Eurasian Bus Rev (2018) 8:171–191

https://doi.org/10.1007/s40821-017-0074-8

ORIGINAL PAPER

A dynamic approach to accounts receivable: the case

of Jordanian firms

Ala’a Adden Abuhommous1 • Tareq Mashoka2

Received: 19 October 2016 / Revised: 15 January 2017 / Accepted: 18 March 2017 /

Published online: 8 May 2017
Ó Eurasia Business and Economics Society 2017

Abstract This paper studies the trade credit policy of firms for a sample of Jordanian
listed firms in the period 2000–2014. In addition, this paper tests whether the
accounts receivable decisions follow a model of partial adjustment. The generalized
methods of moments estimation results suggest that firms have a target accounts
receivable level and move toward this target quickly. In addition, we find that short
term finance, internal cash flow, positive sales growth, product quality, and prof-
itability are playing an important role in the trade credit policy. The study recom-
mends that firms must pay attention to their relationship with customers because they
represent an important investment opportunity. Furthermore, firms should maintain
close relationships with banks because it influences their trade credit policy.

Keywords Accounts receivable  Trade credit policy  Optimal accounts

receivable ratio  Partial adjustment model

1 Introduction

Trade credit represents an important aspect of firms’ investment, where they deliver
goods or render services to customers before receiving their cash payment. Given
the importance of accounts receivable as an investment, several theoretical and
empirical studies have focused on explaining the logic behind trade credit decisions.
Firstly, it can increase sales due to the financial motivation, with firms acting as

& Ala’a Adden Abuhommous

alaa_h1@mutah.edu.jo; alaa_h1@yahoo.com
Tareq Mashoka
tmashoka@yahoo.com; tmashoka@mutah.edu.jo
1
Banking and Finance Department, Business School, Mutah University, Al-Karak, Jordan
2
Accounting Department, Business School, Mutah University, Al-Karak, Jordan

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financing intermediaries offering trade credit to financially constrained customers

(Schwartz 1974; Emery 1984; Smith 1987; Ferrando and Mulier 2013). Secondly,
trade credit can be used as an advertising tool to build and develop a customer base.
Accounts receivable allows firms to stimulate demand and expand market share
through providing extended credit periods and increasing cash discounts (Nadiri
1969; Pike et al. 2005). Thirdly, accounts receivable is an alternative tool to price
reductions and evading price restrictions without provoking competitors into a price
war. It is also a flexible approach to enhance corporate image by building goodwill
(Ng et al. 1999; Garcı́a-Teruel and Martı́nez-Solano 2010a). Fourthly, it creates the
dependence relationship where customers find it difficult to shift their purchases to
another supplier (Petersen and Rajan 1994, 1995; Wilner 2000). Fifthly, accounts
receivable reduces the transaction cost of goods exchanged for money; instead of
paying the supplier for purchases each time the buyer receives the products, they
accumulate all the payments until an agreed date between them. Hence, the buyer
reduces the cost of precautionary cash holdings that are needed to cover any
unanticipated purchases (Ferris 1981). Investment in accounts receivable is
perceived by investors as a sign of increasing sales and growth in profitability.
Therefore, as a firm’s size increases it invests more in accounts receivable to signal
financial health (Molina and Preve 2009; Garcı́a-Teruel and Martı́nez-Solano
2010a; Hill et al. 2012). Furthermore, it plays an important role in reducing
information asymmetry between firms; sellers transfer goods to buyers without the
immediate demand of cash payment which provides enough time to inspect the
quality of goods received, thus improving the moral relationship between a firm and
its clients (Emery and Nayar 1998; Cheng and Pike 2003). In addition to its role in
enhancing firm performance through higher sales and market share, accounts
receivable also could be used to decrease the cost of bank loans. Berger et al. (2016)
find that liquid collaterals such as accounts receivable could decrease the loan risk
premium paid for banks. Furthermore, trade credit policy influences the firm
performance, where the empirical studies find a positive effect of trade credit on
firm profitability (Enqvist et al. 2014; Knauer and Wöhrmann 2013; Yazdanfar and
Öhman 2016; Afrifa 2016), Shareholder return (Hill et al. 2012), firm value (e.g.,
Aktas et al. 2015), and firm growth (Lopez-Garcia and Puente 2012; Ferrando and
Mulier 2013). Moreover, investment in trade credit affects the industry growth.
Fisman and Love (2003) find that the industries that rely on trade credit have higher
growth than industries not using trade credit. However, financing the investment in
accounts receivable comes with some cost. Large investments in working capital
may lead to significant problems for firms and might eventually lead to bankruptcy.
This is because firms have to lock significant amount of money in financing the
working capital, which leads firms to forgo the opportunity to invest in
profitable investments (Soenen 1993). Thus, higher accounts receivables may lead
firms to find alternative sources of funds to finance the investment in accounts
receivable (Hill et al. 2012). These sources are costly, especially if the firms have to
use external sources of finance. Baños-Caballero et al. (2014) suggest that firms
should minimize the investments in working capital because of the high cost of
external finance. They find that high level of working investments have a negative
effect on firms’ performance. In addition, bad debt expenses increase as the

