The Impact of Geopolitical Risk on Trade Credit

ABSTRACT In light of escalating global geopolitical tensions, understanding how firms respond to external shocks has become a critical issue for policymakers, corporate managers, and investors. This study investigates the impact of geopolitical risk (GPR) on firms' reliance on trade credit (TC)—an essential form of short‐term financing, particularly when access to formal finance is constrained. Utilising a comprehensive dataset of 30,704 listed firms across 42 countries from 1990 to 2023, we empirically show that higher levels of GPR are associated with increased use of TC. We identify financial constraints as a key mechanism linking GPR to TC reliance and reveal that this effect is more pronounced among firms with strong environmental, social, and governance (ESG) performance, while it weakens for firms facing high cash flow risk or operating in highly competitive markets. This study offers novel empirical evidence on the strategic role of trade credit in crisis adaptation. Additionally, it offers original insights into the role of geopolitical threats (GPT) in shaping firm‐level financial behaviour and highlights the importance of ESG strength in enhancing financial resilience during heightened levels of GPR. The results carry practical implications for corporate managers, policymakers, and stakeholders, highlighting trade credit's critical function during periods of geopolitical uncertainty.