Extend Trade Credit Research Articles

From carry trades to trade credit: Financial intermediation by non-financial corporations

We use detailed firm-level data from Mexico to document that non-financial corporations engage in carry trades by borrowing in foreign currency (FX) and lending in domestic currency, largely in the form of trade credit, accumulating currency risk in the process. Firms are more active in carry-trades when FX borrowing is relatively cheaper and build currency risk by accumulating peso assets. We use the 2009 Mexican peso depreciation to show that firms that were more active in carry trades experienced larger reductions in investment. Nevertheless, their extension of trade credit remained stable, insulating their trading partners from their balance sheet exposure to the shock.

Firm-level political risk and the firm’s trade credit extension

This paper investigates the influence of firm-level political risk on the firm’s supply of trade credit. Using a novel measure of firm-level political risk developed by Hassan et al. (2019), we find that firm-level political risk has a positive impact on the firm’s trade credit extension. We also demonstrate that our results are not driven by macro financial and political events, firm-level political sentiment and non-political risks, and macro-level economic and political factors. Our result continues to hold after addressing the potential endogeneity concern. Additionally, we find that the positive impact of political risk on trade credit extension is more pronounced for firms selling differentiated goods and services. Furthermore, we demonstrate that extending trade credit enhances firm value when a firm faces higher political risk. This paper highlights the importance of considering firm-level heterogeneity in political risk. It also contributes to the literature on the determinants of trade credit extension and deepens our understanding of the relationship between political risk, trade credit, and corporate performance.

Law and borders: Entrepreneurs' immigration status and trade credit

We examine whether the immigration status of entrepreneurs is a concern for creditors when extending trade credit. Utilizing the disclosure of overseas residence rights of controlling shareholders in China, we show that overseas residence rights negatively affect firms' ability to obtain trade credit. This negative association is attenuated if the overseas jurisdiction has an extradition treaty with China. Our results are robust to the introduction of the Hong Kong national security law as a source of exogenous variation in the boundary of domestic law. The decrease in trade credit provision is more pronounced in firms that are perceived as less trustworthy (i.e., with less social trust or higher expropriation risk). Our results offer new insights into how the reach of law across borders can affect firms' financing activities.

Adoption of digital payment platforms and trade credit activities among informal firms in Ghana

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.

Why do firms extend trade credit? The role of inventories

Why do firms extend trade credit? The role of inventories

A Study on Trade Credit Financing:Evidence from Chinese A-share Listed Companies

Currently, China boasts the largest number of listed companies globally. Trade credit suppliers leverage insights into the future outlook of these entities, extending trade credit as a strategy to capitalize on profitable ventures. This study demonstrates that this informational advantage contributes substantially to the predictability of assessing investment returns. Focusing on A-share listed companies, those relying more on trade credit than on debt financing exhibit heightened potential for future sales growth and stock returns. The predictability of return associated with trade credit is particularly pronounced in firms characterized by a greater degree of information asymmetry. Consequently, this paper aims to investigate the factors influencing the utilization of trade credit and the correlation between its use and the future prospects of listed companies relying on this financial mechanism.

Presidential economic approval rating and trade credit

Trade credit has become crucial for businesses, financial institutions, and policymakers due to the significant role it plays in the economy and financial management. In this paper, we discuss how an important public opinion index, the Presidential Economic Approval Rating (PEAR), impacts a firm's decision to supply trade credit. We find convincing evidence that PEAR is positively correlated with trade credit extension. Furthermore, our results indicate that while business cycle and financial flexibility positively moderate the association between PEAR and trade credit, other factors like market concentration, CEO confidence, and oil supply shocks attenuate their link. Additionally, we observe that consumer sentiment mediates the relationship between PEAR and trade credit. Finally, our findings remain statistically unchanged when we conduct a series of robustness tests using alternative measures and the system generalized method of moments (GMM) technique. In summary, our study provides valuable insights into the considerable influence the general public's perception of the way the President is handling the economy has on corporate decision-making and contributes to the emerging literature on the importance of trade credit.

Trade credit and the stability of supply chains

We show that trade credit flows increase when a firm in a production network becomes a less reliable supplier due to an operating shock. Affected firms extend more trade credit when their customers have lower switching costs or expect more disruption. Suppliers that are more dependent on the affected firms facilitate the trade credit extension. However, when financial constraints at the affected firms and their suppliers prevent the increase in trade credit, customers sever their relationships with the affected firms, and the sales of the affected firms and their suppliers drop, suggesting that trade credit enhances production network stability.