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accounts receivable increases; and the cost of debt collection may increase as well.
Therefore, the positive and negative impacts of trade credit leads firms toward
making important trade-offs between the costs and benefits of investment in
accounts receivables. Therefore, efficient and effective management of accounts
receivable is crucial for firms. Most of the past papers are based on static models;
where they implicitly assume that the target accounts receivable level is achieved
immediately by firms without delays (e.g. Petersen and Rajan 1997; Deloof and
Jegers 1996; Niskanen and Niskanen 2006). The assumption that firms can
instantaneously adjust toward their target accounts receivable ratio may not be
realistic. Nadiri (1969) shows that the actual firm’s accounts receivable level may
not be always equal to the target level. Thus, there are reasons for the gap between
actual and target accounts receivable level. Most firms cannot predict their sales
accurately, or may not correctly estimate the rates of default and bad debt; this gap
may reflect disequilibrium in other assets of the firms, such as capital assets or
inventory. Therefore, the disequilibrium in other balance sheet items may affect the
adjustment process in accounts receivable. However, there are a few studies that
examine the dynamic model of accounts receivable, where they assume that firms
bear some costs in order to adjust their current accounts receivable level. Hence,
they partially adjust their accounts receivable level toward the desired target level
(Nadiri 1969 and Garcı́a-Teruel and Martı́nez-Solano 2010a).
Accounts receivable represents an important and significant amount of Jordanian
firms’ investment. Based on a sample of listed Jordanian firms, accounts receivable
formed 15% of total assets, and credit sales formed 35% of total sales at the end of
2014, which indicates the importance of trade credit on the firm performance and its
continuity. Furthermore, the results from Jordanian market show a positive impact of
working capital management on firms’ profitability and value (Abuzayed 2012).
Furthermore, the main characteristic of the financial system of the Jordanian market is
a bank-based system (Aivazian et al. 2003 and Poghosyan 2011). Jordanian firms rely
heavily on banks loans to finance their investments. In addition, the banking system in
Jordan is developed. Aivazian et al. (2003) show that firms have strong relationships
with banks. Hence, and as suggested by Demirgüç-Kunt and Maksimovic (2002),
firms that operate in bank-based market offer more trade credit because they can easily
finance the investment in trade credit through bank loans.
In this paper, our purpose is to investigate the dynamic aspects in the accounts
receivable investment decisions for Jordanian firms. Additionally, we examine the
main determinants of target accounts receivable investment decisions. Furthermore,
we extend the empirical international evidence on the factors that affect trade credit
policy decisions. Thus, this study is motivated by the identification of target
accounts receivable and its determinants which will encourage firms to consider
these factors in their firm value maximization decisions.
This study aims to make a number of contributions to the understanding of the
trade credit policy in Jordan. First, this study makes a contribution by reporting the
results of target accounts receivable level. Second, the paper examines the factors
that affect the target accounts receivable level using data in emerging market. Third,
the regression models were estimated using panel data methodology. This method
enables us to control for firm-specific effect and time-specific effect. We employ

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two-step system-GMM estimator developed by Arellano and Bover (1995) and

Blundell and Bond (1998). This method has considerable advantage over other
estimations techniques such as cross-section for dynamic panel data (Bond 2002).
We use data from listed Jordanian firms for the period from 2000 to 2014. We
develop a target adjustment model, where firms set their target accounts receivable
level according to specific factors and partially move toward it. Our empirical
evidence shows that Jordanian firms have a target accounts receivable ratio, but
there is a cost to adjust their previous year’s level toward the target ratio in the
current year. Our results show that the cost of adjustment is similar to that in the
developed countries, with Jordanian firms needing less than 2 years to reach their
target. In addition, we find that the accounts receivable ratio is positively affected by
the availability of bank loans, product quality, and positive internal cash flow.
Finally, the accounts receivable level is negatively affected by the firm’s
profitability.
The remainder of this paper is organized as follows: Sect. 2 reviews the
theoretical background and the main theories on the motivation for the trade credit
decision. Section 3 discusses the target level of trade credit. The following section
discusses the main determinants of the trade credit decision. Data and descriptive
statistics, model and empirical results are described in Sect. 4. Discussion of the
results is shown in Sect. 5. The final section draws the conclusions from the study.

2 Theoretical background

In the presence of a perfect market, all positive net present value investments should
be considered, and the firm’s characteristics should not affect the firm’s investment
decisions. However, the market is imperfect, and one of the key investments for any
firm is accounts receivable. There are two general theories that attempt to explain
the reasons behind the firm’s decision to offer trade credit to their customers.

2.1 Financing motives theory

This theory holds that sellers may act as intermediaries, and finance their customers’
purchases at a rate lower than that offered by financial institutions (Schwartz 1974;
Emery 1984; Smith 1987). Market imperfections increase the wedge between
financial institutions and firms. However, some firms have easy access to the money
market relative to their customers. These firms maximize their profits by selling
merchandise to customers that are financially constrained and thus have fruitful
investment opportunities. Furthermore, suppliers have close relationships with their
customers due to regular contact. So they have more information about trading
activity, purchases, and time of payments. Therefore, they know more about each of
their customer’s financial status than the financial institutions would do. Addition-
ally, the cost of reselling the products seized from defaulting customers is lower for
the suppliers than for the financial institutions. The role of trade credit as a financing
tool may be more important for financially constrained firms, especially during
periods of limited funds. Psillaki and Eleftheriou (2014) find that during the

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financial crisis small firms shift from bank loans to trade credit. Moreover, Myers’s
(1984) pecking order theory demonstrates that firms should finance their investment
using the internal sources of funds before external sources, and debt before equity.
However, the external sources of funds bear some additional costs such as issuing,
administrative, and asymmetric information costs. Hence, the seller’s financial
motive is derived from the desire to earn from their liquid reserves by investing in
trade credit, or from using external sources of funds if available at a lower cost.

2.2 Operating motives theory

This theory states that firms face a transitory fluctuation of demand due to
seasonality or uncertainty of sales. It is costly for firms to adjust their operations in
the form of changing the prices, accumulating inventory, and reducing customer
queues (Emery 1984, 1987). Alternatively, firms can offer trade credit to customers.
Hence, firms prefer to expand their trade credit to customers during low demand
periods and restrict trade credit in peak periods. In this way, firms can reduce the
cost of holding inventory, minimize the fluctuations of production level, and
minimize the problem of under- or over-investment in productive assets (such as
plant, equipment, and machines).

