Introduction Accounts receivable comprise of the debts which are owed to the firm by those customers who purchase goods on credit. As assets, accounts receivable comprise substantial fraction of a firm’s total assets owing to the fact that a lot of sales are done on a credit basis. From the point of view of a creditor, accounts receivable have different characteristics from those of other assets of the firm. The performance of other assets such as machinery depends on how the firm is efficient, and such information is held by the managers of the firm. However, with accounts receivable, the performance depends on the risk characteristics of the creditors. It is tied to how well and promptly they repay their debts. Due to the fact that customers are highly diversified, there arises information asymmetry as far as accounts receivable are concerned. In this study, I will investigate whether an increase in information asymmetry increases the chances of using accounts receivable as one of the financing options in a firm. I will use one of the firms where I was previously working. This firm is Harvey Electronics Limited. My thesis statement is that accounts receivable financing decreases with an increase in information asymmetry in an organization. Background and the development of hypothesis Going with my experience at Harvey Electronics Limited, accounts receivable were a major financing alternative for the customers. Since some of the clients were institutional, I saw that the firm was very crucial to their operations. This was specifically so when liquidity on the side of the customers was low. According to Townsend (2009), firms usually extend credit to small firms since getting information about such firms can be done with relative ease. In order to extend credit to their customers, firms use internal financing or debt and equity issues. Accounts receivable financing is usually done on a short term basis, and it is also determined by the eligible customers (Townsend 2009). The capital structure that is adopted by a firm is crucial since it dictates the costs that a firm will incur to obtain each of the sources of capital. At Harvey Electronics, I found out that this issue was upheld in high regard by the managers. This was one of the main reasons why the firm was able to extend credit to its customers at a considerably high rate. At the firm, computations were done to establish the advantages that Harvey Electronics could gain from tax shields, bankruptcy costs and agency costs. In my own view, it is crucial to keep such efforts in place so that firms can benefit from increased efficiency in their operations. In addition, firms will be in a position to reduce the costs that they may incur owing to poor capital structure management. Information asymmetry firms tend to use internal funds in their financing. If additional funds are required, the firms will opt for debt which has relative low risk and finally equity which has a high risk. Leverage will, therefore, increase with information asymmetry (Calamiris and Duffie 2011). In this paper, I will investigate whether increases in information asymmetry increases the chances of using accounts receivable as an option of financing a business. Given that accounts receivable have different characteristics, the information risk is diversified across the customers. This goes hand in hand with the customer base and the information environment of the company. If most of the clients of a firm are large enterprises or government, the information risk is substantially low. However, if the customer base is comprised of private firms and individuals, the information risk is high. Firms will, therefore, prefer to borrow against assets that are low in information asymmetry relative to the other assets in a view to reduce the premium paid/ the risk involved (Smith, Klapper and Besanko 2007). H1: the use of accounts receivable decreases with information asymmetry in a firm Firms, which have information asymmetry, usually hold accounts receivable credit facilities. However, if information asymmetry changes over time, the information environment of the firm may change in line with the asymmetry. The other factor that determines the use of credit facilities is the business cycle of the firm. Such firms may hold credit facilities if the information gap makes other financial options costly. Firms with a nil balance at the end of the financial year are different from those firms that use accounts receivable financing options as far as information asymmetry is concerned. I will, therefore, investigate whether the use of accounts receivable increases with information asymmetry in a firm. Planning of the research process In conducting this work, I will critically examine how the information asymmetry in firms interplays with accounts receivables. This work is important since this cause and effect relationship are inherent in all firms. The phenomenon occurs whether the management is conscious of the matter and it may affect a firm adversely if the management does not take the matter seriously. At Harvey Electronics, the management analyzed this cause and effect relationship and was able to address the issue arising from information asymmetry. Following my critical examination of operations at Harvey Electronics, I feel that streamlining operations in line with information asymmetry is an important successful factor. I have one main research question. The question is; does accounts receivable financing increase with an increase in information asymmetry? My major research objective is to establish whether accounts receivable financing increases with an increase in information asymmetry. This paper is significant in a number of ways. The major significance is that the findings will be used by managers of firms in decision making. Managers will appreciate the role of accounts receivable in information asymmetry. They will be able to position their firms at positions where they can benefit from adopting the attractive levels of information asymmetry. The findings will also be applied by debtors of firms. They will take in the optimal amounts of debt so as to have an appropriate amount of debt and at the same time avoid information asymmetry at their expense. As far as the scope of the study is concerned, I will visit the premises of Harvey Electronics. I have an adequate exposure in the firm which will be useful in my research work. I have confidence that I will obtain the required information from this electronics firm since it applies the cause and effect relationship that is of interest to me. In this research work, I will maintain all the necessary professional and ethical standards. Permission to collect data on financial incentives will be obtained from the respective authority, in this case the public relations officer of Harvey Electronics. Some information such as that on sales figures is considered to be of a sensitive nature. Therefore, the researcher will conceal details such as names of creditors who borrow at different amounts. The data I shall collect will only be used for this research, and it will not be spread out for any other unauthorized purposes. Data sampling In my research work, I have a sample of 15 respondents from a target population of 60. My choice of this number is based on the fact that it is manageable since it is not too large to be cumbersome. In addition, the number will sufficiently provide the required data. I will apply random sampling to pick out one respondent from each group of 4 individuals in the population. I have chosen this procedure in order to avoid biases. Data collection When conducting this research work, I will apply a combination of data collection instruments. The major instrument will be questionnaires. In addition to this, I will also apply observation and interviews as the data necessitates. As far as the questionnaires are concerned, I will use a formal questionnaire. My primary aim is to collect valid and reliable information in a view to attain my research objective. I will apply open ended questions so that I may collect a wide variety of information. However, closed ended questions will also be applied as the information required necessitates specific facts on the data to be collected. I also intend to gather data by use of interviews. The purpose of interviews in this study is to acquire current and past or historic information about factors experienced and opinions of respondents. This instrument is employed so that the researcher may gain clarity on any issues that may not be easily comprehended in the questionnaires. Finally, I will incorporate observation method; though to a limited extent. In this case, will watch the happenings at the sales outlet of Harvey Electronics. I will gather information of how the customers obtain credit and how the electronics firm selects its customers. Data evaluation I will do data evaluation on the collected data to ensure that it exists as it is required. I will evaluate the raw data. This evaluation will be crucial to me since it will allow me take into account incomplete responses. This will allow me to adjust for any incomplete questionnaire in my survey. The other use is that it will also allow me to adjust for data entry errors. This arises when the data is not entered properly. Finally, data evaluation will also help me in detecting any questionable entries. It will correct all inconsistencies in responses as it may arise when a respondent shows contradicting answers.
