The relationship between credit policy and firms’ profitability: empirical evidence from Indian pharmaceutical sector
-
DOIhttp://dx.doi.org/10.21511/imfi.17(2).2020.12
-
Article InfoVolume 17 2020, Issue #2, pp. 146-156
- Cited by
- 1843 Views
-
638 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Credit policy plays a vital role in the operational efficiency of credit departments as it reduces the ambiguity of credit departments’ functions by giving clear guidelines and instructions. It also reduces the loan default and speeds up accounts receivable turnover. This paper seeks to evaluate the effect of credit policy on the profitability of pharmaceutical firms listed on the Bombay Stock Exchange (BSE), using a balanced panel data of 82 pharmaceutical firms from 2008 to 2017. The number of days’ collection period and the number of days’ payable deferral period are chosen for measuring firms’ credit policy, while return on assets (ROA) is used for measuring firms’ profitability. It is found that the number of days’ collection period and the number of days’ payable deferral period have a negative and significant effect on the profitability of the pharmaceutical firms, while the control variables leverage, firm size, and age negatively impact the profitability of pharmaceutical firms. Financial managers in pharmaceutical companies should reduce the number of days’ collection period and increase the number of days’ deferral period to reduce the risk of bad debts. Furthermore, they should conduct a credit analysis to evaluate potential clients as it prevents bad debts.
- Keywords
-
JEL Classification (Paper profile tab)G30, G32, L25, O25
-
References63
-
Tables6
-
Figures0
-
- Table 1. Variables description
- Table 2. Descriptive statistics
- Table 3. Correlation matrix
- Table 4. Panel diagnostic tests
- Table 5. Heteroscedasticity and multicollinearity tests
- Table 6. Regression fixed effects model
-
- Abuzayed, B. (2012). Working capital management and firms’ performance in emerging markets : The case of Jordan. International Journal of Managerial Finance, 8(2), 155-179.
- Afrifa, G. A. (2013). Working Capital Management and Aim Listed SME Companies Profitability : A Mixed Research Method Approach. Bournemouth University.
- Afrifa, G. A., & Padachi, K. (2016). Working capital level influence on SME profitability. Journal of Small Business and Enterprise Development, 23(1), 44-63.
- Afrifa, G. A. (2016b). Net working capital, cash flow and performance of UK SMEs. Review of Accounting and Finance, 15(1), 21-44.
- Anbar, A., & Alper, D. (2011). Bank specific and macroeconomic determinants of commercial bank profitability: Empirical evidence from Turkey. Business and Economics Research Journal, 2(2), 139-152.
- Anil. (2015). Impact of working capital management on profitability: A study of Indian manufacturing companies (Doctoral thesis). Available at Shodhganga.
- Atandi, F. G., & Wabwoba, T. B. (2013). Effect of credit on micro and small enterprises performance in Kitale Town. International Journal of Academic Research in Business and Social Sciences, 3(9), 570-583.
- Bagchi, B., Chakrabarti, J., & Roy, P. B. (2012). Influence of working capital management on profitability : A study on Indian FMCG companies. International Journal of Business and Management, 7(22), 1-10.
- Baltagi, B. H., Bratberg, E., & Holmås, T. H. (2005). A panel data study of physicians’ labour supply: the case of Norway. Health Economics, 14(10), 1035-1045.
- Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2010). Working capital management in SMEs. Accounting & Finance, 50(3), 511-527.
- Banos-Caballero, S., Garcıa-Teruel, P. J., & Martınez-Solano, P. (2012). How does working capital management affect the profitability of Spanish SMEs? Small Business Economics, 39(2), 517-529.
- Berg, H. L. T. (2016). Working capital management: Evidence from Norway. International Journal of Managerial Finance, 12(3), 295-313.
- Brigham, E. F., & Ehrhardt, M. C. (2008). Financial Management: Theory and Practice (12th ed.). Mason: OH: Thomson South-Western.
- Cheng, N. S., & Pike, R. (2003). The trade credit decision: Evidence of UK firms. Managerial and Decision Economics, 24(6-7), 419-438.
- Chowdhury, M. A. F., & Rasid, M. E. S. M. (2017). Determinants of performance of Islamic banks in GCC countries: Dynamic GMM approach. Advances in Islamic Finance, Marketing, and Management, 49-80.
