Determinants of Trade Credit Supply and Shareholders’ Return in Developed and Developing Countries

Abstract

This study analyzed the relationship between firm-specific determinants and trade credit supply. Unlike past studies, average collection period is used as a proxy of trade credit supply. Further, impact of trade credit supply on shareholder return is examined in the study. This study compared the results among different income groups consisting of developing and developed countries (lower-middle income, upper-middle income, and high income). Data of six countries is collected from DataStream for the period 2002-2018. Kruskal Wallis test revealed that firms of lower-middle income developing countries collected receivables early as compared to other countries. Generalized method of moments (GMM) is applied to test the relationship between determinants and trade credit supply. The findings of the study showed that for all firms, average payment period, inventory conversion period and net profit margin of supplier significantly increase while cash flow volatility and leverage significantly decrease the trade credit supply. The relationships are similar across different group of countries except net profit margin. However, the impact of determinants on trade credit supply is different in different groups. In addition, an optimal period of trade credit supply is found. Longer average collection period beyond optimal period decreases shareholder returns. In each income group, optimal period of trade credit supply is different. These results have implications for managers across developed and developing countries to optimize trade credit supply policies.