Country financial development and the extension of trade credit by firms with market power

Prior research on the impact of market power on firms’ willingness to extend trade credit has produced inconsistent results, highlighting a critical gap in understanding firm behavior. This study addresses this issue by analyzing a comprehensive dataset of industrial firms across 26 countries, focusing on how the relationship between market power and trade credit depends on a country's financial development level. Firms with monopolistic power often restrict credit provision to improve cash flow. However, our findings reveal a U-shaped relationship, where monopolistic firms in countries with either underdeveloped or highly developed financial sectors are more likely to extend trade credit than those in mid-level financial systems. This highlights the moderating role of financial development in shaping the interaction between market power and trade credit behavior.