2.3 Commercial motives

Trade credit has commercial motives that can be used to increase the firm market
share. Firms can increase sales if they extend the trade credit policy to customers.
Nadiri (1969) argues that firms can increase product marketability by granting trade
credit to customers. In particular, he suggests that the cost of trade credit is similar
to the advertising expenses. Hence, trade credit is considered as a promotional tool
to support customer needs (Shipley and Davies 1991). Smith (1987) demonstrates
that the trade credit can increase sales by allowing customers to verify the product
quality before paying. Furthermore, Lee and Stowe (1993) suggest that trade credit
is a useful tool to guarantee product quality. They argue that newly established firms
and small firms as well guarantee their product quality by allowing customers to use
product first and pay later. In this way, the asymmetric information problem
between customers and sellers can be reduced. Long et al. (1993) find that smaller
manufacturing firms are more likely to grant trade credit because their products
need longer periods of time to be assessed. However, Deloof and Jegers (1996) find
no evidence to support the product quality hypothesis.
Additionally, trade credit can be considered as part of firm’s pricing strategy
because it allows firms to change the selling price by changing the credit terms
according to the customer’s financial status (Schwartz 1974). Mainly, firms can
increase the credit period or grant more cash discounts to customers. This allows
sellers to increase market share (Brennan et al. 1988). Therefore, firms can increase
sales if they can bear the cost of financing late customer’s payments. Petersen and
Rajan (1997), Cheng and Pike (2003), and Garcı́a-Teruel and Martı́nez-Solano
(2010a, b) show evidence for price discrimination theory, where they find that firms
with high profit margin can offer more trade credit.

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Many firms have invested in accounts receivable and a few studies have
examined the determinants of the firm’s investment decision in accounts receivable.
Petersen and Rajan (1997) studied the accounts receivable decision in listed U.S
firms; they find that the supplier access to funds increases investments in accounts
receivable. They also find that firms with high profit margin intend to increase the
market share by targeting lower-credit customers. In addition, they find high growth
firms increase trade credit. Moreover, Niskanen and Niskanen (2006) investigate the
determinants of accounts receivable ratio in Finnish companies. They also find that
the access to external finance positively affects the firm’s ability to grant trade
credit. Garcı́a-Teruel and Martı́nez-Solano (2010b) explore the trade credit policy in
European SMEs, where they find some support to the results that the capability to
obtain resources from banks increases the firm’s ability to grant trade credit. They
also find that the cost of external finance affects the accounts receivable ratio.

3 Target accounts receivable and speed of adjustment

Lee and Wu (1988), Wu and Ho (1997), Gallizo and Salvador (2003), Gallizo et al.
(2008), Mate-Sanchez et al. (2012) demonstrate that firms have target balance sheet
items. In particular, they show that the financial ratios including the current balance
sheet items follow the partial adjustment model. Firms’ management consider that
continuous adjustment of balance sheet items toward the desired target is crucial.
The working capital items are to a large extent easy to adjust and manipulate (Peles
and Schneller 1989; Fazzari and Petersen 1993). Empirically, Baños-Caballero et al.
(2012) show that firms have a target working capital and the benefits from being on
target is higher than the cost of adjustment.
Most of the previous papers regarding trade credit policy adopt the static model,
where they assume that firms do not bear any cost to move toward a target level of
accounts receivable (Petersen and Rajan 1997; Deloof and Jegers 1999; Ono 2001).
However, few studies assume that firms have an accounts receivable target and
partially move toward it, and they use the dynamic model to test the speed of
adjustment toward this target (Garcı́a-Teruel and Martı́nez-Solano (2010a). In this
study, we extend empirical research and test for the adjustment process for accounts
receivable in publicly traded Jordanian firms. We assume that the firms have a target
trade credit policy and balance the benefits of being on target with the costs of being
off target. When firms are prevented from being on their target, the speed of
adjustment toward the target trade credit level depends on the cost of adjustment
relative to the cost of being off target. Accordingly, firms rebalance their trade credit
accounts. Thus, we test whether firms have a target trade credit level and measure
the speed of adjustment toward this target. When examining the effect of accounts
receivable at time t - 1 on the current year’s level, we test if the firms have a target
credit level or not. Furthermore, we measure the speed of adjustment toward this
target. Thus, we assume that the credit policy of Jordanian firms is a result of
dynamic optimizing strategy.
H1 Jordanian firms have a target accounts receivable ratio and adjust their
accounts receivable ratio toward this target.

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4 Determinants of target accounts receivable policy

The dependent variable of the study is firm accounts receivable level. We follow
Petersen and Rajan (1997) and use the ratio of accounts receivable to sales (REC) as
the dependent variable to measures the longest term of payment that firms grant to
customers. The main objective of this study is to examine whether Jordanian firms
have target accounts receivable level. Since the banking sector is very important for
Jordanian firms finance, our main independent variable is the access and availability
to external funds. There are also some factors that may affect the accounts
receivable level, we include them as control variables. Therefore, we include in our
model firm sales growth, internal cash flow, product quality, and profitability.