- Cooly and Roden. (1988). Business Financial Management. New York: The Dryden Press.
- Deloof, M. (2003). Does working capital management affect profitability of Belgian firms ? Journal of business finance & Accounting, 30(3-4), 573-588.
- Denčić-Mihajlov, K. (2011). Impact of accounts receivable management on the Profitability during the financial crisis: Evidence from Serbia. Paper presented at 9th International ASECU Conference on “Systemic Economic Crisis: Current Issues And Perspectives”.
- Ferrando, A., & Mulier, K. (2013). Do firms use the trade credit channel to manage growth ? European Central Bank, 37(8), 3035-3046.
- Field, A. (2009). Discovering Statistics Using SPSS. International Journal of Psychophysiology, 52.
- Garcia-Teruel, P. J., & Martınez-Solano, P. (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance, 3(2), 164-177.
- Garson, G. D. (2012). Testing statistical assumptions: Blue Book Series.
- Gitman, L. J. (2003). Principles of Managerial Finance (10th ed). Boston: Pearson Eduction.
- Gitman, L. J. (2009). Principles of Managerial Finance (12th ed). Boston: MA: Pearson Prentice Hall.
- Hair Jr, J. F., Black, W. C., Babin, B. J., & Andersen, R. E. (2010). Mutilvariate data analysis (7th ed). Upper Saddle River, NJ: Pearson Prentice Hall.
- Hamption, J. J. (1980). Financial Decision Making. New Delhi: Prentice Hall of India.
- Hill, M. D., Kelly, G. W., & Lockhart, G. B. (2012). Shareholder returns from supplying trade credit. Financial Management, 41(1), 255-280.
- Hill, N. C., & Sartoris, W. L. (1992). Short-term financial management: text and cases. Macmillan Publishing Company.
- Hsiao, C. (2003). Analysis of panel data (2nd ed.). New York: Cambridge University Press.
- Kyereboah-Coleman, A. (2007). The impact of capital structure on the performance of microfinance institutions. Journal of Risk Finance, 8(1), 56-71.
- Kung’u, J. N. (2015). Effects of Working Capital Management on Profitability of Manufacturing Firms in Kenya (Dectoral thesis). Jomo Kenyatta University of Agriculture and Technology.
- Lazaridis, I., & Tryfonidis, D. (2006). The relationship between working capital management and profitability of listed companies in the Athens Stock Exchange. Journal of Financial Management and Analysis, 30(76), 1-12.
- Lin, T.-T., & Chou, J.-H. (2015). Trade credit and bank loan: Evidence from Chinese firms. International Review of Economics & Finance, 36, 17-29.
- Mahato, J., & Jagannathan, U. K. (2016). Impact of working capital management on profitability : Indian telecom sector. Journal of Management & Commerce, 2(2), 17-23.
- Makau, M. V., AA, B., & Stephen, M. M. (2014). Effect of working capital management on financial : A case study of listed manufacturing firms at Nairobi securities exchange, Kenya. International Journal of Management and Commerce Innovations, 4(2), 881-888.
- Masood, O., & Ashraf, M. (2012). Bank-specific and macroeconomic profitability determinants of Islamic banks: The case of different countries. Qualitative Research in Financial Markets, 4(2/3), 255-268.
- Martínez-Sola, C., García-Teruel, P. J., & Martínez-Solano, P. (20014). Trade credit and SME profitability. Small Business Economics, 42(3), 1-31.
- Mbula, K. J., Memba, S. F., & Njeru, A. (2016). Effect of accounts receivable on financial performance of firms funded By government venture capital in Kenya. IOSR Journal of Economics and Finance, 7(1), 62-69.
- Mehta, M. S. P. (2017). Working capital management and firms’ profitability : Evidence from emerging Asian countries. South Asian Journal of Business Studies, 6(1), 80-97.
- Moyer, R. C., McGuigan, J. R., Kretlow, W. J., & Nunez Herrejon, J. L. (2005). Administración financiera contemporánea [Contemporary financial management] (9th ed.). México: International Thomson. (In Spanish)
- Mushtaq, H., Chishti, A. F., Kanwal, S., & Saeed, S. (2015). Trade off between liquidity and profitability. International Journal of Scientific Research and Management, 3(5), 2823-2842.
