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Trade credit and SMEs: " It is all down to culture "

Working Paper · September 2017

DOI: 10.13140/RG.2.2.25057.81765

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 Trade credit and SMEs: “It is all down to culture”

Yacine BELGHITAR, School of Management, Cranfield University, UK

School of Management Cranfield University Cranfield, Bedfordshire, MK43 0AL
Tel: 44(0)123475 4557; yacine.belghitar@cranfield.ac.uk

Cesario MATEUS*, University of Greenwich, UK

Faculty of Business, Park Row, Old Royal Naval College, SE10 9LS
Tel: 44(0)2083318487; c.mateus@greenwich.ac.uk

Andrea MORO, School of Management, Cranfield University, UK

School of Management Cranfield University Cranfield, Bedfordshire, MK43 0AL
Tel: 44(0)123475 4409; andrea.moro@cranfield.ac.uk

Abstract

This article examines trade credit decisions in Western Europe using a comprehensive

sample of 182,296 small firms for the period 2003-2013. Relying on information asymmetry

and financial flexibility theories, we show how a country’s informal institutions can impact

short term credit access. In particular, we show that each country cultural norms play a key role

in explaining trade credit differences in a European region that shares common formal

institutional characteristics. We find that in countries with high power distance, high

individualism, high masculinity, and high uncertainty avoidance rely more on trade credit.

These results are robust to a range of alternative variable measurements, conventional control

variables and specifications.

JEL: G3; G32

Keywords: Trade Credit, Culture, SMEs, Bank Credit

1
Introduction

Trade credit, the provision of credit by suppliers to their customers, is a common

business practice in all economies (Wilson, 2014). In spite of the existence of a specialized

financial sector and trade credit being considered to be very costly to the firm,1 it is regarded

as the most important source of financing, especially for small and medium enterprises (SMEs).

For example, Berger and Udell (1998) show that 15.78% of the total assets of US small firms

are funded by trade credit. In Europe, Bougheas et al. (2009) document that trade credit in

Germany, France and Italy represents more than 25% of total assets. In the UK, 70% of total

short-term debt is financed through trade credit (Guariglia and Mateut, 2006).

Given the importance of trade credit to firm financing as well as in investment

decisions, a body of research has been devoted to assessing the determinants of trade credit.

Despite the number of trade credit studies, the motives of its use are still not well understood.

Much of the extant literature emphasizes that firms, and in particular SMEs, use trade credit

because banks are unwilling to provide loans (Boissay and Gropp, 2007). A majority of the

explanations that have been put forward in the literature, focus on a single country from the

perspective of financial advantage theory (Emery, 1984; Mian and Smith, 1992; Petersen and

Rajan, 1997; Smith, 1987), price discrimination theory (Brennan et al., 1988; Mian and Smith,

1992), or transaction cost theory (Ferris, 1981). However, as pointed out by Aggarwal and

Goodell (2009), the extent of the transaction and discrimination costs associated with

asymmetric information and agency costs differ markedly across countries, depending not only

on the legal environment but also on underlying societal norms.

Indeed, there is burgeoning literature suggesting that institutional factors play a pivotal

role in explaining cross-country differences in financial choices (see Demirgüç-Kunt and

Maksimovic, 2002; Ferrando et al., 2015; Jappelli et al., 2005; Bartholdy and Mateus, 2008;

1
Boissy and Gropp (2007) estimate the implicit annual interest of trade credit to be about 40%.

2
La Porta et al., 2013). Williamson (2000) argues that the financial choices available to a firm

are subject to its formal (e.g. financial legal systems) as well as informal (e.g. underlying

societal norms) institutions. According to North (1990), informal institutions such as customs,

religion, language and culture have a far deeper influence on a firm’s decision than formal laws

and economic rules. Support to this point is provided by the research on soft factors in credit

access (e.g the works by Berger and Schaeck 2011; Elsas and Krahnen 1998; García-Teruel

and Martínez-Solano 2007; Harhoff and Körting 1998; Hernandez-Canovas and Martınez-

Solano 2007; Moro and Fink 2013; Stein 2002).

This growing literature, however, has yet to identify a clear channel through which

informal institutions, such as cultural values, affect firms’ decision. In this paper, we build on

a general consensus that there is a relationship between trade credit and bank credit (see inter

alia, Biais and Gollier 1997; Fisman and Love 2003), and then we go on to argue that a SME’s

decision on short term credit depends largely on how cultural values affect the concepts of

information asymmetry and financial flexibility.

This research focuses on small and medium enterprises. Besides being considered the

backbone of the European economies, we argue that the influence of culture is more relevant

and visible for SMEs. According to organizational learning theory (Barkema and Vermeulen,

1998; Kogut and Zander, 1993), SMEs are more affected by influences of their national culture

because they tend to operate mainly on the domestic market. Similarly, Ramírez and Tadesse

(2009) argue that the decisions of domestic firms with domestic managers reflect the values of

the society in which it exists. In a study of firms’ risk-taking behaviour, Li et al. (2013) show

that cultural values have greater influence on risk-taking for small firms than they do on large

ones. The main explanation for this result is that managers in smaller firms have the freedom

of more discretion and hence are more likely to be influenced by cultural values when making

decisions, while managers of large firms do not enjoy the same level of discretion because of

3
the governance control systems in place that act to constrain managerial behaviour. In another

study on board composition, Hahn and Lasfer (2015) show that large firms have a higher

proportion of foreign directors and hence the boards are more culturally diverse. This is not the

case with SME boards which are mainly composed of domestic directors with close ties to the

owner-manager of the firm (Huse, 2003). SMEs are also more vulnerable to market

imperfections such as informational asymmetry and financial constraints (Van Caneghem and

Van Campenhout, 2012), which give rise to moral hazard and adverse selection when it comes

to credit access (see inter alia Belghitar and Khan 2013). As such, SMEs provide us with a

unique platform from which to assess the dynamics between national culture and trade credit.

We examine the effect of culture on trade credit in Western Europe using a

comprehensive sample of 182,296 SMEs over the period 2003-2013, making 1,161,018 firm-

year observations. In particular, we use a sample of 16 countries (Austria, Belgium, Denmark,

Finland, France, Germany, Greece, Iceland, Italy, Netherlands, Norway, Portugal, Spain,

Sweden, and United Kingdom). To capture each country’s cultural values, we rely on

Hofstede’s (Hofstede, 1983, 1981; Hofstede et al., 1990) cultural categories2 that allow us to

note cultural differences that may be more pervasive than expected. We find that Southern

European countries rely more on trade credit than Northern European countries. For example,

trade credit represents, on average, 25.27% of total assets of Italian SMEs, whereas in Finland

trade credit is, on average, only 10.29%. We find that in countries characterised by high power

distance, high individualism, high masculinity and high uncertainty avoidance rely more on

trade credit. The results are robust to alternative measures of trade credit as well as national

culture. The findings are also robust to alternative estimation techniques, as well as the

potential endogeneity issue that emanates from the joint determination of bank credit and trade

2
Hofstede categorises the world culture into clusters, depending on how the national culture is in relation to a)
change and uncertainty b) power distance and hierarchic structures c) individuality d) long term pragmatism and
e) masculinity – femininity (task orientation versus person-orientation).

4
credit. In addition, we control differences in the determinants of trade credit at country level,

and whether our results are affected by a particular country (or few countries), or by a particular

industry.

The paper closest to ours is by El Goul and Zheng (2016), who examine culture’s

influence on trade receivables. Similar to our work they estimate the impact of culture at firm

and country level using Hofstede's culture framework. However, in contrast to our work,

authors investigate the determinants of trade credit using a sample of international, large and

listed firms. Our paper focus on the effect of culture on unlisted SMEs because we believe that

effect of culture is stronger for these type of firms. In fact, our results show that large SMEs

use less trade credits compared to smaller SMEs. Another major drawback of drawing

conclusions from studying large and listed firms is the fact they are not necessarily listed in the

country of origin and, in general, have a higher proportion of foreign directors, and, are more

culturally diverse (Hahn and Lasfer, 2016). Estélyi and Nisar (2016) affirm that board's foreign

members influence the quality of its decisions. For instance, Van Veen et al., (2014) examined

the data on boards across countries in Europe and provided the average number of nationalities

on board (figures are stated in parentheses): Luxembourg (5.3), The Netherlands (5.0), The

United Kingdom (4.3), France (3.9) and Germany (3.8), Italy (2.2) and Denmark (2.2). Hence,

we argue that the impact of culture in large listed companies may be attenuated. Finally, and

more importantly, our paper differs from El Goul and Zheng’ (2016) work by developing a

conceptual theoretical framework based on information asymmetry and financial flexibility

arguments to identify the channels through which culture affects credit access.

For our knowledge our paper is the first study providing evidence of the impact of

culture on SMEs financial decisions. There is little research that considers the similarities or

differences between countries that fall into the same general legal framework and display

5
similar level of economic development. The behaviour of capital markets in Western Europe

might often be perceived to be comparatively similar in terms of market maturity and

sophistication. However, countries in this European region display noticeable cultural

differences that affect market conditions. The reminder of this paper is structured as follows.

The next section presents the conceptual theoretical framework and hypotheses. While section

3 discusses the methodology and sample description. Section 4 presents our main results, with

section 5 discussing the robustness tests. Lastly, section 6 concludes.

2. Theoretical framework and hypotheses devolvement

Every society has informal institutions, such as culture, which provide unnoticeable

structure and unwritten rules that define the perceptions and decisions of the society in both

personal and professional settings. In fact, Markus and Kitayama (1991) argue that human

perceptions and behaviours are developed and determined by cultural norms and beliefs.

Culture permeates every aspect of the life of individuals as well as organisations affecting the

way in which the society is shaped, for instance by supporting the regulatory system and the

political system. Interestingly, culture impacts both whether information is easily and

informally shared with the business partners (Easterby-Smith et al., 2008), and the desire of

maintaining financial flexibility (Deutsch, 2000).

