Country financial development and the extension of trade credit by firms with market power

Koresh Galil, Offer Moshe Shapir and Rodrigo Zeidan

Journal of Banking & Finance, 2025, vol. 178, issue C

Abstract: Prior research on the impact of market power on firms’ willingness to extend trade credit has produced inconsistent results, highlighting a critical gap in understanding firm behavior. This study addresses this issue by analyzing a comprehensive dataset of industrial firms across 26 countries, focusing on how the relationship between market power and trade credit depends on a country’s financial development level. Firms with monopolistic power often restrict credit provision to improve cash flow. However, our findings reveal a U-shaped relationship, where monopolistic firms in countries with either underdeveloped or highly developed financial sectors are more likely to extend trade credit than those in mid-level financial systems. This highlights the moderating role of financial development in shaping the interaction between market power and trade credit behavior.

Keywords: Market power; Working capital management; Trade credit; Cash conversion cycle; Financial development; Debt constraints (search for similar items in EconPapers)
JEL-codes: G31 G34 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:178:y:2025:i:c:s0378426625001360

DOI: 10.1016/j.jbankfin.2025.107516

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