Trade Credit, Corporate Business Strategy and Corporate Life Cycle

Abstract

This paper examines the association between trade credit and a business strategy at various stages of the corporate life cycle. Using the Miles and Snow (1978, 2003) typology to analyse 53,011 firm year-observations from 1987 to 2019, we find a positive correlation between business strategy and trade credit. Our findings indicate that defender (prospector) type firms have less (more) trade credit than analysers. When analysing this relationship with the corporate life cycle, we find a strong negative correlation between trade credit and the defender at the introduction/decline stage, but a positive relationship during the growth/maturity stage. For the interrelationship between prospector-type strategy and trade credit, our results show a positive association throughout the introduction/decline stage and a negative relationship during the growth/maturity stage. Our results remain robust using different measures of trade credit and corporate business strategy, as well as several endogeneity tests, including firm fixed effects (FE), propensity score matching (PSM), entropy-balancing, and generalized method of moments (GMM). Overall, our findings indicate that corporate business strategy is a useful instrument for analysing client trade credit at various stages of the corporate life cycle.

Keywords: Trade credit, business strategy, corporate life cycle, propensity score matching, Entropy balancing