# 4 Measuring sectoral comovement, input-output linkages, and the use of trade credit

## 4.1 The use of trade credit

The main measure of the intensity of use of trade credit is the _Payables to Cost of Goods Sold Ratio_ , _P_ , (henceforth _Payables Financing_ ) which is the inverse of the payables turnover ratio widely used in financial analysis.<sup>6</sup> For a given firm and year it corresponds to the average of the accounts payable at the end of years _t_ and _t −_ 1 divided by the total cost of goods sold in year _t_ and measures the fraction of input purchases financed with supplier’s credit.

The model presented in section 2, as well as the model of Kiyotaki and Moore (1997), suggests that the use of financial intermediaries as a source of finance for the purchase of intermediate inputs could attenuate the transmission of shocks through credit chains. To test this prediction, I also measure the relative use of intermediaries versus suppliers as sources of short-term financing by the ratio of short term debt to accounts payable, _S._ A high value for this ratio indicates that a firm obtains most of its short term financing from the financial system.

The empirical analysis requires representative values of these measures for various manufacturing sectors in different countries, which I obtain in the following manner (focusing on the payables financing ratio, _P,_ to fix ideas). First, I compute a representative value of _P_ for each country _c_ ( _Pc_ ) as the median of _P_ across all manufacturing firms in the country with more than five years of data in Worldscope 2006, except for the U.S.where I use data from Compustat. Additionally, for the U.S. I also calculate industry-level values of _P, Pi,US,_ aggregating all firms in a given industry in the same way described above, which then I divide by the US country-level value, _PUS,_ to obtain a relative index of payables for each industry in the U.S., _Pi_ = _Pi,US/PUS_ . Industries in the U.S. where _Pi,US_ is higher (lower) than the overall U.S. median _PUS_ will have a relative value of accounts payables _Pi_ higher (lower) than one. Finally, assuming that these relative values for different industries are constant across countries, I estimate the industry _i_ level value of accounts payables in a given country _c, Pic,_ as the product of the US relative value of industry _i_ and country _c_ ’s overall median, _Pic_ = _Pi × Pc._ Several aspects of this procedure require further discussion. The assumption of constant relative ratios across countries is equivalent to assuming that some industries tend to rely relatively more on trade credit financing for technological reasons that do not vary substantially across countries. This assumption was previously used by Fisman and Love (2003) who also provide a series of theoretical and empirical justifications for it. My motivation for making this assumption is mainly data availability. The 2006 version of Worldscope contains data on about 10,500 manufacturing firms in 58 countries, but for most of the 36 developing countries included it does not report sufficient firms at the 3-digit ISIC industry-level. For instance, more than 40 percent of the countries in the sample have fewer than five manufacturing industries with more than five firms, and almost

> 6For a recent application of this measure to analyze the determinants of trade credit use, see Demirguc-Kunt and Maksimovic (2001).

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