The Impact of Trade Credit Provision on Retail Inventory: An Empirical Investigation Using Synthetic Controls

Christopher J. Chen (), Nitish Jain () and S. Alex Yang ()
Additional contact information
Christopher J. Chen: Kelley School of Business, Indiana University, Bloomington, Indiana 47405
Nitish Jain: London Business School, London NW1 4SA, United Kingdom
S. Alex Yang: London Business School, London NW1 4SA, United Kingdom

Management Science, 2023, vol. 69, issue 8, 4591-4608

Abstract: Trade credit is an important source of short-term financing and an integrated part in supply contracts. Although a number of theories have been proposed on how trade credit could improve supply chain efficiency, causal studies on the impact of trade credit on operational decisions are scarce. In this study, we examine the impact of trade credit on inventory decisions using an empirical strategy that leverages (i) an exogenous shock imparted by the French government’s intervention to impose a ceiling on trade credit duration, (ii) a triple difference-in-differences identification strategy, and (iii) synthetic controls (SCs). By considering the 60-day ceiling coverage and SC construction requirements, we identify four French retail sectors as our main sample. Among them, in the postregulation period, the hardware retail sector firms on average exhibited a significant 16% decline in trade credit usage. Correspondingly, these firms also displayed a significant 11% decline in inventory level. In the remaining three sectors, we found mixed results in the main sample. All the four sectors, however, show consistent support for a causal link between trade credit and inventory in a subsample compiled using a stringent 90-day ceiling criterion. Collectively, our findings offer direct evidence that trade credit is an indispensable financing source for inventory procurement. Finally, in the postregulation period, the hardware retailers exhibited a 15.5% decline in revenue and 3.5% reduction in gross profit. This cautions policy makers that regulations limiting the use of trade credit may have unintended consequences on downstream firms, and may harm overall supply chain efficiency.

Keywords: OM–finance interface; trade credit; inventory; empirical OM; synthetic control (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2022.4600 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:8:p:4591-4608

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().