Firm-level political risk and the firm’s trade credit extension

Abstract

AbstractThis paper investigates the influence of firm-level political risk on the firm’s supply of trade credit. Using a novel measure of firm-level political risk developed by Hassan et al. (2019), we find that firm-level political risk has a positive impact on the firm’s trade credit extension. We also demonstrate that our results are not driven by macro financial and political events, firm-level political sentiment and non-political risks, and macro-level economic and political factors. Our result continues to hold after addressing the potential endogeneity concern. Additionally, we find that the positive impact of political risk on trade credit extension is more pronounced for firms selling differentiated goods and services. Furthermore, we demonstrate that extending trade credit enhances firm value when a firm faces higher political risk. This paper highlights the importance of considering firm-level heterogeneity in political risk. It also contributes to the literature on the determinants of trade credit extension and deepens our understanding of the relationship between political risk, trade credit, and corporate performance.