Does Trade Credit Financing Affect Firm Performance? Evidence from an Emerging Market

Abdullah Al Mahmud (), Muhammad Shahin Miah and Mohammad Rakib Uddin Bhuiyan
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Abdullah Al Mahmud: Department of Banking and Insurance, University of Dhaka, Dhaka 1000, Bangladesh
Muhammad Shahin Miah: Department of International Business, University of Dhaka, Dhaka 1000, Bangladesh
Mohammad Rakib Uddin Bhuiyan: Department of International Business, University of Dhaka, Dhaka 1000, Bangladesh

IJFS, 2022, vol. 10, issue 4, 1-19

Abstract: In this study, we examine the association between interim financing and firm performance in an emerging economy. Prior research shows that firms utilize trade credit to boost their operating performance or market valuation. However, recent research on the relation between trade credit as alternative financing and firm performance provides mixed evidence. Nevertheless, limited research has been conducted in developing economies; hence, we attempt to fill this gap in the present paper. We argue that trade credit may not be attractive to external debt financing as trade credit may not contribute to business growth while external debt financing does. To test our conjecture, we employed ordinary least squares (OLS), firm fixed effects, and random effects regressions. By utilizing 1002 firm-year observations, our findings suggest a negative relationship between trade credit and firm performance. To check and control endogeneity and reverse causality issues we use instrumental variable approach (i.e., Heckman two-stage least squares regression). Our results remain robust through different measures of firm performance and trade credit. Our study provides policy implications and contributions to trade credit and firm performance literature.

Keywords: trade credit; interim financing; developing country; alternative financing; firm performance (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2022
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