4.1 Creditworthiness and availability of external funds

The financial market imperfections may enable sellers to have better management if
they offer credit to customers than the financial institutions, in terms of information
collection process and managing the debt. The financing motives of trade credit
demonstrate that firms with high creditworthiness have better access to funds from
financial markets, and as a result, they act as financial intermediaries between
capital markets and financially constrained customers. Therefore, creditworthiness
of sellers and their accessibility to financial markets affect the ability to grant trade
credit (Schwartz 1974; Wilner 2000; Petersen and Rajan 1997). However, the
degree to which the firm’s characteristics measure its ability to finance investments
is influenced by the financial system structure. The accessibility of suppliers to
funds is affected by the information asymmetric between them and financial
institutions. Bond et al. (2003) find that firms that operate in bank-based markets
have better access to funds than firms that operate in market-based markets. They
find that bank-based markets enable firms to establish good relations with banks and
obtain funds easily.
The supplier can have updated information about their customer due to regular
interaction. The trading activities may give important information regarding the
financial situation. Sellers can liquidate the repossessed products quickly if
customers default. Hence, the collateral value of products is higher than for financial
institution (Garcı́a-Teruel and Martı́nez-Solano 2010a). Furthermore, the trade
credit may mitigate the moral hazard problem, the first reason is that the supplier
offers inputs and goods which are costly to divert (Cuñat 2007). Secondly, the
buyers may bear high costs if they switch suppliers, especially if the supplier offers
differentiated goods and services (Giannetti, et al. 2011). Consequently, we measure
creditworthiness and reputation by firm size; where large firms may have less
asymmetric information than small firms. Following Garcı́a-Teruel and Martı́nez-
Solano (2010a), we measure size as the natural log of total assets.
H2 Firm size has positive influence on accounts receivable level.
Another important proxy of creditworthiness is a firm’s age; a long relationship
with financial markets reduces the asymmetric information problem with the firm
and lenders, which allows firms to raise funds easily with low cost (Guariglia 2008).

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Besides, older firms have more experience with customers. So they may face lower
risk when extending their trade credit to customers that they have known for long
periods (Petersen and Rajan 1994). We measure the AGE as the logarithm of
(1 ? age), where age is number of years since the firm was established. In addition,
it is more important to build reputation during the early years of a firm’s life than in
later years. Thus, we include the square of the age (AGE2) to allow for this non-
linear relationship. We expect a positive impact of size and age on accounts
receivable levels and a negative relationship between AGE2 and accounts receivable
levels.
H3 Firm age has positive influence on accounts receivable level.
The ability of a firm to borrow from financial institutions at a reasonable cost
may affect its trade credit decision, which affects the financing motives of the firm
(Schwartz 1974; Emery 1984; Smith 1987). There is no benefit from acting as a
financial intermediary when a firm cannot finance itself, or has to pay a high cost for
borrowing funds (Garcı́a-Teruel and Martı́nez-Solano 2010a). The financial system
of Jordan is bank based, and most firms depend on banks to raise funds. Therefore,
the only short-term sources of finance are bank loans. Thus, we use short-term
financing as a proxy for the availability of external funds. Short-term leverage
(STLEV) is calculated as short-term loans over total sales. Furthermore, the
financial cost of debt (FCOST) can affect the cost of financing accounts receivable;
when the cost is low, firms are encouraged to extend their credit policy. FCOST can
be calculated as the percentage of financial expenses over total debt less accounts
payable. We expect a positive relationship between short-term loans and accounts
receivable.
H4a Short term banks loans have positive effect on accounts receivable level.
H4b Financial cost of debt has negative influence on accounts receivable level.

4.2 Internal resources

According to the pecking order theory, the first choice for firms to finance their
investment is internal funds (Myers 1984). Hence, they have more resources at their
disposal to grant trade credit to customers. Thus, the availability of internal sources
of funds can affect a firm’s ability to extend its credit policy (Petersen and Rajan
1997; Niskanen and Niskanen 2006; Garcı́a-Teruel and Martı́nez-Solano 2010a).
Internal cash flow can be measured by the variable CFLOW, calculated as the
percentage of net profit plus depreciation over sales.
H5 Cash flow has positive influence on accounts receivable level.

4.3 Sales growth

Sales growth is an indicator of demand for a firm’s goods. Hence, firms use trade
credit to achieve their target growth rate, thus, firms give customer discount and
allow customers to delay payments (Niskanen and Niskanen 2006). On the other
hand, lower rates of sales growth mean that the firm needs to extend its trade credit
to boost growth. Consequently, firms use trade credit as an advertising tool to
increase their sales (Nadiri 1969). According to operating motives, firms tend to

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decrease trade credit during peak period and extend trade credit during low demands
periods (Emery 1987). On the other hand, firms with negative sales may lose some
of their ability to force the customers to pay their debt, thereby increase the accounts
receivable ratio (Molina and Preve 2009). In order to further examine the effect of
sales growth on accounts receivable, we examine the impact of the sales growth
direction on the trade credit policy. Thus, we split growth into two parts,
multiplying growth by dummies to differentiate between positive growth
(PGROWTH) and negative growth (NGROWTH). We expect that firms grant
trade credit when they have positive sales growth in order to increase sales. On the
other hand, we expect firms tend to decrease the trade credit when they face
negative sales growth. During recession periods, firms may find it difficult to finance
their operations, which limits their ability to sell on credit (Garcı́a-Teruel and
Martı́nez-Solano 2010a) We measure sales growth as [(sales at timet - salest-1)
over sales at timet-1].
H6 Sales Growth rate has positive influence on accounts receivable level.

4.4 Product quality

Accounts receivable may be used as an instrument to promote firms’ goods. Firms

with high confidence about the quality of their merchandise might allow customers
to examine their products. Thus, customers might use and test the products, and
return them if they are below the agreed standards. The asymmetric information
problem between a firm and its customers can be reduced if the firm grants time to
customers between their purchasing and payment. Therefore, firms use accounts
receivable as a mechanism to promote product quality (Lee and Stowe 1993; Pike
et al. 2005). Following Long et al. (1993), product quality (TURN) can be measured
as [(sales/total assets)/accounts receivable]. Thus, low assets turnover indicates that
firms depend more on fixed assets to produce products, which might be considered
as a signal for product quality. Subsequently, firms that need longer production time
are more concerned about the quality of their products.
H7 Product quality has negative influence on accounts receivable level.

4.5 Price discrimination

The terms and conditions of trade credit granted may affect the price of goods,
where the actual price may differ according to the payment timing. Thus, customers
that benefit from discounts are paying less than others who do not take advantage of
the discount offered. Firms increase their sales by offering trade credit to customers
with financial difficulties, but the actual selling price for these customers is higher
than for customers that are financially healthy. This is known as the price
discrimination theory, proposed by Brennan et al. (1988) and empirically tested by
Petersen and Rajan (1997). They propose that firms operating in monopolistic
competition and with high profit margin (PROF) are more able to bear the cost of
granting trade credit and increase their cash flow. We measure profit margin by the
percentage of gross profit to sales. In addition, to control for the effect of firms with

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high profit margin the square of profit margin (PROF2) is added (Petersen and Rajan
1997).
H8 Profitability has positive influence on accounts receivable level.