In his seminal work, Hofstede (1983) sees culture as the collective programming of the

mind that distinguishes the members of one group or category of people from another. The four

widely adopted dimensions of Hofstede national culture are: power distance, individualism

versus collectivism, masculinity versus femininity, uncertainty avoidance. Prior studies have

shown that there is a relationship between trade credit and bank credit (e.g. Biais and Gollier

1997; Fisman and Love 2003). In this paper we contend that this relationship is influenced by

the cultural values. Figure 1 illustrates our conceptual framework.

6
 -------------

FIGURE 1 HERE

--------------

In this conceptual framework, we identify two channels through which culture affects credit

access, namely information asymmetry and financial flexibility.

Asymmetric information and culture

Agency problems arise because of information asymmetry between the SME and the

creditor, where the former is assumed to possess more information than the latter (Jensen and

Meckling, 1976). The creditor is adversely affected and incurs moral hazard risk and adverse

selection, especially when information that is relevant to the decision taking is withheld by the

firm; this applies to both formal and soft information (Howorth and Moro, 2006; Stein, 2002;

Uzzi and Lancaster, 2003). The literature presents evidence that suggests that culture influences

how information is processed and shared among business partners (Easterby-Smith et al., 2008;

Timonen and Ylitalo, 2008). For instance, in competitive cultures, based on highly structured

and hierarchic organizations, SMEs tend to be very protective of information. In cooperative

environments, characterized by very flat organizations, SMEs are happier to share their

business information (Millar and Choi, 2009).

One common explanation for the existence of trade credit is based on the premise that

suppliers would be in a better position to process and acquire information than banks (e.g. Mian

and Smith 1992; Tsuruta 2008)3. This advantage may enable them to provide trade credit more

easily than banks; an aspect that can play a particularly important role in countries where

cultural values do not facilitate the process of acquiring information. For instance, when

3
It is argued that suppliers, through their commercial relationship (the regular payments on previous supplies,
financial relationship with other business partners, etc), have better information and control on the business of
their customers (SMEs) (Smith, 1987).

7
societies exhibit a large degree of power distance, they accept a hierarchical order in which

everybody has a place: bank-firm relation is formal and firms perceive banks as distant entity

that cannot be trusted (Ferrary, 2003). In this context, SMEs are unwilling to make information

easily available. Consequently, bank credit denial will increase because of the lack of access

to private hard information (Berger and Udell, 2006). Similarly, in individualistic societies

characterised by the strong preference for a loosely-knit social framework (where individuals

are expected to take care of only themselves and their immediate families), there is little room

for the development of informal and personal relationship among business partners (Uzzi and

Lancaster, 2003). Also in this case, SMEs tend to see banks as external formal entities instead

of close business partners to trust (Tang et al., 2016), or even antagonists that typically take

lending decision based on credit scoring/rating lending or on asset lending (Berger and Udell,

2006). As such, SMEs tend to be very protective of information and avoid sharing it because

they do not trust bank (Lowry et al., 2014; Rheinbaben and Ruckes, 2004). In masculine society

with preference for achievement, heroism, assertiveness and material rewards for success,

society is generally more competitive and mistakes are not tolerated. Banks are careful in taking

lending decision since wrong decision will not be forgiven. As such, banks tend to ask a lot of

additional information instead of relying on personal relationships and trust (Howorth and

Moro, 2012; Moro and Fink, 2013). This behaviour is perceived by SMEs as intrusive (Das

and Teng, 1998). Finally, in uncertainty avoidance countries, SMEs are less comfortable with

the banking system because they find it uncertain and ambiguous, while at the same time banks

need additional information in order to improve creditworthiness evaluation and minimize the

risk they incur. The joint effect of these behaviours is that they preclude the establishment of

friendly and cooperative relationships between banks and firms (Lewicki and Bunker 1996;

Lewicki and Wiethoff 2000).

To sum up the above discussions, in countries with high scores in Hofstede’s cultural

8
values, the lack of information compromises the bank’s ability to evaluate the SMEs, and thus

constrain banks from providing credit. Trade credit, on the other hand, appears to be more

appealing to SMEs. In uncertainty avoidance society, it is easier for SMEs to develop a

cooperative relation with business partners because of the less intrusive, friendlier approach

they have (Deutsch, 2000). At the same time, business partners are able to access the

information they need and take more flexible decision about the provision of (trade) credit.

Next, trade credit providers can enjoy a stronger and more open relationship with the customer

even in high power distance societies because of the intensity of the interaction with both the

firm and firm’s competitors (Lewicki and Bunker, 1996; Lewicki and Wiethoff, 2000;

McKnight et al., 1998). Lastly, the suppliers of goods/services are more likely to provide trade

credit because they are in a better position to assess and evaluate their customers’/SMEs’

creditworthiness and financial performance.

Financial flexibility and culture

The ability of an SME to respond to unexpected changes in cash flows or sales is often

known as financial flexibility. SMEs which manage to preserve flexibility are more able to

avoid financial distress (Almeida et al., 2011). From this perspective, the decision regarding

different sources of short term finance is chiefly influenced by the flexibility provided by the

creditors to the firm (Pindado et al., 2006). In high power distance countries, the complexity of

dealing with financial distress and loan repayment difficulties is high since any negotiation

about the restructuring of the bank debt is complex: different parties find it difficult to

understand each other’s needs and typically have little trust in the counterpart. This can hinder

re-financing negotiations, compromising SMEs’ ability to cover the emerging financing needs

(Uzzi, 1999). In individualistic societies, SMEs rely less on informal relationships and

connections. The loose knits that the firm’s management has with the bank make it difficult for

9
the bank to have a clear understanding of the SME (Howorth and Moro, 2006). In such a

context, the reduced room for informal and cooperative approach (Deutsch, 1958; Lewicki and

Wiethoff, 2000) makes it more likely that delinquency on a loan may drive the firm into

liquidation/bankruptcy or that a debt restructuring will not be successful. In addition, the

bankruptcy/distress costs are expected to be high. Firms facing financial distress in masculine

societies face a great deal of red tape because of the banks’ prudent approach and the related

additional administrative work increases management costs (Das and Teng, 1998; Deutsch,

2000; Macaulay, 1963). Thus, in a masculine societies bank loans imply greater complexity,

greater risk, and greater bankruptcy/distress cost. In these societies, quite often the negotiations

are long and complex ones and firms can face additional covenants and costs4. Finally, in high

uncertainty avoidance banks follow more formal rules in the lending decision process. This

approach generates additional red-tape and related costs. In addition, in case of financial

distress any re-negotiation of the loan is complex and can take a lot of time. To sum up, in

countries with high scores in Hofstede’s cultural values (namely, high power distance, high

masculinity, high individualism and high uncertainty avoidance), bank credit rigidity increases

the firm’s financial risk since it will struggle to handle any emerging unexpected financial

issue.

Interestingly, compared to bank credit, trade credit may offer greater flexibility in

accommodating unexpected cash flow variations than bank loans or overdraft. García-Teruel

and Martínez-Solano (2010) argue that SMEs with cash shortages find it simpler to extend

trade credit than to renegotiate bank credit. Trade credit renegotiation, is quite often informal

as no additional information is requested by the supplier - and thus no (or very reduced)

additional costs are incurred (Summers and Wilson, 2002). Moreover, the outcome of trade

4
The renegotiation of the loan generates additional costs: fees to pay, a higher interest rate and the other costs
associated with the additional information required by the lender. The process outcome of a bank loan/overdraft
renegotiation is also highly uncertain. Moreover, delinquency in bank loans/overdraft typically triggers actions
from the bank and is rapidly recorded by credit scoring/credit rating agencies.

10
credit negotiation is less uncertain because the process can be concluded very rapidly. Finally,

trade credit delinquency does not trigger an immediate harsh reaction (i.e. the denial of

additional credit or the shutting down of the current credit lines) as it is quite often not recorded

by credit rating/scoring agencies. In the case of cultures that show high power distance, any

negotiations with suppliers about trade credit restructuring is easier than bank negotiations. In

addition, the credit renewal incurs lower costs as the decision is typically taken very rapidly

because of the established relationship (Gulati, 1995). In individualistic societies, trade credit

offers greater flexibility, easiness and it incurs lower costs during difficult periods compared

to bank credit because of the bonding relationship between the supplier and the firm (Das and

Teng, 1998; Deutsch, 2000; Macaulay, 1963). Similarly, in masculine societies dealing with

trade credit is by far simpler and less expensive than dealing with bank credit (Bromiley and

Harris, 2006; Macaulay, 1963) as trade creditors have a greater knowledge of their customers

and rely on trust in business partners in their dealings (Deutsch, 2000) implicitly reducing the

costs they incur. Finally, in societies characterised by high uncertainty avoidance, SMEs find

it easier and cheaper to deal with the credit provided by suppliers that are in a better position

than the bank to evaluate the creditworthiness of the customer.

Hypotheses

Based on the foregoing discussions on the influence of culture on information

asymmetry and financial flexibility, we offer the following testable hypotheses:

H1: European countries’ reliance on trade credit is influenced by cultural dimensions

H2: In countries with higher power distance characteristics reliance of SMEs on trade credit
is heavier

H3: There is a positive relation between individualism and the use of trade credit.

H4: In masculine society SMEs use more trade credit.

H5: Higher uncertainty avoidance - heavier reliance of SMEs on trade credit

11
H6: The impact of culture on SMEs’ reliance on trade credit may diminish with time

12
3. Methodology and sample description

3.1 Methodology

To test our hypotheses, we use panel data regression analysis to account for firm

heterogeneity. To this end, we run Breusch–Pagan Lagrange Multiplier (LM) tests to test the

effect of the pooled specifications against the firm’s random effects specifications. The LM

tests are statistically significant at the 1% level, suggesting that the random effects model is

preferable to the pooled model; hence the random effects model is reported in the specifications

that include culture variables. To be comparable with prior studies, we start estimating a

specification that does not consider the cultural dimension and then we show the results of four

additional specifications that control for each cultural dimension.

