Linking labor with capital: How employee friendly treatment impact trade credit availability

Abstract

This study explores the value of employee friendly treatment from a signaling theory perspective by relating it to corporate trade credit. Theoretically, employee friendly treatment signals firms' high possibility of “will and able” to perform obligations, which strengthens firms' bargaining power in striving for trade credit. The empirical tests show a positive relationship between employee friendly treatment and trade credit availability. The positive effect of employee friendly treatment on trade credit is more prominent in firms with lower market power and firms located in areas with weaker legal enforcement, lower level industrialization and poorer high education popularity. Overall, the study establishes a link between labor and capital market, implying that firms' treatment to employees who are internal stakeholders can be a cue for outsider stakeholders such as suppliers to alter the provision of trade credit.