DETERMINANTS OF TRADE CREDIT SUPPLY: EVIDENCE FROM SOUTH ASIAN EMERGING ECONOMIES

Abstract

Trade credit is a form of short-term credit that suppliers extend to their clients, allowing them to purchase goods or services on credit with the balance payable later. For many firms, trade credit serves as a vital source of financing. Drawing upon financial advantage theory, commercial motive theory, and operating flexibility motive theory, this study investigates the determinants of trade credit supply in three South Asian emerging economies: Pakistan, India, and Bangladesh. Using fixed effects regression on a panel dataset of 4,417 firm-year observations from 2009 to 2020, sourced from DataStream, the findings reveal that suppliers offering high-quality products extend credit terms to allow customers to verify product quality before payment. In contrast, larger and more established firms rely on their reputations, reducing the need to extend credit guarantees. The results support the price discrimination theory of trade credit, suggesting that suppliers use trade credit to differentiate prices among customers. Additionally, firms that achieve sales growth or possess sufficient internal resources tend to exhibit opportunistic behaviour by reducing the provision of credit to customers. The identified determinants exhibit strong consistency among Pakistani and Indian firms, aligning with the overall sample results. However, Bangladeshi firms demonstrate divergent patterns, although some findings are consistent with trade credit studies in other emerging markets. This research enhances the understanding of trade credit supply by developing a theoretical framework, identifying key determinants, validating and refining existing theories, and contextualizing findings within specific economies. Understanding the factors influencing accounts receivable provides crucial practical insights that can affect a firm’s financial performance, liquidity, risk management, and strategic decision-making. By leveraging these insights, firms can optimize operations, improve cash flow, and build robust customer relationships, thereby driving sustainable growth and profitability.