Extending trade credit as socially responsible companies: evidence from the COVID-19 pandemic

Abstract

Purpose The paper investigates companies’ trade credit decision-making and the impact of corporate social responsibility (CSR) on these decisions during the COVID-19 crisis. The study aims to expand the knowledge about the determinants of trade credit issuance beyond the factors that are normally found in the short-term working capital literature. Design/methodology/approach This study constructs an empirical study based upon several strands of literature, including crisis management, corporate social responsibility (CSR) and morality as well as financial working capital literature. Using international evidence during the COVID-19 pandemic, this study applies a difference-in-difference analysis to examine the effect of CSR on firms’ trade credit extension and the corresponding operating performance. Findings The results suggest that while firms reduce trade credit extension when facing economic uncertainty during the crisis, firms with strong CSR performance are more likely to extend trade credit due to moral considerations than those firms with weak social performance. These effects are more pronounced among firms with less financial constraints and a high level of cash, and in countries with weak institutions and stricter policies in response to COVID-19, where morality and voluntary socially responsible actions are more relevant. In addition, our results support the business relationship motivation that such “in-kind financing” to their customers allows firms to secure future business opportunities, hence better future operating performance such as higher market share and operating profit margin. Originality/value This paper fulfills a relatively unaddressed area of research examining firms’ decisions to extend trade credit during a global crisis that harmed businesses across all industries and that created worldwide financing constraints.