Trade Credit and Pricing: An Empirical Evaluation

Abstract

We empirically investigate the proposition that firms charge premia on cash prices in transactions involving trade credit. Using a comprehensive Swedish panel dataset on product-level transaction prices and firm-characteristics, we relate trade credit issuance to price setting. In a recession characterized by tightened credit conditions, we find that prices increase significantly more on products sold by firms issuing more trade credit, reflecting their larger exposures to increased funding costs and counterparty risks. Our results thus demonstrate the importance of trade credit for price setting and show that trade credit issuance induces a channel through which financial frictions affect prices.

The Political Connections and Commercial Credit Financing of Privately Held Companies

“…Engbers and Rubin pointed out that once customers had overdue payments of commercial credit, suppliers would execute contract requirements according to their own trading position in such supplier-customer relationships [7], and the effect of contract execution is often protected by the local legal system. Studies have also shown that the improvement of the legal and regulatory system could help to improve the execution of contracts, which in turn would help to stimulate the provision and use of commercial credit in the course of trading [9].…”