Trade Credit as Quality Signal: An International Comparison

Abstract

This paper tests the product quality theory of trade credit with 1993 year‐end data for Germany, Japan, United Kingdom, and United States. The results are inconsistent with the transaction and financing theories of trade credit, since the evidence indicates that firms with high sales relative to their assets and firms with larger sizes extend less credit. However, the quality theory of trade credit is not uniformly supported by the data. Moreover, the evidence suggests wide variations of trade credit policies across countries and industries.

The Determinants of Trade Credit Demand: An Empirical Study from Cameroonian Firms

“…Trade credit is used as a means of avoiding such information asymmetries related to default risk of the buyer. Smith's model has largely inspired other researchers (Long et al, 1993;Lee and Stowe, 1993;Deloof and Jegers, 1996;Wei and Zee, 1997;Emery and Nayar, 1998;Pike et al, 2005;Pindado and Bastos, 2007). Informational asymmetry is not about the quality of the borrower but about the quality of the product sold by the supplier.…”

A trade credit explanation based on the agency theory, legal factors and credit contagion

“…The first objective of this research provides a complement to those theories that propose that trade credit is used to allow clients to check the quality of the product bought before paying for it, as a consequence of ex-ante asymmetric information between suppliers and buyers (Smith, 1987). Starting from this argument, also tested by Lee and Stowe, 1993;Long et al, 1993;Deloof and Jegers, 1996;Wei and Zee, 1997;Pike et al, 2005, we go one step further by introducing an opposite effect of the asymmetric information on the trade credit extended, the moral hazard phenomenon. Since in asymmetric information conditions suppliers are unable to check the real creditworthiness of customers, they will reduce the trade credit extended.…”

“…Trade credit is one of the oldest forms of corporate financing and it continues to be very important at present; it refers to the financing provided by a seller to the client (Wei and Zee, 1997). To understand the concept of trade credit it is important to know the range of alternative credit arrangements that can occur in trade.…”

“…Although some works have recently studied trade credit using samples composed of firms from different countries (see, for instance, Wei and Zee, 1997;Demirgüç-Kunt and Maksimovic, 2001;Fisman and Love, 2003;Delannay and Weill, 2004;Pike et al, 2005;and Horen, 2005), none of them have attended to the specific importance of the creditor protection level as a factor that may mitigate supplier risk in extending trade credit. In addition, as far as we know, the quality of the accounting standards of a country have/has not been studied as a characteristic that diminishes information asymmetries between suppliers and their clients.…”

“…In this vein, Wei and Zee (1997) In another relevant paper, Horen (2005) tests for the use of trade credit as a competitiveness tool using a sample of firms from 42 developing countries.…”