Trade Secrets and Trade Credit Provision

Suppliers’ trade credit strategies with transparent credit ratings: Null, exclusive, and nonchalant provision

PurposeUsing a sample of manufacturing firms listed in China between 2007 and 2019, first, this paper aims to examine whether peer firms influence corporate trade credit supply. Next, the authors examine the channels through which peer firms influence corporate trade credit supply by testing the predictions of rivalry and information theories. Furthermore, the authors examine the heterogeneity of the industry peer effect on corporate trade credit supply. Finally, the authors examine the economic consequences of the industry peer effect on corporate trade credit supply.Design/methodology/approachThe sample includes all manufacturing firms listed on both the Shanghai and Shenzhen securities exchanges for the sample period from 2007 to 2019, and the data come from the China Stock Market & Accounting Research database. The authors use the fixed effects method to examine the industry peer effect on trade credit supply. The results are robust to a series of robustness tests. To address the potential endogeneity problem, the authors adopt appropriate instruments by estimating instrumental variable models (two-stage least square). The authors use Heckman’s two-stage model to mitigate the sample selection bias.FindingsThe authors provide strong empirical evidence showing that the industry peer effect on trade credit supply exists in the manufacturing sector. It is also found that both competitive rivalry-based and information-based theories can provide explanations of the industry peer effect on trade credit supply. This process is both active imitation and passive reaction. Additional analysis suggests that the industry peer effect on trade credit supply is more pronounced for state-owned firms, firms with low customer concentration and firms with high geographical proximity. The amplification effect and spillover effect are the economic consequences of the industry peer effect on trade credit supply. In other words, the trade credit supply based on peer effect will not only increase the liquidity risk of the firm per se but also induce and increase the liquidity risk of the industry.Originality/valueThe study makes some important contributions. First, the authors find robust evidence that peer firms’ trade credit supply is an important factor in explaining corporate trade credit supply, which extends the literature by connecting the firm’s trade credit supply with the peer effect. Second, the study provides a new micro-perspective for understanding that firms use trade credit supply as a tool of competition, which proves the importance of rivals’ decision-making as a determinant of corporate decisions. Third, the authors examine the industry peer effect on trade credit supply, which not only helps to guide firms to pay more attention to the potential risk and spillover effects of the trade credit supply decision-making relevance but also helps to clarify the industry interaction phenomenon of corporate decision-making behavior. It is an important practical significance to play a role as a bridge between the microlevel of the firm and the meso-level of the industry. Finally, the study provides inspiration for the formulation of industry norms and policies.

Climate change presents increasing operational risks for firms, yet its influence on financial policy remains underexplored. While prior research has examined climate change's effects on capital structure and investment decisions, the role of trade credit, a vital tool for liquidity management, has received limited attention. Drawing on data from US firms between 2001 and 2021, this study investigates how climate change exposure affects suppliers' provision of trade credit. The empirical findings reveal a statistically significant positive relationship between climate exposure and trade credit provision, particularly among firms with greater financial flexibility, weaker performance, or lower reputational standing. Moreover, shareholders respond favorably to such credit expansions. These results suggest that trade credit functions as a risk‐sharing mechanism for climate‐exposed firms, offering novel insights into adaptive financial strategies and stakeholder responses to environmental challenges.

Trade credit supply and financial distress outcomes: evidence from Australian voluntary administrations

Cash Collateral, Creditor Rights, and the Provision of Trade Credit

This study investigates the relationship between the utilisation of digital payment platforms and the decision of informal firms to engage in the demand for or supply of trade credit. Recognizing the pivotal role of trade credit in alleviating financial constraints for informal enterprises, our research employs a recursive bivariate probit model to assess the impact of digital payment platform usage on both the demand for and supply of trade credit among informal firms in Ghana. Leveraging data from the World Bank Enterprise Survey, we find that 13.83 % of informal firms receive trade credit from suppliers, while 26.89 % extend trade credit to customers. Additionally, 49.6 % of firms use digital payment platforms for their business transactions. The study finds that digital payment platforms increase the probability of firms engaging in the demand and supply of trade credit. It argues that digital payments enhance transaction efficiency, convenience, and security, potentially reducing associated transaction costs and facilitating business interactions across distant locations. Various factors, including firm age, maintenance of accounting records, sales volume, owner experience, credit facilities, internet use for social media marketing, and operating hours, significantly influence the decision to engage in trade credit activities. The robustness of our results is confirmed through alternative estimation techniques. Recommendations include policy interventions aimed at promoting the digitalization of informal firms, supported by government investments in digital infrastructure. It is recommended that firms and their suppliers and customers should adopt these digital payment platforms in order to facilitate their use of trade credit in business transactions. A regulatory environment fostering business trust and responsible use of digital payment platforms is crucial, necessitating measures to ensure data protection, security, and ethical conduct within the digital payments’ ecosystem.

We examine how access to debt markets affects firms’ incentives to provide trade credit. Using hand-collected trade credit data between customer-supplier pairs and two exogenous shocks to firms’ debt capacity, we show that better access to debt reduces firms’ provision of trade credit per dollar of sales. The decline in trade credit is concentrated on ex ante powerful customers, but absent for weak ones, suggesting that better access to debt improves firms’ bargaining position relative to powerful customers. The decline in trade credit leads customers to cut investment, increase leverage, and scale back trade credit provision to firms further downstream. This paper was accepted by Camelia Kuhnen, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.04090 .

