Trade credit, firm profitability, and financial constraints

Huan Cong Hoang · Qin Xiao · Saeed Akbar

40 citations0/0 files storedInternational Journal of Managerial Finance

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Abstract

Purpose The purpose of this paper is to investigate the non-linear association between trade credit and profitability of small and medium-sized enterprises (SMEs). Moreover, this paper analyses whether the above relationship varies according to financial constraints of SMEs. Design/methodology/approach The authors use panel data methodology to conduct investigations for a sample of 1,509 non-financial listed SMEs from nine countries or territories located in the East Asia and Pacific region, namely, China, Vietnam, Malaysia, Thailand, Japan, South Korea, Taiwan, Singapore and Hong Kong, over the period from 2010 to 2016. Findings This study indicates that trade credit receivable (TCR) and trade credit payable (TCP) have an invertedU-shaped relationship with SMEs’ profitability, which implies the existence of an optimal trade credit level that balances between costs and benefits to maximize their profitability. This result suggests that managers should try to keep the level of trade credit investment as close to the optimal point as possible to avoid the case that their profitability reduces when they move away from this point. Moreover, this study also finds that the optimal trade credit level is sensitive to the financial constraints of SMEs. In particular, optimal level of more financially constrained firms is lower than that of less financially constrained firms. Originality/value A number of contributions that this study makes to the existing literature are presented as follows. First, the paper takes account of the possible presence of a concave relationship between trade credit and SMEs’ profitability, largely ignored by the existing empirical literature. Second, it demonstrates this association in terms of both aspects of trade credit, including TCR and TCP. Third, the study investigates the effect of the different level of financial constraints faced by SMEs on the relationship between trade credit and their profitability.

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References

1978Specification Tests in Econometrics 1995What Do We Know about Capital Structure? Some Evidence from International Data 1988The Determinants of Capital Structure Choice 1963CORPORATE INCOME TAXES AND THE COST OF CAPITAL: A CORRECTION 1998The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle 1995Diversification's effect on firm value 1997Trade Credit: Theories and Evidence 1999Understanding the determinants of managerial ownership and the link between ownership and performance

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2020Financial leverage, debt maturity, future financing constraints and future investment 2021Working capital management, the market environment and corporate performance: evidence from China 2020Trade credit and firm profitability: Empirical evidence from India 2021Bibliometric Analysis for Working Capital: Identifying Gaps, Co-Authorships and Insights from a Literature Survey 2023Does national culture impact trade credit provision of SMEs?

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