5 Data sample, descriptive statistics, and model specification

5.1 Sample and descriptive statistics

We use data from the Bureau van Dijk’s Osiris database. The sample contains all of
the non-financial Jordanian publicly traded companies listed at the Amman Stock
Exchange. We choose the period 2000–2014 due to the availability of data. Our final
sample consists of 105 firms. In our estimation we use the dynamic model and the
Generalized Method of Moments. Hence, we need each firm to have at least five
consecutive years’ data in order to calculate robust estimations. We use panel data
because it enables us to learn about the credit policy process, and simultaneously
control for unobserved heterogeneity between cross sections and between years. As
well, with panel data we can use the dynamic model (which cannot be used in cross-
sectional analysis).
Table 1 shows the common size balance sheet, where each item is divided by
total assets. Accounts receivable represents, on average, 14.94% of total assets,
which represents a significant amount of the Jordanian firms’ investment. Hence, the
trade credit decision is crucial for a firm’s management team. Accounts receivable is
the largest item in current assets, even larger than inventory. The accounts
receivable level is increasing over time from an average of 12% during the period
2000–2009 to 21% during the period 2010–2014, which indicates that firms are
investing more in accounts receivable during the last 5 years. This can be explained
by the financial crisis of 2008 because customers consider trade credit as a
sustainable source of funds.
Table 2 reports summary statistics on the sample. Accounts receivable represents
a significant percentage of the firms’ sales (35%). On average in our sample each
firm sells 89 million Jordanian Dinar (JD) per year, has average total assets equal to
97 million Jordanian Dinar, and has an average age of 29 years. Short-term leverage
represents 59% of total sales.
Table 3 displays correlation among variables used in the regression analysis. The
correlation between REC and STLEV is positive and indicates the importance of
bank loans on the firm’s credit policy. The correlation among the independent
variables suggest that the multicollinearity should not be problematic since its less
than (0.70). Furthermore, we use the variance inflation factor (VIF) for each
independent variable in our model. The highest VIF value is (2.11) and the mean
value for all other variables is (1.38), this suggests that the multicollinearity does
not institute a problem in the regressions.

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 Table 1 Selected Balance sheet item for all firms in the sample for the years 2000–2014
Balance sheet item Year Average
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cash on hand and at banks 7.30 7.00 7.40 8.80 11.80 12.40 13.50 10.90 11.00 10.73 10.32 11.92 9.59 9.90 8.40 10.06
Account receivables, net 12.40 10.30 10.90 10.60 10.40 12.70 11.10 12.00 14.50 12.37 15.81 19.83 20.74 24.20 26.25 14.94
Inventory 11.60 11.80 12.60 11.20 11.90 7.30 11.60 11.50 11.40 11.16 11.26 11.56 12.70 11.35 10.26 11.28
Total current assets 36.70 35.10 36.80 37.80 40.90 47.80 46.60 46.50 47.10 40.72 43.61 48.72 48.36 49.25 48.51 43.63
Total fixed assets 49.20 49.10 48.20 46.40 39.70 34.40 35.00 34.80 35.20 41.87 41.82 37.15 35.18 33.54 31.50 39.54
Accounts and notes payable 14.40 12.70 12.60 13.40 9.80 8.40 9.30 8.00 9.80 12.61 10.60 14.52 16.24 16.77 17.47 12.44

The value of each item is calculated as the sum of all firms averaged by total assets for all firms in each year. The sample contains 105 non-financial firms listed in the
Amman Stock Exchange
181

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Table 2 Descriptive statistics of variables

Mean Perc. 10 Median Perc. 90 S.D

REC 0.35 0.029 0.21 0.72 0.54

SALES 64,129,174 1,500,000 10,876,500 84,037,754 2,710,000
GROWTH 0.16 -0.26 0.058 0.45 0.97
TOTAL ASSETS 97,210,000 4,500,000 28,900,000 120,000,000 22,890,000
LSIZE 16.92 16.81 1.37
AGE 29 15 23 58 15
LAGE 3.30 2.7 3.17 4.06 0.48
STLEV 0.59 0.15 0.37 1.06 0.91
FCOST 0.13 0 0.064 0.17 0.75
CFLOW 0.067 -0.111 0.106 0.330 0.57
TURN 0.79 0.22 0.644 1.36 0.80
PROF -0.010 -0.19 0.051 0.247 0.58

REC is accounts receivable over total sales; SALES is total sales in U.S dollar; GROWTH is the
percentage change of total sales; Total assets is total assets in U.S dollar; LSIZE is the natural logarithm
of total assets; LAGE as the natural logarithm of (1 ? AGE) where AGE is number of years since the
firms established; STLEV is short term loans divided over total sales; FCOST is the percentage of
financial expenses over total debt less accounts payable; CFLOW is the percentage of net profit plus
depreciation over total sales; TURN is the percentage of sales over total assets minus accounts receivable.
PROF is gross profit to sales

5.2 Econometric specification of the model

In this study we use the partial adjustment model, where we assume that the firms
have a target accounts receivable ratio. This target is a function of k explanatory
variables abovementioned in Sect. 2. The specification is as follows:
X

