The Hidden Asset: How Social Capital Influences Trade Credit in Private Firms

Abstract

This paper examines the relationship between social capital and trade credit among private firms headquartered in 111 developing economies. The paper shows that firms headquartered in countries with higher levels of social capital receive more trade credit from their suppliers and extend more trade credit to their customers than firms headquartered in countries with lower social capital. The findings remain robust after controlling for a wide range of firm-level and country-level characteristics. Additional analyses show that the relationship between social capital and trade credit is more pronounced in countries with strong institutional environments. The results further indicate that specific dimensions of social capital, particularly interpersonal trust and social tolerance, are positively associated with both supplier-provided and firm-provided trade credit. Overall, the findings highlight the importance of informal institutional environments in facilitating relational financing among private firms operating in developing economies.