they negatively impact on thefirms’ operational efficiency since all of firm always need financial sources to do business. 3.2.4. Characteristics and role of trade credit for Vietnamese listed companies  Trade credit characteristics of Vietnamese listed companies - Trade credit is used by businesses popularly and with simple manner - Trade credit potentializes many risks - There haven’texistedthe specific regulations of trade credit yet.  The role of trade credit for Vietnamese listed companies - Increase financial resources for production and business activities - Save the cost of capital and money circulation costs - Speed up the products circulation 15 3.3. Assess the current status of trade credit of Vietnam's listed companies Currently, trade credit is being used by many Vietnamese listed companies, but there are many potential risks. Vietnamese listed companies also have a certain credit requirements. However, according to the results of in-depth interviews, many enterprises do not have detailed binding terms, as well as the debt collection process has not been properly built. Therefore, businesses need to study the strict terms of the business contract and establish a strict debt collection process to avoid any loss to businesses. In addition, according to Vietnamese listed companies, trade credit is a valuable source of funding, so most businesses do not miss this source of capital to diversify the financial sources and maintain business operations. However, it does not mean that the companies can use these financial sources as much as possible, thefirms’ reputation and the relationship between them and their vendors are the core determination. The application of trade credit policies of Vietnamese listed companies is heavily influenced by the degree of corporate creditworthiness. In general, Vietnamese enterprises with large scale and the stable market will reduce the attraction of customers through trade credit policy. Besides, long-established businesses will provide credit to customers more than misappropriating capital from suppliers. CHAPTER 4: RESULTS OF THE TEST OF FACTORS AFFECTING TRADE CREDIT OF VIETNAMESE ENTERPRISES 4.1. Descriptive statistics 4.2. Examining the factors affecting the customer receivables of Vietnamese listed companies Table 4.1. Factors affecting customer receivables Dependent variable REC Estimation method FEM REM FGLS GMM PROVI 0,7116*** 1,0127*** 1,4667*** 1,6450** GROWTH -0,0165*** -0,0111** -0,0114*** -0,0201 SIZE -0,0153*** -0,0126*** -0,0098*** 0,0024 LAGE 0,0046 -0,0012 -0,0113* -0,0152 STLEV 0,0880*** 0,1071*** 0,0999*** -0,0893 FCOST -0,0281 -0,0298 -0,0275 -0,2483* CFLOW -0,0421 -0,0658** -0,0819*** -0,9798* TURN 0,0620*** 0,0614*** 0,0628*** -0,0913 GPROF -0,0493* -0,0413 -0,0160 0,4522 INVEN -0,1288*** -0,1112*** -0,0606*** -0,2008* LIQ 0,0008 0,0034 0,0058*** -0,0224 Number of observations 1630 1630 1630 1304 R2 0,2837 0,2783 F-test 0,0000 Breusch-Pagan test 0,0000 Hausman test 0,0000 Wald test 0,0000 16 Wooldridge test 0,0000 AR (2) 0,103 Hansen test 0,505 (*), (**) and (***) represent 10%, 5%, and 1% significance respectively Source: Author's test results In table 4.1, employing the GMM estimation method, there are 4 factors that affect the receivables in the whole market including: provision for bad debts (PROVI), net cash flow (CFLOW), financial cost (FCOST) and inventory ratio (INVEN). Additionally, each industry group will have its own unique and different business characteristics, so the factors affecting the customer receivables of each industry group are also different. The test results of factors affecting the customer receivables of Vietnam's listed companies under the GMM method are detailed in Appendix 7. 