Operational Risk, Market Power, and Speed of Achieving Optimal Tread Credit

A firm’s tendency to supply and demand an optimal amount of trade credit stems from the fact that deviation from this level can negatively affect the firm value. Firms are constantly looking for an optimal level of trade credit; however, the associated costs slow down the adjustment process. Nevertheless, there are some factors that can speed up the achievement of an optimal trade credit. This study investigated the effect of operational risk and firm’s market power on the speed of achieving the optimal trade credit ratio in 128 listed companies in Tehran Stock Exchange (TSE) for the period of 2005-2020. Panel data and system GMM estimators were used for this purpose. The results showed that the sample firms reduced around 65% (39%) of the gap between the supply (demand) of the actual trade credit and the optimal level every year. In other words, they could correct half of the deviation of the supply (demand) of trade credit within about 8 months (17 months). In addition, the research findings indicated that an increase in the operational risk and firm’s market power enhanced the speed of achieving the optimal level of trade credit. The supplementary analyses confirmed the main research findings and were consistent with the trade-off theory.