Stakeholder Orientation, Customer Concentration, and Trade Credit Provision

This paper examines whether stakeholder orientation affects firms’ trade credit policy and whether the relation between stakeholder orientation and trade credit provision is affected by customer concentration. Trade credit is the deferment of payments for purchases, and it can benefit customers by providing then with short-term financing. Stakeholder orientation allows managers and directors to incorporate the interests of non-shareholder stakeholders into making business decisions, for example, by extending trade credit to customers. We use the staggered enactment of state-level constituency statutes in the U.S. as an exogenous shock to stakeholder orientation to investigate the relation between stakeholder orientation and trade credit provision. The difference-in-differences analysis reveals that compared to the suppliers unaffected by the constituency statutes, those affected increase trade credit provision to a greater extent. Furthermore, we find that this relationship is more salient for suppliers with a lower customer concentration, indicating that suppliers are better able to extend trade credits when they have a stronger bargaining power towards customers. We further find that the increase in trade credit attributable to the rule change is associated with the enlarged customer base. Lastly, the additional analysis on dynamic effect of treatment shows that our findings are unlikely to be driven by pre-existing trends in trade credit provision. Combined, this study implies that enhanced stakeholder orientation significantly affects firms’ decision making process.