We also implemented a battery of robustness checks. Since it could be argued that our

analysis can suffer from endogeneity because of the simultaneity between trade credit and bank

credit, we estimate this relationship in a framework of simultaneous regressions where the

equation for bank credit includes the following independent variables: liquidity, debtors,

profitability of the firm, the firm’s size, national unemployment rate, gross domestic product

and the cultural variables. We estimate the regressions for trade credit (TC) and bank credit

(BC) simultaneously using three-stage least squares (3SLS) where the disturbance terms are

assumed to be contemporaneously correlated. Because of the role played by the legal system

in the derivation of our hypotheses (i.e. the role of the bankruptcy/distress procedures and the

related costs), it is important to check for any impact that the legal environment can have on

trade credit decision. Thus, we re-estimated our original specifications including legal variables

as controls. It could be also argued that the results can be influenced by the cultural variables

used. Thus, we re-estimate the model by using an alternative measure of culture, namely,

Schwartz Culture Factors.

There is no such thing as a definitive measure of trade credit. This implies that the

13
analysis is sensitive to the way trade credit is measured. In order to control this issue, we re-

estimated the model by using an alternative measure of trade credit, namely creditors days.

We also implemented two additional checks: first, we re-estimated the basic regression

(without cultural variables) for each country in our sample in order to examine whether our

results are driven by differences in the determinants of trade credit at country level. Finally, we

test whether the results are affected by one or few countries or by the industries or by years.

We re-estimated the original model 34 times, each time dropping either a country, a sector or

a year for each cultural dimension: if a country/an industry affects the results, then we should

find big differences in the cultural coefficients when that country or that industry is dropped.

3.2 Data

The accounting and financial data was obtained from ORBIS, a global company

database produced by Bureau van Dijk which contains information on over 80 million

European private companies. This is a comprehensive database which provides accounting and

financial information in an analogous and uniform format allowing comparisons across

countries. We started by selecting Manufacturing SMEs from sixteen Western European

countries (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland,

Italy, Netherlands, Norway, Portugal, Spain Sweden and United Kingdom) and from seven

different sectors (chemicals, rubber, plastics, non-metallic products; food, beverages, tobacco;

machinery, equipment, furniture, recycling; metals & metal products; publishing, printing;

textiles, wearing apparel, leather and wood, cork, paper). The data is organized following the

Statistical Classification of Economic Activities in the European Community, Rev. 2 (2008)

and it is reported in ORBIS under NACE Rev. 2 main section, C – Manufacturing. We select

only small and medium sized enterprises following the European Commission

Recommendation 2003/361/EC grouped according to the number of employees, annual

14
turnover or annual balance sheet total.

In this paper we examine the effect of culture on trade credit with the focus on SMEs,

as we claim that the effect of culture is stronger in small companies vis-à-vis large listed firms.

Large listed companies are not necessarily listed in the country of origin and, in general, have

a higher proportion of foreign directors , therefore, are more culturally diverse (Hahn and

Lasfer, 2015). Estélyi and Nisar (2016) affirm that a board's foreign members may influence

the quality of its decisions. As an example Veen, Sahib and Aangeenbrug (2014) examined the

data on boards across countries in Europe and provided the average number of nationalities on

board (figures are stated in parentheses): Luxembourg (5.3), The Netherlands (5.0), The United

Kingdom (4.3), France (3.9) and Germany (3.8), Italy (2.2) and Denmark (2.2). Hence, we

argue that the impact of culture in large listed companies may be attenuated. In addition, for

companies listed outside of the country of the origin with an international board of directors

the decision making may incorporate not the impact of the culture but the impact of market

conditions of the receiving country.

Our analysis is conducted for SME’s in Western European countries. Due to SME’s

data limitations (limited country coverage) we cannot extend our analysis to Asian or Latin

American countries, so that may be of interest for further research. However, we contend that

the impact of culture on trade credit should be measured among countries with similar

configuration of financial systems, thus cross-countries firms’ use and provision of trade credit

can be attributed to the culture and not affected by legal environment, the level of economic

development, macro-economic conditions, political conditions, and the level of institutional

development.

The time period of this study is from 2003 to 20135. The final sample consists of

182,296 unique unbalanced SMEs, giving us 1,161,018 SME-year observations. Table 1

5
Orbis reports cover 10 years of data

15
provides the distribution of the sample by country (in Panel A) and by industry (in Panel B).

-----------------

TABLE 1 HERE

-----------------

The proportion of observations per country mirrors the proportion of small and medium

SMEs in existence according to the EU statistics: in fact, Italy is the country with the greatest

number of observations followed by Germany. The country with the smallest number of

observations is Iceland. Panel B shows that the most represented industry is the “Machinery,

Equipment and Furniture” (32.60% of the observations) followed by “Metals and Metal

Products” (18.94% of the observations). The smallest sector is Publishing and Printing (3.49%

of the observations).

The main variable of interest in this study is trade credit. As such, we measure trade

credit as the ratio between creditors and total assets.

------------

TABLE 2

-------------

From Panel A, in Table 2, trade credit in Europe, on average, represents 16% of the

total assets of SMEs. However, when we look at the average of the trade credit by country, the

descriptive statistics are revealing. Trade credit in Finland, on average, is 10.3%. Compared to

the other European SMEs, Finnish SMEs have the smallest trade credit ratio. On the other hand,

SMEs in Italy have the highest trade credit ratio, representing, on average, 25.3% of total assets.

Looking over the period of analysis (2003-2013), there are some interesting patterns. We notice

that in Italy, France, Portugal and Spain, trade credit decreases. For instance, in 2003 Italy’s

trade credit represented 29.2% of total assets, whereas in 2013 it represented only 23.6%. As

for the other European countries, we do not notice a significant change. Turning to Panel B

16
Table 2, there are no major differences across the sectors. On average, the Food, Beverage and

Tobacco sector has the highest trade credit ratio, 16.7%; whereas, the Textile, Wearing and

Apparel sector has the lowest ratio, 15.5%. Similarly, we do not observe any difference in the

trade credit by sector for each country. All in all, the descriptive statistics indicate that the use

of trade credit appear to be more related to country aspects than to sector characteristics.

3.2.1 Cultural variables

The independent variables of interest in our research are those that measure culture. As

already discussed we rely on Hofstede’s culture dimensions (Hofstede, 1983, 1981; Hofstede

et al., 1990). Hofstede’s is the earliest and most widely cited cultural dataset (Aggarwal, 2016).

As the most recent Hofstede’s culture framework was used in Frijns, Dodd and Cimerova

(2016), El Ghoul and Zheng (2016), Ashraf and Arshad (2017). Karolyi (2016) analysed the

impact of cross-cultural research on finance and economics and highlighted that more than

two-thirds studies of the two dozen cited used one or several Hofstede’s measures6.

In this study we use four independent variables as per Hofstede's classification. The

first dimension we include is the power distance (PD). It is defined as the extent to which less

powerful members of institutions and organizations within a country expect and accept unequal

distribution of power. The second dimension, Individualism (IND) captures the degree of

interdependence a society maintains among its members. The third dimension, a masculine

society (MAS) is one that is driven by competition, achievement and success, with success

being defined by being the winner/best in field. Finally, uncertainty avoidance (UNC) has to

do with the way that a society deals with the fact that the future can never be known.

6
Karolyi (2016) also explains an enormous impact of Hofstede’s framework on research in various business
disciplines, like organizational behaviour, strategy, and human resources management. Thus, the cumulative
citations to his articles according to the Web of Knowledge totals 5761 over 1980 to 2015 across 142 published
items implying an average of 40.57 citations per item.

17
 Based on Table 2 we observe that Southern European countries rely more on trade

credit than Northern European countries. For example, trade credit represents, on average,

25.27% of total assets of Italian SMEs, whereas in Finland trade credit is, on average, only

10.29%. Thus, we want to test whether it can be driven by culture. For this reason we run

preliminary tests by dividing the countries by quartiles according to their cultural variable

values and the average trade credit by country. The Wilcoxon rank-sum non-parametric test is

used to test difference between the means of two independent samples with a null hypothesis

that there is no difference in mean values presented for firms in the top and bottom quartile

countries against an alternative hypothesis that a particular population tends to have larger

values than the other. In table 3 the results show that the difference between the two groups of

countries with the average trade credit in the upper quartile and in the lower quartile according

to Hofstede’s cultural dimensions is statistically significant at 1 percent level. Our preliminary

results confirm our Hypothesis 1 that European countries’ reliance on trade credit depends on

cultural dimensions. As an example, in countries with high power distance values (i.e. in upper

quartile), trade credit represents, on average, 21.38% of the firms’ total assets compared to only

13.35% in countries with low power distance values (i.e. in lower quartile), statistically

significant at the 1% level. Similar results are found across all four Hofstede measures.

-----------------

TABLE 3 HERE

-----------------

3.2.2 Firm characteristic variables and Macroeconomic Variables

As additional control variables, we also include two sets of variables: the first set looks

at each SME’s characteristics since the trade credit decision could depend on SME performance

and financial strategy. The second set includes macroeconomic variables as the economic

18
context as well as the credit availability might affect the decision to use different sources of

finance.

Focusing on the SME’s related variables, we include the ratio between debtors and total

assets (Debtors). If an SME decides (or it is forced) to provide more credit to the customers,

i.e. it faces a greater debtor ratio, it needs more finance. The expectation is that the additional

finance requested by the customer is, at least in part, financed by relying more on the trade

credit. Thus, we expect a positive relationship between Debtors and the use of trade credit. The

use of trade credit is also affected by how much stock the SME has: the greater the amount of

stock (be it raw material, work in progress or final product) the SME has, the greater the need

for additional finance. Moreover, the liquidity preference of the SME may affect the amount

of trade credit: SMEs that prefer to have greater amount of cash in hand, may use more trade

credit in order to make such amounts of cash available. All in all, both the amount of stock and

the SME preference for liquidity affect the trade credit in the same direction: they increase the

amount of trade credit the SME uses. We take these aspects into consideration by including the

variable Liquidity that is the sum of cash in hand and stock divided by the total assets of the

SME. According to pecking order theory, SMEs tend to rely on the profit in order to finance

their activities as retained profit is the cheapest source of finance (Myers and Majluf, 1984).

