Impact of Trade Credit Financing on Firm Performance in Supply Chains

Abstract

Using a dyadic panel dataset that links U.S. suppliers with their major buyers, we study the impact of trade credit on firm performance. In particular, we make the distinction between an industry-average trade credit and an individual supply chain’s deviation from such an industry average. When suppliers offer trade credit at their industry-average level, this action facilitates trade and, thus, is positively associated with both parties’ performance; conversely, when suppliers are more aggressive in their trade credit strategy than the industry average, then the excess trade credit is negatively associated with buyer performance. One managerial message from our research is that buyers should be cautious about trade credit far exceeding the industry-average level.