Credit Position and Retail Firm Operational Efficiency.

Evidence from China.

by
Yue Zhang
2021

1
TABLE OF CONTENT

LIST OF TABLES.....................................................................................iii

LIST OF FIGURES...................................................................................iv

Abstract…………………………………………………………………………………………v

1. Introduction..........................................................................................1

1.2 Research Background and Motivation......................................................1

1.3 Research Question................................................................................4

1.4 Main Findings.......................................................................................4

1.5 Research Contribution...........................................................................5

1.6 Organization of the Study......................................................................5

2. Literature Review...............................................................................6

2.1 Theoretical Framework of Operational Efficiency.......................................6

2.2 Operational Efficiency of Retailing Firms..................................................8

2.3 Firm Credit Position..............................................................................9

2.4 Theoretical Aspects of Credit Position and Firm Operational Efficiency........10

2.5 The Association between Credit Position and Operational Efficiency Via Trade
Credit.....................................................................................................12

2.6Other Determinants of Operational Efficiency...........................................14

3. Research Methodology......................................................................17

3.1 Data Envelopment Analysis..................................................................17

3.2 Malmquist Productivity Index................................................................17

3.3 Bootstrapped Tobit Regression Model....................................................18

3.4 Review of DEA Application in Retail Firms Efficiency.................................18

3.5 Model Specification.............................................................................20

3.5.1 Operational Efficiency.......................................................................20

3.5.2 Credit Position.................................................................................21

3.5.3 Control Variables.............................................................................22

3.5.4 Regression Model............................................................................23

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3.6 Analytical Approach.............................................................................23

3.7 Data.................................................................................................25

4.Results……………………………………………………………………………………26

4.1 Profile Description of Retail Firms..........................................................26

4.2 Efficiency of Retail Firms in 2019 and 2020 using DEA.............................29

4.3 Retail Firms Efficiency Change..............................................................33

4.4 Relationship between Credit Position and Operational Efficiency................35

4.5 Extending the Analysis: Interaction of Credit Position with Control Variables
.............................................................................................................38

5. Conclusion........................................................................................41

5.1 Implications to Management and Practice...............................................42

5.2 Study Limitations................................................................................43

6.References.........................................................................................44

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LIST OF TABLES

Table 1. Profile of Retail Firms.................................................26

Table 2. Description of Study Variables.....................................27
Table 3. Summary Statistics....................................................28
Table 4. Efficiency Scores of Retail Firms...................................29
Table 5. Efficiency Scores Summary Statistics (2019 and 2020)....32
Table 6 MPI Analysis of 14 Retail Firms from 2016 to 2020..........33
Table 7. Correlation Matrix......................................................35
Table 8. Tobit and Bootstrapped Regression Models....................36
Table 9. Robustness Check: Fixed Effects Models........................37
Table 10. Interaction and Non-linear Models..............................39

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LIST OF FIGURES

Figure 1. Analytical Framework................................................24

Figure 2. Efficiency Trend of selected Retail Firms.......................31

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Abstract

The relationship between operational efficiency and credit position has not
received significant attention despite credit position being an important factor in
retail firms. In economies where the access to finance is limited, private firms
resort to trade credit, and firms rely on credit position to secure trade credit,
hence consequently the improving the operations of the firm. The operational
efficiency of Chinese companies is not strong and it is characterized by a number
of aspects including low innovation ability, and poor product quality leading to
the question; does credit position have a negative or positive influence on
operational efficiency of retail firms in China? To answer the question, this
research sought to explore the relationship between credit position and
operational efficiency of retail firms in China. Rather than using operational
efficiency ratios, the study adopts a non-parametric measure of operational
efficiency namely the Data Envelopment Analysis. The study further employs
bootstrapped Tobit regression model to establish the relationship between credit
position and operational efficiency. The study found that credit position has
significant beneficial effects on the efficiency of Chinese retail companies. The
study finds that the beneficial effects of credit position increases with increase in
firm size. The study concludes that credit position creates avenue for more
liquidity which the firm can leverage to smoothen the operations, whether
through improving technologies, or increasing inventory materials, or paying
distribution and marketing expenses among others.

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 1. Introduction

1.2 Research Background and Motivation

According to Lee and Johnson (2013) operational efficiency pertains to the
use of the company inputs in order to achieve its output effectively, adopting the
appropriate input mix to create the correct output blend in light of economic
conditions and the effectiveness of the scaling of its outputs. Numerous studies
have highlighted the importance of efficiency as a profit growth and stability
factor. The most fundamental strategic objectives for firms are based on
operational efficiency. The improvement of consumer satisfaction and increased
value for shareholders rely both on operational effectiveness. The improvement
of operational efficiency is thus one of the primary goals of the firms.
Organizations do endeavour to enhance operational efficiency, but they struggle
because changes aren't properly conveyed throughout the firm (Gill et al., 2014).
Efficiency has been highlighted across numerous studies as a component that
influences profitability and long-term sustainability. According to Fisman (2001),
a firms overall performance and efficiency are closely connected. The most
effective use of an organization's resources is referred to as efficiency.
Companies must be able to produce adequate product from input in order to
sustain competitive advantage.
Operational efficiency has a considerable impact on corporate output in the
wholesale and manufacturing industries, as well as supplying essential
information for a variety of tactical, analytical, and set of policies choices
(Modgliani, & Zeman, 1952; Tetlock, 2008). As per Osazefua (2019) firms must
improve their operational efficiency to aid their financial sustainability. Even
though, the analysis of operational efficiency and productivity is one of the
important activities in every firm, studies have concentrated on how operational
efficiency affects various aspects of the firm and completely ignored what
impacts the operational efficiency (Berlin & Mester 2001; Couppey-Soubeyran et
al., 2012; Shou et al., 2018).
Financing is an important aspect in the context of operational efficiency
hence firms can leverage credit position to generate financial positions which will
help in attaining operational efficiency (Shin & Park, 2020). According to Walker
(2019) firms finance their operations through institutions such as banks hence,
every supplier is paid at the instance of delivery. However, firms do not only get

1
their operational finances from financial intermediaries but also the suppliers in
form of delayed payments known as account payables (Auboin & Engemann,
2013). Additionally, the firm may not require immediate payment after delivering
the goods and services, hence account receivables. The management of account
receivables and account payables leads to firms’ credit position. The credit
position of a company is the total of the value of transfers it has acquired over
time minus the value of transfers it has sent over time. Couppey-Soubeyran
(2012) defines credit position as the spread between accounts receivables and
accounts payable.
So how does credit position influences operational efficiency? From a
theoretical perspective, credit position is a critical feature of corporate finance in
the scope of accounts and inventory control since it has a substantial impact on
the company's capital structure and profitability (Tsuruta, 2013). According to
Berlin & Mester (2001) credit positions determines trade credit. The credit
position of the firm determines whether the firm will extend credit to its
commercial partners to finance its operations. When a firm is in net credit
position, it is more likely to get trade credit from its suppliers and thus finance its
operations and when it is on the net debt position, it is less likely to extend the
credit to its customers or get credit from the suppliers due to financial distress.
In the net debit position, the firm would focus much of its attention on acquiring
receivables and settling the payables. However, this mechanism where firms
finance their operations through receivables and trade credit has received little
attention from few scholars (Burkart & Ellingsen, 2002; Berlin & Mester, 2001).
Moreover, Allen et al. (2005) avers that credit position is analogous to liquidity
position. A firm with good credit position implies that it has liquid cash for its
operations and liquidity is critical for smooth function and operational efficiency
of the firm (Allen et al., 2005; Lotto, 2019); hence credit position may help avoid
inventory shortages and smooth out operational processes. Thus, if a company's
credit position is solid, it can attain operational effectiveness (Ge & Qiu, 2007).
Surprisingly, scant research has addressed the influence of credit position
on firms’ efficiency (Dietsch, 1998; Agostino & Trivieri, 2019). Dietsch (1998)
analysis the influence of credit position in terms of trade credit on the efficiency
of firms, however, the context of the study was on French firms. Agostino and
Trivieri (2019) looked into how trade credit position influences the efficiency of

2
firms in Italy. So far similar studies remain elusive in the context of Chinese
firms hence, the need for the study.
Walker (2019) asserts that businesses usually finance their activities with
equity or debt, which necessitates the use of middlemen including banks and
investors. Companies have performed well in many nations where the finance
industry is not well developed, owing to their inclination to discriminate against
and/or be discriminated against services provided by commercial banks such
as loans (Tsuruta, 2013). Chinese companies, rely on their credit position and
trade credit to meet their financial needs. Cull, Xu and Zhu (2009) provides an
overview of a Chinese private corporation that has been identified to use trade
credit to secure a considerable amount of funding.
A number of things make studying Chinese retail sector intriguing. The
retail industry in China has been undergoing tremendous growth as the country
transitions to a market economy and from centrally planned economy. In recent
years, total consumer goods retail sales have increased (Chen et al., 2020). The
restructuring of China's economy has intensified, and the retail business has
seen significant advances as well. From 3.9 Yuan trillion in 2000 to 39.2
Yuan trillion in 2020, the country's overall retail value has increased tenfold. The
retail industry prospered as a result of the tremendous growth, but dividends
began to dwindle. Over the last five years, the retail sector has demonstrated
tenacious life in the face of pressure, which is reflected in new business models
and capital restructuring and business innovation while at the same time
leverage development of internet finance.  The last two decades are
unquestionably the sector’s golden development decades. The local stores have
successfully competed with foreign capital over the two last decades. This retail
sector evolution is manifested through developments and emergence of vertical
e-commerce and e-commerce in general driven by advancements in technology
and internet (Nazarenko & Zhong, 2020).
China's prosperity has always been fuelled by the expansion of businesses
in a variety of sectors. The cultivation and procurement of raw materials are the
key sectors in China. On one hand, despite the fact that China's primary sector is
the world’s biggest with a value of US$1.8 trillion, its operating efficiency is low
(Zheng, 2004). On the other hand, China's secondary industry, which includes
commercial services including insurance and banking, is well-known around the
globe as being effective (Zheng, 2004). Despite the growth of Chinese industries,

3
Ramanathan and Yu (2008) observed that Chinese retail industry is characterized
by low operational efficiency and only 37.7 percent of the registered retail firms
reported progress as proved by Malmquist productivity index during 2000 and
2003. The researchers discovered that retail characteristics had a considerable
impact on retail efficiency. Although, it can be argued that it is almost a decade
ago and that operational efficiency has improved since then, more recent study
Li and Liu (2019) proves that not the case. Li and Liu (2019) observed that
operational efficiency of Chinese companies is not strong and it is characterized
by a number of aspects including low innovation ability, and poor product quality
which are attributed to low operational efficiency. Given the variety and
difference in effectiveness among Chinese enterprises, it is necessary to
investigate the factors that influence operational efficiency.
1.3 Research Question
The scanty literature on operational efficiency and credit position and the
potential linkages between the two variables justifies the need to empirically
determine their relationship. Besides, retail industry in China has seen significant
growth due to development in internet finance, capital restructuring and business
innovation. Yet authors have pointed out that operational efficiency of retail
industry in China is varying with some reporting efficient use of their resources
and achieving optimal returns while others reporting inefficiencies (Ramanathan
& Yu,2008; Li & Liu, 2019). This study sought to answer the question; does
credit position have beneficial effects on the operational efficiency of retail firms
in China? To contribute to the discovery of the relationship between the two
variables, the study specifically focused on the period between 2016 and 2020.
1.4 Main Findings
The research found that credit position has a positive influence on the
efficiency levels of retail firms China. High credit position arises from high
accounts receivables which significantly reflect the strength of the relationship
between retail firms with their commercial partners, hence increasing the
chances of trade credit. Thus, the positive relationship between credit position
and operational efficiency can be attributed to beneficial financing capacity
brought about by good credit position. The study also found that credit position
exerts more operational benefits on larger firms compared to smaller firms since
large firms can also benefit from economies of scale.