RECi;t ¼ a0 þ dk Xk;i;t þ ei;t ð1Þ
K¼1

where REC* represents the target credit policy ratio (accounts receivable ratio) for
firm i at time t and X is a vector of k explanatory variables that represents the firm’s
characteristics (i.e. size, age, age2, sales growth, short-term leverage, financial cost,
internal cash flow, and sales turnover). These variables affect the costs and benefits
of having different trade credit policy ratios, and dk are unknown parameters to be
estimated. In imperfect market transactions cost exists and firms have to move
toward the target accounts receivable ratio gradually and frequently. Garcı́a-Teruel
and Martı́nez-Solano (2010a) find that Spanish firms have target accounts receivable
ratios with a speed of adjustment toward this target of between 0.73 and 0.77 yearly.
The speed of adjustment toward the target credit policy ratio can be presented as
follows:

RECi;t  RECi;t1 ¼ kðRECi;t  RECi;t1 Þ ð2Þ

where k represents the adjustment toward the desired credit level. If k = 1, the firm
moves toward this level with transaction cost equal to zero. On the other hand, if

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 Table 3 Correlation Matrix
REC GROWTH SIZE AGE STLEV FCOST CFLOW TURN PROF
Eurasian Bus Rev (2018) 8:171–191

REC 1
GROWTH -0.0759 1
SIZE -0.2340 0.0064 1
AGE -0.1066 -0.0855 0.1359 1
STLEV 0.5483 -0.0387 -0.0404 -0.1482 1
FCOST -0.0136 0.0343 -0.0194 0.0085 -0.0210 1
CFLOW -0.3269 0.0443 0.1312 0.0242 -0.2929 0.0122 1
TURN -0.1002 -0.0061 0.1484 0.1328 -0.1984 0.0190 0.0210 1
PROF -0.3142 0.0843 0.2120 0.0110 -0.2841 0.0117 0.6085 -0.1021 1
183

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k = 0, the firm tends not to change its current credit level, and prefers to have the
same level of credit over time where the current level is similar to the previous
year’s level, RECi,t-1. The trade-off between the costs of moving toward the target
credit ratio and the costs of being off target is determined by the magnitude of k. By
rewriting the above equations we substitute Eqs. 1 into 2, which gives:
X
RECi;t ¼ ð1  kÞRECi;t1 þ k dk Xk;i;t þ kei;t ð3Þ
K¼1

The gap between the desired and actual credit level is measured by the amount of
k where it lies between 0 and 1. The value of k is closer to zero when the adjustment
cost is higher than the cost of being off target, and the firm prefers to be on the
disequilibrium level.
Equation 3 can be written as:
X
RECi;t ¼ boRECi;t1 þ bk Xk;i;t þ ei;t ð4Þ
K¼1

where bo = 1-k, bk = dkk, and ei,t = kei,t

By adding a firm-specific effect and a year-specific effect our model of accounts
receivable to test for the target credit level, becomes:
RECi;t ¼ a0 þ boRECi;t1 þ b1 GROWTHi;t þ b2 LSIZEi;t þ b3 LAGEi;t
2
þb4 LAGEi;t þ b5 STLEVi;t þ b6 FCOSTi;t þ b7 CFLOWi;t ð5Þ
2
þb8 TURNi;t þ b9 PROFi;t þ b10 PROFi;t þ gi þ wt þ ei;t

where a0 is the constant; REC is accounts receivable over total sales for firm i at
time t; GROWTH is the percentage change of total sales; LSIZE is the natural
logarithm of total assets; LAGE is the natural logarithm of (1 ? age) and age is
number of years since the firms established; LAGE2 is the square of the LAGE;
STLEV is short-term loans over total sales; FCOST is the percentage of financial
expenses over total debt less accounts payable; CFLOW is the percentage of net
profit plus depreciation over total sales; TURN is the percentage of sales over total
assets minus accounts receivable; PROF is gross profit to sales; PROF2 is the square
of PROF; gi represents the time-invariant unobservable firm-specific effects and the
associated omitted variable bias (e.g. managerial skills, management attitude); wt
are time-specific effects that are the same for all firms but may change over time
(e.g. interest rates, macroeconomics variables); ei,t is the random disturbance. For all
estimations we apply a two-step System-GMM estimator proposed by Blundell and
Bond (1998) with corrected standard using the method proposed by Windmeijer
(2005). System-GMM takes the first difference of the dependent and independent
variables, hence the firm specific-effect (fixed effect) is eliminated. The endogeneity
problem may arise because ei,t-1 and RECi,t-1 are correlated. Furthermore, the
independent variables are simultaneously determined. Therefore, the System GMM
uses lagged differences of the regressors as instruments for equations in levels, in
addition to lagged levels of regressors as instruments for equations in first differ-
ences. We apply the Hansen’s (1982) J-test to examine the validity of the used

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instruments, under the null hypothesis that the instruments are uncorrelated with the
error term. We test for first-order (AR 1) and second-order (AR 2) serial correlation
using the test proposed by Arellano and Bond (1991), under the null hypothesis that
there is no serial correlation.

