Does investment in trade credit matter for profitability? Evidence from publicly listed agro-food firms

Stanley K. Dary and Harvey James

Research in International Business and Finance, 2019, vol. 47, issue C, 237-250

Abstract: The paper examines the relationship between trade credit investment and firm profitability, employing a panel of publicly listed agro-food firms in the United States for the period 2001-2014. Whilst almost all firms in the sample invest in trade credit, there is statistically significant variation in the level of trade credit investment and credit period within the United States public agro-food industry. The pooled ordinary least squares, fixed effects and random effects estimations established a significant positive effect of trade credit investment on firm profitability. Due to endogeneity concerns, an instrumental variable fixed effects model is estimated and the results also confirm a statistically and economically significant positive effect of trade credit investment on firm profitability. The results are robust to different econometric estimation techniques and to the use of non-market based measure (return on assets) and market based measure (Tobin’s q) of firm performance. The paper concludes that investing in trade credit significantly increases profitability of agro-food firms as suggested by the financing, transaction/operation and commercial theories of trade credit. Notwithstanding, firms’ trade credit investment decisions should be guided by cost-benefit tradeoff.

Keywords: Trade credit investment; Trade credit theories; Profitability; Agro-food firms; United States (search for similar items in EconPapers)
JEL-codes: D22 G32 L66 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:47:y:2019:i:c:p:237-250

DOI: 10.1016/j.ribaf.2018.07.012

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