Behavioral biases in trade credit policy: does it matter for financial performance?

Abstract

PurposeCorporate firms often follow their peer firms to articulate multiple financial decisions. Among the others, trade credit policy is a vital financial decision that can impart its dynamic role in achieving financial efficiency. Therefore, the current analysis aims to assess the role of herding behavior in determining the trade credit policies of corporate firms and its relevant effect on corporate financial performance.Design/methodology/approachFor this purpose, the financial data of 13089 nonfinancial sector firms from 50 countries are employed and the dynamic generalized method of moments (GMM) model to estimate the regression is applied.FindingsThe empirical findings first reveal that corporate firms actively mimic their peer firms regarding trade credit policies. However, this mimicking behavior hampers the financial performance due to noncompatibility with peers’ trade credit policies. Peer firms often develop such trade credit policies that are not applicable to corporate firms.Practical implicationsMainly, the findings of the study suggest two implications. First, it highlights the peer effect in terms of trade credit patterns. Second, it elaborates an adverse effect regarding financial performance due to herding of peers’ trade credit policies.Originality/valueThis study adds new thoughts regarding herding behavior in terms of trade credit policy and its possible consequences for corporate financial performance. No study explores such a relationship.

Does trade credit spur performance of the firm: a case study of non-financial firms in Pakistan

“…To the best of the researchers’ knowledge, Abuhommous (2017), Farooq et al (2022) and Pham and Pham (2020) are the pioneers to study the current issue from emerging point of view economies. Keeping in view the importance of the issue, still there is much ambiguity about the structure, trends and issues of trade credit regarding firm performance in Pakistan for textile sector.…”

“…Keeping in view the importance of the issue, still there is much ambiguity about the structure, trends and issues of trade credit regarding firm performance in Pakistan for textile sector. The textile sector for the past few years is in continuous phase of cash shortfall and dependent on external funding sources (Farooq et al , 2022). Therefore, the impact of trade credit is important to investigate in mitigating these issues.…”

“…Because trade credit is one of the dimensions of working capital, it plays an important role in shaping firm's operations and is considered as a business channel which deals with the credit arrangements within the dealing parties (Farooq et al, 2022) specifically when firms face issues of financing from banks and other sources (Deloof and Overfelt, 2011). Because the consistency of trade credit ensures the stability of the firms (West et al, 2018), trade credit might be thought of as an element which boost market transactions (Seifert et al, 2013) and at the same time considered as an alternative source of short-term finance (Rajan and Zingales, 1995).…”