Is government contract a driver of trade credit? The moderating role of bargaining power, financial and institutional constraints

• Published in: Cogent business & management Vol. 9; no. 1; pp. 1 - 27
• Main Authors: Ha, Tran Manh, Thang, Doan Ngoc, Dat, Luong Van, Dong, Do Phu, Hai, Nguyen Thi Hong
• Format: Journal Article
• Language: English
• Published: Abingdon Taylor & Francis 31-12-2022; Cogent; Taylor & Francis Ltd; Taylor & Francis Group
• Subjects: Accounting; Bargaining; bargaining power; Contractors; F10; financial constraints; government contract; Government contracts; Government purchasing; Hypotheses; institutional constraints; International trade; Monetary policy; Social responsibility; Suppliers; trade credit; Trade finance
• ISSN: 2331-1975; 2331-1975
• DOI: 10.1080/23311975.2022.2107743

This paper studies the effect of government contracts on trade credit by using cross-country firm-level data. Trade credit is defined as a firm's deferral of payment to its sellers when it buys material inputs. We apply the instrumental variable to take into account the endogeneity problem caused by the simultaneous relationship between government contracts and trade credit. Our empirical results prove that government contracts have negative effects on trade credit. These effects become more pronounced when firms have higher bargaining power and more severe financial and institutional constraints and are located in middle-income countries. Our results are robust for alternative measures of financial and institutional constraints. These findings have important policy implications: Contracting with the government helps firms to reduce their dependence on trade credit by switching to other cheaper forms of financing, especially in the case of firms with high bargaining power and financial and institutional constraints.