Do generous trade credit terms provide a competitive edge?
Asia-Pacific Journal of Business Administration
ISSN: 1757-4323
Article publication date: 10 August 2021
Issue publication date: 3 January 2022
Abstract
Purpose
The authors document a persistent negative link between contemporaneous trade credit provision and subsequent firm-level operating performance.
Design/methodology/approach
Textual analysis of firms' profile descriptions is used to study the role of market segmentation and product differentiation in intermediating the nexus between trade credit and corporate performance. The paper relies on dynamic panel regression modeling to investigate the postulated empirical relationships. This approach allows to address endogeneity issues and to test a number of different model specifications.
Findings
Despite fueling short-term sales growth, the more generous trade credit terms are found to be associated with lower post hoc margins and declining overall business profitability. The market share is not affected by firms' proclivity to provide trade credit suggesting that the latter may not be effectively used as a long-term growth enhancement strategy. Firms' similarity to their competitors is found to play a salient role in altering the magnitude of the discovered negative relationship.
Originality/value
The authors find that the intensity of intra-industry competition measured by firms' similarity to their competitors magnifies the discovered negative trade credit-performance nexus. Therefore, generous trade credit may play a more important role in solidifying client–supplier relationships on the more segmented markets with a higher degree of product differentiation.
Keywords
Citation
Osiichuk, D. and Wnuczak, P. (2022), "Do generous trade credit terms provide a competitive edge?", Asia-Pacific Journal of Business Administration, Vol. 14 No. 1, pp. 72-100. https://doi.org/10.1108/APJBA-03-2021-0120
Publisher
:Emerald Publishing Limited
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