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1.5 Research Contribution
Because there is little literature connecting operational efficiency and
credit position, the empirical task of determining the relationship between the
two variables in Chinese retail industry is more fascinating and academically
gratifying. This dissertation expects to benefit operational and financial managers
especially, by establishing linkages between credit position and operational
efficiency. The results will undoubtedly aid in operational management of the
firms by identifying unseen risks and guide in developing appropriate strategies
for financing operations during the periods of financial struggles.
1.6 Organization of the Study
The first chapter has introduced the reader to the study concepts or
variables, giving the necessary background information to contextualize the
study, research aims, and the contribution of the study to practice and literature.
The rest of the study is organized into four chapters, the second chapter details
the existing literature. The study will especially focus on theoretical framework
and theory relevant to the study and discuss the existing literature to draw the
gap, as well as, identify the solution to literature gap. The third chapter will
discuss the methods and materials that will be used. The section establishs and
discuss the specific models that will achieve the study aims. The fourth chapter
presents the analysis results while the fifth chapter will discuss the results by
corroborating them with the existing literature in chapter 2 and form the
dissertation conclusion and contribution to theory and practice.

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 2. Literature Review

This chapter reviews the operational management theories and operational

efficiency. The chapter details and gives an overview of the concept of
operational efficiency, and credit position. It also presents the determinants of
operational efficiency and underpins the theoretical relations between the credit
position and operational efficiency to establish research gaps and study
hypothetical stance.
2.1 Theoretical Framework of Operational Efficiency
As operations management studies have become more comprehensive
over the years, there have been different critiques concerning the discipline's
theory deficiencies (Schemenner & Swink, 1998). Despite the fact that it is
widely regarded as critical to a success of the firm, operations management
struggles in some places due to the lack of a well-established concept on which it
is based or for which it is well-known. Finance is based on economic theory, and
relies on other primary concepts from psychology which anchor parts of
corporate behaviour and marketing. Because operations management lacks the
academic strictness of other areas of business, it heavily depends on the law
(Rahman & Mazlan, 2014).
Over the years, the subject of operations management has produced a
series of rules that impact the phenomena of differential industrial productivity.
These laws guide the discussion and definition of operational efficiency
(Schemenner & Swink, 1998). For instance, the principle of variability, developed
from queuing theory, holds that the more unpredictable variability imposed on
the procedure or inherent in the procedure or the materials produced, the less
efficient the procedure is. As a consequence, the more variable the duration or
nature of the work available by the procedure, as well as the manufacturing
steps themselves or the goods manufactured, the less production there will be
from the procedure, as measured by labour productivity metrics, machine
effectiveness measures, raw material performance outcomes, or total factor
productivity measures; thus leading to low operational efficiency. According to
the rule of bottlenecks, an operation's efficiency can be increased by minimizing
or improved managing of its bottlenecks (Schemenner & Swink, 1998). If a
bottleneck cannot be removed in any way, for as by adding capacity, efficiency
can be enhanced by sustaining steady output through it, even if it means

6
extended runs and little changeovers. Long runs and little changeovers are not
required in non-bottleneck activities. This law is most commonly connected with
Eliyahu Goldratt (1989) and his "constraint theory," even though his theory may
well be better defined in terms of science philosophy as a law that is deductive
but has not been empirically grounded but instead are mathematical so that it
can be checked through simulation. Furthermore, the principle of quality states
that efficiency can often be increased if quality (i.e., conformity to requirements,
as appreciated by consumers) improves and wastage decreases, whether
through improvements in product design, materials, or manufacturing. These
advancements could be attributed to a variety of quality-control measures. This
is a law that has sparked greater debate. It is described as a probabilistic
principle that does not have to hold in all instances (for example, not in
circumstances where defects are close to zero), but it has been proved to hold in
the majority of them. While much of it is subjective, there is a lot of evidence to
support this law (Deming, 1982).
These laws apply in this study and are tested especially in how credit
position allows or hinders attainment of the laws. The underlying assumption for
this study is that net credit position allows smooth running of the firms by
facilitating access to finance. Investigator frequently employ the philosophy of
swift even flow to connect financial statements of entities capacities to
operational efficiency. According to this hypothesis, the faster and more equal
the flow of materials via a procedure, the more profitable it is. Thus, output for
any operation, whether it is labor productivity, equipment efficiency, resources
efficiency, or factor productivity, improves with the rate at which materials flow
via the procedure and decreases with rises in the variability related to the flow.
Schmenner and Swink (1998) observe that the corporation must reduce the
variability connected either with the demands on the procedure or the system's
operating steps in order for resources to flow relatively uniformly. Whenever the
demands made on the operation are even and consistent, variability is reduced.
Availability of operational finances reduces the variability to a great extent
allowing smooth flow of information and materials. Modigliani and Zeman (1952)
emphasize that the most important resource in a firm is operations finances.
They argue that restrictions on current or quick ratios, limitations on future debt,
influence the financing operations of large corporations to a very great extent. By
extension, this study assumes that credit position can be looked at as one of the

7
limitations or facilitators of operations financing; hence it potentially affects
operational efficiency.
2.2 Operational Efficiency of Retailing Firms
According to Lee and Johnson (2013), operational efficiency refers to how
well a company uses its resources to produce its product, how well it uses the
proper mix of resources to create the necessary mix of products given market
trends, and how well it scales its operations. Operating productivity is expressed
as an effect on the company's future success as regards adjustments in the cash
conversion cycle, capital expenditures on sales income, operating income, total
asset turnover, overall debt on the full asset ratio and size of company ( Agostino
& Trivieri, 2019). In strategic management literatures, efficiency is defined as
the result of firm-specific characteristics such as organisational skills, creativity,
controlling costs, and market share acting as predictors of present business
efficiency and robustness (Abuzayed & Molyneux, 2009). In literature,
operational efficiency, production efficiency, technical efficiency and productivity
have been used interchangeably but they all imply efficiency at firm level.
For executives in industrial and service sectors, performance and
effectiveness have been a pertinent concepts during the last few years (Mas-Ruiz
& Sellers-Rubio, 2007). Retail efficiency has had major effects on the
coordination and monitoring of retail companies in the retail industry and offers
crucial details for a quantity of strategical, tactical and decision making (Mas-
Ruiz & Sellers-Rubio, 2007). Productivity and performance assessment in retail
and production companies has become an essential aspect (Barros & Alves,

2004). 

In China, a chronicle of studies has been conducted to establish the

operating efficiency of firms. Zhang et al. (2002) assessed the effects of
proprietorship on output and discovered that foreign-owned firms had the best
efficiency ratings, while government organizations had the lowest. Furthermore,
Zheng (2004) utilized datasets from 600 State-owned enterprises between 1980
and 1994 to assess their performance level while employing data
envelopment2analysis (DEA) and the Malmquist index. Li and Liu (2019) use the
retail sector as a research study to describe their structure affects efficiency. The
authors reported that compared to small ones, large SOE are less efficient,
implying that the administration's decision of merging large Corporations in this
sector is inefficient.

8
2.3 Firm Credit Position
The credit position of a company is total value of payments it has collected
over time minus the value of payments it has sent over time. Credit position is a
critical feature of companies finance in the scope of accounting and inventory
control since it has a substantial impact on the company's return on assets
(Tsurata, 2013). If a firm uses trade credit to finance its operations, credit
position helps the supplier to evaluate their creditworthiness and make more
sustainable decisions (Experian n.d).
Some scholars, such as Dietsch (1998), Berlin and Mester (2001), Burkart
and Ellingsen (2002) highlight the usefulness of considering the credit position
in terms of trade credit that is, the spread between accounts receivables and
accounts payable when studying the determinants of trade credit. According to
Białek-Jaworsk and Nehrebecka (2016) the following are some of the reasons for
trade credit extension: decreasing asymmetric information between both the
monetary and non-monetary markets, improving operational effectiveness,
lowering financial market ineffectiveness, securing business opportunities, and
bolstering the competitiveness. Amberg et al (2016) adds that in market
competition, businesses are required to issue trade credit in order to maintain
operational efficiency. In that regard, credit position of the firm determines
whether the supplier will extend firm credit or not. When a firm is in net credit
position, it is more likely to get trade credit from its suppliers and thus finance its
operations and when it is on the net debt position, it is less likely to extend the
credit to its customers or get credit from the suppliers due to financial distress.
In the net debit position, the firm would focus much of its attention on acquiring
receivables and settling the payables (Burkart & Ellingsen, 2002; Berlin & Mester,
2001). Couppey-Soubeyran, Héricourt and Chaari (2012) confirms this theory
empirically by establishing that net credit position positively and significantly
influence access to trade credit. However, this mechanism where firms finance
their operations through receivables and trade credit has not received any
significant attention but it has been noted by few scholars (Burkart & Ellingsen,
2002; Berlin & Mester, 2001).
Moreover, the relevance of credit position has been emphasized through
management of account receivables. According to certain studies, such as Lyani
(2018), Ekiti (2019), funding firm activities via accounts receivables is gaining
popularity around the world since it allows businesses to access funds quickly.