6 Results and discussion

Table 4 shows the estimates of target and determinants of trade credit policy. The
specification tests suggest that our models are correctly specified; the Hansen-J test
and (AR 2) show the validity of our two-step System-GMM estimation. The null of
the second-order serial correlation (AR 2) is rejected where we find no second-order
serial correlation. The p value in the Hansen-J test, for all models, is between 0.147
and 0.53, which suggests that the null cannot be rejected and the instruments are not
correlated with the error term.
The estimates reported in this regression are consistent with H1, that Jordanian
firms have a target trade credit policy. In columns from 1 to 7 the speed of
adjustment toward target accounts receivable is measured by the coefficient of
RECt-1. The RECt-1 coefficient is statistically significant at 1%. Thus, the results
confirm that the Jordanian firms have target accounts receivable and move toward
this target quickly. The adjustment coefficient bo which is given by 1 - k is
between 0.68 and 0.57. This indicates that firms quickly adjust their accounts
receivable level to avoid the cost of being on the disequilibrium level. Hence,
Jordanian firms may find that the cost of adjusting accounts receivable toward their
target is low. This result is consistent with the findings of target accounts receivable
level by Nadiri (1969) and Garcı́a-Teruel and Martı́nez-Solano (2010a). Addition-
ally, the results support that firms have target financial ratio (e.g. Gallizo et al. 2008
and Mate-Sanchez et al. 2012). This confirms that firms have target working capital
ratio (Baños-Caballero et al. 2012).
In columns (1–7) the results also show that the creditworthiness measured by the
firm’s size and firm’s age and age square has the predicted sign but is not
statistically significant (p [ 0.1); H2 and H3 are, thus not supported. For European
countries Garcı́a-Teruel and Martı́nez-Solano (2010b) find the same results for age
but not for size. This may result from the financial system in Jordan; the financial
system in Jordan is bank-based. Hence, there is close relationship that exists
between firms and banks. Thus, size and age may not be an important factor for
banks to evaluate the financial status of the firms.
The results also confirm that the availability of short-term finance (STELV) is
positive and statistically significant at a conventional level, which is consistent with
H4a. Thus, access to bank credit may increase the firm’s capability to afford trade
credit. Hence, firms may play a financial intermediary role between banks and
customers, as suggested by the financing motives theory (Schwartz 1974; Emery
1984; Smith 1987). The results also indicate the effect of the banking system on
firm’s ability to finance their investment as suggested by Bond et al, (2003). The
impact of availability of short term bank loan is consistent with findings of Garcı́a-
Teruel and Martı́nez-Solano (2010a) and Niskanen and Niskanen (2006).

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Table 4 Determinants of accounts receivable, dependent variable: RECi,t

1 2 3 4 5 6 7

RECi,t-1 0.32*** 0.43*** 0.41*** 0.359*** 0.33*** 0.353*** 0.43***

(3.58) (5.31) (6.04) (4.72) (3.78) (4.48) (5.43)
STLEV 0.155** 0.078 0.11** 0.12** 0.151** 0.12** 0.078
(2.39) (1.3) (2.19) (2.27) (2.34) (2.27) (1.25)
FCOST -0.108 -0.073 -0.083 -0.097 -0.113 -0.096 -0.05
(-1.52) (-1.18) (-1.56) (-1.58) (-1.53) (-1.55) (-1.03)
LSIZE -0.014* -0.097 -0.08 -0.081 -0.086 -0.09 -0.08
(-1.81) (-1.17) (-1.17) (-1.19) (-1.47) (-1.46) (-0.96)
LAGE 0.015 -0.40 -0.14 -0.261 -0.256 0.005 -0.38
(0.27) (-0.53) (-0.24) (-0.36) (-0.43) (0.11) (-0.44)
LAGE2 _ 0.05 0.029 0.039 0.039 _ 0.046
(0.49) (0.25) (0.36) (0.42) (0.42)
CFLOW 0.613 _ 0.52 0.6 0.695* 0.545 _
(1.36) (1.38) (1.53) (1.67) (1.3)
PCFLOW _ 0.92** _ _ _ _ 0.88**
(2.55) (2.49)
NCFLOW _ 0.22 _ _ _ _ 0.21
(0.43) (0.43)
GROWTH -0.014 -0.021 _ -0.013 -0.02 -0.007 _
(-0.45) (-1.28) (-0.60) (-0.70) (-0.35)
PGROWTH _ _ 0.003 _ _ _ -0.07
(0.13) (-0.34)
NGROWTH _ _ -0.27 _ _ _ -0.47
(-0.78) (-1.26)
TURN 0.095** 0.09** 0.084** 0.08* 0.08** 0.09* 0.093**
(2.24) (2.00) (2.00) (1.75) (1.99) (1.94) (2.03)
PROF -0.721* -0.56 -0.614* -0.802** -0.80** -0.74** -0.51
(1.65) (-1.38) (-1.75) (-2.33) (-1.99) (-2.08) (-1.25)
PROF2 _ -0.027 0.001 -0.01 _ -0.01 -0.021
(-0.95) (0.04) (-0.37) (-0.35) (-0.84)
AR(1) -2.37 -2.13 -2.38 -2.41 -2.38 -2.41 -2.16
P = 0.018 P = 0.032 P = 0.017 P = 0.016 P = 0.017 P = 0.016 P = 0.031
AR(2) 0.82 0.93 0.86 1.05 0.85 1.01 0.91
P = 0.415 P = 0.353 P = 0.388 P = 0.294 P = 0.396 P = 0.311 P = 0.365

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Table 4 continued

1 2 3 4 5 6 7

J-TEST 46.95 (48) 79.17 (67) 67.29 (60) 55.02 (54) 50.18 (48) 53.01 (54) 75.61 (66)
P = 0.516 P = 0.147 P = 0.242 P = 0.436 P = 0.387 P = 0.513 P = 0.196

REC is accounts receivable over total sales; SALES is total sales in U.S dollar; GROWTH is the
percentage change of total sales; positive sales growth (PGROWTH); negative sales growth
(NGROWTH); Total assets is total assets in U.S dollar; LSIZE is the natural logarithm of total assets;
LAGE as the natural logarithm of (1 ? AGE) where AGE is number of years since the firms established;
LAGE2 is the square of the LAGE; STLEV is short term loans divided over total sales; FCOST is the
percentage of financial expenses over total debt less accounts payable; CFLOW is the percentage of net
profit plus depreciation over total sales; TURN is the percentage of sales over total assets minus accounts
receivable. PROF is gross profit to sales; PROF2 is the square of PROF. All of estimations have been
carried out using two-step System-GMM z statistics in brackets. AR(i) is a serial correlation test of order
i using residuals in first differences, asymptotically distributed as N(0,1) under the null of no serial
correlation. J-test is a test of the over-identifying restrictions, asymptotically distributed as x2 under the
null, degrees of freedom in brackets. ***, **, * indicate coefficient significant at 1, 5, 10% level,
respectively

