ESG performance and trade credit in European firms: the moderating role of institutional factors

What the paper says

Purpose To investigate the relationship between corporate environmental, social and governance (ESG) performance and trade credit, with a particular focus on the moderating role of institutional variables. Design/methodology/approach An empirical analysis was conducted using a comprehensive panel dataset of European listed firms included in the STOXX 600 Index from 2015 to 2022. The research employs panel regression techniques, with an ordinary least squares estimation with robust standard error and the application of the Heckman two-stage test to address the possible issue of sample selection bias. Findings Higher ESG performance improves trade credit use by fostering supplier trust and reducing information asymmetry. Crucially, this relationship is moderated by the institutional environment. Firms operating in countries with a less efficient legal system and/or higher corruption rely more heavily on their ESG performance to secure trade credit, indicating a compensatory effect. Practical implications Financial managers in countries with weak institutional frameworks should prioritise their ESG performance, as it serves as a high-impact signal for accessing trade credit. For policymakers, the results stress the importance of integrating sustainability indicators and institutional reforms into policies that promote access to trade credit. Originality/value This article offers novel evidence by highlighting the dual role of ESG performance as both a general signal of creditworthiness and a compensatory mechanism in institutional contexts characterised by weak rule of law and high corruption. It extends the trade credit literature by integrating firm-level ESG factors with country-level institutional quality.