9
While there is no clear nexus between credit position and access to finance, it
can be argued from Lyani (2018) observation that net credit position acts as
collateral for credit access to finance operations. Mbula, Memba and Njeru (2016)
suggested that effective account receivable management improves the firms’
productivity and can be used to raise funds during liquidity crisis to finance firms
operations.
2.4 Theoretical Aspects of Credit Position and Firm Operational
Efficiency
The relationship linking the credit position and operational efficiency can
be deduced by looking at theoretical aspects of credit position such as accounts
receivables and accounts payables. Moreover, since net credit position as
determined by Dietsch (1998), Berlin and Mester (2001), Burkart and Ellingsen
(2002) and Couppey-Soubeyran et al. (2012) determines the access to credit,
indirect nexus can be established through the effects of trade credit on
operational efficiency. Studies in China lend support to this argument. For
instance, Cull, Xu and Zhu (2009) observed that the Chinese private companies
receive substantial financial assistance from commercial loans. This implies that
companies can attain efficiency via commercial credit (Ge & Qiu, 2007). Wu,
Firth and Rui (2014) note that Chinese manufacturing companies extend more
commercial credit to consumers and receive receipts and payments faster. Credit
position is born out of the interaction between account receivables and account
payables.
Some studies have shown that account receivables and payables
management influence production efficiency of wholesale and manufacturing
firms. According to Nadiri (1969) accounts payable, accounts receivables and net
credits all respond to changes in their user costs. These accounts consists of
three key aspects, that is the carrying cost, depreciation cost and borrowers’
ability to pay or lenders’ loan standards. Manufacturing firms reduce the
receivables when the user cost of lending increases and increase their payables
when the borrowing costs from bank sources increases. The liquidity aspect of
the user cost is an important factor and the changes are usually reflected in
operational efficiency. Ndebugri and Senzu (2017) assert that account
receivables contributes to current assets and are determinants of trade credit. By
extension, therefore, firms with high levels of account receivable are better
placed to win trade credit because they are in net credit position.

10
 Moreover, credit position arises from management of account receivables
and payables. Theoretical literature argues that account management directly
influences operational efficiency of firms; hence implicitly suggesting that credit
position influences productivity efficiency of firms. Akinleye and Adebowale
(2019) observes that firms who achieve high increase in accounts receivables, in
this case, net credit position increase their profitability. The authors therefore
prove that net credit position improves operational efficiency on account of
increased profitability. The extent to which firms increases its operational
efficiency, positively correlates with the extent to which it increases its accounts
receivables and achieve net credit position. Further, using panel regression
methods Akhter (2018) empirically establishes that liquidity arising from efficient
accounts manager improves operational efficiency of commercial banks.
Another set of research is based on production function estimation that is
augmented with financial factors in Cobb-Douglas production function. For
example, Nicolitsas and Nickell (1999) evaluated the impact of increased
financial strain, operationalized as borrowing ration, on business efficiency using
UK panel data. They discovered that borrowing ratio has a minor but positive
effect on the production efficiency. Their findings support the bankruptcy theory,
which states that as financial stress increases, the chance of bankruptcy
increases. As a result, it's logical to anticipate them stepping up their efforts to
boost production. According to Ayyagari et al.2(2010), although Chinese
enterprises predominantly use internet finance, funding through banks is related
with greater firm production efficiency compared to other funding alternatives.
In Estonia, Slootmaekers and Moreno-Badia (2009) found evidence of a
connection between financial limitations and firm production efficiency. They
discovered that a considerable proportion of enterprises, particularly the young
enterprises have significance financial restrictions and heavily indebted.
However, with the exception of R&D, these limits do not reduce productivity in
most industries. Their findings support the theory that financing influences firms'
innovation activities, which in turn influences firm productivity.

2.5 The Association between Credit Position and Operational

Efficiency Via Trade Credit
Credit position has also been looked at from trade credit position concept
and its influence on productivity of the firms. On a theoretical level, trade credit

11
position might have a positive or negative impact on company efficiency. On the
one hand, trade credit position has the potential to improve efficiency by
removing financial restraints. Indeed, if companies choose suppliers credit more
during when their access to other alternatives of credit is limited, the choice of
suppliers credit could be crucial in supporting financially constrained enterprises
in managing their productive assets optimally (Rajan & Petersen, 1997). Murfin
and Njoroge (2015) give evidence that supports this hypothesis. They show, in
particular, that providing lengthier trade credit terms is especially poses
disadvantages to the challenged suppliers, since it tends to relax other
oppurtunities of investment and is thus potentially wasteful. The alternative
argument, however is that trade credit may be beneficial to the receiving
company since it facilitates continuation of operations by eliminating the
limitations of shortage of inventories and creating smooth operations.
Indeed, when financial limitations are included into an inventory
management model, organizations may fail to manage working capital optimally
(Fisman, 2001). Furthermore, credit from commercial partners can be used to
assess product quality prior to payment (Jegers & Deloof, 1996) hence avoiding
inefficiencies caused by products return. Moreover, credit from commercial
partners can help reduce transaction costs by allowing trading partners to reach
long-term business agreements in terms of product deliveries and payment
milestones hence, allowing them to better manage their cash and inventories
(Ferris 1981).
Another possible good impact of credit from commercial partners on
business efficiency is from the financial strain that comes from the accounts
payables. As such, the managers are forced to optimize the available resources
in order to clear up the accounts payables. Bougheas et al. (2009) argues that
credit from commercial partbers is widely regarded as a more expensive
financing option than traditional loans. However, Nickell and Nicolitsas (1999)
posits that greater reliance on commercial partners financings usually the
incentives of the managers to better utilize productive assets available in effort
to expand firms' efficiency, hence counteract the negative effects of high debts.
Conversely, because they are likely monetarily constrained and under
huge financial pressure, enterprises using trade credit may be driven to increase
efficiency and productivity, demanding more efficient use of the available
resources.

12
 Białek-Jaworsk and Nehrebecka (2016) observes that trade credit is aimed
at ensuring event flow and improves operational efficiency of the firms. However,
the authors’ note that trade credit is mostly extended to bigger companies who
are in a net trade credit position. Literature reveals that the relevance of trade
credit is found in improving the financial health of the firm and providing
operating funds. Couppey-Soubeyran et al. (2012) empirical study proves that
net trade credit position holds great significance to the firms’ liquidity and
operational efficiency. The study established that net trade credit position
positively and significantly influences the financial health of the firm.
From the perspective of agency costs literature, there may be a negative
relationship between trade credit position and a firm's technical efficiency.
Indeed, as a result of the asymmetry of gains from hazardous investments, a
growth of financing from commercial partners may cause moral hazard issues
(Meckling & Jensen, 1976), because the goals of commercial partners involved in
the trade credit agreement may diverge. As a result, managers may choose to
act opportunistically by investing in higher-risk ventures. More trade credit may
jeopardize enterprises' ability to attain the best technical practice if such a
situation arises.
However, studies have also shown that negative impact of debt on
operational efficiency is caused by the conflict of interests between creditors and
shareholders which is lower for financing from trade credit position than in other
alternatives of financing.  Suppliers may, for example, use the threat of
suspending the supply of specific inputs needed in process of production to
discipline client enterprises, gaining an advantage in enforcing debt repayments
(Cunat 2007). Furthermore, given that the suppliers have the capacity to monitor
the firms, and that the borrowing which is in form of inputs is less liquid, trade
credit financing is difficult to divert that other forms of financing hence causing
less moral hazard issues  (Burkart & Ellingsen 2004). Furthermore, because
suppliers’ relationship with the firm is likely to be higher than banks', they may
be more concerned in preserving their clients' relationship and enterprise; hence
have greater incentives to act and monitor their clients (Agostino & Trivieri
2014).
In addition, problems with soft budget constraints may indicate a negative
association between credit from commercial partners and the operational
efficiency of the company. Indeed, suppliers are primarily concerned with the

13
success of their clients' businesses; as a result, they are less likely to halt
supplies of goods offered on credit, even when buyers are experiencing financial
difficulties (Cunat 2007). As a result, the ability to rely on trade credit regardless
of the performance of the firm can distort the managers' incentives.
2.6 Other Determinants of Operational Efficiency
Like Lovell (1993) points out, identifying the variables that influenced
disparities in productivity is critical for improving company performance.
However, few theories in economics such as Cobb-Douglas theorem provide a
model based of performance determinants. Even when enterprises operate in the
same marketplace, empirical studies demonstrate that output differs
significantly. While some businesses thrive on the cutting edge of technology and
achieve great revenues, many fall far behind and struggle to stay afloat. Previous
studies in the economic literature used frontier techniques to examine both the
models and the drivers of productive efficiency. Beeson and Husted (1989), for
example, employed a stochastic function model to assess productive efficiency in
the industrial industry of United States. Regional disparities in workforce traits,
degree of development, and industrial structure are all linked to variations in
operational efficiency. Perelman (1995) uses a parametric stochastic frontier and
a non-parametric output frontier to estimate total factor productivity (TFP). The
TFP is divided into two parts: technological development and effectiveness
changes, and the connection between the variables is examined using a set of
potential independent variable like as R&D spending, competitive conditions, and
structural properties.
Aspects outside the company include the level of competition in the
markets in which it operates and the culture of the organisation itself including
the type of business, greater or lesser financial strength and the benefits of its
business premises. The most frequent topics are the determining factors of
operational efficiency. Workers productivity ratio has a considerable impact on
operational efficiency, according to Rahman and Mazlan's (2014) empirical
investigation. Existing studies has also shown a positive impact of workers
productivity ratio on the operational efficiency of companies (Lotto, 2019).
Joseph, Eliab and Aggrey, (2010) found a small but positive link between
operational efficiency and companies’ square-size business efficiency, and a
minor but negative link between corporate size and operating efficiency.
Moreover, Badunenko, Fritsch and Stephan (2008) confirmed the results of other

