Trust and SME short-term financial policy. European evidence
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 5 July 2024
Issue publication date: 17 January 2025
Abstract
Purpose
Does societal trust influence short-term financial management? Recent papers uncover the importance of societal trust for financial management in specific countries and large firms. Our paper aims to provide a comprehensive analysis of the impact of societal trust on short-term financial policies of SMEs, namely working capital management and cash holdings.
Design/methodology/approach
We rely on a sample of 14,711 privately owned medium-sized manufacturing firms from 26 European countries with a sample period between 2014 and 2020. For estimation, we use pooled OLS and hierarchical linear models and control for several firm-specific and country-specific known determinants of short-term financial management. Moreover, our results are robust to the specific measurement of trust, financial constraints, and corruption.
Findings
We show a positive relationship between trust and working capital requirements investment and a negative relationship between trust and the level of cash holdings. Moreover, we show that trust attenuates the negative impact of being a financially constrained firm and the positive impact of national perceptions of corruption. Finally, in higher trustworthy environments, firms operate with relatively higher inventories and relatively lower trade credit granted and obtained.
Research limitations/implications
Results suggest that policies supporting societal trust may also foster business development and that when dealing with clients or suppliers from different trustworthy environments, firms may have to adapt their business models to incorporate trust differences between business environments.
Originality/value
Firstly, the comprehensive analysis of the impact of trust on working capital management and cash holdings while controlling for different firm-level and country-level known determinants of short-term financial management. Secondly, it addresses a European sample of unquoted, medium-sized firms. Thirdly, it studies the combined effect of trust and financial constraints and trust and corruption.
Keywords
Acknowledgements
We thank the Editor and the anonymous reviewers for their constructive feedback and insightful suggestions. All errors are our own.
This work has been funded by national funds through Fundação para a Ciência e a Tecnologia, I.P., Project UIDB/05037/2020 with DOI 10.54499/UIDB/05037/2020.
Corrigendum: It has come to the attention of the publisher that the article Gama, P.M. and Pedroso, E. (2024), “Trust and SME short-term financial policy. European evidence”, International Journal of Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJMF-12-2022-0557, displays Elsa Pedroso's affiliations incorrectly. This error was introduced during the submission process. University of Coimbra, Coimbra, Portugal and Faculty of Economics, CeBER, University of Coimbra, Coimbra, Portugal has now been corrected to Faculty of Economics, CeBER, Univ Coimbra, Coimbra, Portugal and Coimbra Business School, ISCAC, Polytechnic University of Coimbra, Coimbra, Portugal. The authors sincerely apologise for this error and for any misunderstanding.
Citation
Gama, P.M. and Pedroso, E. (2025), "Trust and SME short-term financial policy. European evidence", International Journal of Managerial Finance, Vol. 21 No. 1, pp. 67-86. https://doi.org/10.1108/IJMF-12-2022-0557
Publisher
:Emerald Publishing Limited
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