Abstract
Prior studies show that higher corporate social responsibility (CSR) performance lowers firms’ cost of debt and equity financing. Using a sample of 16,463 U.S. firm-year observations that represent more than 2455 individual firms over the 1996–2016 period, we investigate the relation between all aspects of CSR and trade credit. We provide strong and robust evidence that higher overall CSR scores are related to a higher level of trade credit. A further examination reveals positive associations between trade credit and the four CSR individual components (i.e., the environment, employee relations, community, and diversity). Taken together, our results highlight the important signaling role that CSR plays in increasing the suppliers’ willingness to extend trade credit. Our study also has an important supply chain implication that emphasizes the role of CSR in designing contracts between buyers and suppliers and the level of trade credit for buyer firms with CSR investments.
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Notes
One advantage of this specification is that it focuses on measuring the firms’ use of trade credit from an operating perspective rather than from a firm-wide financing perspective. Thus, it avoids the noise from the variations of the firms’ unique financing management policies and motives (Chen et al. 2017). We also use the book value of total assets as an alternative scaler in the robustness tests, and the results do not change qualitatively.
We also conducted a robustness test examining the relation between trade credit and cash holdings in year (t − 1), we still document a positive relation between trade credit and cash holdings in year (t − 1). To some extent, the results suggest that cash holdings drive trade credit. Then, we control for the potential influence of trade credit on cash holding by performing a 2SLS regression. Our instrumental variable on the first stage is the median value of last year’s cash holdings by industry. The second stage results show that our main results still hold.
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Appendix 1: Definitions of variables used in the main tests
Appendix 1: Definitions of variables used in the main tests
Variable | Definition | |
|---|---|---|
Main variables | ||
TRADECREDIT | = | The ratio of accounts payable to the book value of the cost of goods sold |
AP/AT | = | The ratio of accounts payable to the book value of total assets |
AP/LT | = | The ratio of accounts payable to the book value of total liabilities |
CSR variables | ||
HUM | = | The human rights net score equals the difference between number of strengths and number of concerns in the human right issues area |
EMP | = | The employee relations net score equals the difference between number of strengths and number of concerns in the employee relations qualitative issues area |
DIV | = | The diversity net score equals the difference between number of strengths and number of concerns in the diversity qualitative issues area |
COM | = | The community net score equals the difference between number of strengths and number of concerns in the community qualitative issues area |
PRO | = | The product net score equals the difference between number of strengths and number of concerns in the product qualitative issues area |
ENV | = | The environment net score equals the difference between number of strengths and number of concerns in the environment qualitative issues area |
CSR | = | The overall CSR score equals the sum of HUM, EMP, DIV, COM, PRO, and ENV |
CSR_STRENGTH | = | The total number of strengths in the human rights, employee relations, diversity, community, product characteristics, and environment qualitative issues areas |
CSR_CONCERN | = | The total number of concerns in the human rights, employee relations, diversity, community, product characteristics, and environment qualitative issues areas |
Control variables | ||
LIQUIDCOST | = | The liquidation costs calculated as the ratio of raw materials to total assets and multiplied by − 1 |
LOGASSET | = | The natural logarithm of the book value of total assets |
LOG_AGE | = | The natural logarithm of firm age plus 1 |
MKTSHARE | = | A firm’s market share calculated as the ratio of the firm’s sales over total industry sales, where industry classification is based on sic two-digit codes |
POS_CHGSALE | = | The positive changes in sales scaled by the book value of total assets |
NEG_CHGSALE | = | The negative changes in sales scaled by the book value of total assets |
ROA | = | The return on assets, calculated as the ratio of net income over total assets |
MTB | = | The ratio of the market value of equity to the book value of net assets |
PREDRATING | = | The S&P credit rating from Compustat. If the rating is not available for a firm-year, then we estimate a credit rating following Beatty et al. (2008). The larger the value of the predicted rating is, the lower the credit quality. |
LEVERAGE | = | The ratio of long-term debt and debt in current liabilities to the book value of assets |
CA | = | The ratio of noncash current assets to the book value of total assets |
CL_XTRADE | = | Current liabilities excluding accounts payable, over total assets |
CASHHOLD | = | The ratio of cash and marketable securities to total assets |
OPERATINGCYCLE | = | The natural logarithm of days of accounts receivable plus days of inventories |
TANGIBILITY | = | The ratio of net property, plant, and equipment to assets |
CSR_INDUSTRY | = | The industry-year average of the overall CSR score |
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Xu, H., Wu, J. & Dao, M. Corporate social responsibility and trade credit. Rev Quant Finan Acc 54, 1389–1416 (2020). https://doi.org/10.1007/s11156-019-00829-0
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DOI: https://doi.org/10.1007/s11156-019-00829-0