Complementarity Between Supply and Demand of Trade Credit in Firm Performance: Evidence from Europe

Our study investigated the interaction of credit from suppliers (trade payables) and credit given to customers (trade receivables) in order to better understand how the reliance on credit from suppliers and credit given to customers interact with each other to affect firms’ performance. Using a sample of 26,731 firm-year observations from 28 European countries over the period 2008–2017, we found new empirical evidence that both trade payables and trade receivables have a more positive effect on firm performance than would be the case if their individual effects were considered in isolation; thus, a complementarity may exist between the credit from suppliers and credit given to customers, affecting firms’ performance. Interestingly, our results showed greater sensitivity to certain firm-specific characteristics. In particular, the interaction effect of trade payables and trade receivables was stronger for young firms, firms with growth potential, and financially constrained firms. Further analysis also revealed that the interaction effect of trade payables and trade receivables was stronger for small and medium-sized enterprises (SMEs), and firms in countries with French/German legal origins, or countries with more debt-reliant bank-based economies.