Trade credit and firm profitability: moderation analysis of intercompany financing in Italy

Abstract

PurposeThe purpose of this paper is to verify whether the benefits gained by granting extended payment terms can lead to higher profitability for Italian companies. Moreover, the analysis aims to investigate whether trade credit offered at a higher level than the sector average can contribute to the profitability of companies. Finally, it aims to test whether the profitability connected to granting trade credit is higher for the unconstrained and financially sound companies.Design/methodology/approachThe empirical analyses are conducted on a sample of Italian firms, over the period 2008–2016. The methodologies used to test research hypotheses are panel analysis with fixed effects and random effects models, as well as the generalized method of moment (GMM).FindingsThe results show the contribution of trade credit to the profitability of Italian companies. The empirical analysis also suggests that companies might improve their profitability by increasing investments in trade receivables to a greater extent than companies in their business sector. Finally, the greater use of payables to suppliers and the higher incidence of bank debt reduce the contribution of accounts receivable to the profitability of companies.Originality/valueThis study contributes to the existing literature as very few studies have analyzed whether trade credit offered at a higher level than the sector average may contribute to the profitability of companies. Moreover, the study provides new evidence on the moderation effect of payables to banks and suppliers on the contribution of granting trade credit to company performance.

Working Capital Management and Performance in Financially Dependent Firms: Evidence from Developing Asian Economies

“…However, an important detail that has not been addressed in this literature is the dependency of certain firms on TC as a source of financing, which can significantly influence their financing policies. Furthermore, our findings do not completely support the conclusions drawn in previous studies (e.g., Aktas et al, 2012;Goto et al, 2015;Dary and James, 2019;Bussoli and Jonte, 2020). The common conclusion offered in these studies is that TC is positively associated with performance measures.…”

“…This study makes the following contributions to the literature on trade credit. The majority of previous research has been conducted in Western countries (Dary and James, 2019;Bussoli and Jonte, 2020) or large Asian countries such as China and Korea (Hyun, 2017;Yano and Shiraishi, 2020). However, there has been a lack of investigation into the consequences of borrowing for financial reasons in the wider Asian context.…”

“…All estimations are conducted in Stata using "xtabond2" code developed byRoodman (2009) This methodology has been commonly preferred in performance-related studies e.g.,Grau and Reig (2018);Afrifa et al (2020);Bussoli and Jonte (2020).7 Please note that in GMM estimation, the lag structure specified for endogenous variables can significantly affect the coefficients. To ensure a valid comparison, we used the same lag structure, specifically t − 5, in our estimations.…”

Trade Credit as a Determinant of Firm’s Financial Performance: Moderating Role of Bank Financing

“…Linking trade credit with a firm's financial performance, a recent study conducted by Bussol and Conte (2020) reported a negative influence of aggressive trade credit policies on corporate financial efficiency. Offering trade credit, specifically, during financial distress could hamper the financial performance through creating the liquidity problem.…”