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

Abstract

The aim of this study is to examine the effect that trade credit investment has on firms' profitability. The characteristics of this relationship have not been dealt with in depth for manufacturing firms. We use panel data for a total of 227 Vietnamese publicly listed manufacturing firms for the period 2005–2017. Different econometric estimation techniques such as the feasible generalized least squares, fixed effects and random effects and different calculation of firm performance such as non market-based measure (return on assets) and market-based measure (Tobin's q) are employed to validate the consistent results. The robust results confirm a statistically significant inverted U-shaped relationship between trade credit investment and profitability.

Do the trade credit influence firm performance in agro-industry? Evidence from Thailand

“…Consistent with the finance and business literature, we used return on assets (ROA) as a proxy to evaluate firm performance, the dependent variable. Following previous explorations, ROA is the finest indicator of corporate performance or corporate profitability [ 8 , 26 , 27 ]. ROA is measured as the ratio of earnings before interest and taxes (EBIT) to total assets.…”

“…The fixed effects model controls for omitted time-invariant firm characteristics and any unrecognized time-variant effect that impacts each firm in the sample. To generate the empirical results based on panel data for our hypothesis, we employed the panel OLS estimations, often used in the finance literature [ 7 , 8 ]. The following equation model as expressed in Eq.…”

“…Therefore, both partners have incentives to continue partnering. From a business point of view, trade credit investments can be used as a way for companies to build their brands [ 8 ].…”

“…Because trade credit plays a significant role in a firm's operation as a channel of credit, prior studies are related to the relationship between trade credit and firm performance or firm profitability [ [5] , [6] , [7] , [8] , [9] ]. One of the crucial questions in the prior literature is whether a firm's trade credit enhances or weakens its performance.…”

Trade credit from agrochemical vendors as an alternative source of finance for cabbage producers in the Bono East Region of Ghana

“…By using trade credit, accounts receivable and accounts payable have an inverted U-shaped association with SMEs’ profitability (Hoang et al , 2019), implying that, trade credit becomes optimal to offset benefit and cost to achieve the maximum profit. Likewise, Pham and Huynh (2020) professed an inverted U-shaped association between trade credit investment and a firm’s profitability. Abuhommous (2017) shows that, the use of trade credit positively affected the profitability of firms.…”