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

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  • Dary, Stanley K.
  • James, Harvey S.

Abstract

The paper examines the relationship between trade credit investment and firm profitability, employing a panel of publicly listed agro-food firms in the United States for the period 2001-2014. Whilst almost all firms in the sample invest in trade credit, there is statistically significant variation in the level of trade credit investment and credit period within the United States public agro-food industry. The pooled ordinary least squares, fixed effects and random effects estimations established a significant positive effect of trade credit investment on firm profitability. Due to endogeneity concerns, an instrumental variable fixed effects model is estimated and the results also confirm a statistically and economically significant positive effect of trade credit investment on firm profitability. The results are robust to different econometric estimation techniques and to the use of non-market based measure (return on assets) and market based measure (Tobin’s q) of firm performance. The paper concludes that investing in trade credit significantly increases profitability of agro-food firms as suggested by the financing, transaction/operation and commercial theories of trade credit. Notwithstanding, firms’ trade credit investment decisions should be guided by cost-benefit tradeoff.

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  • Dary, Stanley K. & James, Harvey S., 2019. "Does investment in trade credit matter for profitability? Evidence from publicly listed agro-food firms," Research in International Business and Finance, Elsevier, vol. 47(C), pages 237-250.
    • Handle: RePEc:eee:riibaf:v:47:y:2019:i:c:p:237-250
    DOI: 10.1016/j.ribaf.2018.07.012
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    2. He, Xinao & Xu, Runguo & Sun, Kai & Wang, Jian, 2024. "Population intensity, location choice, and investment portfolio selection: A case of emerging economies," International Review of Financial Analysis, Elsevier, vol. 94(C).
    3. Abudu Braimah & Yinping Mu & Isaac Quaye & Alhassan Abubakar Ibrahim, 2021. "Working Capital Management and SMEs Profitability in Emerging Economies: The Ghanaian Case," SAGE Open, , vol. 11(1), pages 21582440219, February.
    4. Hyeongtae Cho & SungMan Yoon, 2023. "Do Governmental Tax Reliefs for Investment Lead to Investment Efficiency and Sustainability for SMEs? Evidence From South Korea," SAGE Open, , vol. 13(1), pages 21582440231, February.
    5. Duong Phuong Thao Pham & Thi Cam Ha Huynh, 2020. "The Impact of Trade Credit Investment on Manufacturing Firms' Profitability: Evidence from Vietnam," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 68(4), pages 775-796.
    6. Abdullah Al Mahmud & Muhammad Shahin Miah & Mohammad Rakib Uddin Bhuiyan, 2022. "Does Trade Credit Financing Affect Firm Performance? Evidence from an Emerging Market," IJFS, MDPI, vol. 10(4), pages 1-19, September.
    7. Bahadir Karakoç, 2023. "Working Capital Management and Performance in Financially Dependent Firms: Evidence from Developing Asian Economies," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 9(1), pages 37-55.

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    More about this item

    Keywords

    Trade credit investment; Trade credit theories; Profitability; Agro-food firms; United States;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

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