We take this aspect into consideration by including a variable (Profitability) that considers

profit after taxes but adds up depreciation and amortisation scaled by total assets. Our

expectation is that Profitability is negatively related to the use of trade credit. We also control

for the level of short term Bank credit (BC) available to the firm. An SME’s ability to use bank

credit to finance its current activities also impacts the use of trade credit: the greater the

capability to leverage alternative sources of finance, the smaller the reliance on trade credit.

Finally, an SME’s financial needs are also dependent on its dimensions: bigger SMEs need

more finance and, thus, they can try to use more trade credit. In addition, bigger SMEs may

19
have more negotiating power with suppliers and thus are able to obtain trade credit at better

conditions. However, bigger SMEs are also able to access many alternative sources of finance

(such as additional capital) and they are also in a better position to negotiate good terms when

accessing financing (i.e. better terms on the loans). The size of the SME is measured by natural

logarithm of total assets.

Table 4 presents the firm specific descriptive statistics and Table 5 shows the

correlation.

-----------------

TABLE 4 HERE

-----------------

-----------------

TABLE 5 HERE

-----------------

The average, over all the countries, for SMEs liquidity (LIQUIDITY) is 0.299. The

country with the lowest liquidity ratio is Greece (0.248), German SMEs have the highest ratio

(0.373). The picture depicted by debtors is only partially different: the overall average is 0.242

– the country with the greatest debtors is Greece (0.339) and the one with the smallest debtors

is Austria (.041). Dutch SMEs are the most profitable (Profitability) with a ratio of 0.121

compared to the other European countries in the sample. Regarding the use of alternative

sources of short term finance, the overall average ratio of short term bank credit is 0.306.

Austria’s SMEs have the highest ratio of bank credit, representing about 53% of the total assets

whereas Irish SMEs have the lowest debt ratio (0.206). This is not surprising, given that Austria

has the lowest trade credit ratio as discussed above.

Turning our attention to the macroeconomic aspects, we include two variables: Credit

(defined as the amount of credit provided by the financial sector as a percentage of the GDP)

20
and Unemployment (the percentage on unemployed persons among the population of working

age). The argument for credit is that the greater the amount of credit provided by the financial

sector, the lower the need for trade credit since the financial needs can be more easily covered

by banks and other financial institutions. Thus, a negative relationship is expected.

Unemployment as a variable allows us to control for the general economic environment. High

unemployment rate implies an economy that is not expanding and where doing business can

be quite difficult.

21
4 Empirical Results

Table 6 reports the results for six specifications where the dependent variable is Trade

credit (TC) and the independent variables are firm specifics, country characteristics and

Hofstede cultural dimensions.

-----------------

TABLE 6 HERE

-----------------

To allow comparison with previous studies on trade credit, Model 1 includes only firm

and macroeconomic variables. Liquidity and Debtors are positively related to the use of Trade

credit as expected; while Profitability and Bank credit are negatively related to Trade credit.

The sign of the variable SIZE is of particular interest since we do not have any prior

expectation. Our result supports the argument that larger SMEs use less Trade credit, possibly

because they are able to rely more on alternative sources of finance. With regard to

macroeconomic variables, greater availability of credit from the financial system reduces the

use of trade credit while higher unemployment increases its use. The last point supports the

fact that in harsher times (i.e. when unemployment is higher) SMEs rely more on trade credit,

possibly because it is harder for them to access finance from banks or alternative sources.

In Model 2, we augment our specification by including the Power Distance (PD) culture

variable. Compared to Model 1, there are no changes in firm and macroeconomic variables in

terms of sign and significance. In addition, the variable of interest PD is significant and

positively related to trade credit: as expected the greater the power distance the greater the use

of trade credit (in accordance with the Hypothesis 2).. Along similar lines, Individualism

(IND), in Model 3, is significant suggesting that in highly individualistic societies SMEs rely

more on trade credit, as it allows them to avoid asymmetry related issues and reduces the costs

linked to control (In line with the Hypothesis 3). Model 4 presents the results including the

22
cultural variable of Masculinity (MAS). No change in the significance and sign of control

variables. The result is in line with what we expect and suggests that in masculine societies that

are driven by competition, achievement and success, managers rely more on trade credit

(Hypothesis 4). Finally, in Model 5 we include Uncertainty Avoidance (UA). All variables are

significant, including UA that is positively related to trade credit: as expected, it confirms the

Hypothesis 5 that in high uncertainty avoidance societies, SMEs rely more on trade credit.

We also performed an additional regression where we include all the culture variables

at once (Model 6). Interestingly, there are no changes in the other variables and all cultural

dimensions are statistically significant and have the expected (positive) sign. All in all, our first

set of regression support all five mentioned above hypotheses.

One finding from the descriptive statistics on trade credit is that it is decreasing over

the period of our analysis in some countries such as Italy and Portugal. In order to take the

discussed convergence of the use of trade credit among countries in Europe into consideration,

we re-estimate our specifications by introducing the time variable (year) with the Hofstede

cultural variables. Results are presented in table 7.

-----------------

TABLE 7 HERE

-----------------

Firm and macroeconomic variables maintain their original sign and are significant;

Hofstede’s cultural dimensions are positively related to trade credit and are significant. More

interestingly, in all four models, the interaction terms are statistically significant. The findings

clearly support our Hypothesis 6 that even if culture is relevant in terms of trade credit used,

its role is diminishing through time.

23
5. Further Robustness Analysis

In this section, we conduct a number of robustness checks to ensure the validity of the

foregoing results.

5.1 Simultaneous Regressions

As discussed above, it could be argued that trade and bank credit could be jointly

determined. This would imply that the results presented in table 6 could be endogenous. In

order to address this potential issue we estimated our models using 3SLS. The results are

reported in table 8.

-----------------

TABLE 8 HERE

-----------------

The results are consistent with the results presented in Table 6. All the culture variables

have a positive and significant effect on trade credit (TC). Looking at the bank credit (BC)

specification, the results are interesting. Individualism and Masculinity are significantly and

positively related to bank credit, while Power Distance and Uncertainty Avoidance are

significantly and negatively related to bank credit. We interpret this finding in the light of the

two channels (information asymmetry and financial flexibility) that we consider in this work.

In the case of Power Distance and Uncertainty Avoidance, the decision to rely more on trade

credit seems to be supported by the substitution effect: higher level of power

distance/uncertainty avoidance increases the role played by information asymmetry as a

constrain in accessing bank finance. SMEs react to the lack of bank finance by increasing the

use of trade credit. This implies that these cultural dimensions “drive” the reallocation of

financing from bank credit to trade credit. In the case of Individualism and

Masculinity/Femininity both trade credit and bank credit are positively related suggesting that

24
there is not such substitution effect: in fact, we interpret this as a support to the financial

flexibility argument. Complimentary use of trade credit and bank credit was documented in the

studies of Burkart and Ellingsen (2004) and Taketa and Udell (2007).

All in all, this robustness check suggests that both the information asymmetry

channel that suggests a substitution effect between trade credit and short term bank credit, and

the financial flexibility channel that suggests a greater use of trade credit independently from

the use of bank debt are important in affecting the decision to rely on trade credit. However,

the roles of asymmetry of information and financial flexibility differ according to the results

based on cultural dimension.

5. 2 Additional legal environment variables

There is ample evidence in the literature that suggests that institutional environment

(legal, political, economic, financial, and social systems that surround firms and grant them

legitimacy) plays a key role in explaining a firm’s behaviour. With regard to the legal system,

La Porta et al. (1998) provided evidence that investors in countries with common law traditions

are better protected than investors in countries with civil law origins. Likewise, (Zheng et al.,

2012) argue that the cost of imposing contracts depends largely on the country’s legal system.

There is also some evidence in the literature which suggests that the quality of the country’s

law enforcement influences firms’ financing choices (Bae and Goyal, 2009; Giannetti, 2003;

Qian and Strahan, 2007) as well as the access to finance (Moro et al., 2016). Developed political

institutions can also affect firms’ financing choices (Zheng et al., 2012). For instance, Qi et al.

(2011) show that better political rights lead to lower cost of debt and Demirgüç-Kunt and

Maksimovic (2002) show that short term financing depends not only on firm specifics but also

on the level of development of a country's financial system and its financial institutions.

The effectiveness of the legal environment can affect the SME’s decision to rely on one

25
source of finance instead of another. Specifically, in an effective judicial environment, creditors

can easily recover their credit. This fact can impact on financing decisions since bank credit

can be easier to access in countries where there is a greater and more effective protection (Moro

et al., 2016) thus reducing the use of trade credit. In contrast to this, in countries that have a

more inefficient judicial system, SMEs can turn to trade credit in order to compensate for the

increased difficulties they face in accessing bank finance. We use two measures of judicial

effectiveness: the time needed in order to obtain a decision from a judge (Time); the cost of the

process as a percentage of the estate (Cost).

However, the quality of the judicial system is also correlated to the culture of a country:

regulation setting and implementation is influenced by the country’s culture. As such, we

examined the correlation between these variables and our focal cultural variables. As expected,

we found large variance inflation factor. Keeping in mind the potential collinearity issue, we

re-estimate our original specifications by including two variables (the cost of the judicial

procedure as a percentage of the estate and the time (in days) needed to obtain a decision by

the judge7) one at a time. The results are reported in table 9 (length of the procedure) and 10

(cost of the procedure).

-------------

TABLE 9 HERE

-------------

-------------

TABLE 10 HERE

-------------

7
We also looked at the number of procedures. However, this variable is very highly correlated to the culture.
The related regression present big problems of multicollinearity that compromise the result obtained.

