Influence of institutional differences on trade credit use during pandemics

Abstract

This study examines the formal and informal institutions that affected trade credit during the pandemic periods. To this end, we analyze 590,025 firm-year observations across 107 countries during six recent pandemic crises: SARS (2003), H1N1 (2009), MERS (2012), Ebola (2014), Zika (2016), and COVID-19 (2020). The study finds that formal legal institutions and firms' information transparency during pandemic periods act as a “brake” for trade credit usage. By contrast, informal institutions with religious connotations or attributes, social trust, and policy stability play a “cushion” role in softening the impact of pandemic crises when a firm applies for trade credit. These results remain robust after alternating the estimation techniques, trade credits, pandemic variables, and different samples. This study offers new evidence on the role of trade credit from the perspectives of formal and informal institutions during pandemic crises. The outcomes thus provide information worthy of consideration by policymakers when faced with informal institutional conditions and support government efforts to improve unstable formal systems and prevent severe shocks in the future.