Short-term debt and trade credit: Evidence on a non-linear relationship

Abstract

The literature on the relationship between bank credit and trade credit is mixed between the substitution and complementarity effects. The extant studies only investigate the linear relationship between the two factors, thus missing some important implications from any non-linear relationship that could exist. The current study investigates the linear and non-linear impacts of short-term bank debt on trade credit, using a sample of 622 listed non-financial firms in Vietnam from 2011 to 2019. The research results contribute to reconciling the mixed findings about the impact of short-term debt on trade credit by showing that short-term debt tends to reduce the use of the latter at high levels of short-term debt. However, at lower levels, the substitution effect is weaker. Together, the pattern between the two factors depicts an inverted U-shaped relationship. This implies that in the relation between the two short-term funding sources, the levels of short-term debt could indicate financial constraints firms face when accessing capital markets.