4.3. Examining the factors affecting the trade payables of Vietnamese listed companies Table 4.2. Factors affecting trade payables Dependent variable PAY Estimation method FEM REM FGLS GMM GROWTH 0,0013 0,0010 0,0020 -0,0068 SIZE 0,0096** 0,0090*** 0,0044*** 0,0124** LAGE 0,0077 -0,0036 -0,0210*** -0,0102 STFIND -0,3408*** -0,3024*** -0,2511*** -0,1972*** FCOST 0,0850* 0,0859** 0,0384* 0,0160 CFLOW -0,0978*** -0,1353*** -0,0919*** -0,1404*** CURRAS 0,2403*** 0,2323*** 0,2096*** 0,1369*** INVEN -0,0384** -0,0424*** -0,0269*** -0,0877*** LIQ -0,0527*** -0,0512*** -0,0405*** -0,0343*** Number of observations 1630 1630 1630 1304 R2 0,3007 0,2968 F-test 0,0000 Breusch-Pagan test 0,0000 Hausman test 0,0003 Wald test 0,0000 Wooldridge test 0,0000 AR (2) 0,192 Hansen test 0,249 (*), (**) and (***) represent 10%, 5%, and 1% significance respectively Source: Author's test results In table 4.2, by using the GMM method of estimation, there are 6 factors affecting the trade payables in the whole market including short-term loan ratio (STFIND), net cash flow (CFLOW), short-term assets ratio (CURRAS), inventory ratio (INVEN), liquidity (LIQ), firm size (SIZE). 17 In addition, each industry group will have its own unique and different business characteristics, so the factors affecting the trade payables of each industry group are also different. The test results of factors affecting the trade payables of Vietnam's listed companies under the GMM method are detailed in Appendix 8. 4.4. Examining the impact of customer receivables on the performance of Vietnam's listed enterprises The regression results show that the expectation of a nonlinear relationship between customer receivables and business performance is completely reasonable (table 4.3). The regression coefficients of the variables REC and REC2 are statistically significant. When the dependent variable is ROA, the coefficients of REC and REC2 are both significant both significant at level 5%. Similarly, ROE is replaced as the dependent variable, the significance of the coefficients REC and REC2 are both at 10%. Table 4.3. The results of regression of non-linear relationship between customer receivables and performance of Vietnamese listed companies Estimation method GMM Dependent variable ROA ROE REC 0,4295** 0,9869* REC2 -0,8597** -1,9625* GROWTH 0,0223*** 0,0728*** SIZE 0,0082* -0,0031 LEV -0,0254*** -0,0141 Number of observations 1304 1304 AR (2) 0,256 0,761 Hansen test 0,149 0,766 (*), (**) and (***) represent 10%, 5%, and 1% significance respectively Source: Author's test results When ROA and ROE are employed as the dependent variable respectively, the coefficient of RECispositiveandthecoefficient’ssignof REC2 is negative as expectation. This proves that a nonlinear relationship exists between customer receivables and business performance, ie it has an inverse U shape. In order to test the robustness of the research results, which mean that how business performance will change if the ratio of customer receivables to assets deviates from the optimal value. The study eliminates two variables REC and REC2 in the third model and replaced with the variable named DEVIATION. Then regression was performed in the fourth model of DEVIATION. The research results are presented in table 4.4. 18 Table 4.4. The regression results test the change of customer receivables to the performance of Vietnamese listed enterprises Estimation method GMM Dependent variable ROA ROE DEVIATION -0,0568* -0,1285* GROWTH 0,0117 0,0370** SIZE 0,0119*** 0,0254** LEV -0,0306*** -0,0119 Number of observations 1304 1304 AR (2) 0,204 0,193 Hansen test 0,747 0,973 (*), (**) and (***) represent 10%, 5%, and 1% significance respectively Source: Author's test results The regression results in Table 4.4 reveal that the expectation of business performance will decrease when the ratio of customer receivables to assets deviated from the optimal value is completely reasonable. Specifically, the coefficient of the variable DEVIATION is negative and has a significant level of 10% in both cases of the dependent variable ROA and ROE. Thus, the test results have highlighted that when the customer receivables ratio shifted away the optimal value, the firm performance will decrease. Additionally, due to the different business characteristics of each industry sector such as companies in some industry use