Abstract
We examine the influence of peer firms on trade credit policies of listed firms in the United States. We posit and find evidence that firms mimic their peers in formulating trade credit policies. The findings are more pronounced for firms that operate in highly competitive product markets and an uncertain information environment. Our results show that firms not only mimic peers in similar circumstances but also imitate their more and less successful peers. We find that the benefits of mimicking peers' trade credit policies increase initially, but for firms that already maintain high levels of trade credit, these benefits diminish faster as the intensity of mimicking increases. Our results are robust to different methods of selecting peers, sampling, different proxies, and estimation techniques.
Highlights
Trade credit is the most important source of short-term financing for firms in the United States (Petersen and Rajan, 1997; Barrot, 2016) and is responsible for global trade in excess of US$25 trillion (Klapper et al, 2012)
All variables used are defined in Appendix A and are winsorized at the lower and upper first percentiles. ∗∗∗, ∗∗, and ∗ indicate significance at the 1%, 5%, and 10% levels, respectively
We examine the effects of market competition on peer firm influence on trade credit policies using three proxies of product market competition based on the Herfindahl–Hirschman index, Herfindahl–Hirschman index, and the Lerner index (Lerner, 1934)
Summary
Trade credit is the most important source of short-term financing for firms in the United States (Petersen and Rajan, 1997; Barrot, 2016) and is responsible for global trade in excess of US$25 trillion (Klapper et al, 2012). When examining heterogeneity in peer effects, our results indicate that follower firms (which have low market share, low liquidity, and low profitability) are more sensitive to their industry leader peer firms This evidence is consistent with both the learning motive and information-based theories (Scharfstein and Stein, 1990; Lieberman and Asaba, 2006; Leary and Roberts, 2014; Adhikari and Agrawal, 2018), where followers replicate the policies of industry leaders because they perceive them to possess superior information. Existing studies (e.g., Leary and Roberts, 2014; Adhikari and Agrawal, 2018), our findings suggest that peer effects are associated with follower firms imitating leader firms and both follower and leader firms imitating each other's trade credit policies We attribute these findings to the multifaceted roles that trade credit plays as a tool for fighting competition and as a means of alleviating product market and capital market imperfections.
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