The impact of board size and independence on trade receivables in Vietnam

Abstract

Trade credit plays a significant role in firm performance, and proper corporate governance can help manage trade credit in the best interest of shareholders. Given the nature of high levels of information asymmetry and inadequate institutional quality in developing countries, the role of corporate governance linked to board characteristics is highly relevant in determining the level of trade credit granted. Even though trade credit might help firms win customers, excessive trade credit extension puts the firms at risk of working capital being abused by purchasers, and low liquidity which hampers smooth operations or even bankruptcy. In a developing country like Vietnam, it is likely that boards can act as a deterrence to business practices that are harmful to corporate performance. This research paper investigates the relationship between two board characteristics and trade receivables in Vietnam using data from 2010 to 2022. The research utilizes conventional panel data estimators, including the random effects model and the System Generalized Method of Moments. We find that board size tends to reduce trade receivables, implying that larger boards prevent firms from extending much trade credit which could lead to increased implicit costs and hamper firms’ liquidity. This result implies that firms benefit more from larger boards, rather than encounter troublesome coordination caused by more crowded boards. However, board independence is insignificantly associated with trade credit extension, suggesting that this factor does not help curb trade credit extension. This result negates the view that firms benefit more from independent directors and that independent directors do not necessarily enhance corporate governance in Vietnam. Based on these results, the research offers implications for the directors monitoring role and strategy management especially in a developing country.