Does Supply Chain Visibility Enhance Trade Credit? Evidence through Operational Improvements

Scholars and practitioners believe that supply chain visibility (SCV) is critical to effective supply chain management, enabling firms to lower operational costs and enhance efficiency. In this research, we investigate the impact of SCV on firms’ trade credit, a widely neglected yet critical supply chain resource that reduces costs and fuels business growth. Relying on disclosures specified by the 2010 Dodd-Frank Act for supply chain–related conflict minerals, we investigate how a firm’s SCV might lead to higher trade credit received from its suppliers. We adopt a large sample of US firms during 2014–2016, and show that firms with higher SCV actually gain more trade credit from their suppliers. Specifically, customers with higher SCV receive 5.84% more trade credit, which is equivalent to an average of US$39 million. Our evidence indicates that SCV enhances trade credit through improving cost management and operational efficiency, leading to higher creditworthiness of the firms. We also demonstrate that SCV has a more significant effect on trade credit for customers with higher financial constraints and product market uncertainty, indicating that weak and vulnerable firms benefit more from SCV. We further find that SCV leads to less downstream trade credit, indicating that suppliers with higher SCV rely less on trade credit as a mean to attract or capture customers. Overall, our research shows that SCV enhances supply chain finance, which can further be a driver of shareholder value.