The significance of the access to bank credit coefficient and the insignificance of
creditworthiness coefficients may give us an indicator of the financial market nature
that Jordanian firms work in. In markets where the number of publicly traded
companies is relatively small the asymmetric information problem may not be an
issue and creditworthiness indicators (i.e. size and age) may not be important to
banks. This is because banks have the ability to evaluate the firm’s performance
with high accuracy. As predicted, the estimated coefficient of cost of finance
(FCOST) is negative. However, it is not statistically significant, not supporting H4b.
This might be explained by the ability of the firm to transfer the cost of borrowing to
customers.
The results also show that cash flow coefficient (CFLOW) is positive but
significant at 10% in one estimation only, thus H5 is not supported. As a result,
firms that generate more cash flows are more able to sell their merchandise on
credit, consistent with Pecking order theory (Myers 1984) and with the empirical
studies Niskanen and Niskanen (2006) for Finnish firms and Garcı́a-Teruel and
Martı́nez-Solano (2010a) for Spanish firms, but not consistent with the finding of
Petersen and Rajan (1997) for U.S. firms. For further investigation, column (2)
shows the results from disaggregation of CFLOW to two parts—positive cash flows
PCFLOW and negative cash flows NCFLOW. The coefficient for PCFLOW is
positive and statistically significant. Indicating that firms with positive internal cash
flow tend to offer trade credit to customers; this result supports the pecking order
theory, where firms use internal funds to finance their investments. The financial
status of the firm may limit its ability to sell merchandise on credit. The coefficient
of NCFLOW variable is insignificant. These results confirm the finding from
STLEV, where firms are more likely to work as financial intermediaries if they have
access to external funds and available internal resources of funds. The result is
consistent with finding of Long et al. (1993) and Garcı́a-Teruel and Martı́nez-Solano

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(2010a). Consequently, we can conclude that availability of funds is playing a key

role of a firm’s trade credit decision.
The results do not support our hypothesis that the growth rate has an effect on the
accounts receivable level; the coefficient of GROWTH is not statistically
significant, thus, (H6) is rejected. This suggests that growth firms are not using
trade credit to stimulate their sales. The result is not consistent with operating
motives. To extend our investigation of testing the impact of sales growth on
accounts receivable, we replace the variable GROWTH with two variables—the
positive and negative growth of sales. In column (3) the results show that neither
positive nor negative sales growths have impact on the accounts receivable level.
The coefficient of TURN which introduced to test the product quality hypothesis
is positive and statistically significant. Hence, firms with high sales turnover have
more accounts receivable level, thus. This result is in contrast to H7, that firms
producing high quality goods offer more trade credit to give the customer the
required time to test their product. The result shows that firms producing goods
which do not need a long time to evaluate are more willing to offer trade credit.
Long et al. (1993) find negative relationship between product quality measure and
trade credit. Furthermore, some studies find no evidence to support the product
quality hypothesis (Deloof and Jegers 1996; Garcı́a-Teruel and Martı́nez-Solano
2010a). Thus, we can conclude that firms with high product quality are not using
trade credit as an advertising tool to increase their sales.
The PROF variable which proxies for price discrimination practices has a
negative and statistically significant coefficient; thus the result is in contrast to H8.
This is inconsistent with our initial expectation that firms with a high profit margin
have a propensity to generate more cash flow by financing poorer customers. In
contrast, the results suggest that firms with a high profit margin invest less in
accounts receivable. Profit margin may be an indicator of profitability, which shows
that profitable firms do not want to take any risk by lending to financially
constrained customers. The result is inconsistent with finding of study of Pike et al.
(2005), that uses a survey data and find firms adopt product quality strategy and
extend trade credit. On the other hand, studies that use financial data find no
evidence to support the product quality hypothesis (e.g. Cheng and Pike 2003;
Garcı́a-Teruel and Martı́nez-Solano 2010a). The results also show that the square
coefficient PROF2 is statistically insignificant. Also, the results confirm that a non-
linear relationship between profitability and accounts receivable does not exist.

7 Conclusions

This paper analyses the dynamic aspect of trade credit decision specifically on the
existence of target accounts receivable ratio, the speed of adjustment and
determinants of target. While the trade credit theories explain the main factors
that affect the firm’s trade credit decision to its customers, there has been little
evidence whether firms have target accounts receivable ratio, and how the firm’s
characteristics affect this target. This study is based on an unbalanced data of 105
listed firms in ASE in the Jordan over the period from (2000 to 2014). The results

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show that the Jordanian firms partially move toward this target, and it takes them
less than 2 years to reach their target level. Thus, Jordanian firms balance relatively
well between costs and benefits of investing in accounts receivable. The results also
show that the accounts receivable is influenced by firm-specific factors. We find that
the availability of short-term external finance and positive internal cash flow
positively influence the accounts receivable ratio. Furthermore, we find that firms
that have higher product quality offer less trade credit. Moreover, we find that firms
with high profitability have lower accounts receivable ratio. However, factors such
as financial cost of debt, size, age, sales, and growth do not influence the level of
trade credit granted to customers.
Pursuing target accounts receivable level and determining the factors that
influence this decision are related to firm value maximizing goal.
This study has important practical implications for managerial finance. Since
there is target accounts receivable level, firm’s management should consider
efficient and effective monitoring of accounts receivable level in their working
capital management decisions. Thus, firms can avoid over-investing in accounts
receivable that may lead to higher opportunity cost and bad debt; or under-investing
that leads to lower sales and market share. Furthermore, firms should consider cash
flow management and their relationship with banks as an important issue because it
has significant impact on trade credit policy.
Finally, although this study covered all non-financial listed firms, one possible
limitation is that it’s biased toward listed firms. Therefore, we cannot generalize the
results for non-listed firms. This could be considered in future research. In addition,
since this study finds that firms have target accounts receivable ratio, future research
can investigate the impact of the deviation from this target on firms’ performances
and values.

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