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Does Trade Credit Boost Firm Performance?

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  • Dongya Li
  • Yi Lu
  • Travis Ng
  • Jun Yang

Abstract

Some firms have achieved good performance in developing countries where the financial sector is far from established. One explanation in the literature is that these firms benefit from trade credit, a form of informal financing. Using a survey of firms in China conducted by the World Bank in early 2003, this article examines whether trade credit indeed boosts firm performance. Our ordinary least squares results show that trade credit is significantly and positively correlated with firm performance. However, using the instrumental variable approach to address endogeneity, we find that the statistical significance disappears. The results are robust to a series of robustness checks, casting doubt on the claim that trade credit boosts firm performance.

Suggested Citation

  • Dongya Li & Yi Lu & Travis Ng & Jun Yang, 2016. "Does Trade Credit Boost Firm Performance?," Economic Development and Cultural Change, University of Chicago Press, vol. 64(3), pages 573-602.
    • Handle: RePEc:ucp:ecdecc:doi:10.1086/685764
    DOI: 10.1086/685764
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    Cited by:

    1. Lifang Hu & Rigoberto A. Lopez & Yinchu Zeng, 2019. "The impact of credit constraints on the performance of Chinese agricultural wholesalers," Applied Economics, Taylor & Francis Journals, vol. 51(35), pages 3864-3875, July.
    2. Wei, Hao & Tu, Yue & Zhou, Peng, 2023. "Technical barriers to trade and export performance: Comparing exiting and staying firms," Economic Modelling, Elsevier, vol. 126(C).
    3. Philipp Ehrl, 2021. "Live large or die young: subsidized loans and firm survival in Brazil," Empirical Economics, Springer, vol. 61(6), pages 3479-3503, December.
    4. 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.
    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. Kenichi Kashiwagi & Erina Iwasaki, 2024. "Industrial linkage, vertical integration and firm performance: evidence from textile and garment industry in Egypt," Quality & Quantity: International Journal of Methodology, Springer, vol. 58(1), pages 803-828, February.
    8. Afrifa, Godfred Adjapong & Gyapong, Ernest & Monem, Reza M., 2018. "Product differentiation, market dynamics and the value relevance of trade payables: Evidence from UK listed firms," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(3), pages 235-253.

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