The Impact of Trade Credit Provision on Retail Inventory: An Empirical Investigation Using Synthetic Controls

Abstract

Trade credit is an important source of short-term financing and an integrated part in supply contracts. Although a number of theories have been proposed on how trade credit could improve supply chain efficiency by encouraging downstream operational investments, such as inventory, casual study on the impact of trade credit on operational decisions are scarce. In this study, we examine the impact of trade credit on inventory decisions at the retailer level using an empirical strategy that leverages: (i) an exogenous shock imparted by the French Government's intervention to impose a ceiling on trade credit repayment; (ii) a triple difference-in-differences identification strategy; and (iii) Synthetic Controls. We find that the retail sectors which received significantly less trade credit due to the French regulation exhibited a sizeable decline in inventory. In particular, in the hardware retail sector, the trade credit usage, as measured by payable days, declined 16%, which in turn caused an 11% decline in inventory days. Put differently, a 1% reduction in trade credit led to a 0.67% decrease in inventory. Further, these retailers also exhibited a 15.5% decline in revenue and 3.5% reduction in gross profit. Collectively, our findings offer direct evidence that trade credit is an indispensable financing source for inventory procurement, and thus caution policy-makers that regulations limiting the use of trade credit may harm overall supply chain efficiency.

Keywords: OM-Finance Interface, Trade Credit, Inventory, Empirical OM, Synthetic Controls