Does Exclusion of Trade Credit Late Payments From Deductible Costs Shorten Days Payable Outstanding?

Abstract

Abstract Trade credit late and long payments are a severe problem in many economies. In Poland, in 2013–2015, debtors with overdue payments of more than 30 days and those with payments longer than 90 days, were forced to adjust income tax base - deductible costs resulting from unpaid liabilities - to improve payment discipline. This natural experiment enables us to answer whether excluding late and long payments from deductible expenses shortens days payable outstanding. To achieve this goal a panel of 56,364 Polish firms from 2010 to 2019 is analysed. Our results show that during 2013–2015 firms cut the days payable outstanding, which acknowledges that the examined instrument is an effectual tool for reducing payment congestion. Furthermore, higher effective income tax rates in 2013–2015 for firms with overdue liabilities confirm that the unreliable contractors applied the analysed provisions. Therefore, excluding late payments from deductible costs is a good way to reduce intentionally delayed payments. JEL Codes: H25, H32, G32, G38, M41