Do trade credits finance long-term investments?
Bartholdy J. Olson D.
October 2023Elsevier Ltd
Heliyon
2023#9Issue 10
Our model indicates that European firms across all size categories use trade credits to purchase 6%–15% of tangible fixed assets and 14%–30% of intangible assets in the short-run. A long-run target adjustment model shows that large firms eventually replace most of this temporary trade credit financing with cheaper sources of funds. However, even in the long-run, small firms finance 4%–6% of tangible fixed asset purchases and 5%–10% of intangible fixed asset purchases using trade credit. Since smaller firms do not have the same access to bank credit as larger firms, trade credit is used to fund long-term investments Trade credit is therefore a key component in the capital structure decisions of smaller firms and it should be included in their weighted-average cost of capital calculations.
Long-term financing , Trade credits , Weighted average cost of capital
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Department of Economics, Aarhus University, Aarhus, Denmark
Bang School of Business, KIMEP University, Almaty, Kazakhstan
Department of Economics
Bang School of Business
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