Employment protection and firms' reliance on trade credit: international evidence

Purpose Employment protection legislation (EPL) constitutes a salient institutional source of labor adjustment rigidity, yet firms' financing responses within the supply chain remain underexplored. Drawing on financing advantage theory and operations–finance research on transaction-embedded supplier financing, this paper examines how firms' reliance on trade credit varies with major changes in EPL strictness in a large international sample. It further investigates the operational, financing, and informational mechanisms underlying this association, as well as firm- and country-level boundary conditions that moderate its strength. Design/methodology/approach Based on 315,625 firm-year observations across 29 countries during 1991–2019, this study constructs a reform-based country-year measure of major changes in EPL strictness and estimates fixed-effects panel models. The analysis further examines three mechanisms – operational rigidity, financial constraints, and information asymmetry – and investigates how firm-level characteristics and country-level institutional environments condition the association between EPL reforms and firms' reliance on trade credit. Findings The results suggest that (1) stricter EPL is associated with firms' greater reliance on trade credit; (2) this effect is intensified under greater operational rigidity, tighter financial constraints, and more severe information asymmetry; (3) at the firm level, the association is stronger for firms with weaker market power and greater growth opportunities; (4) at the country level, the association is more pronounced in countries with weaker creditor protection, higher labor unionization, lower political risk, and greater social embeddedness. Originality/value This research advances the literature on the operations–finance interface, trade credit, and employment protection by linking national labor-market regulation to firms' use of transaction-embedded supplier financing. By showing that supplier-provided trade credit becomes more salient under EPL-related labor adjustment rigidity, the study highlights an interfirm financing channel through which firms respond to labor-market institutions.