The ebb and flow of trade credit: implications for financing financially dependent firm growth

Abstract

Purpose

This study investigates the significance of trade credit (TC) as an alternative source of funding in financing the growth of financially dependent firms.

Design/methodology/approach

Panel data analysis using the difference generalized method of moments (GMM) and fixed-effects ordinary least squares (FE-OLS) is conducted on annual data from publicly listed firms across a number of developing economies. The data cover the period from 2003 to 2019.

Findings

The findings indicate that financially dependent firms rely on TC to manage their growth, especially when they have exhausted their debt capacity. This dependence on TC displays a cyclical pattern. As firms enhance their financial position, they tend to scale back their dependence. Nevertheless, firms with significant growth opportunities continue utilizing TC for at least two years after their initial identification as financially dependent.

Practical implications

The author's conclusion highlights that TC can be a valuable and accessible source of funding, especially in developing economies where the real sector may require alternative financing channels. Hence, TC has the potential to play a very significant role in financing corporate growth in these economies.

Originality/value

The current study adds to the existing body of literature by revealing that access to alternative sources of finance is also critical for firms that are dependent on external sources and for firms that have exhausted their financial debt capacity.

Citation

Karakoç, B. (2023), "The ebb and flow of trade credit: implications for financing financially dependent firm growth", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-12-2022-1903