A Tale of the Firm and its Trade Secrets: An Examination of the Theory of the Firm, its Trade Secrets and the Law Uncovers a Tango of Interdependence with Frustrations and Successes

PurposeThe purpose of this paper is to study the influence of investor sentiment on the supply of trade credit, and further explores the difference of the effect of investor sentiment on the supply of trade credit in the environment of strong market competition and weak market competition.Design/methodology/approachThe authors use panel estimation techniques to examine the impact of investor sentiment in the Chinese securities market on the supply of corporate trade credit.FindingsThis paper finds that investor sentiment has positive impact on trade credit through three channels of motivation, willingness and ability. At the same time, this paper finds that investor sentiment has stronger impact on enterprises in strong market competition than enterprises in weak market competition.Research limitations/implicationsThis paper expands the research on the influence of virtual economy on the real economy, analyzes the difference of the influence of investor sentiment on the supply of trade credit under different market competition conditions.Practical implicationsThe paper perfects the mechanism of trade credit decision-making at this stage, and provides more evidence for the virtual economy to act on the real economy.Social implicationsThis paper provides a theoretical basis for the government functional departments to use the investor sentiment to play a positive role in trade credit to improve the market competition and guide the development of China’s capital market in the direction of rationalization and health.Originality/valueIn combination with market competition environment and industry characteristics, this paper investigates external irrational factors and studies how investor sentiment affects trade credit supply.

PurposeExisting studies that documented the effect of financial distress on trade credit provisions did not include measures financial constraint. It is possible that financial distress is tie to financial constraints, and both financial distress and financial constraints mutually reinforce each other in their effects on trade credit provision. The purpose of this study is to evaluate the effects of financial constraint and financial distress on trade credit provisions in the UK FTSE 350 listed firms.Design/methodology/approachThis study employs panel data in the estimation of the determinants of accounts payables and accounts receivables of the UK FTSE 350 firms from 2009 to 2017.FindingsThis study finds that financial distress has significant positive effect on accounts payables and a significant negative effect on accounts receivables. Financial constraints have significant negative effect on accounts payables and a significant positive effect on accounts receivables.Practical implicationsTrade creditor desiring to maintain an enduring product-market relationship grant more concessions to customer in financial distress. The amount of trade credit that sellers provide to financially constrained firm is an increasing function of the buyer's creditworthiness. The urgent cash needs of financially distressed firms lead them to sell trade receivables to factoring company leading to reduction in trade receivables. Firm facing external financing constraints increase trade credit to customers in anticipation of cash flow inflow to enhance liquidity.Originality/valueThis study shows that financial distress and financial constraints mutually reinforce each other in their effects on trade credit provisions, and firm's financing condition contributes to divergence in trade credit policies.

While peer influences on trade credit decisions are well documented, prior studies have overlooked their asymmetric effects across providing and receiving trade credit. Using a comprehensive firm-level dataset from 2004 to 2023, we show that industry contagion significantly affects firms’ provision of trade credit but has limited impact on their receipt of trade credit. Moreover, supplier concentration significantly suppresses contagion in receiving trade credit, whereas customer concentration exerts little moderating effect in providing trade credit. Further analyses reveal that the constraining role of supplier concentration diminishes when firms possess strong institutional bargaining advantages. These findings extend research on peer influences by establishing the asymmetric nature of contagion in trade credit and by highlighting how vertical structural constraints shape firms’ responses to industry-wide pressures. This study also provides practical insights for managing trade credit strategies under both horizontal competition and vertical supply chain dependencies.

PurposeThis study mainly investigates two pivotal questions: (1) How does the acquisition of government procurement contracts influence corporate strategies in trade credit provision? (2) What underlying mechanisms drive the observed changes in trade credit policies following government contract awards?Design/methodology/approachThis study employs comprehensive data pertaining to government procurement contracts granted to China’s listed companies spanning from 2015 to 2022, utilizing a two-way fixed effects model to perform the econometric analyses. A battery of robustness tests, including instrumental variable (IV) estimation, Heckman two-stage correction, propensity score matching (PSM), and placebo tests, has been systematically implemented to validate the reliability of our baseline findings.FindingsGovernment procurement contracts augment firms’ provision of trade credit to their customers rather than to their suppliers. This outcome is attributed to the fact that firms securing government contracts can access increased bank loans and government subsidies, and expand their production scale. Furthermore, the primary drivers of the effects above are procurement contracts from the city government where the firm is headquartered, as well as contracts awarded by local governments rather than those from the central government. On the demand side, government procurement reduces enterprises’ trade credit demand, primarily that from their customers.Originality/valueThis study pioneers the revelation of government procurement as an “institutional signal”, whose dual transmission channels enhance corporate trade credit supply: the governmental credit endorsement effect and the scale economy effect. Thus, it contributes to the literature on determinants of trade credit financing and on the effects of government procurement contracts.

Corporate social responsibility and provision of trade credit

PurposeThe purpose of this paper is to examine whether the level of financial credit available in a country influences the level of trade credit provided to customers.Design/methodology/approachThe authors examine the association between the supply of trade credit and the availability of country-level private financial credit using multivariate regression models that account for country-level heterogeneity, macroeconomic conditions and firm-specific characteristics. The data set is a pooled sample of publicly traded firms incorporated in 66 countries.FindingsSupporting the re-distributional view of trade credit, robust results suggest that suppliers incorporated in countries with increased access to financial credit provide increased trade credit to their customers. Further results indicate significant differences in trade credit usage across geographical regions. Consistent with existing research using samples of US firms, the use of trade credit is correlated with firm-level measures of financial constraints and product market dynamics.Originality/valueThe authors provide one of the first studies to examine differences in trade credit extension across a large number of countries.

Strategic fit and trade credit: evidence from China