Firm’s Resilience to Financial Constraints: The Role of Trade Credit

Isaac Marcelin and Daniel Brink
May 2020

We propose to test hypotheses on the effects of trade credit on financially constrained firms using a rich new data set on South African firms. We analyse cross-industry differences in external liquidity needs. We test whether liquidity or cash-strapped firms in industries with higher dependence on trade credit financing exhibit higher profitability, rates of growth in investment, employment, and industry value added. We expect a resilience-enhancing liquidity effect that is stronger among firms that are financially constrained and that depend heavily on liquid funds. Furthermore, firms with greater barriers to external finance will fall back on trade credit to stabilize rates of profits. Finally, financial constraints and the extent of trade credit utilisation and the firm performance are assumed highly interdependent.

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