Justification for the type of study
Accounts receivable are applied by many businesses since they give out credit to their customers in large numbers. However, maintaining a balance in these businesses is a tough task owing to the information asymmetry. This problem is highly prevalent in small businesses, which may find it difficult to dedicate resources, to research in this field. This study comes in to solve this problem by highlighting the possible solutions as the findings will indicate. This study procedure will be highly useful in attainment of the objectives of this study. Applying a primary method of data collection will make it possible to attain the research objective in an effective manner.
Data summary
The data is collected from 15 respondents. The data collected is tabulated as shown in the table. The level of information asymmetry is measured by the extent to which the firm is able to obtain information on its borrowers. If a firm is able to obtain information on less than a third of the borrowings of a customer, the information asymmetry is considered high. If it is between a third and two thirds, the information asymmetry is moderate. However, if the business can obtain information on over two thirds of the borrowings, information asymmetry is considered low.
. Justification for the type of study Accounts receivable are applied by many businesses since they give out credit to their customers in large numbers. However, maintaining a balance in these businesses is a tough task owing to the information asymmetry. This problem is highly prevalent in small businesses, which may find it difficult to dedicate resources, to research in this field. This study comes in to solve this problem by highlighting the possible solutions as the findings will indicate. This study procedure will be highly useful in attainment of the objectives of this study. Applying a primary method of data collection will make it possible to attain the research objective in an effective manner. Data analysis From the data collected in the table above, it is clear that the number of customers decreases with information asymmetry. At low levels of information asymmetry, the number of customers is high. This is due to the fact that such a business is confident in the ability of such a customer to pay the debt. However, as information asymmetry increases, the business will incur a high risk premium if it lends to such customers. This is the cause for a low number of customers at high levels of information asymmetry. Response to the content In my own opinion, the data analysis depicts the actual patterns in the business world. As far as the information asymmetry is low, businesses will have an information advantage hence they will lend to such customers. Based on my critical opinion, the businesses have adopted this manner of evaluating their clients, but it may be conservative in a way. I base my argument on the fact that such customers may depict unpredictable behaviors and they may shift from their historical trends. For instance, some defaulting customers may shift and improve their payment periods. A major factor that is responsible for this shift is the missed opportunities that such customers may experience hence causing them to change their behaviors. On the other hand, some credit worthy customers may drift and become less credit worthy over time. Firms relying on such past information may make erroneous decisions if they base their lending decisions on past information. Instead, businesses must be creative and come up with solutions to avert this challenge. They can opt for security on any amount they lend. They can also adopt moral persuasion on their customers. Restatement of the thesis statement My thesis statement - accounts receivable financing decreases with an increase in information asymmetry in an organization, is true. This statement has been proven by the findings of the research work at Harvey Electronics. There is a consistent pattern of the usage of accounts receivable against the level of information asymmetry. Conclusion It is clear that accounts receivable decreases with an increase in information asymmetry. I conclude that firms consider the prevalent information asymmetry inherent in their customer base before making a lending decision. However, businesses should not limit their decision making to the historical performance of their customers. They have to obtain current trends in payments by their customers. These businesses can opt for other agreements with their customers such as pledging of certain assets as security. Finally, the businesses may use moral persuasion.
References
Calamiris, Brian, and Ashley Duffie. "Capital Structure and Financing Costs." Harvard Business Review, 2011: 15-17.
Smith, M., P. Klapper, and Boot Besanko. "Critical Factors in Information Assymetry ." Journal of Management, 2007: 21-22.
Townsend, P. "Accounts Receivable Financing for Small Firms." Journal of Finance, 2009: 21-23.
Appendix
Questionnaire
Dear respondent.
Please fill in this questionnaire. Your assistance is highly appreciated.
Gender
Question 1
How many customers do you serve on average per day?
Question 2
How many customers do you extend credit to per day?
Question 3
How do you select the customers to extend credit to?
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Question 4
What is your experience on lending as far as retail and institutional customers are concerned?
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Question 5
What would you advise other businesses who may want to use accounts receivable?
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