Corporate Governance and Trade Credit: International Evidence from Board Reforms

Drawing on current literature and our simple external financing model, we hypothesize a negative relationship between internal governance quality and supplier financing. This relationship is expected to intensify among firms with weak internal governance, those in countries with strong external governance and financing mechanisms, and financially fragile firms facing increased financing needs, financial constraints, demand uncertainty, and competition. Using a decade of data surrounding governance-enhancing board reforms in 38 countries, our difference-in-differences analyses strongly support these predictions. Improved internal governance reduces reliance on supplier financing and payables manipulation for signaling and opportunistic purposes, leading to better investment decisions and firm performance.