The Firm's Trade Credit Policy Effects on Financial Distress: A Whole Response to Molina and Preve (2012)

Purpose – The aim of this paper is to analyze financial distress probability conditions based on short and long-term capital insufficiencies models, instead analysing the financial distress effects on firm’s trade credit. The conditions under which may be explained are based on scholar explanatory variable sets constituted by financing, profitability, return volatilities and flexibilities in financing and assets structure. Design/methodology/approach – Capital insufficient models are tested on two prominente bankruptcy predictions models using probit regression analysis, where control variables are related to trade credit policy and trade credit risk taking levels. Sample consists of 1.322 Western European small firms related to 9 countries. Data sample is related to the 1990-2002 period which is desired for research and characterized by a relative economic and financial stability. Findings – In relation to the inclusion of trade credit duration gap and trade credit risk taking associated to different coverage ratios in basic model (1) finish to eliminate return on assets, return volatilities and trade credit risk taking to coverage ratio effects on short term capital insufficiency. Negative working capital acts as a complement of short term financing positive effect on the deterioration of short term capital insufficiency that contributes to increase probability of financial distress (or bankruptcy). More over, the inclusion of trade credit duration gap and trade credit risk taking associated to different coverage ratios in basic model (2) eliminate return on sales volatility, negative working capital and trade credit risk taking ratios more related to core business coverage ratios impacts. Equity impact acts as the most important autonomous effect to meet trade-off predictions on strongly reducing both short and long term capital insufficiencies. Pecking order predictions are also respected by the negative impact of return on assets on long term capital insufficiency, confirming findings that no single theories provides a complete explanation for all aspects of the data analysed. Pecking order and trade off predictions are long term well running when trade credit control variables enter in long term capital insufficiency basic model. At last, FDL and Z-core models are substantially confirmed by results of long term capital insufficiency model. Research limitations/implications – This study is the first period research on financial distress, which is limited to a stabilized period of data, to be completed further with a complementary research using data from 2003 to 2015. This second period research will include crisis impact on capital insufficiencies as a reinforced sign of financial distress and/or bankruptcy within a double period comparative analysis. Practical implications – Findings contribute to understand an alternative path to explain financial distress and or bankruptcy from short and long-term capital insufficiencies; capital requirements are suggested to be diversified to help firms to achieve financial sustainability conditions. Originality/value – To the author’s best knowledge, short and long-term capital insufficies with trade credit control variables impact is not studied so far in the existing corporate financing literature.