14
researchers and empirically proves that firm size contributes up to 20 percent of
operational efficiency. The overall assertion is that the operating expenses
reduce as the company grows in size, leveraging scale savings. The link between
corporate size and effectiveness is not straightforward from a theoretically.
Bigger companies are said to be able to penetrate the market better and benefit
from economies of scope and size. Bigger businesses have more financial
resources and superior management staff (Kumar, 2003). On the other hand, it
is harder to organize and proficiently operate all branches in a huge corporation
(Audretsch, 1999). Following the empirical findings and theoretical arguments,
this study uses firm size as the control and as a moderating variable.
Moreover, the firms holding cash balances improve their efficiency in
production. The observation that liquidity is an essential tool in operations has
been proved both in theoretical and empirical studies. Basci, Mahmud & Yucel
(2007) empirically proved that short-term credit and cash balances affect the
operational efficiency of manufacturing firms positively. In relation to this,
Odunga et al., (2013) and Lotto (2019) have shown that capital adequacy has a
beneficial influence on the productive efficiency of the enterprise while Mwengi
and Kung’u (2017) and Lotto (2019) found that the value of a bank's assets
impacts its operating efficiency in a positive manner and numerically.
In inventory managing literature, good inventory levels encourage
businesses, by developing inventories of each product which optimize net
revenue, to surpass consumer requirements. This observation has been
empirically proved by Khan and Siddiqui (2019) who found that good inventory
management practices improve firm efficiency. Similarly, Basci et al. (2007)
money and inventories are statistically significant determinants of operational
efficiency and suggested that firms with larger inventories seem to achieve less
efficiency by holding more cash balances. Given the theoretical importance of
inventory management on the productive efficiency, this study will thus use
inventory levels as a control variable.
In addition, a number of studies have established that firm characteristics
are significant determinants of operational efficiency. For instance, Ramanathan
and Yu (2008) in their study regarding operational efficiency of retail firms in
China found that retail characteristic, that is, department stores, food retailing,
and home appliances retailing. The authors found that departmental stores are
far more efficient compared to other retailers. Saranga and Phani (2008) lends

15
support to that finding, however, their definition of retail characteristic was
different and they looked at factors such as ownership and governance, age of
the establishment and level of innovation in determining the efficiencies of
pharmaceutical firms in India. Their study, in line with other studies, confirms
that larger firms enjoy higher operational efficiencies compared to smaller firms
due to their accumulated learning and capabilities development. In addition, local
firms in India, which are characterized by distinct organizational culture and
structure achieve significantly higher efficiencies compared to foreign companies.
In the context of banking industry, capital adequacy and asset quality
have been determined as beneficial factors to operational efficiency by a number
of researchers. For example, Eldomiatry et al. (2020) study on financial factors
affecting operational efficiency found that capital adequacy, asset quality and
liquidity have beneficial effects on bank’s operational efficiency in Egypt.
Likewise, Rahman and Mazlan (2014) found that capital adequacy and liquidity
are significantly benefits the operational performance of MFIs in Bangladesh.

16
 3. Research Methodology

This section presents the model specification, analytical approach and data
sources.
3.1 Data Envelopment Analysis
This study employs non-parametric measure of operational efficiency
namely the Data Envelopment Analysis (DEA). Data envelopment Analysis has
extensively been used by researchers to measure operational efficiency of firms
considered homogenous. It is a linear programming technique that computes the
firms’ levels of efficiency based on various inputs and outputs (Sarkis &
Weinrach, 2001). Two distinct assumptions are used to generate efficiency
scores using DEA namely variable returns to scale (VRS) and constant return to
scale (CRS). The efficiency score by VRS approach measures the technical
efficiency of the firms, without regard to scale. The CRS efficiency score, on the
other hand, ascribes to technical efficiency, but takes into account the
inefficiencies caused by input/output configuration and operations size (Perrigot
& Barros, 2008). The ratio of VRS efficiency to CRS efficiency can be used to
calculate scale efficiency. As a result, a decision-making units, in this case, the
firms producing or operating optimally given the resources they have, have scale
efficiency equal to one and are said to be 100 percent efficient (Cooper et al.,
2011).
3.2 Malmquist Productivity Index
The use of DEA results in conjunction with the MPI is a unique way of time
series analysis in DEA. Caves et al. (1982) established the MPI as a theoretical
index, which Fare et al. (1994) popularized as an empirical index (1994). The
MPI is defined as the result of the terms frontier shift and catching up. The word
"catching up" refers to how much an enterprise gains additional efficiency,
whereas the term "frontier-shift" refers to the shift in the efficient frontier around
the enterprise between two different times (Mas-Ruiz & Sellers-Rubio, 2006).
The MPI index uses distance functions to break down improvements in
productivity into efficiency regress or improvements and changes in technology,
that is movements in efficient frontiers. MPI is the result of technological
advancements and increased efficiency.

17
3.3 Bootstrapped Tobit Regression Model
After generation of efficiencies using the DEA method, the next stage
(usually known as the second stage) is modelling the efficiency determinants
using either Truncated or Tobit regression methods (Hoff, 2007). DEA literature
has proven that efficiency scores achieved in the DEA first stage are
associated with the covariates employed in the second term, resulting in biased
and inconsistent second-stage estimations (Simar & Wilson, 2011). As a result,
Wilson and Simar (2007) proposed that a bootstrap process be used to solve the
issue. The bootstrap method is a computerized to assign precision measures and
accuracy to statistical estimates. In most empirical literatures regarding
modelling efficiency and other determinants, the efficiency scores are first
corrected from the bias, which is the first stage bootstrap and then a
bootstrapped modelling using Tobit or Truncated regression ensues (Ramanathan
& Yu, 2008; Agostino & Trivieri, 2019).
3.4 Review of DEA Application in Retail Firms Efficiency
The use of DEA has become common in retail and manufacturing
industries. Over the last decade, there are more than a dozen studies which have
utilized DEA approach to determine the technical and operational efficiency of
retail firms. When evaluating recent operations research for instance, studies
by Thomas et al. (1998), Yoo & Donthu (1998), Chu and Keh (2003) and Alves
and Barros (2004), it is clear that the use of DEA to analyse the productivity of
manufacturing and retail industry has increased over the last decade. However,
in China, studies using DEA to analyse the efficiency of retail firms seems to be
scanty, with only one study by Yu and Ramanathan (2009) utilizing the method.
In the Spanish retail industry, Mas-Ruiz & Sellers-Rubio, (2006) employed DEA
to measure the economic efficiency of supermarket networks. Between 1995 and
2001, the authors conducted the empirical study using a sample of 100
supermarket retail chains. The study revealed high inefficiency levels of
supermarkets.
Most research on operational efficiency has been conducted at two-stages.
The first stage being computation of efficiency levels followed by the second
stage which involves modelling of factors determining the level of firm efficiency.
For instance, Barros (2006) used a two-stage process to evaluate a
representative sample of 22 supermarkets and hypermarkets operating in the
Portuguese market. The efficiency drivers were estimated using the DEA method

18
in the first stage and censored regression model in the second stage. Perrigot
and Barros (2008) also used a two-step technique to examine the technical
efficiency of retailing firms in France. Output oriented and input oriented DEA
models were employed to generate the technical productivity in the first stage of
analysis. A bootstrapped censored model was employed in the second step to
determine the efficiency drivers. According to the second stage analysis results
the drivers of efficiency were publicly traded firms, firms which have gone
through mergers and acquisitions, and firms that have international markets.
However, although the studies by Barros (2006) and Perrigot and Barros (2008)
bootstrapped the censored regression models, to account for data uncertainty
Simar and Wilson (2007) recommends double bootstrapping, hence the studies
ought to bootstrap the efficiency scores to remove the bias.
Another important aspect of DEA analysis is the type of inputs and outputs
used. The input and output variables must be chosen carefully for DEA to work
well. According to Yoo & Donthu (1998), DEA output and input variables should
accurately mirror the retail firm's goals and sales environment. Previous
literature has offered both in monetary and non-monetary output metrics.
Monetary metrics such as profit volume and sales revenue have been employed
by researchers such as Donthu and Yoo (1998), Ramanathan and Yu (2008) and
Ramanathan and Yu (2009). However, the downside of using profits as one of
the output measures is that its value might be negative, hence the firms
registering losses are dropped. To correct the negative issues, non-monetary
output metrics such as customer shop loyalty, customer happiness, and quality
of services have been by researchers such as Yoo and Donthu (1998). The
downside of these metrics is that they are time consuming and requires survey.
In general, the literature on retail productivity evaluation distinguishes
between two types of inputs: controllable and non-controllable inputs, depending
on whether the firm includes them in strategic plans or not (Mas-Ruiz & Sellers-
Rubio, 2006). Controllable inputs are commonly used in efficiency assessments
because they can be managed by businesses to achieve a competitive
advantage. Firm management elements and personnel factors, such as square
feet of selling space and firm size are examples of controllable inputs (Yu &
Ramanathan, 2009). Non-controllable inputs, on the other hand, are commonly
referred to as environmental variables since they have the potential to influence
business efficiency but cannot be controlled by the organization. Retail structure,

19
retail sector circumstances, geography, market demographics, and country
development are examples of non-controllable factors studied in the literature
(Donthu & Yoo, 1998).
In the retail industry, analyzing efficiency and productivity has become a
crucial activity which can be reflected in the upsurge of studies applying DEA to
determine firm efficiency levels (Perrigot & Barros, 2008; Ramanathan & Yu,
2009). Mas-Ruiz and Sellers-Rubio (2006) employed DEA to evaluate the
productivity of supermarket firms in Spain. The study involved used a panel data
of 100 sample supermarket firms for the period between 1995 and 2001. The
study found that the Spanish retailing industry had a significant level of
operational inefficiency. Perrigot and Barros (2008) used a two-step technique to
examine the efficiency of retailing firms in France. The efficiency scores were
determined using four DEA models and a bootstrapped models was used to
establish the drivers of efficiency. The study revealed that being a publicly traded
firm, adopting a mergers and acquisitions (M&A) strategy, and expanding to
international markets contributes to operational efficiency. Yu and Ramanathan
(2008) used three related approaches to analyze operational efficiency of 41
United Kingdom (UK) retail enterprises between 2000 and 2005. The study
employed DEA, followed by bootstrapped censored model and found that
ownership, retail sub-sector legal form, have an influencing role in retail
efficiency in UK. Yu and Ramanathan (2009) replicated the study using Chinese
retail firms and found that retail characteristics play a crucial role to their
efficiency. 
3.5 Model Specification
3.5.1 Operational Efficiency

Operational efficiency refers to how well a company uses its resources to

produce its product, how well it uses the proper mix of resources to create the
necessary mix of products given market trends, and how well it scales its
operations (Lee & Jonhson, 2013). Some authors have operationalized it in terms
of ratios such as operational efficiency ratio (Odunga, 2016; Akhter, 2018). This
study employs DEA method of operational efficiency measurements which takes
into account the use and transformation of firm inputs to achieve the desired
firm outputs. Varieties of studies have used this method (Yu & Ramanathan,
2009; Simar & Wilson, 2011; Othman et al., 2016).

