Does investment in trade credit matter for profitability? Evidence from publicly listed agro-food firms

Working Capital Management and SMEs Profitability in Emerging Economies: The Ghanaian Case

“…According to Long et al (1993) and Ng et al (1999), trade credit serves as a useful mechanism for reducing information asymmetry between the firm and its customers. Based on the transaction cost theory, others have indicated that firms can also benefit from reduced transaction cost and consequently increased profitability by offering trade (Dary & James, 2019;Ferris, 1981). Offering trade credit also signals product quality (Baños-Caballero et al, 2014;Lee & Stowe, 1993), compliments firm's marketing tools (Cheng & Pike, 2003;Dary & James, 2019), and serves as useful tool for mitigating financial friction of customers (Meltzer, 1960).…”

“…There are, however, risks associated with such policy. For example, increasing investments in receivables may lead to higher bad debts (Cheng & Pike, 2003;Dary & James, 2019), locked up capital and higher opportunity cost (Dary & James, 2019;Martinez-Solano et al, 2013), and increased debtors administration costs (Abuhommous, 2017;Mian & Smith, 1992). Higher inventories may also increase holding cost, higher obsolescence, and frequent stock write-downs (Baños-Caballero et al, 2012;Koumanakos, 2008).…”

The Impact of Trade Credit Investment on Manufacturing Firms' Profitability: Evidence from Vietnam

“…Meanwhile, in the restaurant industry, Mun and Jang (2015) reveals firms' working capital which includes accounts receivable has a significant inverted U-shaped relationship with profitability. The above-mentioned relationship in individual industries have caught much scholar's attention for decades (Dary and James, 2019;Grau and Reig, 2018;Mun and Jang, 2015). However, few researchers have addressed the issue in the manufacturing industry.…”

“…Because the specification is dependent on the selection between FEM and REM mentioned previously. Finally, we use Sasabuchi-Lind-Mehlum test (see e.g., Dary and James, 2019) to test the linearly positive relationship between trade credit investment and profitability of manufacturing firms.…”

“…More than 99% of firms spend about 18% of their total assets on investing in trade credit. Moreover, this study is designed to apply the methodology developed by Dary and James (2019) so as to examine the effect of trade credit on firm performance. In which, the statistical models consist of Feasible generalized least squares (FGLS), Fixed-Effect Model (FEM) and Random-Effect Model (REM).…”