The Impact of Trade Credit Provision on Retail Inventory: An Empirical Investigation Using Synthetic Controls

Abstract

Over the last decade, trade credit has been subject to increasing government regulation in many countries. Though such policies could improve suppliers' financial sustainability, they may negatively affect supply chain performance by limiting positive operational roles of trade credit. In this study, we examine the potential negative implication of limiting trade credit on inventory decisions at the retailer level. Using an empirical strategy that leverages: (i) an exogenous shock imparted by the French government's intervention to impose a ceiling on trade credit repayment; (ii) a triple difference-in-differences identification strategy; and (iii) Synthetic Controls, we estimate the causal impact of trade credit on firms' inventory stocking decisions. We find that, in retail sectors affected by the French regulation, the decrease in trade credit led to both an economically and statistically significant decline in firms' inventory levels. For example, in the hardware retail sector, the regulation reduced the trade credit level, as measured by payable days, by 16%, which in turn caused an 11% decline in inventory days. Put differently, a 1% reduction in trade credit led to a 0.67% decrease in inventory. In combination with industry-calibrated parameters, these estimates indicate a decline of up to 2.2% in retail profits and 3.0% in fill-rate on the account of the imposed ceiling. Our findings offer direct evidence that trade credit is an indispensable financing source for inventory procurement. Equally importantly, they also inform policymakers that limiting trade credit below equilibrium levels could harm supply chain efficiency and consumer welfare.