Production flexibility and trade credit under revenue uncertainty

AbstractIn an uncertain economic environment, the ability of firms to adapt their production levels to unforeseen market demand is critical for their investment, financing and trade credit policies. This paper focuses on the impact of production flexibility on trade credit values and maturity in the presence of uncertain demand. We develop a continuous‐time real options framework where a buyer firm with capacity constraints orders input goods on credit from a supplier. The supplier optimally chooses the trade credit maturity, considering its influence on the buyer's optimal quantities and default timing. We distinguish between flexible firms, capable of suspending production during adverse conditions, and rigid firms, constrained to constant full‐scale production. Our findings reveal that production flexibility positively affects trade credit values and maturity. Flexible firms invest in larger capacity, default later and order larger quantities, resulting in higher trade credit values. Suppliers extend longer maturities to flexible firms, reflecting their higher creditworthiness and the positive effects of extended trade credit on their installed capacity. Furthermore, we explore extensions to our framework, including switching costs, entry timing, interactions between debt and trade credit and a non‐cooperative bargaining game.

Unlocking Trade Credit Opportunities and Working Capital Efficiency through ESG Disclosure

This paper explores the impact of firms’ ESG performance on their trade credit financing and working capital efficiency, utilizing a sample of 586 Indian firms listed on the National Stock Exchange (NSE) from 2015 to 2022. The study offers robust evidence supporting the positive connection between superior ESG disclosure and trade credit, as well as the negative link between ESG disclosure and the cash conversion cycle. These findings underscore the role of ESG disclosure in increasing suppliers’ willingness to extend trade credit and facilitating efficient working capital management practices. The result shows that improved ESG disclosure practices increase payable turnover days and reduce both inventory turnover and receivable turnover days, reflecting the enhanced operational efficiency and market power of the firm.

Executives' horizon and trade credit

AbstractUsing executives' decision horizon as a measure of internal governance, this study examines the association between customer's internal governance and supplier's extension of trade credit. Suppliers may extend more trade credit to customers with strong internal governance because of their lower operational risk, higher firm performance, and better information environment. However, firms with better internal governance may have easier access to other sources of financing, and thus may need less trade credit. Using a sample of US listed firms between 1992 and 2021, we find that suppliers extend more trade credit to customers with strong internal governance. We also find that the association between internal governance and trade credit is more pronounced for financially, and informationally constrained firms. Our results are robust to alternative measures and specifications. Incremental to prior studies, we show that effectiveness of customers' internal governance affects suppliers' lending decisions.

COVID-19 pandemic and corporate liquidity: The role of SOEs’ trade credit response

Although state-owned enterprises are associated with less efficiency and lead to resource misallocation, they may have stabilizing effect in face of a crisis. Exploiting the COVID-19 pandemic as a natural experiment, we study the role of firm ownership in trade credit provision and find robust evidence that SOEs increase their trade credit to downstream firms more than non-SOEs after the outbreak of the pandemic. Moreover, we explore the underlying mechanism and find that better financing ability and multitask of the SOEs contribute to greater trade credit during the pandemic, and the latter plays a more active role. Further analyses show that SOEs’ advantage in trade credit extension is more pronounced in industries with higher external financial dependence and provinces with a higher level of government involvement. Our paper provides new insights into the real effects of SOEs on the economy.

Data breaches (hacking) and trade credit

This study examines the relationship between data breaches (hacking) and trade credit for U.S. firms. Employing a staggered difference-in-differences approach, we observe that breached firms face shorter payable periods from suppliers than the control group. Data breaches increase the operational risk of breached firms. Suppliers associate high information risk with breached firms. Our findings remain robust to alternative specifications and are more pronounced for firms with no in-house IT expertise and an increased number of stolen records. Overall, our findings suggest that supplier firms become more prudent with the extension of trade credit after data breaches.

External finance and trade credit extension in China: Does political affiliation make a difference?

External finance and trade credit extension in China: Does political affiliation make a difference?

Trade credit and global value chain: Evidence from cross-country firm-level data

This paper investigates the effect of joining the global value chain (GVC) on trade credit by using the World Bank Enterprise Survey (WBES) for 55 countries from 2003 to 2019. GVC participation reflects status when a firm is a two-way trader and owns a quality certificate. When exporting, a firm may extend trade credit to its customer (account receivable). When importing, a firm may receive trade credit from its suppliers (account payables). Taking into consideration endogeneity due to reverse causality, our empirical results show the positive effects of GVC participation on the use of trade credit. When a firm participates in GVC, it is more likely to receive trade credit from its suppliers, extend trade credit to its customers, and simultaneously be involved in both types of trade credit. These effects become pronounced for financially-constrained firms, especially for small and medium-sized firms. Our findings suggest that one of the firms’ incentives to participate in the global supply chain is to overcome liquidity shortages.

