IS LABOR AN IMPORTANT ASPECT OF CORPORATE SOCIAL RESPONSIBILITY FOR TRADE CREDIT: INTERNATIONAL EVIDENCE?
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Academics and practitioners have given employee treatment a lot of thought. Fair employee treatment mitigates the conflicts between the firm and its employees, hence increasing employees’ commitment and loyalty toward the firm. It also reduces the employee turnover ratio and increases hiring efficiency (e.g., Zingales, 2002; Cao and Rees, 2020). Additionally, labor-friendly practices increase innovation (Mao et al., 2019), firm productivity (Darrough et al., 2019), and sales (Fauver et al., 2018). However, employee treatment may result in conservative financial policies to protect the interests of the firm’s employees. For instance, Bae et al. (2010) show that fair employee treatment is associated with lower leverage. Ghaly et al. (2015) document a positive relation between cash holdings and employee treatment. Saeed (2021) shows that firms that treat well their employees distribute less dividends. The objective of this thesis is to add to this strand of literature by examining the employee treatment’s impact on an important component of the firm’s working capital namely trade credit. We argue that firms with fair employee treatment are less likely to extend trade credit. The intuition behind this is that employee treatment, which increases innovation and productivity, fosters the firm’s growth. In order to maintain this growth, firms tend to invest less in working capital and more in long-term profitable investments, which leads to fewer trade-credit extensions. We also argue that managers may invest in employee-friendly practices, not in order to ensure the sustainability of the firm but in order to hide their wrongdoings (Landier et al., 2007; Cronqvist et al., 2009; Ben-Nasr and Ghouma, 2018). Therefore, entrenched managers are less concerned with the advantages of extending trade credit to their customers (e.g., increasing customer loyalty and sales), hence are less likely to give trade credit to their customers. However, prior literature shows that employee-friendly firms enjoy lower financing costs (e.g., Verwijmeren and Derwall, 2010) and are less financially constrained, hence are more able to extend trade credit to their customers. Additionally, firms that treat their employees well enjoy having a good reputation and trust with various stakeholders such as customers. Since trust is a key element of trade credit. Employee-friendly firms are expected to extend trade credit to their customers. Using a sample of companies from 45 countries over the 2003-2018 period and the workforce score from ESG, we find a positive association between employee treatment and trade receivables. Our findings are robust to utilizing alternative proxies of trade receivables and to the use of the instrumental variable approach to address the endogeneity issues.
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