Trade credit financing has usually been assumed to be an expensive source of funds. Recent studies, however, suggested that it can be available at either low or no cost. Using an international panel of firms, we provide an empirical answer to this matter. We analyze the type of firms and financial environments that are associated with a relatively more intense use of financial credit and, consistent with the mainstream literature, we find that trade credit financing is chosen by firms that have more restricted access to financial credit. These results appear to be stronger for firms located in emerging markets.

We survey 290 LATAM firms on capital budgeting, cost of capital and capital structure issues. We analyze the results and compare them to those of other studies. We interpret differences according to special features characterizing both
emerging markets and SME. We observe that LATAM firms make use of standard capital budgeting techniques, but give special weight to liquidity and capital rationing considerations. They rely less on cost of capital formal estimations;
rather, they use investors’ requests as their primordial input. Finally, surveyed firms are less leveraged, and inclined towards stressing the role of internal financing and minimizing payment commitments.

This paper studies the use of supplier’s trade credit by firms in financial distress. Trade credit represents a large portion of firms’ short-term financing and plays an important role in financial distress. We find that firms in financial distress use a significantly larger amount of trade credit to substitute for alternative sources of financing. Firms that are smaller, with less market power, and with more unique products tend to use more trade credit financing when in distress. We also find
that firms that significantly increase their trade payables when in financial distress, experience an additional drop of at least 11% in sales and profitability growth over the previously documented 21% average drop for financially troubled firms.

Working capital management is an issue in which finance research is scarce. One possible reason behind this fact might relate to the relative ease with which efficient financial markets correct deviations from optimal working capital policies. However, in less efficient financial markets, pervasive among emerging economies, working capital management is critical for both firms’ performance and survival. The difference in the market’s ability for providing immediate assistance to firms might explain the differential consequences on firms’ profitability and financial distress. This article explains the fundamentals of working capital management, the importance of its interaction with financial markets, and how this interaction might explain working capital patterns around the world.

In this paper we tackle one of the controversial aspects of valuation theory, more specifically we discuss the fact that in a standard valuation framework we are prepared to discount expected cash flows using a discount rate that considers only symmetric risks.  This is likely to become a problem when we face situations in which there is a significant and non-negligible asymmetric risk involved, like for instance valuation in emerging markets.  The usual methodology for overcoming this problem is to estimate a conditional cash flow and to include an extra term in the discount rate to account for this additional risk.  This procedure, however, violates most of the basic assumptions of the Capital Asset Pricing Model, so it is not acceptable.  We start by explaining the nature of the problem and its main consequences, and then move on by proposing a novel approach that allows the inclusion of the asymmetric risk in the cash flows by using Montecarlo simulations in the estimation of an unconditional cash flow that includes both, the probability of crisis and the firm-specific recovery value (or crisis effect).  We are then able to use standard discount rates to value this cash flow.  The framework presented in this paper can be helpful in several valuation settings, for instance the valuation of a highly levered risky firm.

This paper studies the trade receivables policy of distressed firms as the trade off between the firm’s willingness to gain sales and the firm’s need for cash. We find that firms increase trade receivables when they have profitability problems, but
reduce trade receivables when they have cash flow problems. We also find that a firm that significantly cuts its trade receivables when in financial distress will experience an additional drop of at least 13% in sales and stock returns over the previously documented 20% average drop for financially troubled firms. Moreover, the performance decline of a firm in financial distress is significantly higher if the firm cuts trade receivables than if it does not.

This paper studies the effect of financial crises on trade credit for a sample of 890 firms in six emerging economies. Although the provision of trade credit increases right after a crisis, it contracts in the following months and years. Firms that are financially more vulnerable to crises extend less trade credit to their customers. We argue that the decline in aggregate trade credit ratios is driven by the reduction in the supply of trade credit that follows a bank credit crunch, consistent with the “redistribution view” of trade credit provision, whereby bank credit is redistributed via trade credit from financially stronger firms to weaker firms.