Trade Credit and Profitability of Listed Manufacturing Firms in Ghana

Abstract

The study investigates the effect of accounts receivable on the profitability (ROA ROE, TQ) of listed manufacturing firms in Ghana over a fourteen-year period. The study also examined the effect of accounts payable on the profitability (ROA ROE, TQ) of listed manufacturing firms in Ghana over the same fourteen-year period. Secondary data was collected from the annual reports and financial statements of thirteen (13) listed manufacturing firms between 2003 and 2016. Random effects panel data estimation technique was employed to explore the link between trade credit (accounts receivable and payable) and profitability (ROA ROE, TQ) of listed manufacturing firms with the aid of an unbalanced panel data. The results showed that accounts receivable has a positive significant effect on firm profitability whereas accounts payable have a negative significant effect on firm profitability. The study also finds a significant positive relationship between control variables (leverage, size and sales growth) and the profitability (ROA, ROE and TQ) of listed manufacturing firms. This suggests that both account receivables and payables play an important role in the profitability of listed manufacturing firms in Ghana. Emphasis should therefore be placed on proficient and effective trade credit management would improve the profitability of listed manufacturing firms in Ghana significantly. Consequently, listed manufacturing firms will be more profitable if their investment in accounts receivable is higher than the average investment of the firms in the industry. Keywords: Accounts Receivable, Accounts Payable, Ghana, Listed Manufacturing Firms and Profitability.