20
 Different scholars have used different measures of inputs and outputs.
Among the outputs employed are service quality, customer satisfaction and sales
revenue. Since this study relies heavily on secondary data, it employs monetary
outputs namely sales revenue as used by Mas-Ruiz and Sellers-Rubio (2006) and
Ramanathan and Yu (2009). Sales revenue is selected because firms in retail
business are involved in a wide range of services and products which prevents
the use of other homogenous outputs (Mas-Ruiz & Sellers-Rubio, 2006).
Furthermore, aside from revenues generated from sales, retailers especially
those that are listed in stock markets are concerned more about revenue and
growth to ensure the firm's viability (Mas-Ruiz & Sellers-Rubio, 2006).
The second output taken into account is the firms’ profit volume as used
by Yu and Ramanathan (2009) who found that the association between profit
and sales is low at 0.504 correlation coefficient, which suggests that the two
variables are not identical measures of financial performance. This implies that a
retail firm registering high sales does not necessary lead to high profits; hence
this study uses them as output measures. In terms of inputs, the factors utilized
to generate services or products can be separated into controllable and non-
controllable categories, as shown in the literature review. This study utilizes the
controllable input factors namely benefits payable to employees and other
expenses (Perrigot & Barros, 2008; Yu & Ramanathan, 2009). Benefits payable
to employs takes into account the employees’ salary and allowances and
therefore appropriate in capturing the number of employees and employees
competency. Other payable expenses include the distribution, marketing and
floor space costs. The study generated both the variable returns scale and
constant returns scale, however, VRS was used as the indicator of operational
efficiency in the modeling stage.

3.5.2 Credit Position

Credit position is the independent variable of this study determined by the

accounts payables and accounts receivable of the selected firms. For each retail
firm, this study calculates credit position as the difference between the value of
the transfer received and the value of transfer sent. When the value is positive,
that gives rise to net credit position, while a negative value is net debit position.
Different approaches by different researchers have been employed to measure
credit position. Agostino and Trivieri (2019) used the ratio of accounts payable to

21
the total cost of the raw materials purchased as a measure of trade credit
position. Couppey-Soubeyran et al. (2012) calculated credit position as (i)
accounts receivables + stocks – accounts payables and used the following as a
measure of trade credit position (ii) accounts receivables + stocks – accounts
payable)/assets. This study follows a similar approach and calculates the credit
position as difference between accounts receivables and accounts payables to
total assets.

3.5.3 Control Variables

As revealed in existing literature, operational efficiency is also influenced

by other firm level characteristics. First, given that the dependent variable for
this study is purged from scale efficiency, the size control (firm size) is intended
to capture other potential effects of size on firms' ability to successfully manage
their input combinations rather than economies of specialization resulting from
larger dimensions. Larger companies, for example, may have easier access to
capital, attract higher-skilled personnel, and better align themselves as
exporters, exposing them to international trade effects such as international
competition (Agostino & Trivieri, 2019). This study uses firm size (FS) to control
for such effects on operational efficiency. Firm size is measured in this study is
measured as log of total assets.
Another attribute of consideration is firms’ inventory levels because larger
inventories rates may indicate ineffective inventory management, and vice versa.
Furthermore, because the influence of supplier credit may be more prominent in
businesses that are more reliant on inventories than those that are not heavily
reliant on inventories. Also, Basci et al. (2007) and Khan and Siddiqui (2019)
observed that good inventory management practices improves firm efficiency.
This study expresses inventory levels as input materials inventories to total
assets as used by Agostino and Trivieri (2019).
Moreover, studies have also found the influence of liquidity on operational
efficiency (Basci, Mahmud & Yucel, 2007; Lotto (2019). Indeed, increased
liquidity may help enterprises better utilize their productive capacity by
smoothing the manufacturing process. Debt, on the other hand, might come with
agency costs, as shareholders can act opportunistically at the expense of
debtholders by making decisions that do not always improve business value and
efficiency. Long-term and short-term bank debt can have opposing effects on

22
efficiency, similar to trade credit. Furthermore, banks may face soft budget
restriction issues if they continue to finance firms even when they are pursuing
unproductive projects in order to avoid default and recover prior loans (Agostino
& Trivieri, 2019). This study controlled for firm liquidity by establishing the effect
of short-term debt and long-term debt on operational efficiency expressed as
short-term debt to total assets over long-term debt to total assets, similar to
Agostino and Trivieri (2019) study.

3.5.4 Regression Model

The regression model takes the operational efficiency scores as the

dependent variables, credit position as independent variable and controls for firm
size, inventory levels, short term and long term debts effects on operational
efficiency of retail firms. The overall estimation equation is shown in the equation
1. Specifically, the study adopts Yu & Ramathan (2009) approach of modelling
operational efficiency determinants. However, it follows the model used by
Agostino and Trivieri (2019). However, Agostino and Trivieri (2019) also used
industry dummy. The current study does not include those dummies because the
focus is only on retail industry.
∅ ¿ =α + β1 CPSTN i (t ) +∂ X i (t ) + ∑ θ t T i (t ) +ε ¿ (1)
t

Where ∅ is the variance returns to scale efficiency score. VRS score is

generated from DEA method as illustrated by (Yu & Ramanathan, 2009). CPSTN
is credit position. Xi represents all other control variables. Agostino and Trivieri
(2019) used firm size, firm age, level of inventories and short-term debt and
long-term debt. The current study follows Agostino and Trivieri (2019) approach
with the exclusion of firm age.
3.6 Analytical Approach
This study will employ two analytical techniques to explore the operational
efficiency of retail firms in China and how it is influenced by credit position and
other control variables. The two techniques are Data Envelopment Analysis (DEA)
and bootstrapped Tobit regression. As previously discussed, DEA method helps in
identification of the operational efficiency of retail firms in China while
bootstrapped Tobit regression helps identify the effect of credit position on
operational efficiency of the Chinese retail firms.  Yu and Ramanathan
(2009) used these two methods to model the relationship between environment

23
characteristics and operational efficiency of retail firms in China hence; this
research adopted their analytical conceptual framework shown in Figure 1.

Fi
gure 2. Analytical Framework

Studies such as that of Yu and Ramanathan (2009) and Simar and Wilson
(2011) employed two stage method to identify efficiency. In their analysis, the
first stage involves calculation of scale and technical efficiencies of the firms
using DEA and the conventional inputs and outputs. The study by Yu and
Ramanathan (2009) on operational efficiency of retail firms used tow inputs
namely number of employees and selling floor space and two outputs namely
profit before taxation and turnover as measures of operational efficiency in DEA
model. The second stage of analysis, the authors applied the DEA extensions
namely Malmquist Productivity Index (MPI) to provide the trend of operational
efficiency over time.  This study only applies the applies both the DEA and MPI to
explore the operational performance of retail firms in China for the years 2016,
2017, 2018, 2019 and 2020. Generally, DEA considers operational performance
of firm at particular point in time while MPI is a time series version of DEA. In
addition, there are two approaches of calculating efficiencies using DEA and/or
MPI, first is the input orientation approach and the second is the output
orientation approach. This study particularly employs input orientation method
as used by Yu and Ramanathan (2009). The study goes further to employ MPI
as part of the retail firms’ operational efficiency description. The study generates

24
both VRS and CRS efficiencies using dEAR package in R program language and
calculates the scale efficiencies.
Even though the findings of DEA may demonstrate that scale economies
are the primary cause of efficiency, the model does not show other driving
factors that influence efficiency (Othman et al., 2016). Therefore, to compute the
effect of credit position and the control variables on operational efficiency, the
study applies Tobit and bootstrapped Tobit regression methods to model the
efficiency scores against the covariates. As a robust check, the study also
employs random and fixed effects model. Fixed effects model will be particularly
useful since it controls for potential endogeneity of covariates and time-invariant
firm effects.
3.7 Data
To estimate the effect of credit position on the retail firms’ operational
efficiency in China, the study uses firms’ panel data for the recent five years
from 2016 to 2020. The data for this study is obtained from China Stock Market
and Accounting Research (CSMAR) database, which as the name suggests
contains stocks trading, balance sheet and income statements data of companies
listed in Chinese Stock Market. In any case, the company had a subsidiary, the
study focused on the consolidated data, which combines data for primary retail
firm and its subsidiaries. The study followed the following criterion of
selecting the 27 firms. One is that they must be retail firms, operating as
departmental stores, commercial, e-commerce firms, friendship/group
firms and hypermarkets. Second, since the study is about Chinese firms,
they must be Chinese firms (local firms). Additionally, since the source of
data was CSMAR, a database for publicly traded firms in Chinese stock
exchange, the firms should be listed at either Shanghai or Shenzhen stock
exchange. Other retail firms not listed at the stock exchanges were
excluded because of lack of availability of data for the study variables.
Finally, issue of 27 firms as a small sample size is eliminated because the
study period spans for five years, that is, 2016, 2017, 2018, 2019 and
2020. Therefore, the number of observations are 135 enough for
regression analysis using Tobit and fixed effects models. 

25
 4. Results

This chapter presents the findings of the analysis. First, the chapter
describes the retail firms and the variables used in the study. Secondly, the
chapter reports the DEA and the MPI results and thirdly, the section reports the
regression models analysis results and interpretations.
4.1 Profile Description of Retail Firms
A total sample of 27 retail firms was obtained from CSMAR database.
Table 1 below shows the profile description of retail firms.
Table 1. Profile of Retail Firms
Retail Firm Number Percentage
Firm Nationality
Local 27 100%
Years of Incorporation
1-10 years 0 0%
11 to 20 years 4 15%
Over 21 years 23 85%
Firm Characteristics
Department Store 10 37%
Commercial 5 19%
E-commerce 2 7%
Friendship(group) 1 4%
Enterprise 5 19%
Hypermarket 2 7%
N= 27. Data is obtained from CSMAR.
As shown in Table 1, all the retail firms are locally registered and majority
of the firms were formed in 1990s. All the firms in the study have been in
operation for over 10 years. Moreover, the table shows that majority of the retail
firms operate in department store retailing sector, accounting for 37 percent,
followed by commercial and enterprise sector at 5 percent each, and majority of
the enterprise retailing focus on home appliances retailing. The profile underlines
the department store as the traditional and main retail format in China.

