The Moderating Role of Firm Tangibility on Bank Credit and Trade credit: An Indian MSMEs context

Abstract

Access to credit plays a pivotal role in the growth trajectory of firms; however, Micro, Small, and Medium Enterprises (MSMEs) in emerging economies face myriad challenges that hinder their full potential. Therefore, The primary objective of this research is to explore the association between bank credit and trade credit, considering the moderating influence of firm tangibility within the realm of Indian manufacturing MSMEs. Using a robustly balanced panel dataset comprising manufacturing MSME firms over a decade from 2014 to 2023, the study employs a Fixed Effects model to analyse the data meticulously. The study's primary findings indicate a negative association between bank and trade credit supporting a substitution effect. Additionally, the study found that the relationship between bank credit and trade credit is moderated by tangibility, which reduces the adverse effect and turns the substitution effect into complementary. Despite an extensive literature review, the authors did not find substantial evidence of the moderating effect of firm tangibility on the dynamics between bank credit and trade credit. Additionally, limited research has been conducted on the relationship between bank credit and trade credit within the context of emerging economies, further underscoring the novelty and significance of this study. The study contributes to the existing literature and helps policymakers, governments, business owners and researchers.