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, 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 using an empirical strategy that leverages: (i) an exogenous shock imparted by the French Government's intervention to impose a ceiling on trade credit duration; (ii) a triple difference-in-differences identification strategy; and (iii) Synthetic Controls (SC). By considering the 60-days ceiling coverage and SC construction requirements, we identify four French retail sectors as our main sample. Among them, in the post-regulation period, the hardware retail sector firms' on average exhibited a significant 16% decline in trade credit usage. Correspondingly, these firms also displayed a significant 11% decline in inventory level. In the remaining three sectors, we find mixed results in the main sample. All the four sectors, however, show consistent support for a casual link between trade credit and inventory in a sub-sample compiled using a stringent 90-days ceiling criterion. Collectively, our findings offer direct evidence that trade credit is an indispensable financing source for inventory procurement. Finally, in the post-regulation period, the hardware retailers exhibited a 15.5% decline in revenue and 3.5% reduction in gross profit. This cautions policy-makers that regulations limiting the use of trade credit may have unintended consequences on downstream firms, and may harm overall supply chain efficiency.

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