26
 The results regarding firm, macroeconomic and cultural variables are qualitatively

similar to those previously reported. The effective judicial environment variables are

significant. Interestingly, the amount of time needed to obtain the final decision from a judge

is always positively related to trade credit (see Table 9). This can be linked to the fact that more

inefficient legal systems constrain access to bank credit. Thus, SMEs are forced to use more

trade credit in order to satisfy their financial needs. On a similar note, the cost of the procedure

is also positively related to trade credit (see Table 10). This suggests that the inefficient judicial

system forces the SME to switch their source of funds from bank credit to trade credit. More

importantly to our research is the fact that nothing changes in the case of our variables of

interest: all four cultural factors maintain their original sign both when we enter them one by

one and when we include all cultural factors together. Thus, we can conclude that culture

affects trade credit beyond the effectiveness of the legal system.

5.3 Schwartz Culture Factors

There is no such thing as a definitive measure of culture. This implies that our results

can be affected by the way in which we measure culture. In actuality, our analysis relies on

Hofstede’s model that is very consolidated and has been widely used for more than 30 years.

However, we cannot rule out that by measuring culture in a different way, one can obtain

different results. Thus, we re-estimate our original model by using an alternative measure of

culture: Schwartz Culture Factors. In order to make them consistent with Hofstede’s ones we

multiply them by -1 when needed. The results are reported in table 11 and are consistent with

our previous findings: Schwartz Cultural Factors significantly affect trade credit decisions.

-------------

TABLE 11 HERE

-------------

27
5.4 An alternative measure of trade credit

It could be argued that our results are affected by the way in which we measure trade

credit. Thus, we re-estimate our models by using an alternative measure of trade credit:

creditor’s days. This is calculated as the ratio between the creditors and the cost of goods sold

(COGS) times 365. Results are presented in Table 12.

-------------

TABLE 12 HERE

-------------

Regarding macroeconomic and firm level variables, the results are consistent with the

results reported in Table 6. Interestingly, Hofstede cultural dimensions maintain their

significance level and their original sign, suggesting that our results are robust to the alternative

measure of trade credit.

5.5 Country level regressions

We also examine whether our results are driven by differences in the determinants of

trade credit at country level. In order to do this, we re-estimate the specification (excluding

Hofstede culture dimension) country by country. Results are reported in table 13.

-------------

TABLE 13 HERE

-------------

In terms of an SME’s specific determinants of trade credit, there appears to be a lot of

consistency among the countries in the sample. Liquidity is always positively significant,

except in Finland. Debtors are always positively related to trade credit, but they are only not

significant in Sweden. Except for Ireland, Profitability affects trade credit negatively. In

addition, Profitability is not significant in the case of the Netherlands. Bank credit is negatively

28
related to trade credit. Finally, Size is negatively related to trade credit, except for Spain. It is

also not significant in the case of the Netherlands.

5.6 Laemer histograms

We examine whether the results are affected by one or a few countries or are driven by

the industry or year. In order to do this, we re-estimated the original model presented in Table

5 34 times, each time dropping either a country, a sector or a year for each cultural dimension.

If one country or an industry drives the results, then we expect to find big differences in the

cultural coefficients when that country or that industry is dropped. The results are reported as

Laemer histograms (see Figure 2).

-------------

FIGURE 2 HERE

-------------

In reality, we end up with very consistent result: the coefficients for the four cultural

dimensions are always positive, i.e. irrespective the country we drop or the sector we drop,

suggesting that our results are not influenced by an industry or by a country. In addition, their

spread is limited and the values are very consistent.

6 Conclusion

This study examines the trade credit decision of Western European SMEs. Despite the

fact that countries in this European region share similar institutional characteristics, we find

striking differences in the trade credit use. For example, Italian SMEs rely roughly twice as

much on trade credit as Finnish SMEs do. In an attempt to explain these differences, we develop

theoretical arguments that emphasise the salient effect of national culture on information

asymmetry and financial flexibility that surrounds credit access. Using Hofstede (1983)

29
cultural dimensions (uncertainty avoidance, individualism, power distance, and masculinity),

we propose testable hypotheses on the determinants of trade credit.

Hofstede (1981, 1983) and Hofstede et al. (1990) cultural dimensions have a positive

and significant effect on trade credit. More specifically, we find that in high power distance

countries, SMEs rely mainly on trade credit. Similarly, we find that, in individualistic societies,

SMEs to turn to their suppliers for financing. In masculine societies, we show that suppliers of

goods/services are more prone to providing trade credit because they have better information

and control of the business of SMEs. In countries with high uncertainty avoidance, SMEs are

not willing to share information, while banks tend to be very demanding in terms of

information. As such, SMEs in this uncertainty context turn towards trade credit. Our results

are robust to the inclusion of 1) additional institutional country-level variables; 2) alternative

measures of culture and; 3) alternative measures of trade credit. Finally, the results are not

sensitive to inclusion or exclusion of a specific country or few countries.

This work contributes to the literature on culture and finance and opens a new strand of

research examining the effects of cultural norms on SMEs decision making in general, and on

trade credit in particular. The findings provide the insight that national culture needs to be

considered when analysing SMEs’ financial decision, such as trade credit. The analysis of

Western Europe shows that the significant impact of culture on trade credit holds even in the

countries with similar institutional characteristics and after controlling for macroeconomic and

legal environment. In addition, this study contributes to trade credit literature by developing a

conceptual theoretical framework on how information asymmetry/financial flexibility and a

country’s informal institutions, such as culture, impact SMEs decisions on trade credit and

alternative financing.

What can be learnt from our findings? There is a significant difference in the use of

trade credit amongst Western European SMEs. Southern European countries rely more on trade

30
credit than Northern European countries. This study show, theoretically and empirically, that

culture plays a vital role in explaining this difference and helps to understand the trade-off

between trade credit and short term bank credit. These results are of the significant importance

for academics as well as lending institutions dealing with SMEs internationally.

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35
Figure 1: Conceptual Framework

PD Bank
Information Credit
asymmetry

MF
Substitution
effect

IND
Financial
flexibility Trade
UNC Credit

36
Table 1: Sample distribution by country and industry

PANEL A: Sample distribution by country PANEL B: Sample distribution by sector

Freq. Percent Freq. Percent

AT 21,597 1.86 Chemicals, rubber, plastics, non-metallic products 211,627 18.23

BE 45,305 3.90 Food, beverages, tobacco 152,177 13.11
DK 9,201 0.79 Machinery, equipment, furniture, recycling 378,504 32.60
FI 14,661 1.26 Metals & metal products 219,932 18.94
FR 124,443 10.72 Publishing, printing 40,463 3.49
DE 178,472 15.37 Textiles, wearing apparel, leather 88,046 7.58
EL 29,431 2.53 Wood, cork, paper 70,269 6.05
IS 1,142 0.10
IE 9,623 0.83
IT 339,175 29.21
NL 35,633 3.07
NO 16,673 1.44
PT 37,463 3.23
ESP 147,387 12.69
SE 28,130 2.42
UK 122,682 10.57

Total 1,161,018 100 1,161,018 100

Note: AT: Austria, BE: Belgium, DK: Denmark, FI: Finland, FR: France, DE: Germany, EL: Greece, IS: Iceland, IT: Italy, NL:
Netherlands, NO: Norway, PT: Portugal, ESP: Spain, SE: Sweden, and UK: United kingdom.

37
Table 2: Trade credit by country and Sector
PANEL A: Trade credit by country
AT BE DK FI FR DE EL IS IE IT NL NO PT ESP SE UK TOTAL
2003 0.087 0.211 --- 0.111 0.248 0.129 0.226 --- 0.137 0.292 0.156 0.144 0.251 0.219 0.134 0.169 0.179
2004 0.106 0.208 --- 0.108 0.251 0.128 0.218 0.103 0.153 0.270 0.168 0.133 0.248 0.222 0.126 0.169 0.174
2005 0.109 0.203 --- 0.103 0.251 0.125 0.216 0.119 0.157 0.273 0.171 0.135 0.254 0.220 0.126 0.168 0.175
2006 0.106 0.198 0.079 0.098 0.255 0.131 0.217 0.109 0.183 0.285 0.169 0.135 0.234 0.228 0.125 0.169 0.170
2007 0.138 0.197 0.074 0.104 0.253 0.131 0.206 0.107 0.179 0.277 0.166 0.135 0.235 0.228 0.129 0.169 0.171
2008 0.109 0.203 0.105 0.101 0.230 0.117 0.210 0.118 0.158 0.244 0.158 0.130 0.224 0.156 0.123 0.163 0.159
2009 0.105 0.203 0.105 0.101 0.200 0.103 0.209 0.136 0.150 0.228 0.140 0.136 0.210 0.142 0.124 0.156 0.153
2010 0.102 0.198 0.105 0.107 0.209 0.117 0.203 0.117 0.152 0.243 0.156 0.134 0.195 0.149 0.124 0.169 0.155
2011 0.102 0.197 0.104 0.106 0.212 0.118 0.209 0.105 0.164 0.244 0.160 0.134 0.193 0.144 0.125 0.171 0.155
2012 0.100 0.191 0.104 0.102 0.206 0.111 0.206 0.118 0.177 0.234 0.144 0.126 0.193 0.139 0.121 0.165 0.152
2013 0.099 0.196 0.100 0.096 0.202 0.109 0.205 0.120 0.186 0.236 0.150 0.130 0.193 0.139 0.121 0.162 0.153
TOTAL 0.107 0.199 0.104 0.103 0.227 0.118 0.211 0.115 0.166 0.253 0.158 0.133 0.217 0.165 0.124 0.166 0.160
Note: AT: Austria, BE: Belgium, DK: Denmark, FI: Finland, FR: France, DE: Germany, EL: Greece, IS: Iceland, IT: Italy, NL: Netherlands, NO: Norway, PT: Portugal,
ESP: Spain, SE: Sweden, and UK: United kingdom
38
 PANEL B: Trade credit by Sector
AT BE DK FI FR DE EL IS IE IT NL NO PT ESP SE UK TOTAL
Chemicals, rubber,
plastics, non-metallic 0.121 0.201 0.103 0.102 0.240 0.106 0.210 0.119 0.134 0.248 0.136 0.131 0.205 0.157 0.126 0.156 0.156
products
Food, beverages,
0.107 0.199 0.104 0.101 0.211 0.179 0.209 0.117 0.187 0.256 0.189 0.132 0.197 0.165 0.126 0.187 0.167
tobacco
Machinery,
equipment, furniture, 0.103 0.198 0.103 0.105 0.234 0.111 0.212 0.109 0.168 0.250 0.155 0.133 0.221 0.172 0.124 0.155 0.159
recycling
Metals & metal
0.102 0.198 0.104 0.100 0.229 0.119 0.214 0.108 0.197 0.251 0.188 0.130 0.225 0.172 0.124 0.179 0.165
products
Publishing, printing 0.111 0.194 0.102 0.108 0.237 0.127 0.214 0.114 0.213 0.248 0.164 0.130 0.168 0.145 0.122 0.180 0.161
Textiles, wearing
0.106 0.204 0.103 0.113 0.190 0.115 0.214 0.095 0.115 0.268 0.105 0.141 0.244 0.174 0.127 0.173 0.155
apparel, leather
Wood, cork, paper 0.104 0.202 0.106 0.101 0.228 0.118 0.210 0.124 0.145 0.250 0.132 0.138 0.225 0.163 0.123 0.194 0.160
Note: AT: Austria, BE: Belgium, DK: Denmark, FI: Finland, FR: France, DE: Germany, EL: Greece, IS: Iceland, IT: Italy, NL: Netherlands, NO: Norway, PT: Portugal,
ESP: Spain, SE: Sweden, and UK: United kingdom. For variable definitions see Appendix.
39
Table 3 Culture dimension and trade credit

