Trade credit and corporate growth

Ishmael Tingbani, Godfred Adjapong Afrifa, Venancio Tauringana and Collins Ntim

International Journal of Finance & Economics, 2024, vol. 29, issue 1, 206-228

Abstract: While the underlying causal linkage between trade credit and corporate growth has mainly been explored, the primary factors that channel the relationship are limited. This article hypothesises a nonlinear relationship between trade credit and corporate growth due to the existing theoretical arguments on the benefit and cost of using suppliers' credit by corporations to enhance growth. Based on a panel of 23,023 non‐financial companies from the United Kingdom over a 10‐year period, evidence from this study reveals a nonlinear (concave) relation between trade credit and corporate growth: positive for low trade credit received and negative for high credit received. We also find trade credit to be sensitive to financial crisis, financial constraints and growth strategy. The predictability is stronger during a financial crisis, among financially constrained corporations and corporations pursuing an aggressive growth strategy. We also find growth to be higher in firms that move closer to achieving an optimal credit level. This relationship holds for both the above‐ and below‐optimal deviations. These findings have implications for a more balanced and nuanced view of trade credit management.

Date: 2024
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https://doi.org/10.1002/ijfe.2683

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