Trade Credit and Informational Asymmetry

Smith, Janet Kiholm

doi:10.2307/2328295

Cited by 253 publications

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“…A strand of the theoretical literature on trade credit suggests that trade creditors have a competitive edge over other financial intermediaries in their ability to assess prospective debtors' credit worthiness and their ongoing activities (see, e.g., Smith (1987), Biais and Gollier (1997), and Burkart and Ellingsen (2004)). A superior monitoring ability, in combination with typically short-term maturity, will thus allow trade creditors to-in good time-adjust their credit supply to distressed debtors and thereby cap the credit losses associated with trade credit issuance.…”

Section: Testable Hypothesesmentioning

confidence: 99%

Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis

2015

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We quantify the importance of trade credit chains for the propagation of corporate bankruptcies. Our results show that trade creditors (suppliers) that issue more trade credit are more exposed to trade debtor (customer) failures, both in terms of the likelihood of experiencing a debtor failure and the loss given failure. We further document that the credit loss invoked by a debtor failure imposes a substantially enhanced bankruptcy risk on the creditors. The propagation mechanism is mitigated for creditors that are less levered, cash rich, and highly pro…table, and enhanced in R&D intense industries and during economic downturns. Terms of use: Documents inKeywords: Trade credit; Credit chains; Bankruptcy; Contagion JEL: G30; G33 Discussions with and suggestions from Roc Armenter, Mikael Carlsson, Satyajit Chatterjee, Hans Degryse, Reint Gropp, Thomas Jansson, Nobu Kiyotaki, Judit Montoriol-Garriga, Leonard Nakamura, Steven Ongena, Fabiana Penas, Gregory Udell and Jason Wei have been very helpful in improving upon earlier drafts. We are also grateful for comments from seminar participants at Sveriges Riksbank. We are indebted to Tommy von Brömsen for providing outstanding research assistance. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as re ‡ecting the views of the Executive Board of Sveriges Riksbank.y Research Division, Sveriges Riksbank.

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Section: Testable Hypothesesmentioning

confidence: 99%

Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis

2015

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“…), and ensures that any services are carried out as agreed. If the products do not meet expectations, the customer can refuse to pay and return the merchandise (Smith 1987). Trade credit may also be used by less creditworthy and constrained firms to acquire reputation and alleviate adverse selection (Antov and Atanasova 2007).…”

Section: Determinants Of Accounts Payable: Hypothesesmentioning

confidence: 99%

“…Trade credit levels may be affected by changing macroeconomic conditions (Smith 1987). Deteriorating macroeconomic conditions may provoke an increase in levels of accounts payable as firms delay paying their trade credits.…”

Section: Macroeconomic Factorsmentioning

confidence: 99%

“…First, firms choose trade credit to overcome financial constraints (Schwartz 1974), especially when credit from financial institutions is not available (Elliehausen and Wolken 1993;Petersen and Rajan 1997;Danielson and Scott 2004), or in countries with a poorly developed financial sector (Fisman and Love 2003;Ge and Qiu 2007). Second, trade credit allows firms to reduce the transaction cost related with the process of paying invoices (Ferris 1981;Emery 1987), and the verification of the quality of products before paying (Smith 1987;Long et al 1993;Deloof and Jegers 1996;Pike et al 2005). Finally, trade credit provides a higher degree of financial flexibility than bank loans (Danielson and Scott 2004;Huyghebaert et al 2007).…”

Section: Introductionmentioning

confidence: 99%

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A dynamic perspective on the determinants of accounts payable

García‐Teruel

Martínez‐Solano

2009

Rev Quant Finan Acc

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“…Financing advantage theories (Petersen and Rajan, 1997) emphasize that TC should be seen primarily as providing contractual solutions to information problems concerning product quality and buyer creditworthiness. In this vein, Smith (1987) suggests that delayed payment can facilitate exchange by allowing the buyer to verify product quality before paying. Schwartz and Whitcomb (1979), Emery (1987), Freixas (1993) and Burkart and Ellingsen (2002) propose that the existence of TC is due to a monitoring advantage that suppliers have over banks.…”

Section: Relevant Literaturementioning

confidence: 99%

Does Trade Credit Substitute Bank Credit? Evidence from Firm-level Data

Blasio¹

2005

Economic Notes

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The paper examines micro data on Italian manufacturing firms' inventory behaviour to test the Meltzer (1960) hypothesis according to which firms substitute bank credit with trade credit (TC) during money tightening. We find that inventory investment of Italian manufacturing firms is constrained by their availability of TC and that this effect more than doubles during monetary restrictions. As for the magnitude of the substitution effect, however, we find that it is not sizeable. This is in line with the micro theories of TC and the evidence on actual firm practices, according to which credit terms display modest variations over time.

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Trade Credit and Informational Asymmetry

Cited by 253 publications

References 0 publications

Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis

Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis

A dynamic perspective on the determinants of accounts payable

Does Trade Credit Substitute Bank Credit? Evidence from Firm-level Data

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