The purpose of this paper is to investigate the factors that influence Malaysian manufacturing sector investment in accounts receivable, an asset seen by many as one of the riskiest in any company’s balance sheet. We test several theories, related to accounts receivable, using a cross-section of 262 listed manufacturing firms over a period of five years (2007-2011). Both fixed and random effect approaches are considered to deal with potential heterogeneity across firms. Our results show that the absolute level of accounts receivable is almost exclusively explained by size. However, the ratio of accounts receivable to assets is influenced by firm size, short-term finance, sales growth, and collateral. Profit, liquidity and gross margin have no role in affecting the decision to grant trade credit to customers. Some of our results are mostly inconsistent with previous studies. Size and short-term finance have a negative, rather than a positive, impact. Liquidity and gross margin have no, rather than a positive, effect. Profit and sales growth are expected to exhibit a U-shaped relationship with investment in accounts receivable. We found, however, that the former is insignificant while the latter is strictly increasing. The only factor found to be consistent with prior studies, in developed counties, is collateral. Our findings have important implications for policy makers in Malaysia and other emerging economies, especially in the light of the forthcoming International Financial Reporting Standard 9.
Accounts receivable (AR) occur when suppliers of goods and services1 sell on credit and thus allow their customers to defer payment to a later date. This type of credit is granted by firms whose primary business is to sell goods, rather than to provide finance to customers. Sale on credit creates AR, a current asset in the balance sheet of suppliers. Thus AR are the amounts outstanding payable by customers to their suppliers. Given the high volume of sales on credit between businesses, AR are especially high and are considered by many as the riskiest asset in a firm’s balance sheet (Pike and Cheng, 2001; Wilson and Summers, 2002; Boden and Paul, 2014). There has been sustained interest in managing the level of AR from both academics and practitioners, each emphasising the permanent character of this short-term but continuously renewed investment and its strategic potential due to the existence of financial, tax-based, operating, transactional and pricing motives (Asselbergh, 1999; Paul and Boden, 2008). Increasingly, the focus has shifted to the efficiency of AR management and its relationship with profitability, in both developing and developed countries (see, for example, the studies of Michalski (2012) in Poland; Raheman, and Nasr (2007) in Pakistan; Gill, Biger, and Mathur (2010) in the USA; Singh, Kumar, and Colombage (2017) in India). However, whilst there is ample evidence as to why companies in developed countries continue to invest in AR, it is not clear whether firms within the developing world have a similar experience.2 Orobia, Padachi and Munene (2016) observe that the most frequently performed routines relate to safeguarding cash and inventory, and to credit risk assessment. Payment management routines are the least performed. This suggests that firms in emerging countries may face difficulties in managing their extended credit.