Credit Market Imperfections and Monetary Policy: Effects on the Optimality of Trade Credit Durations for Business Volumes

Abstract

This study provides empirical evidence that trade credit durations implied by product distributors' business volumes (implied credit durations) generate business risk for trade credit providers. The study further demonstrates the existence of optimalcredit durations that minimize business risk induced by provision of trade credit facilities, and immunize trade credit providers to fluctuations in business volumes induced by either of credit market imperfections or monetary policy shocks. Empirical results demonstrate optimal credit durations provide better risk mitigation for both relatively small distributors and the trade credit provider in relation to implied credit durations. The favorability of optimal credit durations for relatively small distributors is shown to be achieved without imposition of non-optimal business risk on relatively large distributors.