Payment Practices Transparency and Customer‐Supplier Dynamics

Abstract

ABSTRACTWe exploit the introduction of the Payment Practices Disclosure Regulation in the United Kingdom (UK) to examine the effects of mandating disclosure of customer‐supplier payment practices. We find that nondisclosing small and medium‐sized enterprises (SMEs) experience a reduction in their accounts receivable by 8.3%, consistent with an acceleration of their trade credit collections. Further, SMEs exhibit fewer financial constraints after the regulation. We survey managers from large firms and SMEs to understand the underlying mechanisms. The required disclosures raise large firms’ reputational concerns and shift the bargaining power between large firms and SMEs. Additionally, the new disclosures compel executives at large firms to scrutinize their own firms’ payment practices, leading to increased accountability and a stronger focus on timely payment among senior managers.