Bargaining power and trade credit: The heterogeneous effect of credit contractions

Abstract

High-bargaining-power (low-bargaining-power) customer (supplier) firms borrow (lend) more trade credit according to the literature. We study whether this bargaining power effect strengthens or weakens when credit tightens. We construct a Nash bargaining model of trade credit and show that the effect weakens if the suppliers' financing costs increase more than that of the customers and strengthens if the opposite is true. We find support for model predictions using a unique database of listed firms in China that discloses firms' transaction information with important customers and suppliers. Interest-rate sensitive suppliers, proxied by a non-state ownership, a high debt rollover risk, and a high financial constraint index, reduce trade credit to their high-bargaining-power customers during credit contractions, while interest-rate sensitive and high-bargaining-power customers, proxied by similar indices, borrow more trade credit.