Abstract
An enhancement in the financial depth increases the availability of formal credit to firms. Resultantly credit redistribution by firms is likely to be reduced as they require less trade credit. To provide evidence, how do managers respond to changes in financial depth while making adjustments in their trade credit policy, this paper aims to study the impact of financial depth on credit redistribution by listed manufacturing firms (LMFs). For the firm-level variables, we used a data set of 327 firms listed on PSX for the period 2005 to 2018. Private credit to GDP ratio and market capitalization to GDP ratio are used as proxies for financial depth. Unlike earlier studies, we applied a two-step System GMM estimator to control the endogeneity. The results of the regression analysis display a positive relationship between the use and the supply of trade credit by LMFs. It reveals that LMFs redistribute credit to their customers through trade credit channel. We found a significant and negative impact of financial depth on the supply of trade credit by LMFs. Further, we established that financial depth as a moderator has a buffering impact on the credit redistribution by listed firms. The study highlights the moderating role of financial depth and suggests the financial policymakers of firms to modify their credit policies in response to changes in financial depth. For future research, we suggest the investigation of the effect of financial policy interventions on credit redistribution by small and non-listed firms
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