26
Table 2. Description of Study Variables
Variable Variable Description
DEA Inputs
Employee payables Employee payables
Selling Expenses Distributing, marketing & space costs
DEA Outputs
Total Operating Revenue Total revenue from sales
Total Profit Profit before tax
Credit Position Variables
Total Receivables Total account receivables + Stocks
Accounts Payable Account payables
Total Assets Total assets
Control Variables
Net Inventories Net inventories
Short Term Borrowings Short-term debt from bank
Long Term Debts Long-term debt from bank
Covariates
(Diff in Total receivables-account
CPSTN payables)/total assets
F_SIZE Log of total assets
INVL Net inventories/total assets
ST_DEBT Short term debt/total assets
LT_DEBT Long term debt/total assets

As shown in Table 2, the DEA inputs and outputs include wages, selling
expenses, operating revenue and profit. Yu and Ramanadhan (2008) used the
number of employees and square space as the input variables. This study used
employees’ payables which captures the salaries, allowance, promotion and
employee skill. This was under the assumption that the higher the employee
payables, the greater the output. In addition, the study used selling expenses
which captures the amount incurred in terms of floor space, distribution and
marketing technology.

27
Table 3. Summary Statistics
Variables Mean S.D. Min Max
92.9(Mn 1.38(Mn) 13.4(Mn)
Employee payables ) 1.15
Selling Expenses 834(Mn) 1.04 2.11(Mn) 4.36(Bn)
Total Operating Revenue 5.72(Bn) 7.01 235(Mn) 3.94(Bn)
Total Profit 1.96(Bn) 4.32 1.9(Mn) 19.4(Bn)
Total Receivables 2.32(Bn) 8.4 954(Mn) 3.87(Bn)
Accounts Payable 1.14(Bn) 1.07 152(Mn) 3.67(Bn)
Total Assets 8.19(Bn) 5.87 1.51(Bn) 23.6(Bn)
Net Inventories 774(Mn) 8.12 16(Mn) 3.68(Bn)
Short Term Borrowings 573(Mn) 6.49 0 2.32(Bn)
Long Term Debts 545(Mn) 5.59 0 2.12(Bn)
CPSTN 0.05 0.22 -0. 235 0.746
F_SIZE 9.79 0.35 9.179 10.37
INVL 0.09 0.06 0.00429 0.227
ST_DEBT 0.06 0.08 0 0.286
LT_DEBT 0.03 0.04 0 0.163
N=135, Standard deviations are in scientific format.

From the table 3, it can be observed that the overall mean of outputs is
high than that of the inputs. According to the results, from year 2016 to 2020,
inputs had an average of 92.9 million and 834 million Yuan for employees’
payables and sales and marketing expenses respectively while the outputs had
an average of 5.7 billion and 1.9 billion Yuan for revenue and profit before tax
respectively. The study independent variable is credit position calculated from
total account receivables, account payables and total assets. The average
account receivables from 2016 to 2020 is 2.3 billion Yuan and the accounts
payables is 1.14 billion Yuan, while the average total assets of the listed retail
firms during the study period is 8.19 billion Yuan. The average credit position of
the companies is 0.05 implying that majority of the retail firms were in net credit
position.
The control variables of the study include firm size, inventory levels, short-
term debt and long-term debt from the bank. Firm size is expressed as the log of
total assets and had a mean of 9.79. The average net inventories of the retail
firms listed in Chinese stock exchange from 2016 to 2019 is 774 Yuan million.

28
The inventory levels are expressed as net inventories over total assets and the
average inventory levels over the study period was 0.09. Short-term debt was
expressed as short-term debt over total assets. On average, retail firms short-
term debt was 573 Yuan millions compared to long-term debts at 545 Yuan
millions. This suggests that majority of the retail companies listed in Chinese
Stock Exchange prefer short-term debt over long-term debt. Short-term debt is
mostly used in financing company operations. The ratio of short-term debt to
total assets is also high at 0.06 compared to the ratio between long-term debt to
total assets at 0.03.
4.2 Efficiency of Retail Firms in 2019 and 2020 using DEA
Computation of DEA efficiency values can be done in a number of ways.
This study used output-oriented employed by several scholars such as Hua and
Bian (2007) Yu and Ramanathan (2009). The study makes use of deaR package
in R to generate both Variable Return to Scale (VRS) and Constant Return to
Scale (CRS), as well as, computation of scale efficiency. Here, the study only
reports the efficiency scores for 2019 and 2020 only.
Table 4. Efficiency Scores of Retail Firms
2019 2020
DMU VRS CRS Scale VRS CRS Scale
Hefei Department Store Group
Co., Ltd. 0.638 0.562 0.881 0.244 0.215 0.881
Wuhan Department Store Group
Co., Ltd. 0.814 0.287 0.352 0.377 0.106 0.281
Dalian Friendship (Group) Co.,
Ltd. - - - 1.000 0.150 0.150
Beijing Hualian Department Store
Co., Ltd. 0.139 0.135 0.971 0.127 0.118 0.931
Lanzhou Huanghe Enterprise Co.,
Ltd. 1.000 0.175 0.175 - - -
Nanji E-commerce Co., Ltd. 1.000 1.000 1.000 1.000 1.000 1.000
Guangzhou Grandbuy Co., Ltd. 1.000 1.000 1.000 0.968 0.750 0.775
Renrenle Commercial Group Co.,
Ltd. 0.497 0.311 0.625 0.479 0.453 0.945
Rainbow Department Store Co.,
Ltd. 0.758 0.171 0.226 0.368 0.116 0.316
Shanghai Xujiahui Commercial
Co., Ltd. 1.000 1.000 1.000 1.000 0.597 0.597
Tsann Kuen (China) Enterprise
Co., Ltd. 1.000 0.491 0.491 0.453 0.331 0.730
Hand Enterprise Solutions Co.,
Ltd. 0.208 0.208 0.997 0.261 0.093 0.358
Anhui Xinke New Materials
Co.,Ltd. - - - 1.000 1.000 1.000

29
Oriental International Enterprise
Ltd. 1.000 1.000 1.000 1.000 1.000 1.000
Beijing Hualian Hypermarket Co.,
Ltd. 0.794 0.400 0.505 0.573 0.562 0.980
China Enterprise Co., Ltd. 1.000 1.000 1.000 1.000 1.000 1.000
Nanjing Xinjiekou Department
Store Co., Ltd. 0.631 0.283 0.449 0.436 0.148 0.339
Nanning Department Store Co.,
Ltd. 0.846 0.577 0.681 - - -
Chongqing Department Store Co.,
Ltd. 1.000 0.270 0.270 0.816 0.127 0.156
Xinjiang Friendship (Group) Co.,
Ltd. 0.455 0.442 0.971 - - -
Maoye Commercial Co., Ltd. 1.000 0.735 0.735 0.534 0.513 0.961
Liqun Commercial. Group Co., Ltd. 0.660 0.302 0.457 0.291 0.276 0.951
Anhui Andeli Department Store
Co., Ltd. 0.278 0.277 0.997 0.394 0.326 0.826
Xinjiang Winka Times Department
Store Co., Ltd. 0.420 0.413 0.984 0.279 0.252 0.903

Table 4 shows the efficient scores of the retail firms. Since, some retail
companies reported negative profit values in different years, all the 27
companies are included in the Table but values of efficiencies are omitted in
years they reported loss. In 2019, two retail firms namely Dalian Friendship
(Group) and Anhui Xinke, and in 2020 Lanzhou Huanghe Enterprise and Nanning
department store registered negative value of profit before tax, and thus were
excluded in the DEA model for those respective years. From Table 3, it can be
seen that a number of retail firms had 100% CRS efficiency in year 2019, namely
Nanji E-commerce, Guangzhou Grandbuy, Shanghai Xujiahui Commercial,
Oriental International Enterprise and China Enterprise. In 2020, the year in which
there was health crisis due to spread of new crown, Nanji E-commerce, Oriental
International Enterprise and China Enterprise retained their 100% CRS efficiency.
The CRS efficiency scores of these retail firms are all 1.000 and thus are located
on the efficient frontier. The results imply that in 2020, these retailers have
produced maximum possible outputs, in this case the sales revenue and profits
before taxation given their level of inputs employee benefits payables and selling
expenses.
When the VRS is assumed, nine retailers are efficient in 2019 and this
number drops to six retailers in 2020. Among the nine retailers that are efficient
in 2019 only one was a department store (Chongqing department store). The
rest are Lanzhou Huanghe enterprise, Nanji E-commerce, Guangzhou Grandbuy,

30
Shanghai Xujaihui commercial, Tsann Kuen enterprise, Oriental international
enterprise, China Enterprise and Maoye commercial. Out of these, only four
retained 100% VRS efficiency namely Nanji E-commerce, Shanghai Xujaihui
commercial, Oriental international and China Enterprise.
To establish the trend of operational efficiency, the study chooses the
most efficient, average efficient and little efficient as case firms. Three most
efficient retail companies namely Nanji E-commerce, Guangzhou Grandbuy and
Beijing Hulian hypermarket and two less efficient retail companies namely hand
Enterprise Solutions Co., Ltd. and Xinjiang Winka Times Department Store as the
average efficient firm during the year 2020 are chosen. The trend of the
operational efficiency is shown in Figure 1.

