A study on application of market power trade credit theory

Trade credits considered as an important source of finance for firms which are away from institutional finance. Moreover, in the seller's point of view, it considered as a tool for boost the sales. Hence, many researchers studied the importance of trade credit and formulate the trade credit theories, such as financing theory, liquidity theory, financial distress theory, quality guarantee theory, transaction cost theory, price discrimination theory, product differentiation theory and market power theory. In this paper, market power theory only has been studied with a sample of BSE Auto Index companies. This theory states that payable will be higher than the receivables when a firm having high brand equity. OLS regression model were employed to study the impact of brand equity on the ratio of trade creditors to trade debtors. Our result supports the market power theory that the proxy for brand equity had positively influence the ratio of payables to receivables.