Bank Credit, Trade Credit, and Profit: Evidence from Agricultural Firms in Vietnam

Abstract

This paper investigates the relationships between bank credit and trade credit with profit of 130 agricultural firms listed on Vietnam’s stock exchanges in the period of 2008-2014. Using the GMM approach, the paper reveals inverted-U shaped (∩) relationships between bank credit and trade credit with profit. Specifically, the optimal threshold of bank credit and trade credit to total assets of the firms are 0.4173 and 0.2425, respectively. The findings mean that if the ratio of bank credit to total assets exceeds the benchmark of 0.4173, firms should consider restructuring debts to get them back to the benchmark. To do so, firms should withdraw from those business fields that are not of profession, in addition to liquiditizing unused assets to repay debts and not using short-term credit to invest in long-term projects. Firms may use of trade credit wisely when other sources of finance are lacking. In concrete, firms can increase trade credit use if the ratio of trade credit to total assets is below 0.2425. Yet, if this ratio goes beyond this benchmark, firms should get its back to this benchmark, e.g., keeping a suitable amount of inventory.