Debt Maturity and Trade Credit in Public and Private Firms

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Abstract

This thesis examines debt maturity and trade credit in public and private firms. It consists of three essays that try to answer the following questions: Does the IPO decision affect the debt maturity structure of a firm? Do private firms use more or less trade credit than public firms? Does the supplier’s listing status affect its trade credit provision? The first essay investigates the effect of an initial public offering (IPO) on the evolution of debt maturity structure using a sample of U.S. firms that went public during the period 1998-2011. I find that firms decrease their short-term debt by 19% in the first two years after the IPO and decrease it post-IPO, by about 7% relative to the pre-IPO level. These results continue to hold in a sample of new debt issues, in a difference-in-difference regression of IPO and non-IPO firms, in a treatment regression to account for endogeneity of the IPO decision, and in an instrumental variable regression to control for the joint determination of leverage and debt maturity. Further results show that the decline in short-term debt post-IPO is consistent with the asymmetric information and agency costs of equity theories and inconsistent with the agency costs of debt theory. I also find that the IPO effect on debt maturity was magnified during the recent financial crisis. The second essay explores the use of trade credit by public and private firms using a sample of U.S. firms during the period 1995-2012. Evidence shows that private firms use more trade credit by about 40.4% than public firms. This result is robust to models accounting for sample selection and for the endogeneity associated with a firm’s decision to go public. In line with the asymmetric information and credit constraints theories, private firms that are young, have more growth opportunities, and fewer tangible assets rely more on trade credit than their public counterparts. Compared to private firms, public firms are faster in adjusting toward their target trade credit due to their lower adjustment costs. I also find that during the recent financial crisis, public firms increased their reliance on trade credit, while, suppliers granted private firms less trade credit. The third essay examines the supply side of trade credit; more specifically, the impact of a supplier’s listing status on its trade credit provision using a sample of U.S. firms during the period 1994-2012. The findings show that public firms provide nearly a quarter more trade credit than their private counterparts. I propose that this is because public firms have higher financial capability, better ability in handling the trade credit process, and in enforcing payments and contract terms, than private firms. I rule out that the endogeneity of the listing decision and the observable differences between public and private firms have driven my earlier results. Additional tests show that firm characteristics, industries types, and level of competition, have a significant impact on the level of trade credit provided by public and private firms. The results also indicate that both types of firms provided less trade credit during the recent financial crisis.

Keyword(s)

debt maturity, trade credit, public firms, private firms, financial crisis

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