- Niresh, J. A. (2012). Working capital management & financial performance of manufacturing sector in Sri Lanka. European Journal of Business and Management, 4(15), 23-31.
- Niskanen, J., & Niskanen, M. (2006). The determinants of corporate trade credit policies in a bank-dominated financial environment: the case of finnish small firms. European Financial Management, 12(1), 81-102.
- Padachi, K. (2006). Trends in working capital management and its impact on firms ’ Performance: An analysis of mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58.
- Pais, M. A., & Gama, P. M. (2015). Working capital management and SMEs profitability: Portuguese evidence. International Journal of Managerial Finance, 11(3), 341-358.
- Rahman, M. M. (2011). Working capital management and profitability: A study on textiles industry. ASA University Review, 5(1), 115-132.
- Raheman, A., Afza, T., Qayyum, A., & Bodla, M. A. (2010). Working capital management and corporate performance of manufacturing sector in Pakistan. International Research Journal of Finance and Economics, 47(47), 156-169.
- Saito, R., & Bandeira, M. L. (2010). Empirical evidence of trade credit uses of Brazilian bublicly – listed companies. Brazilian Administration Review, 7(3), 242-259.
- Şamiloğlu, F., & Akgün, A. İ. (2010). The relationship between working capital management and profitability: Evidence from Turkey. Business and Economics Research Journal, 3(5), 62-71.
- Sen, M., & Oruç, E. (2009). Relationship between efficiency level of working capital management and return on total assets in Ise. International Journal of Business and Management, 4(10), 109-114.
- Sharma, A. K., & Kumar, S. (2011). Effect of working capital management on firm profitability: Empirical evidence from India. Global Business Review, 12(1), 159-173.
- Singhania, M., Sharma, N., & Rohit, J. Y. (2014). Working capital management and profitability: Evidence from Indian manufacturing companies. Decision, 41(3), 313-326.
- Tahir, M., & Anuar, M. B. A. (2015). The determinants of working capital management and firms performance of textile sector in pakistan. Quality & Quantity, 50(2), 605-618.
- Tauringana, V., & Afrifa, G. A. (2013). The relative importance of working capital management and its components to SMEs ’ profitability. Journal of Small Business and Enterprise Development, 20(3), 453-469.
- Tran, H., Abbott, M., & Yap, C. J. (2017). How does working capital management affect the profitability of Vietnamese small and medium sized enterprises ? Journal of Small Business and Enterprise Development, 24(1), 2-11.
- Tsuruta, D. (2015). Bank loan availability and trade credit for small businesses during the financial crisis. Quarterly Review of Economics and Finance, 55, 40-52.
- Ukaegbu, B. (2014). The significance of working capital management in determining firm profitability: Evidence from developing economies in Africa. Research in International Business and Finance, 31, 1-16.
- Vahid, T. K., Elham, G., Mohsen, A. khosroshahi, & Mohammadreza, E. (2012). Working capital management and corporate performance: Evidence from Iranian companies. Procedia – Social and Behavioral Sciences, 62, 1313-1318.
- Waema, P., & Nasieku, T. (2009). Effect of working capital management on financial performance of manufacturing firms in Kenya. Journal of Financial Management & Analysis, 2(2), 75-80.
- Wester, K. L., Borders, L. D., Boul, S., & Horton, E. (2013). Research quality: Critique of quantitative articles in the Journal of Counseling & Development. Journal of Counseling & Development, 91(3), 280-290.
- Wu, W., Rui, O. M., & Wu, C. (2012). Trade credit, cash holdings, and financial deepening: Evidence from a transitional economy. Journal of Banking and Finance, 36(11), 2868-2883.
- Yazdanfar, D., & Öhman, P. (2016). The impact of trade credit use on firm profitability: Empirical evidence from Sweden. Journal of Advances in Management Research, 13(2), 116-129.
- Yunos, R. M., Nazaruddin, N., Ghapar, F. A., Ahmad, S. A., & Zakaria, N. B. (2015). Working capital management in Malaysian government-linked companies. Procedia Economics and Finance, 31(15), 573-580.