Title: Trade credit and firm performance
Authors: Stylianos Asimakopoulos - University of Stirling (United Kingdom)
Filipa Fernandes - University of Glasgow (United Kingdom)
Yiannis Karavias - University of Birmingham (United Kingdom) [presenting]
Abstract: Theory suggests that trade credit affects firm performance non-linearly with an optimal maximum level determined through a cost-benefit trade-off. However, empirical literature fails to uncover this theoretical result. We are able to bridge this gap between theory and practice using a large panel of European firms through a novel and very general non-linear panel GMM approach. Specifically, we find a robust non-linear effect of trade credit on firm profitability. Moreover, we find a statistically significant maximum level of trade credit with a negative impact when it is exceeded and a positive when operating below that level. Disaggregating the effect of trade credit on firm performance, using account receivables and payables, we are able to uncover that account payables exhibit an inverted U-shaped effect on firm profitability, whereas account receivables exhibit a U-shaped effect. Our results also indicate that effect of account payables dominates on trade credit. Finally, the above results remain consistent irrespective of the firm performance indicator we implement.