Mean of Upper Mean of Lower Wilcoxon Z

Quartile Quartile
countries countries
PD 0.2138 0.1335 107.628***
IND 0.1940 0.1751 128.468***
MAS 0.1728 0.1326 140.115***
UA 0.2138 0.1241 158.367***
*** denotes ssignificance levels of 1%. For variable definitions see Appendix.

40
Table 4: Firm characteristic descriptive statistics
Liquidity Debtors Profitability Debt Size
N. Mean SD. N. Mean SD Obs. Mean SD. Obs. Mean SD Obs. Mean SD
AT 21,223 0.310 0.209 21,597 0.041 0.097 8,286 0.101 0.213 21,014 0.531 0.490 21,597 8.734 0.825
BE 44,706 0.309 0.208 45,304 0.273 0.181 44,250 0.093 0.178 45,300 0.247 0.207 45,305 8.650 0.792
DK 8,166 0.291 0.171 8,803 0.203 0.138 8,770 0.085 0.150 9,012 0.346 0.228 9,201 8.687 0.800
FI 14,055 0.329 0.191 14,661 0.168 0.127 13,824 0.104 0.133 14,641 0.267 0.191 14,661 8.676 0.795
FR 120,957 0.355 0.190 123385 0.302 0.168 121878 0.073 0.127 123,315 0.259 0.276 124,443 8.642 0.797
DE 175,814 0.373 0.213 178,010 0.070 0.124 89,709 0.108 0.911 119,975 0.331 3.716 178,472 8.623 0.776
EL 29,405 0.248 0.159 29,431 0.339 0.203 26,818 0.053 0.361 29,431 0.281 0.235 29,431 8.593 0.746
IS 1,108 0.250 0.184 1,141 0.161 0.134 1,022 0.083 0.174 1,141 0.305 0.282 1,142 8.544 0.733
IE 8,943 0.289 0.203 9,558 0.219 0.200 4,403 0.096 1.500 9,535 0.206 0.289 9,623 8.667 0.759
IT 337,578 0.254 0.171 339158 0.292 0.213 334643 0.049 0.086 339,175 0.309 0.233 339,175 8.628 0.766
NL 33,217 0.339 0.220 35,515 0.408 0.239 9683 0.121 0.181 6,335 0.371 0.400 35,633 8.544 0.750
NO 16,149 0.329 0.204 16,673 0.218 0.170 15,411 0.099 0.173 16,673 0.304 0.293 166,73 8.712 0.817
PT 37,301 0.252 0.172 37,462 0.356 0.191 36,558 0.058 0.099 37,414 0.248 0.188 37,463 8.564 0.750
ESP 142,515 0.258 0.175 147327 0.300 0.183 143672 0.062 0.139 146,835 0.287 0.248 147,387 8.589 0.783
SE 26,768 0.335 0.182 28,128 0.200 0.132 26,979 0.104 0.131 28,127 0.259 0.178 28,130 8.642 0.796
UK 112,178 0.302 0.196 121840 0.164 0.197 72752 0.088 0.393 120,224 0.370 0.407 122,682 8.650 0.793
ALL 1,130,083 0.299 0.194 1,157,993 0.242 0.208 958,658 0.070 0.340 1,068,147 0.306 1.273 1,161,018 8.626 0.779
Note: AT: Austria, BE: Belgium, DK: Denmark, FI: Finland, FR: France, DE: Germany, EL: Greece, IS: Iceland, IT: Italy, NL: Netherlands, NO: Norway, PT: Portugal,
ESP: Spain, SE: Sweden, and UK. For variable definitions see Appendix.
41
Table 5: Spearman's rank correlation matrix
Liquidity Debtors Profitability Bank credit Size Credit Unemployment PD IND MAS UA
Liquidity 1.0000
Debtors -0.1353*** 1.0000
Profitability 0.0587*** 0.0093*** 1.0000
Bank credit -0.0339*** 0.0660*** -0.1986*** 1.0000
Size -0.0001 -0.0398*** 0.0370*** -0.0427*** 1.0000
Credit -0.0662*** 0.0079*** -0.0628*** -0.0594*** 0.0240*** 1.0000
Unemployment -0.0432*** 0.0670*** -0.0910*** -0.0669*** -0.0878*** 0.3613*** 1.0000
PD 0.0016 0.2042*** -0.0408*** -0.0664*** -0.1349*** -0.0962*** 0.4665*** 1.0000
IND -0.0403*** 0.0209*** -0.0732*** 0.0727*** 0.0329*** -0.1218*** -0.4299*** -0.4186*** 1.0000
MAS -0.0773*** -0.0190*** -0.1551*** 0.0835*** 0.0333*** -0.2471*** -0.2937*** -0.3551*** 0.7301*** 1.0000
UA -0.0432*** 0.1957*** -0.0619*** -0.0615*** -0.1362*** -0.0553*** 0.4951*** 0.9404*** -0.5644*** -0.3733 1.0000
For variable definitions see Appendix. *** denotes significance levels of 1%.
42
Table 6 Main regression

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Liquidity 0.0820*** 0.0818*** 0.0823*** 0.0850*** 0.0820*** 0.0841***
(24.34) (24.03) (24.77) (25.31) (24.43) (24.81)
Debtors 0.3817*** 0.3798*** 0.3842*** 0.3833*** 0.3815*** 0.3809***
(30.19) (29.33) (30.75) (30.63) (29.93) (29.62)
Profitability -0.0186* -0.0185* -0.0186* -0.0185* -0.0186* -0.0183*
(-1.68) (-1.68) (-1.68) (-1.68) (-1.68) (-1.68)
Bank credit -0.1442*** -0.1437*** -0.1438*** -0.1449*** -0.1442*** -0.1435***
(-16.52) (-16.43) (-16.59) (-16.59) (-16.51) (-16.48)
Size -0.0112*** -0.0106*** -0.0116*** -0.0116*** -0.0112*** -0.0106***
(-24.24) (-24.03) (-25.50) (-25.32) (-24.73) (-24.35)
Credit -0.0266*** -0.0244*** -0.0223*** -0.0199*** -0.0261*** -0.0117***
(-32.00) (-26.35) (-27.10) (-24.02) (-28.22) (-12.89)
Unemployment 0.1957*** 0.1726*** 0.2629*** 0.2043*** 0.1916*** 0.2136***
(25.00) (20.55) (32.02) (26.08) (22.68) (24.96)
PD --- 0.0560*** --- --- --- 0.0859***
(9.39) (8.37)
IND --- --- 0.1780*** --- --- 0.1894***
(60.46) (39.79)
MAS --- --- --- 0.1192*** --- 0.0652***
(58.61) ( 25.87)
UA --- --- --- --- 0.0057* 0.0329***
(1.93) (5.81)
Constant 0.2111*** 0.1782*** 0.0731*** 0.1334*** 0.2063*** -0.0575***
(28.32) (27.84) (8.62) (17.00) (31.86) (-7.25)

Sector Dummy YES YES YES YES YES

Years Dummy YES YES YES YES YES YES
Observations 904,310 904,310 904,310 904,310 904,310 904,310
Firms 147,306 147,306 147,306 147,306 147,306 147,306
R-Squared 0.2892 0.2916 0.3130 0.3058 0.2892 0.3264
Note: Model 1 is estimated with firm fixed effects. Models 2 to 6 are estimated with firm random effects. We test if the time fixed
effects are needed when running firm fixed model. We also test to see if the dummies for all years are equal to 0, if they are then no time
fixed effects are needed. In our case, we cannot reject the null hypothesis that all years are equal and therefore we use years dummy in
our analysis.
For variable definitions see Appendix. The coefficients' standard errors are adjusted for the effects of non-independence by clustering on
each country. t statistics in parentheses. ***, **, and * denote two-tailed significance levels of 1%, 5%, and 10%, respectively.

