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1. Introduction
Trade credit, a common transaction method among small- and medium-sized enterprises (SMEs), has been recognized as important in the literature (Rajan and Zingales, 1995; Wilson et al., 2000). For example, previous studies have emphasized the existence of trade credit as a response to capital market imperfections and financing constraints (Garcia-Teruel and Martinez-Solano, 2010; Schwartz, 1974).
Trade credit is a mutual agreement between two parties to delay payment (Mian and Smith, 1992), allowing the buyers to purchase goods on account (without paying cash on delivery), paying the supplier at a later date. The buyer regards this as a current liability on the passive side of the balance sheet. From the supplier’s perspective, the agreement is considered an investment in current assets in terms of accounts receivable on the active side of the balance sheet. The supplier earns a return on the investment as the buyer must pay the cost of capital financing (Martinez-Sola et al., 2014). However, investment in accounts receivable is, like any other investment, linked to risk and return and may therefore influence firm performance in terms of growth, profitability, and value (Pike, 2001). If the marginal income from trade credit supply equals its marginal cost, then this condition is assumed to constitute an optimal credit level or period (Emery, 1984). Consequently, firms can improve their performance by giving trade credit (Deloof, 2003).
Research in the trade credit field can generally be classified into three strands. While the first strand focuses on the demand side, the second puts more emphasis on the supply side of trade credit (e.g. Deloof and Jegers, 1999; Ng et al., 1999; Petersen and Rajan, 1994, 1995; Pike et al., 2005; Wei and Zee, 1997). The third research strand considers trade credit from both sides (Petersen and Rajan, 1997).
In line with the second strand, this study focuses on the supply side, investigating the impact of trade credit in terms of accounts receivable as a current investment in sales growth among Swedish SMEs. The Swedish context is that of a small, export-oriented open economy with universal social benefits funded by high taxes (Swedish Central Bank, 2013). Moreover, almost 99 per cent of all Swedish firms are SMEs, and they employ approximately 70 per cent...