The Impact of Offering Trade Credit on Firms' Profitability

The amount of accounts receivable represents a large portion of firms' investment. Thus, the aim of this article is to investigate the relationship between the investment in accounts receivable and firms' profitability. In addition, we investigate the impact of trade credit motives (commercial, operational, and financial) on the relationship between accounts receivable and profitability. The results show that firms can increase their profitability by investing in accounts receivable; this effect is greater in firms with a highly volatile demand. Furthermore, we find that firms that invest higher than the average firms in the industry are more profitable.