Trade Credit Financing and Sustainability Performance: Evidence from Indian Firms

Abstract

TCF, which has been defined as the granting of credit to commercial enterprises along an enterprise supply chain, allows firms to alleviate cash flow constraints and take advantage of working capital. TCF is gaining traction in India as companies try to manage financial frugality with sustainability aspirations. This study explores the influence of trade credit financing (TCF) on firms’ sustainability performance index (SPI) in India. Employing data from Indian firms publicly traded on the Bombay Stock Exchange from 2015 to 2023, demonstrate a positive and statistically significant association between TCF participation and SPI. Trade Credit Financing (TCF), is a dummy variable set to 1 if a firm’s annual report contains keywords related to trade credit financing, such as “accounts receivable financing,” “trade credit,” or “supplier financing.” Another key variable is the Sustainability Performance Index (SPI), which represents firms’ sustainability performance scores obtained from Bloomberg. TCF mitigates financial restrictions and enhances operational visibility, which enhances the SPI. The findings are robust to other measures of TCF and SPI and are confirmed after controlling for endogeneity concerns. TCF helps foster sustainable business practices by covering financial and transparency aspects. The results provide statistical significance for both channels, highlighting that TCF is a driver of sustainability. This research adds to the literature on sustainable finance by emphasising the use of TCF in advancing sustainability in emerging markets. TCF is, therefore, a key enabler of sustainability through lowering financial barriers and enhancing the transparency of operations. These findings are consequential to decision-makers and practitioners balancing financial and sustainability objectives.