43
Table 7: Interaction regression results
Model 1 Model 2 Model 3 Model 4
Liquidity 0.0819*** 0.0823*** 0.0851*** 0.2889***
(24.03) (24.78) (25.36) (24.42)
Debtors 0.3793*** 0.3843*** 0.3839*** 0.3815***
(29.21) (30.76) (30.67) (29.93)
Profitability -0.0185* -0.0186* -0.0185* -0.0186*
(-1.68) (-1.68) (-1.68) (-1.68)
Bank credit -0.1436*** -0.1439*** -0.1451*** -0.1441***
(-16.42) (-16.59) (-16.60) (-16.51)
Size -0.0106*** -0.0117*** -0.0115*** -0.0111***
(-23.96) (-25.61) (-24.72) (-24.66)
Credit -0.0265*** -0.0219*** -0.0182 -0.0266***
(-29.48) (-26.82) (-22.27) (-28.91)
Unemployment 0.1978*** 0.2439*** 0.1857*** 0.1995***
(23.71) (28.85) (23.68) (23.82)
Year_PD -0.0065*** --- --- ---
(-14.91)
PD 0.0972*** --- ---
(13.09)
Year_IND --- -0.0020***
(-4.30)
IND --- 0.1884*** --- ---
(44.86)
Year_MAS --- --- -0.0032***
(-8.66)
MAS --- --- 0.1403*** ---
(37.74)
-0.0012***
(-4.61)
UA --- --- --- 0.0130***
(3.68)
Constant 0.1908*** 0.0814*** 0.1370*** 0.2092***
(29.49) (9.77) (17.84) (31.98)

Sector Dummy YES YES YES YES

Years Dummy YES YES YES YES
Observations 904,310 904,310 904,310 904,310
Firms 147,306 147,306 147,306 147,306
R-Squared 0.2908 0.3132 0.3060 0.2889
Note: All models are estimated with Random effect estimator. For variable definitions see
Appendix. The coefficients' standard errors are adjusted for the effects of non-
independence by clustering on each country. t statistics in parentheses. ***, **, and *
denote two-tailed significance levels of 1%, 5%, and 10%, respectively.

44
Table 8 3SLS regression models
BC TC BC TC BC TC BC TC
Liquidity -0.0263*** 0.06047*** 0.0168*** 0.0765*** 0.0148*** 0.0704*** -0.0223*** 0.0609***
(-11.62) (57.64) (7.87) (77.78) (7.17) (57.94) (-10.17) (57.86)
Debtors -0.0910*** 0.4349*** 0.1687*** 0.4228*** 0.1437*** 0.4438*** -0.0452*** 0.4357***
(-8.49) (395.09) (19.07) (451.58) (17.63) (364.22) (-4.54) (424.51)
Profitability -0.0642*** -0.0570*** -0.0742*** 0.0025*** -0.0725*** -0.0660*** -0.0663*** -0.0566***
(-71.35) (-57.07) (-90.31) (2.57) (-90.05) (-40.94) (-76.34) (-57.25)
Size -0.0172*** -0.0074*** -0.01374*** 0.0044*** -0.0149*** -0.0113*** -0.0151*** -0.0074***
(-50.68) (-23.57) (-43.32) (15.88) (-46.84) (-26.28) (-45.95) (-24.85)
Unemployment -0.4343*** -0.3275*** -0.5585*** 0.3382*** -0.5662*** -0.2930*** -0.5073*** -0.3164***
(-42.75) (-48.61) (-81.72) (43.08) (-82.32) (-24.78) (-54.64) (-41.86)
GDP -0.0987*** --- -0.1013*** --- -0.0401*** --- -0.0976*** ---
(-57.40) (-55.83) (-30.40) (-53.76)
Credit --- -0.0398*** --- -0.0434*** --- -0.0337*** --- -0.0404***
(-61.31) (-81.81) (-50.73) (-63.98)
Bank credit --- -0.5639*** --- 0.2944*** --- -0.7223*** --- -0.5574***
(-47.44) (24.85) (-33.04) (-47.10)
Trade credit 0.2972*** --- -0.3698*** --- -0.2960*** --- 0.1539*** ---
(11.55) (-17.95) (-15.88) (6.57)
PD -0.2397*** 0.0121*** --- --- --- --- --- ---
(-50.80) (4.62)
IND --- --- 0.1522*** 0.1263*** --- --- --- ---
(36.11) (92.12)
MAS --- --- --- --- 0.0995*** 0.1455*** --- ---
(41.33) (68.71)
UA --- --- --- --- --- --- -0.1078*** 0.0039***
(-40.97) (2.91)
Constant 1.6205*** 0.3591*** 1.4405*** -0.1341*** 0.8522*** 0.3478*** 1.567*** 0.3603***
(85.12) (49.34) (80.79) (-22.92) (59.63) (36.43) (79.01) (54.58)
Chi-Squared 24035.19 208853.88 21555.88 245804.99 22164.46 161246.28 21629.06 208514.07
BC: Bank short term credit. TD: trade credit. All models are estimated with 3SLS. For variable definitions see Appendix. t statistics in parentheses. ***, **, and * denote two-tailed significance levels of 1%,
5%, and 10%, respectively.
45
Table 9: Culture - PD, IND, MF and UA and Judicial effectiveness – Time

Model 1 Model 2 Model 3 Model 4

Liquidity 0.0881*** 0.0881*** 0.0882*** 0.0885***
(26.01) (26.72) (26.59) (26.47)
Debtors 0.3782*** 0.3819*** 0.3809*** 0.3803***
(29.12) (30.32) (30.01) (29.81)
Profitability -0.0181* -0.0182* -0.0182* -0.0182*
(-1.67) (-1.67) (-1.68) (-1.67)
Bank credit -0.1441*** -0.1441*** -0.1447*** -0.1445***
(-16.43) (-16.570 (-16.54) (-16.52)
Size -0.0094*** -0.0103*** -0.0104*** -0.0100***
(-21.58) (-23.02) (-23.32) (-22.46)
Credit -0.0158*** -0.0139*** -0.0161*** -0.0190***
(-16.55) (-16.30) (-18.79) (-20.11)
Unemployment 0.1582*** 0.2384*** 0.1844*** 0.1911***
(18.78) (28.86) (23.33) (22.61)
PD 0.0377*** --- --- ---
(6.39)
IND --- 0.1629*** --- ---
(54.50)
MAS --- --- 0.0635*** ---
(20.49)
UA --- --- --- -0.0254***
(-8.71)
Time 0.0224*** 0.0208*** 0.0168*** 0.0239***
(60.36) (53.02) (29.23) (64.71)

Constant 0.1177*** 0.0186** 0.1165*** 0.1570***

(18.66) (2.28) (15.29) (24.57)

Year Dummy YES YES YES YES

Sector Dummy YES YES YES YES
Observations 904,310 904,310 904,310 904,310
Firms 147,306 147,306 147,306 147,306
R-Squared 0.3132 0.3310 0.3146 0.3124
Note: All models are estimated with Random effect estimator. For variable definitions see Appendix.
The coefficients' standard errors are adjusted for the effects of non-independence by clustering on each
country. t statistics in parentheses. ***, **, and * denote two-tailed significance levels of 1%, 5%, and
10%, respectively

46
Table 10: Culture - PD, IND, MF and UA and Judicial effectiveness – Cost

Model 1 Model 2 Model 3 Model 4

Liquidity 0.0830*** 0.0820*** 0.0853*** 0.0843***
(24.37) (24.77) (25.43) (25.14)
Debtors 0.3778*** 0.3847*** 0.3831*** 0.3780***
(28.95) (30.79) (30.61) (29.18)
Profitability -0.0184* -0.0186* -0.0185* -0.0184*
(-1.67) (-1.68) (-1.68) (-1.67)
Bank credit -0.1439*** -0.1436*** -0.1450*** -0.1445***
(-16.44) (-16.59) (-16.61) (-16.49)
Size -0.0102*** -0.0117*** -0.0116*** -0.0104***
(-23.35) (-25.58) (-25.40) (-23.50)
Credit -0.0323*** -0.0186*** -0.0256*** -0.0323***
(-35.52) (-20.57) (-29.47) (-35.96)
Unemployment 0.2063*** 0.2567*** 0.2296*** 0.2036***
(24.79) (31.77) (28.97) (24.30)
PD 0.1022*** --- --- ---
(15.59)
IND --- 0.2044*** --- ---
(48.05)
MAS --- --- 0.1066*** ---
(52.92)
UA --- --- --- 0.0895***
(19.47)
Cost 0.2665*** 0.0819*** 0.1324*** 0.3607***
(45.92) (11.75) (29.29) (40.15)

Constant 0.1047*** 0.0668*** 0.1187*** 0.0723***

(16.67) (7.64) (15.21) (12.13)

Year Dummy YES YES YES YES

Sector Dummy YES YES YES YES
Observations 904,310 904,310 904,310 904,310
Firms 147,306 147,306 147,306 147,306
R-Squared 0.3056 0.3127 0.3104 0.3062
Note: All models are estimated with Random effect estimator. For variable definitions see Appendix.
The coefficients' standard errors are adjusted for the effects of non-independence by clustering on each
country. t statistics in parentheses. ***, **, and * denote two-tailed significance levels of 1%, 5%, and
10%, respectively

47
Table 11: Alternative culture measure (Schwartz)

Model 1 Model 2 Model 3 Model 4 Model 5

Liquidity 0.1180*** 0.1173*** 0.1146*** 0.1064*** 0.1169***
(29.46) (29.04) (28.29) (26.41) (29.15)
Debtors 0.3651*** 0.3674*** 0.3677*** 0.3676*** 0.3655***
(26.20) (26.58) (26.62) (26.45) (26.03)
Profitability -0.0197 -0.0198 -0.0199 -0.0202 -0.0197
(-1.38) (-1.38) (-1.38) (-1.39) (-1.38)
Bank credit -0.1988*** -0.1986*** -0.1987*** -0.1978*** -0.1980***
(-14.63) (-14.64) (-14.63) (-14.61) (-14.63)
Size -0.0082*** -0.0092*** -0.0094*** -0.0106*** -0.0082***
(-15.10) (-16.81) (-17.05) (-19.09) (-15.12)
Credit -0.0255*** -0.0231*** -0.0230*** -0.0277*** -0.0258***
(-24.69) (-22.33) (-22.24) (-26.58) (-25.13)
Unemployment 0.2223*** 0.2304*** 0.2035*** 0.2112*** 0.2663***
(22.49) (23.26) (20.47) (20.92) (25.79)
HIER 0.1402*** --- --- --- 0.1665***
(66.71) (23.73)
AFA --- 0.0511*** --- --- 0.0449***
(65.78) (20.24)
HAR --- --- 0.1093*** --- 0.1415***
(52.05) (26.97)
MAS --- --- --- 0.0473*** 0.1059***
(16.91) (35.78)
Constant 0.4625*** 0.3761*** -0.3012*** 0.4111*** 0.7445***
(41.37) (37.79) (-24.18) (37.86) (49.76)

