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1. Introduction
Trade credit (TC) is an informal (Degryse et al., 2016) and uncollateralized (Troya-Martinez, 2017) lending technology (Del Gaudio et al., 2018), facilitated by the vendors to ease the financing difficulties of buyers and enable raw material purchase (Fisman and Love, 2003). In the modern parlance of corporate finance, it is considered as an investment in receivables (Paul et al., 2018). Emerging out of natural business transactions (Cunat, 2006), it is guided with financial, operational/transactional and commercial motives (García-Teruel and Martínez-Solano, 2010; Dary and James, 2019).
TC is significant in sustaining global business operations in all types of markets and economies. It is a crucial source of finance for countries with weak or underdeveloped financial systems (McMillan and Woodruff, 1999; Li et al., 2018) and viewed as a major source of corporate finance in the developed world (Afrifa and Gyapong, 2017). Thus, irrespective of the status of financial market development and the non-enforceable legal nature of TC contracts (Troya-Martinez, 2017); it is a preferable choice in financing working capital and (or) acquiring sales.
Comparative assessment of TC with bank credit has been the central focus of literature in the past. The TC channel of monetary transmission is well-recognized with the potential to nullify the recessionary effect of restricted money supply (Meltzer, 1960; Schwartz, 1974; Petersen and Rajan, 1997; Nilsen, 2002). However, the literature has substantially evolved over the years with numerous theories explaining inter-firm credit transactions. For example, the financing theory explains that TC is a financing provision extended to fulfill the commercial objectives of firms (Schwartz, 1974; Mian and Smith, 1992; Petersen and Rajan, 1997). Conversely, the Marketing theory describes TC as a tool to promote sales (Nadiri, 1969; Long et al., 1993; Petersen and Rajan, 1997). The product differentiation theory explains that businesses use TC to differentiate their products from the competition (Nadiri, 1969; Blazenko and Vandezande, 2003). The quality guarantee theory postulates that TC exists because of the asymmetry of information regarding the quality of products between the suppliers and buyers (Long et al., 1993; Ng et al., 1999; Van Horen, 2007). The market power and bargaining power hypotheses explain that firms with higher market share exhibit their bargaining power by demanding more of...