Trade Credit Financing Under Competition and Its Impact on Firm Performance in Supply Chains

Abstract

Using a dyadic panel data set that links U.S. suppliers with their major buyers, we study how trade credit responds to various types of competition in supply chains, as well as the impact of trade credit on firm performance. We find that suppliers with smaller market share are associated with more trade credit, confirming that suppliers with weak market power use trade credit as a competitive tool. Next, we find that buyers with larger market share are associated with more trade credit, whereas suppliers selling to a concentrated buyer base are associated with less trade credit; by differentiating competition in buyers’ markets from competition between supply chain partners, we show that the two types of competition have different impacts on trade credit. In studying the impact of trade credit on firm performance, we make the distinction between an industry-average trade credit and an individual supply chain’s deviation from such an industry average. When suppliers offer trade credit at their industry-average level, this action facilitates trade and, thus, is positively associated with both parties’ performance; conversely, when suppliers are more aggressive in their trade credit strategy than the industry average, then the excess trade credit is negatively associated with buyer performance. One managerial message from our research is that buyers should be cautious about trade credit far exceeding the industry-average level. The online appendix is available at https://doi.org/10.1287/msom.2017.0640 . This paper has been accepted for the Manufacturing & Service Operations Management Special Issue on Interface of Finance, Operations, and Risk Management.

Who pays you to be green? How customers' environmental practices affect the sales benefits of suppliers' environmental practices

“…Due to the nature of the supplier-customer data, the sample usually consists of plenty of dyads but a rather short "T" (i.e., a small number of observations per dyad). For example, the average number of observations per dyad in Chu et al (2018) is 4.0 and in Lee et al, (2018) it is 3.7. These numbers are considerably smaller (lower than a 1:2000 ratio) than the number of dyads in their samples (8,645 and 7,274).…”

Introduction to the Special Issue on Research at the Interface of Finance, Operations, and Risk Management (iFORM): Recent Contributions and Future Directions

“…Four papers in the special issue study problems related to the use of trade credit or buyer financing: , Deng et al (2018), Lee et al (2018), andTang et al (2018). The popularity of this topic is not surprising, in light of the fact that trade credit and buyer financing requires deep understanding of supply chains, procurement contracting, and financial contracting.…”

“…A very interesting empirical study of the impact of trade credit financing on firm performance in supply chains is the second paper in this special issue: "Trade Credit Financing Under Competition and Its Impact on Firm Performance in Supply Chains" (Lee et al 2018). The key OM feature in this paper are supply chain links, while the key finance feature is the amount of trade credit.…”

The Role of FinTech in Mitigating Information Friction in Supply Chain Finance

“…Compared to the aforementioned papers in the supply chain finance literature, which often focuses on the relationship between importers (buyers) and exporters (suppliers), instead of banks and the two parties, our paper focuses on how fintech enables banks to make better lending and investment decisions. 6 We refer readers to Lee, Zhou, and Wang (2018) and Chod, Lyandres, and Yang (2019) for recent summaries of the trade credit literature.…”