Figure 2. Efficiency Trend of selected Retail Firms

As shown in Figure 2, Nanji E-commerce and Guangzhou Grandbuy have
remained efficient over the five year period. This lends to support that they may
have high technological and technical efficiency as well as developed high scale
efficiency over time. For Beijing Hualian hypermarket, however, there is a
declining trend suggesting that their efficiency levels are declining, while for
Hand enterprise solutions, their efficiency levels have been varying and just
about average. The Xinjiang Winka Times department efficiency dropped sharply

31
in 2018 and continued with a declining trend in 2019 and 2020. This suggests
that the company either failed to improve their technologies or match the
technical efficiency required for the available technology in year 2018 to 2020.
Table 5. Efficiency Scores Summary Statistics (2019 and 2020)
DEA 2019 DEA 2020
Statistic VRS CRS Scale VRS CRS Scale
Mean 0.733 0.502 0.717 0.600 0.435 0.718
Median 0.804 0.407 0.808 0.479 0.326 0.881
Mode 1.000 1.000 1.000 1.000 1.000 1.000
Standard Deviation 0.289 0.312 0.301 0.318 0.335 0.312
Sample Variance 0.084 0.097 0.090 0.101 0.112 0.098
Kurtosis -0.683 -0.971 -1.348 -1.644 -0.864 -1.045
Skewness -0.747 0.736 -0.500 0.258 0.769 -0.806
Minimum 0.139 0.135 0.175 0.127 0.093 0.150
Maximum 1.000 1.000 1.000 1.000 1.000 1.000
Number of firms between
0.5 and 1 16 8 14 10 7 15
Number of firms below 0.5 4 12 6 10 13 5

Table 5 shows the mean efficiencies of the retail firms in 2019 and 2020.
Under CRS assumption, the average score of firms in the sample is 0.502.
Among the 20 inefficient retail firms in 2019, 8 companies score a CRS efficiency
between 0.5 and 1.0 and 12 retailers scored efficiency of below 0.5. In
comparison to 2020, the average CRS efficiency is 0.435 and 20 retail firms were
inefficient. Out of those, only 7 firms had CRS efficiency between 0.5 and 1.0,
probably indicating the negative effect of new crown virus.
Under VRS efficiency assumption, out of the 20 inefficient firms, 16
recorded an efficiency levels between 0.5 and 1.0 in 2019. In 2020, the average
VRS efficiency score is 0.60 but 10 retailers VRS efficiency was below 0.5 score
which reflects a high degree of low technical efficiency in China retail sector. In
both 2019 and 2020, some retail firms had VRS efficiency score is 1, but their
CRS efficiency values are less than 1. This suggests that these firms are not able
to achieve CRS efficiency since they are not operating at their absolute
productive scale size. The scale efficiency is a ratio of CRS and VRS efficiencies,
and as shown in Table 3, five and four firms have 1.0 scale efficiencies in 2019

32
and 2020 respectively. As shown in Table 4, the arithmetic mean of scale
efficiency in 2019 and 2020 is 0.717 and 0.718 respectively. Excluding the most
efficient retail firms, 14 retail firms had a scale efficiency between 0.5 and 1 in
2019, and 15 firms had a scale efficiency between 0.5 and 1 in 2020.
4.3 Retail Firms Efficiency Change
Efficiency change over the period of five years ranging from 2016 to 2020
was analyzed using Malmquist Productivity Index (MPI). Out of the 27 retail
firms, only 14 were used to create the panel data required for MPI analysis. 13
retail firms were dropped since they had negative profit before tax (loss) in one
or more years covered in the study (2016 to 2020). Table 6 shows the MPI
analysis results.
Table 6 MPI Analysis of 14 Retail Firms from 2016 to 2020
VRS
Techno Technology Technical Scale
logy efficiency efficiency efficienc
DMU MPI Change change change y change
Anhui Andeli
Department Store
Co., Ltd. 1.075 1.121 0.959 0.973 0.985
Beijing Hualian
Department Store
Co., Ltd. 1.050 1.085 0.968 1.199 0.807
Beijing Hualian
Hypermarket Co.,
Ltd. 1.468 1.271 1.155 1.149 1.005
Guangzhou
Grandbuy Co., Ltd. 1.373 1.278 1.075 1.005 1.069
Hand Enterprise
Solutions Co., Ltd. 0.970 1.116 0.870 1.100 0.791
Hefei Department
Store Group Co.,
Ltd. 1.218 1.181 1.031 1.331 0.775
Liqun Commercial.
Group Co., Ltd. 1.228 1.132 1.085 1.348 0.805
Nanji E-commerce
Co., Ltd. 1.019 1.019 1.000 1.000 1.000
Oriental
International
Enterprise Ltd. 1.157 1.157 1.000 1.000 1.000
Rainbow
Department Store
Co., Ltd. 1.154 1.102 1.047 1.203 0.871
Shanghai Xujiahui
Commercial Co.,
Ltd. 1.479 1.300 1.138 1.000 1.138

33
Tsann Kuen (China)
Enterprise Co., Ltd. 0.879 1.233 0.713 0.755 0.944
Wuhan Department
Store Group Co.,
Ltd. 1.159 1.125 1.030 1.106 0.932
Xinjiang Winka
Times Department
Store Co., Ltd. 1.392 1.143 1.219 1.259 0.968

Table 6 shows that the majority (12 out 14 in the sample) of the retail
firms listed in Chinese Stock Market registered progress in terms of MPI during
the period between 2016 and 2020. Shanghai Xujiahui Commercial registered
the highest improvement in MPI (1.479) which implies that there is an increase
in performance in terms of revenue generated from sales and profit before tax,
for the given level of employee wages and selling expenses which consists of
distributing, marketing, selling products, and floor space costs. Since MPI is a
product of technology change and technical efficiency change, it is observed that
Shanghai Xujiahui Commercial high MPI is contributed by a significant increase in
technology change (1.3) and small increase in technical efficiency change
(1.138). The change in technology change is attributed to management decisions
to improve or acquire operating technologies. The change in technical efficiency
can be attributed to best-practice technology in the retail organization activities,
diffusion of technology through all ranks of management and operations. Hence,
the results of MPI analysis suggest that Shanghai Xujiahui Commercial
improvement and improvement in the MPI in the given period is attributed to
technology improvement. Moreover, the Table shows that Shanghai Xujiahui
Commercial reported a slight increase in VRS technical change efficiency (1.00)
and an increase in scale efficiency (1.138). The improvement in scale efficiency
implies that the retail firm was able to invest in organization variables
accordingly, for instance better balance between outputs and inputs, as well as,
ensuring efficient quality management.
The 2 retail firms in the sample that reported regress are Hand Enterprise
Solutions (0.970) and Tsann Kuen (China) Enterprise (0.879). Their regress is
particularly contributed by regress in technical efficiency despite improvements
in technical changes. In the light of this analysis, it can be argued that although
these two firms are innovating, that is, improving technology, they are not
utilizing that technology efficiently to improve their productivity in terms of
revenue from sales and profits.

34
4.4 Relationship between Credit Position and Operational
Efficiency
The study employed correlations, bootstrapped Tobit regression, Tobit
regression analysis and random and fixed effects regression analysis to model
the relationship between credit position and operational efficiency. Table 7 shows
the correlation analysis results.
Table 7. Correlation Matrix
EFF CPSTN F_SIZE INVL ST_DEBT LT_DEBT
EFF 1
CPSTN 0.72*** 1
F_SIZE 0.46*** 0.46** 1
INVL 0.16 0.12 0.14 1
ST_DEBT 0.15 0.05 -0.02 -0.11 1
LT_DEBT -0.09 -0.02 -0.03 0.25** -0.08 1
Obs= 135, *,** &*** implies significant at 10%, 5% and 1% levels.

As shown in Table 7, the correlation matrix shows that credit position

positively correlates with efficiency scores. The efficiency scores are also
positively correlated with control variables namely firm size, inventory levels, and
short-term debt. However, the efficiency is negatively corrected with long-term
debt. The result suggests that there is linear association between the variables,
in which efficiency appears to increase in independent and control variables. To
further confirm the association between credit position, the study uses the biased
corrected efficiency scores, and Table 8 shows the results of Tobit regressions.

As shown in Table 8, the Tobit and bootstrapped Tobit regressions models

report identical results. Besides, Ordinal Least Squares model is qualitatively
equal to model 2 and 3. Concerning the control variables, firm size, inventory
levels, and short-term debt appears to be associated with an increase in retail
firm efficiency. Increase in firm size is associated with increase in efficiency due
to economies of scale. Short-term debt is associated with benefits in operational
efficiency, which implies that firms are borrowing as a result of financial pressure
and as a cover up for immediate needs. Whereas, long-term debt has negative
association with operational efficiency which could be as a result of moral hazard
issues associated with long-term loans.

35
Table 8. Tobit and Bootstrapped Regression Models
(1) (2) (3)
VARIABLES OLS TOBIT Bootstrapped
Tobit
CPSTN 0.319*** 0.472*** 0.472***
(0.109) (0.154) (0.176)
F_SIZE 0.0834* 0.0953* 0.0953**
(0.0433) (0.0578) (0.0472)
INVTL 0.00689 0.00911 0.00911
(0.0136) (0.0207) (0.0171)
S_DEBT 0.0614** 0.0702* 0.0702*
(0.0249) (0.0392) (0.0382)
L_DEBT -0.108*** - -0.117***
0.117***
(0.0303) (0.0378) (0.0378)
Constant 0.0991 -0.0218 -0.0218
(0.555) (0.764) (0.733)

Observations 114 114 114

R-Squared 0.684 0.8341 0.8341
F-statistic/Chi- 0.0000 0.0000 0.0000
square p.value
Dependent variable is EFF (Efficiency scores). Robust standard errors in parentheses. ***
p<0.01, ** p<0.05, * p<0.1. The description of the variables is shown in Table1. Firm
size is in logarithmic format. Residuals in OLS model are normally distributed. 0 left-
censored observations, 78 uncensored observations, 36 right-censored observations at
EFF>=1.

Surprisingly, inventory levels do not seem to significantly influence the

efficiency levels of retail firms. According to Agostino and Trivieri (2019) having
too much inventory or too low inventory levels can compromise the levels of
efficiency. The possible explanation towards insignificant relationship is that
inventory levels are equally distributed among the inefficient firms. Some
inefficient firms have high inventory levels while others have low inventory levels
depending on their current needs and inventory management strategies.

36
 Focusing on the study independent variable, credit position, which in this
case is net credit position or net financing capacity expressed as the difference
between accounts receivables and account payables to total assets appears to
associate positively with operational efficiency. Under Tobit regression model
one-standard deviation increase in net credit position is associated with increase
in efficiency equal by 0.472. The results remain unaltered when performing
bootstrapped Tobit regression. The Chi-square probability value in Tobit model
and the probability of Wald(Chi2) are both less than signifying that both models
are significant. Therefore, the beneficial influence of operational efficiency seems
to prevail under conditions when the retail firms have more financing capacity,
that is, significant positive difference between the accounts receivables and
accounts payables. For robustness checks, the study further takes into account
the retail firms’ unobserved heterogeneity by performing fixed effects panel
regression model and the results are presented in Table 9 below.
Table 9. Robustness Check: Fixed Effects Models
VARIABLES Fixed Effects
CPSTN 0.203**
(0.0910)
Firmsize 0.0384*
(0.0531)
INVTL 0.00839
(0.0414)
S_DEBT 0.0596***
(0.0208)
L_DEBT -0.0781***
(0.0208)
Constant 0.351
(0.579)

Observations 114
R-squared 0.482
Number of Firms 26
Dependent variable is EFF (Efficiency scores). Robust standard errors in parentheses. ***
p<0.01, ** p<0.05, * p<0.1.

