Trade Credit and Firm Performance: Evidence from Manufacturing Sector of Pakistan

Abstract

The proposed research questions whether the application of the trade credit conditions novelty contributes to the ability of the company listed in the Pakistan Stock Exchange (PSX) to increase its profitability. The article explores the association between the trade credit; as an innovative and adaptable financing instrument and the organisational performance, and the significance of the management of receivables and payables to the financial health of enterprises. Creative trade credit management processes are particularly relevant in manufacturing organisations to keep growth and competitiveness afloat. The analysis will be based on the data of PSX-listed industrial businesses between 2014 and 2023. The theoretical framework based on Tobin Q is used to conduct the econometric study with the help of EViews software, which makes use of both fixed and random effects model based on annual reports and company websites of accounts receivable and payable, and profitability. The statistics indicate that trade credit is a significant short term financial facility particularly in times of liquidity constraints. It is also shown in the findings that innovative management of trade credit receivables is crucial in enhancing profitability with the fixed effects model showing a long-run relationship between trade credit and business performance. Nevertheless, the effect of trade credit receivables on profitability can change over time in the short term.