Investigating the Effect of Trade Credit on Cost Stickiness

The purpose of this study is to investigate whether trade credit can play an effective role in reducing the stickiness of costs or not? Also, can agency costs have a moderating effect on this potential relationship? In other words, can trade credit regarded as a control mechanism and considers as a governance mechanism?

Panel data regression was used to analyze the data and test the hypotheses. Data was refinement based on the requirement and availability of all variables. Therefore, data related to 185 companies listed on the Tehran Stock Exchange in a nine years’ period leading to 2020 was gathered.

The results of the study did not reject the research hypothesis that there is a significant effect of trade credit in reducing the stickiness of administrative and sales costs.  It also posits that when sales decrease, trade credit can accelerate cost reduction and prevent cost stickiness. Also, this effect can appear stronger in companies with higher agency cost.

The research results show that commercial creditors try to prevent the opportunistic behaviors of customers in line with their interests. The results also show sensitivity of creditors to inefficient use of resources with their available tools and collecting customers’ information.

This study showed that trade credit acts as a control mechanism. Therefore, corporate governance can require the manager in any business unit to make part of the financing through trade credit. Monitoring and directing the manager's behavior by creditors can benefit all stakeholders, especially shareholders who are affected by the conflict of interest.