37
 As shown in Table 9, the results remain qualitatively unaltered. The result
reveals that the coefficient of credit position remains positively associated with
operational efficiency. However, the association remains significant and positive
in the fixed effects model suggesting that credit position is associated with
improvement of operational efficiency of retail companies. The results imply that
for every standard deviation increase in credit position, operational efficiency
improves with around 20 percent.

For the control variables the association with efficiency remains positive
and significant for firm size, and short-term debt, and negative and significant
for long-term debt. The results therefore suggest that for every standard
deviation increase in firm size, operational efficiency increases by around 4
percent, while a standard deviation increase in short-term debt results into
around 6 percent increase in retail companies’ efficiencies. In addition, long-term
debts and efficiency seems to have a negative and significant association.
Agostino and Trivieri (2019) explains that efficiency seems to regress over
incentives concerning moral hazards associated with long-term debts.
4.5 Extending the Analysis: Interaction of Credit Position with
Control Variables
The above results have showed positive relationship between credit
position and operational efficiency. To extend the understanding of that
relationship, this study regresses the interaction term between credit position
and control variables. The purpose of interaction term is to show the effects
credit position in the presence of control variables. For instance, the purpose of
this analysis is to identify whether the influence of credit position is higher on
large firms (that is firms with the more total assets) or not and whether credit
position influence is higher on retail firms with high inventory levels, more short-
term debts, and more long-term debts. The interaction term equation is as
shown in equation 2 below.
∅ ¿ =α + ∂ X i(t )∗CPSTN + ∑ θt T i(t )+ ε ¿ (2)
t

Where ∅ is the variance returns to scale efficiency score. CPSTN is

credit position. Xi represents all other control variables namely firm size,
firm age, level of inventories and short-term debt and long-term debt.

38
 The study also checks for non-linear effects of credit position and other
control variables. In Table 10, Model 1 and 2 shows tobit and fixed effects model
for non-linear effects of the variables, Model 3 and 4 shows the Tobit Regression
and fixed effects models for interaction term and Model 3 shows the panel
regression model for interaction terms.
Table 10. Interaction and Non-linear Models
(1) (2) (3) (4)
VARIABLES Bootstrapped Tobit
Fixed effects Fixed Model
Tobit Model
CPSTN (squared) 0.687* 0.146*
(0.360) (0.112)
F_Size (Squared) 0.00492 0.00202
(0.00392) (0.00273)
INVTL (Squared) -5.1605 -0.000134
(0.00144) (0.00322)
S_DEBT (Squared) 0.0089*** 0.00454***
(0.00289) (0.00121)
L_DEBT (Squared) -0.012*** -0.00549***
(0.00292) (0.00141)
CPSTN *Firm size 0.145** 0.200*
(0.260) (0.113)
CPSTN*INVTL 0.076 0.00279
(0.159) (0.0041)
CPSTN*S_DEBT 0.155 0.00043
(0.186) (0.0017)
CPSTN*L_DEBT -0.106* -0.00564***
(0.210) (0.00118)
Constant 0.225 0.410 0.322*** -0.0075***
(0.399) (0.312) (0.0334) (0.00152)
Observations 114 114 114 114
Number of Firms 26 26
*** p<0.01, ** p<0.05, * p<0.1. Tobit regression models were bootstrapped, while the
panel model standard errors generated were robust to avoid the problem of
autocorrelation and heteroskedaticity. For the panel data, the repressors are lagged by
one to avoid the simultaneity bias.

39
 By adding the squared term of the regressors as shown in model 1 and 2
in Table 10, coefficient of credit position, firm size and short-term debt are
positive and significant except for firm size. This implies that firm size has no
non-linear association with efficiency due to economies of scale. Larger firms
with bigger advantage in economies of scale have beneficial effects on efficiency
compared to smaller firms which have not developed economies of scale.
Besides, this study data was from listed companies which qualitatively implies
that they are all large, hence the insignificant results. In addition, the squared
values of, inventory levels, and long-term debt has a negative coefficient, but
only long-term debt non-linear association is significant. The possible explanation
is that the inventory levels are equally distributed or almost equal among the
inefficient firms. However, the results do not alter the results of the key variable,
that is, credit position which is still significantly positive. Model 3 and 4 reports
the analysis results of the interaction between credit position and other control
variables. The results show that only the interaction between credit position and
firm size is significantly positive. This is because larger firms enjoy economies of
scale, and have developed the managerial and marketing capabilities. This is in
line with Couppey-Soubeyran et al. (2012) who found that trade credit position
for larger firms exert significant positive influence on the working capital.
In addition, the interaction term between inventory level and credit
position is positive but insignificant implying that credit position may exert
beneficial influence on the operational efficiency for firms with larger inventories.
However, this relationship is significant and could be explained to the potentially
similar inventory needs and levels of inefficient firms in the study. As for the
interaction between credit position and short-term the coefficients is
insignificantly positive. The insignificant relationship could be attributed to the
fact that firms go for short-term credit due to financial pressures contributed by
immediate needs, something which firms financing capacity or credit position can
equally solve. However, in comparison to long-term debts, the interaction term is
significantly negative suggesting that the influence of credit position is
significantly negative on operational efficiency for the firms with long-term debts.
That is probably because hazardous problems are more prevalent in long-term
debts compared to short-term debts.

40
 5. Conclusion

From the analysis and with the use of different models credit position or
financing capacity appears to positively influence the efficiency levels of retail
firms listed in Chinese. High credit position arises from high accounts receivables
which significantly reflect the strength of the relationship between retail firms
with their commercial partners, hence increasing the chances of trade credit.
Thus, the positive relationship between credit position and operational efficiency
can be attributed to beneficial financing capacity either from accounts receivables
or from trade credit in form of accounts payables. The account receivables
generates beneficial effects by minimizing the liquidity problems and moral
hazard problems that comes with debt, while it can also be argued that account
payables in form of trade credit reduces financial constraints leading to optimized
efficiency levels even in the presence (Agostino & Trivieri, (2019).
However, the effect of high credit position seems to be higher than the
effect of short-term and long-term debt, suggesting that short-term and long-
term debt offers more in terms of liquidity position. This difference appears in the
literature; since debt is in form of cash, it is subjected to a moral hazards issue
and can be easily mismanaged by the managed (Burkat & Ellingsen, 2004).
Compared to credit position, especially the accounts payables financing
capabilities, debt is mostly illiquid since it is in form of inputs from the suppliers.
Besides, the suppliers have the incentives to control the management use of
debt hence improving firm efficiency. Furthermore, the effect of credit position
seems to be larger than the effect of firm size on the operational efficiency. The
reasonable explanation to this result is that retail firms listed at Chinese Stock
Market are reasonably huge, hence almost homogenous in terms of size.
The interaction terms model show that credit position exerts even more
beneficial influence on operational efficiency for the firms which are large, have
high inventory levels and have short-term bank debts. The study finds that credit
position has stronger positive effect on operational efficiency for the large firms,
and the possible explanation to this is that large retail companies are less
financially constrained as compared to small retail firms. This is in line with
Couppey-Soubeyran et al., (2010) who found that the impact of financial
constraints on trade credit recourse is amplified by the size of the company. That
is, when faced with limited access to credit from banks, a relatively greater large

41
number of enterprises turn to trade credit. As a result, the ability to provide
collateral, which is associated with larger firm size, enhances the access of trade
credit and hence relaxes the limits of internal and external financing.
Conversely, credit position positive influence is stronger for the retail firms
which have high inventory levels. Indeed, this finding is supported by Agostino
and Trivieri (2019) finding that trade credit position positive influence efficiency
when the inventories are optimized to counteract the adverse moral hazard that
comes with high trade credit and indebtedness. Furthermore, the credit position
influence on operational efficiency is negative in retail firms that have long-term
debt compared to those that have short-term debt which implies that moral
hazard issues and financial pressures may be higher during long-term borrowings
as compared to short-term borrowings.
This study contributes to the existing literature on management and
management practice in two main aspects. First, the study rather than adopting
the usual measures of operational efficiency, adopts nonparametric measures of
efficiency and corrects for the potential bias implied by uncertainty in the data.
The study is based on the assumption that not all retail firms are operating at the
optimal scale and part of that is due to financial constraints. Thus, by using DEA
method, the study contributes to the literature in regard to ways of measuring
efficiency.
Secondly, the study makes contributes to the literature of business
management by establishing the potential relationship between credit position
and operational efficiency, which was neglected by researchers. The study
assertion is that credit position creates avenue for more liquidity which the firm
can manage to smooth the operations, whether through improving technologies,
or increasing inventory materials, or paying distribution and marketing expenses
among others. In that regard, the study concludes that the positive association
between operation efficiency and credit position is due to mechanism in which
credit position enhances the firms’ financing capacity and helps in reducing
financial constraints to better manage the productive resources.
5.1 Implications to Management and Practice
The main implication to management derived from this study analysis
results is that financial structure and liquidity position of retail firms are of great
importance for their operational efficiency. In that regard, managers should take
into consideration benefits and costs of their financing choices. While debts from

42
banks improve the operational efficiency, they are also accompanied by high
moral hazards compared to debt from suppliers. Managers should therefore
consider enhancing their credit positions to leverage trade debt and also benefit
from soft relationship with their suppliers.
5.2 Study Limitations
The study is not free of limitations. First, the DEA model evaluates relative
efficiency of the decision making units, which are assumed to be homogenous at
the operational level. However, although the study analyzed the retail firms, and
as such homogenous at industry level, they are in fact different at sub-sector
level, thus future studies should take into account that the services, market and
business strategies are different among the retailing firms. Additionally, DEA
method does not allow inclusion of negative inputs or outputs, as such, a number
of variables were dropped and this increased the possibility that a given
observation in the decreased sample size is considered efficient. Future studies
should leverage on models that can handle negative data in efficiency linear
programming models developed by Portela et al., (2004). Finally, this study
over-relied on accounting data and some retailer firms information was not
available hence, errors might occur during translation.

43
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