Trade credit, firm profitability, and financial constraints: Evidence from listed SMEs in East Asia and the Pacific

Hoang, Cong Huan; Xiao, Qin; Akbar, Saeed

Abstract

The principal objective of this study is to investigate the non-linear association between trade credit and profitability of small and medium enterprises (SMEs). Moreover, this paper analyses whether the above relationship varies according to financial constraints of SMEs.
The authors use panel data methodology to conduct investigations for a sample of 1,509 non-financial listed SMEs from nine countries or territories located in the East Asia and Pacific region, namely, China, Vietnam, Malaysia, Thailand, Japan, South Korea, Taiwan, Singapore and Hong Kong, over the period from 2010 to 2016.
This study indicates that trade credit receivable (TCR) and trade credit payable (TCP) have an inverted U-shaped relationship with SMEs’ profitability, which implies the existence of an optimal trade credit level that balances between costs and benefits to maximize their profitability. This result suggests that managers should try to keep the level of trade credit investment as close to the optimal point as possible to avoid the case that their profitability reduces when they move away from this point. Moreover, this study also finds that the optimal trade credit level is sensitive to the financial constraints of SMEs. In particular, optimal level of more financially constrained firms is lower than that of less financially constrained firms.
A number of contributions that this study makes to the existing literature are presented as follows. First, the paper takes account of the possible presence of a concave relationship between trade credit and SMEs’ profitability, largely ignored by the existing empirical literature. Second, it demonstrates this association in terms of both aspects of trade credit, including trade credit receivable (TCR) and trade credit payable (TCP). Third, the study investigates the effect of the different level of financial constraints faced by SMEs on the relationship between trade credit and their profitability.

Citation

Hoang, C. H., Xiao, Q., & Akbar, S. (2019). Trade credit, firm profitability, and financial constraints: Evidence from listed SMEs in East Asia and the Pacific. International Journal of Managerial Finance, 15(5), 744-770. https://doi.org/10.1108/IJMF-09-2018-0258

• Journal Article Type: Article
• Acceptance Date: Jan 21, 2019
• Online Publication Date: Apr 17, 2019
• Publication Date: Apr 17, 2019
• Deposit Date: Jan 23, 2019
• Publicly Available Date: May 18, 2019
• Journal: International Journal of Managerial Finance
• Print ISSN: 1743-9132
• Publisher: Emerald
• Peer Reviewed: Peer Reviewed
• Volume: 15
• Issue: 5
• Pages: 744-770
• DOI: https://doi.org/10.1108/IJMF-09-2018-0258
• Keywords: Small and Medium Enterprises (SMEs); Trade credit; Profitability; East Asia and the Pacific; Financial constraints
• Public URL: https://hull-repository.worktribe.com/output/1225236
• Publisher URL: https://www.emerald.com/insight/content/doi/10.1108/IJMF-09-2018-0258/full/html
• Contract Date: Jan 23, 2019