Does trade credit boost firm performance?

Abstract

Dongya Li, Yi Lu, Travis NG, and Jun Yang examine whether trade credit indeed boosts firm performance. Their 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, they 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. 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.