Journal of Applied Finance & Banking

Reflection of the Black-Scholes Model through Factoring

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• Abstract

   

  Financing through factoring depends on the creditworthiness of trade receivables (TRs). The creditworthiness of TRs depends on credit rating of the debtor (buying firms); credit period; quality, kind and nature of the goods and services delivered; category of goods (perishable, non- perishable); strength of regulatory framework in the country; etc. All these influence the amount and terms of conditions of financing through factoring. The same principle happens in financing through derivative contract influenced by the underlined assets which is explained by the Black- Scholes model. The amount of financing through option contract under Black-Scholes theory is the function of the underlined asset, time to maturity, exercise price, risk free interest rate, volatility of asset price, etc. Thus this study finds a relevance of Black-Scholes model with financing through factoring. This study has assessed the impact of financing through factoring influenced by Black- Scholes model (BSM) in terms of return on assets (ROA), return on equity (ROE), current ratio (CR), internal growth rate (IGR), and sustainable growth rate (SGR). The study is a reflection of BSM through factoring. The study has used TRs as mediator. With reference to previous imperial studies and industry practices, four types of business expenses such as payments of purchases (P), salary and wages (SW), overhead (OH) expenses, and sales administration (SA) expenses that are commonly financed through factoring have been used as the explanatory variables in the study. The empirical models used in the study to measure the effect are of multiple regression. The models used the panel data consisting of 5400 firm year observations of 2014 – 2019. This paper is a reflection of a financial theory (BSM) theory through the application of a financial model (factoring).

   

  JEL classification numbers: G0, G2, G3, G30, G300, G32, O0, O1, O12.

  Keywords: Black-Scholes Model, Factoring, Trade Receivables, ROA, ROE, CR, IGR, SGR.