How does mandatory CSR reporting affect supply chain? A new perspective from suppliers

AbstractExploiting a quasi‐natural experiment which mandates a subset of Chinese listed firms to report corporate social responsibility (CSR) activities, this paper examines how mandatory CSR disclosure affects suppliers' willingness to extend trade credit. We document that mandatory CSR disclosure firms suffer a significant shrinking in the volume of trade credit, which is driven by the supply side instead of the demand side. Further mechanism analyses reveal that both financial condition deterioration and interest conflicts contribute to adverse policy effects. These two factors negatively impact the credit quality of mandatory firms and then weaken credit quality after the mandate subsequently undermines suppliers' willingness to lend. Additionally, the negative association between mandatory CSR disclosure and trade credit is mainly concentrated on highly policy‐exposed corporates, that is, state‐owned enterprises (SOEs) and high‐polluting firms. Our work innovatively evaluates CSR effects from the perspective of suppliers, which provides a new insight into CSR management along the supply chain for academics and practitioners.

Working capital management and profitability of manufacturing companies in Kosovo

This article aims to demonstrate the profitability of the manufacturing companies in Kosovo impacted by the managing practices in the working capital. We use multiple regression analyses to estimate the effect of working capital indicators on profit. The Pearson correlation is used to calculate whether the variables are positively or negatively correlated and to what extent. The sample includes thirty-six manufacturing companies for the period 2012-2013. The data show that the increase in cash conversion cycle (CCC) and extension in the receivables term positively influenced operating profit and net return on assets. On the contrary, the increase in payables days had a negative effect on the operating profit and the net return on assets. The rise in inventory days led to increased profit. Therefore, the companies' competitiveness is maintained mainly by extending trade credit terms to their customers and keeping the cash engaged longer in operating activities.

Corporate social responsibility, trade credit provision and doubtful accounts receivable: the case in China

PurposeThis study aims to examine the linear and non-linear effects of corporate social responsibility (CSR) engagement on trade receivables of listed firms in China. Furthermore, this paper analyzes whether CSR explains the provision for doubtful trade receivables.Design/methodology/approachThe authors use a sample of listed firms in China over the period from 2008 to 2015. System generalized method of moments is used to estimate dynamic panel models.FindingsCSR is positively related to trade receivables, in line with previous studies in this field. Nonetheless, the investigation of the non-linear effect of CSR reveals that CSR has an inverted U-shaped relationship with trade receivables. This implies that at low levels, CSR is more likely to be a tool to mitigate risk and/or build a trusting relationship between suppliers and buyers; whereas, at high levels, CSR is more prone to be subject to agency cost. The authors further find that CSR has a U-shaped relationship with the provision for bad trade receivables, which substantiates the above link between CSR and trade receivables.Originality/valuePrevious studies have extensively examined the link between trade credit extension and firm performance and determinants of trade credit. CSR can be connected to trade receivables in some ways, but very little effort has been exerted in verifying this relationship. In addition, CSR is linearly linked to trade receivables in previous literature, but theoretically, it can be expected to have a non-linear relationship with trade receivables. Furthermore, CSR has not been examined as a determinant of the provision for doubtful trade receivables. The authors aim to void the gaps here by using a sample of listed firms in China.

Access to public capital markets and the extension of trade credit: An empirical analysis of Korean public and private firms

Using a large dataset of Korean public and private firms, we show that public listing does not influence the supply of trade credit among firms affiliated with a large business group (chaebol). Meanwhile, non-affiliated public firms provide more trade credit to customers than their private counterparts. Public listing allows non-affiliated firms to have greater access to cheaper sources of external capital, thereby increasing the supply of trade credit. However, the results for chaebol-affiliated firms may be attributed to well-functioning internal capital markets. Our results shed light on the substitution between internal and external capital markets.

What determines the composition of a firm's cash reserves?

We investigate what determines variation in the composition of the financial assets that constitute corporate cash reserves and how this variation relates to other key liquidity management practices. The degree to which a firm invests its cash reserves in less liquid, longer-maturity financial assets that earn a higher yield is explained by financial constraints, the ability to accurately forecast short-term liquidity needs, and the firm's likelihood of defaulting on its debt. During years when a firm's cash reserves are required to fund increases in investment or operating expenses the firm transfers funds from less liquid to more liquid financial assets. A firm's decisions relating to the composition of its cash reserves interacts with other key liquidity management practices, such as relying on credit lines for liquidity, extending trade credit or using it as a source of financing, and holding large amounts of inventories. Our findings provide insights on an important component of corporate liquidity management decisions.