Sector Dummy YES YES YES YES YES

Years Dummy YES YES YES YES YES
Observations 750,675 750,675 750,675 750,675 750,675
Firms 119,327 119,327 119,327 119,327 119,327
R-Squared 0.2877 0.2804 0.2687 0.2499 0.1490
Note: HIER, AFA and MAS factors multiplied by (-1). Model 1 is estimated with fixed effects. Models 2 to
5 are estimated with random effects. For variable definitions see Appendix. The coefficients' standard errors are
adjusted for the effects of non-independence by clustering on each country. t statistics in parentheses. ***, **, and *
denote two-tailed significance levels of 1%, 5%, and 10%, respectively

48
Table 12: Alternative measure of trade credit results
Model 1 Model 2 Model 3 Model 4 Model 6
Liquidity 15.476*** 3.572*** 4.179*** 5.967*** 4.131***
(8.61) (2.81) (3.19) (4.53) (3.29)
Debtors 68.003*** 63.365*** 65.727*** 66.072*** 63.534***
(9.76) (12.26) (12.42) (12.50) (12.34)
Profitability -10.6756*** -12.558** -12.717** -12.599** -12.555**
(-2.31) (-2.44) (-2.44) (-2.44) (-2.44)
Bank credit -53.648*** -49.000*** -49.421*** -49.834*** -49.193***
(-14.37) (-16.31) (-16.20) (-16.25) (-16.34)
Size 14.073*** 6.564*** 5.971*** 5.650*** 6.419***
(51.66) (44.96) (38.44) (36.65) (43.31)
Credit 9.7299*** -6.069*** -7.214*** -5.599*** -4.929***
(20.43) (-18.94) (-23.57) (-18.50) (-15.17)
Unemployment 116.775*** 98.013*** 128.195*** 135.734*** 87.680***
(32.40) (30.88) (39.91) (44.14) (27.22)
PD --- 63.470*** --- --- ---
(29.63)
IND --- --- 13.675*** --- ---
(11.74)
MAS --- --- --- 62.189*** ---
(79.45)
UA --- --- --- --- 49.043***
(43.66)

Constant -97.041*** -29.054*** -4.763 -31.985*** -32.308***

(-21.02) (-13.65) (-1.51) (-11.37) (-14.91)

Year Dummy YES YES YES YES YES

Sector Dummy YES YES YES YES YES

Observations 833,088 833,088 833,088 833,088 833,088

Firms 137,157 137,157 137,157 137,157 137,157
R-Squared 0.1571 0.1490 0.1485 0.1491 0.1490
Note: Model 1 is estimated with fixed effects. Models 2 to 6 are estimated with random effects. The dependent variable is
measured as the ratio between the debtors and the cost of goods sold (COGS) times 365. For variable definitions see
Appendix. The coefficients' standard errors are adjusted for the effects of non-independence by clustering on each country. t
statistics in parentheses. ***, **, and * denote two-tailed significance levels of 1%, 5%, and 10%, respectively

49
 Table 13 Country Regressions
Country AT BE DK FI FR DE EL IS
Variables
Liquidity 0.0104* 0.0258*** 0.0356*** -0.0127*** 0.0605*** 0.0478*** 0.1605*** 0.0710***
(1.66) (7.34) (6.25) (-3.12) (11.32) (10.41) (19.98) (3.61)
Debtors 0.3007*** 0.4552*** 0.2838*** 0.2182*** 0.2918*** 0.2294*** 0.2991*** 0.2235***
(24.61) (77.15) (28.78) (23.81) (51.10) (37.32) (47.55) (5.80)
Profitability -0.0547*** -0.0982*** -0.0579*** -0.0964*** -0.1073*** -0.0007 -0.0230 -0.0861***
(-3.50) (-2.79) (-6.01) (-6.49) (-16.94) (-1.08) (-1.26) (-3.77)
Bank credit -0.0071* -0.0811*** -0.0151*** -0.0196*** -0.1015*** -0.0464*** -0.0872*** -0.0122
(-1.72) (-13.06) (-2.84) (-3.64) (-15.49) (-9.01) (-6.23) (-0.87)
Size -0.0133*** -0.0272*** -0.0031** -0.0334*** -0.0284*** -0.0057*** -0.0453*** -0.0282***
(-6.06) (-16.72) (-2.11) (-18.47) (-14.22) (-3.29) (-22.84) (-5.61)
Constant 0.1658*** 0.3300*** 0.0736*** 0.3712*** 0.3963*** 0.1053*** 0.4698*** 0.3041***
(7.64) (19.57) (5.51) (21.88) (22.51) (6.62) (26.14) (6.53)
Observations 7,649 43,722 7,783 13,318 119,759 71,171 26,799 994
Firms 2,469 6,604 2,296 2,408 18,537 15,919 4,423 200
R-Squared 0.2225 0.2911 0.2194 0.1866 0.1492 0.1503 0.1715 0.1659
Hausman test 𝜒 2 (5) 81.52*** 813.64*** 41.38*** 436.74*** 1532.42*** 475.84*** 601.39*** 16.64***
Country
IE IT NL NO PT ESP SE UK
Variables
Liquidity 0.0681*** 0.1649*** 0.0803*** 0.0404*** 0.0557*** 0.1209*** 0.0080*** 0.0483***
(4.40) (31.46) (2.83) (8.50) (4.32) (22.31) (2.88) (10.69)
Debtors 0.2719*** 0.3984*** 0.1466*** 0.2502*** 0.1568*** 0.2791*** 0.2392*** 0.2305***
(10.53) (30.56) (4.86) (32.00) (13.25) (37.12) (39.27) (33.82)
Profitability 0.0002 -0.2013*** -0.0116 -0.1845*** -0.1410*** -0.2861*** -0.0887*** -0.0152***
(1.35) (-18.25) (-0.68) (-18.31) (-7.37) (-6.73) (-18.79) (-3.46)
Bank credit -0.0677*** -0.3088*** -0.0641 -0.0541*** -0.1622*** -0.3595*** -0.0221*** -0.0249***
(-3.42) (-25.90) (-1.37) (-6.92) (-11.25) (-22.62) (-6.59) (-4.43)
Size -0.0071 -0.0345*** -0.0072 -0.0312*** -0.0449*** 0.0297*** -0.0342*** -0.0174***
(-1.07) (-26.74) (-0.68) (-17.40) (-10.49) (12.34) (-23.95) (-10.55)
Constant 0.1402** 0.4622*** 0.1616* 0.3673*** 0.5776*** -0.1302*** 0.3829*** 0.2519***
(2.30) (43.11) (1.77) (21.73) (15.00) (-5.73) (29.18) (16.49)
Observations 4,142 333,646 3.019 15,103 36,408 138,772 25,727 68,065
Firms 926 48,068 987 2,624 5,636 21,053 4,392 12,000
R-Squared 0.1742 0.4830 0.1075 0.2425 0.1290 0.3382 0.2144 0.4960
Hausman test 𝜒2 (5) 31.61 4962.08*** 46.59*** 703.77*** 546.85*** 2826.70*** 1609.48*** 1542.53***
Note: AT: Austria, BE: Belgium, DK: Denmark, FI: Finland, FR: France, DE: Germany, EL: Greece, IS: Iceland, IT: Italy, NL: Netherlands, NO: Norway, PT: Portugal, ESP: Spain, SE: Sweden, and UK:
United kingdom. We apply the usual procedure for choosing between fixed and random effects by using the Hausman test statistic for the difference between the fixed-effects and random effects estimates, as
suggested by Hsiao (2003). The test rejects the random effects specification to all model specifications so fixed-effects estimations are employed. For variable definitions see Appendix. . t statistics in
parentheses. ***, **, and * denote two-tailed significance levels of 1%, 5%, and 10%, respectively
50
Figure 2: Leamer histograms

.15
30
20

.1
Density

Density

.05
10
0

0
.02 .04 .06 .08 .1 .12 10 20 30 40 50
PD Z-stat

.06
20
15

.04
Density

Density
10

.02
5
0

0
.05 .1 .15 .2 .25
IND 20 40 60 80 100
Z-stat

.04
15

.03
10

Density
Density

.02
5

.01
0
0

0 20 40 60 80
0 .05 .1 .15 Z-stat
MF
20

.06
15

.04
Density

Density
10

.02
5
0

0 .02 .04 .06 .08

UA
0

0 10 20 30 40
Z-stat

Each histogram contains 34 regressions (drop one country, year and sector at the time). Coefficients are on left histograms and
Z-statistics on the right

51
Appendix: Table 14 Variable empirical definition and data sources
Source
Variables Empirical definition
Creditors over Total Assets ORBIS
Trade credit (TC)
Credit_days Creditors over Cost of Goods Sold times 365 ORBIS
Liquidity Cash plus Stock over Total Assets ORBIS
Debtors Debtors over Total Assets ORBIS
Profitability Earnings after Taxes plus Amortization & Depreciation ORBIS
over Total Assets
Bank Credit (BC) Firm short term bank debt ORBIS
Size Natural logarithm of Total Assets ORBIS
Credit Domestic credit provided by financial sector (% of GDP) EUROSTAT
Unemployment Unemployment, total (% of total labor force) EUROSTAT
Time Time to complete a judiciary proceeding World bank
Cost Cost of a judiciary proceeding World bank
PD Hofstede
Power Distance dataset
IND Hofstede
dataset
Individualism
MAS Hofstede
dataset
Masculinity/ Femininity
UA Hofstede
dataset
Uncertainty Avoidance
HIER Schwartz
Schwartz’s cultural index on Hierarchy Dataset
AFA Schwartz
Dataset
Schwartz’s cultural index on Affective Autonomy
HAR Schwartz
Dataset
Schwartz’s cultural index on Affective Harmony
MAS Schwartz
Dataset
Schwartz’s cultural index on Mastery

52

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