Ownership structure and receivables management

• Published date: 01 May 2020
• Author: Raveesh Krishnankutty,Nemiraj Jadiyappa
• DOI: http://doi.org/10.1002/pa.2041
• Date: 01 May 2020

ACADEMIC PAPER

Ownership structure and receivables management

Raveesh Krishnankutty

1

| Nemiraj Jadiyappa

2

1

Finance and Economics, Rajagiri Business

School, Kochi, India

2

BITS Pilani, Hyderabad, India

Correspondence

Raveesh Krishnankutty, Assistant Professor,

Dept. Finance and Economics, Rajagiri

Business School, Rajagiri Valley P. O,

Kakkanad, Kochi –682 039, Kerala, India.

Email: raveeshbabau@gmail.com

In this study, we examine the impact of ownership structure on the receivables man-

agement of Indian corporate firms. We argue that owners' incentives to monitor

manager's actions increase with the increase in their stake holding. Therefore, firms

with concentrated promoter and institutional ownership should have lower receiv-

ables in terms of its sales. Our results obtained using a panel of 1,164 firms show a

negative relationship between the percentage of promoter holding and the receiv-

ables ratio. Further, for growing firms, both promoter and institutional shareholdings

have a negative impact. However, the firm size effect did not show any impact on

the relationship between ownership concentration and receivables ratio.

1|INTRODUCTION

Accounts receivables hold substantial fraction of firm's total assets.

Twenty-one percent of the total assets of U.S. manufacturing firms in

1986 (Mian & Smith, 1992) and 17% of Belgian firms in 1997 (Deloof,

2003) were accounts receivables. Even in India, they account for

about 19%. This has two important implications for firm financial pol-

icy. First, the amount of financing needed to finance these accounts

receivables is substantial, and the second because these are short-

term assets, it requires frequent refinancing. Therefore, they form an

important factor in the overall financial policies of a firm. Accounts

receivables are generated during the course of firm's business and in

the presence of market competition, they become unavoidable.

Therefore, the efficient management of accounts receivables has

value implications (Shin & Soenen, 1998). On one hand, accounts

receivables are a cost to the firm, and on the other, they increase the

revenue by generating more sales. Therefore, there is a trade-off

between the benefits and costs of accounts receivables. Apart from

this pure trade-off between benefits and costs of accounts receiv-

ables, their management is also affected by the agency conflict

between the manager and the owners. In a firm where the manager

owns a small percentage of shares, he has less incentives in efficiently

managing the receivables (Jensen & Meckling, 1976). Perhaps he will

be more liberal in receivables policy as it tends to increase the sales in

the short run. However, it generates higher financial costs to the firm

and increases bad debts. In this context, we examine the impact of

ownership concentration on the receivable management of a firm.

Ang, Cole, and Lin (2000) argue that the concentrated ownership

has enough incentives to monitor firms efficiently as owners have

higher stake in that firm. We apply this theoretical argument to our

study and examine the impact of concentrated ownership on the

receivables management. We argue that in the presence of agency

costs, concentrated ownership should have a negative impact on the

proportion of receivables to their sales. We use the percentage of

promoter ownership and the percentage of institutional ownership as

the proxies for ownership structure. Both of these owners have the

capacity and willingness to exercise their capacity in efficiently moni-

toring the managers in the presence of higher stake. Although there

are studies in the finance literature that have examined the manage-

ment of accounts receivables, its determinants, and its impact on firm

performance (Hung & Kao, 2011; Mian & Smith, 1992; Michalski,

2008; Michalski, 2012; Molina & Preve, 2009). However, we have not

come across any study that examined the impact of ownership struc-

ture on the management of accounts receivables. Therefore, in this

study, we examine the impact of ownership structure on the receiv-

ables management of Indian corporate firms. We study this issue in

the Indian context because accounts receivables play a major role in

the business of the firms, and thus in the determination of firm value,

when the formal financial institutions are not well developed. Various

researchers argue that Indian financial system is less developed com-

pared with western financial systems in terms of the size, competi-

tiveness, and the number of financial instruments being issued

(Jadiyappa, Vanga, & Krishnankutty, 2016). Therefore, it provides an

ideal setting to examine this issue.

To examine this, we define efficiency of the management of

accounts receivables in terms of receivables ratio, that is, total

accounts receivables as a proportion of total sales. The greater the

ratio is, the less efficient the receivables management would be.

Received: 4 September 2019 Accepted: 22 October 2019

DOI: 10.1002/pa.2041

J Public Affairs. 2020;e2041. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd. 1of5

https://doi.org/10.1002/pa.2041

Department of Finance and Economics, Rajagiri

Business School, Rajagiri Valley P. O,

Kakkanad, Kochi –682 039, Kerala, India.

Email: raveeshbabau@gmail.com

J Public Affairs. 2020;20:e2041. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd. 1of5

https://doi.org/10.1002/pa.2041