Amount Of Trade Credit Research Articles

Relationship lending and the use of trade credit: the role of relational capital and private information

Using a unique sample of Italian manufacturing firms, we investigate the impact of relationship lending on firms’ use of trade credit. We find that firms maintaining close and long-lasting relationships with their main banks are associated with higher amounts of trade credit extended by suppliers. This result is robust to alternative measures of trade credit and relationship lending, and to different estimation techniques. We also analyze the mechanisms driving the association between relationship lending and the use of trade credit. Regression results suggest that the positive link between accounts payable and relationship lending is especially significant for firms that use to provide soft information to their lenders and for companies with greater relational abilities.Plain English Summary The existence of close and long lasting lending relationships positively affects the amount of trade credit manufacturing firms receive from their suppliers. By relying on the Survey on Italian Manufacturing Firms, we show that the positive link between relationship lending and the use of trade credit is driven by two channels: private information and relational capital. In a policy perspective, our findings reveal a need for banking regulation and supervision to encompass banking business models in evaluating banks. The current approach might not be suitable for local banks investing in soft information acquisition and could weaken SMEs’ chances to receive both bank financing and trade credit from suppliers. Moreover, from a managerial point of view, our results uncover the relevance of firms’ ability to create strong relationships with banks, suppliers, and other companies that may help alleviating financial constraints.

Why is the Inter-firm Credit Market in Korea Special? An Agency View of Trade Credit Use by Chaebols

We study inter-firm credit (also known as trade credit (TC) or the delayed payment a supplier allows its downstream customer on a product sale) with an emphasis on its unique features in Korea. It is the prominence of chaebol-affiliated firms in the Korean economy that makes Korea unique because chaebol firms are linked together by common ownership and thus distort the assumption common to all theories of TC that the input supplier is independent from its customer. We find several aspects of TC use by chaebols. First, viewed as input purchasers, these firms take more TC (the chaebol effect). The amount of TC taken is positively related to purchases from other chaebol affiliates (the affiliate effect), and with the degree of the chairman's ownership-control disparity (the ownership multiplier effect). Also TC as proportion of short-term debt increases significantly after profit growth (the profit effect). Furthermore, chaebol members give less TC although this is strongly correlated with transactions with affiliates. We suggest a unifying interpretation of these patterns based on agency cost: TC, by substituting for external financing and reducing monitoring by outsiders, presents controlling minority owners the opportunity to misuse their greater control for their own benefit.

Media Reputation of a Firm and Extent of Trade Credit Supply

A positive corporate reputation is generally taken to be a valuable intangible resource leading to competitive advantage. In this paper we examine the association between a firm's media reputation and the amount of trade credit given in a sample of listed UK firms. We argue that media reputation is instrumental in mitigating customer information asymmetry. Consistent with expectations, our results show that a firm's willingness to extend trade credit to its customers is inversely related to its media reputation. The better its reputation, the less trade credit it allows. Moreover, the effect of media reputation on trade credit supply is stronger for younger firms and smaller firms, suggesting that media reputation is more effective in reducing trade credit given for firms lacking a well-established product performance reputation. These results document one of the ways in which corporate reputation, as an intangible resource, creates value for a firm.

Relationship Lending and Conservative Accounting? Empirical Evidence from Private Firms

This is the first study which analyzes the effect of relationship lending on accounting conservatism for private firms, and how this affects corporate finance. Based on a database containing the financial accounting data of approx. 8,600 private German firms, we first show that relationship lending is positively associated with the level of accounting conservatism, even when controlling for leverage and other factors. Relationship lending is measured by the proportion of loans provided by the main lender. Accounting conservatism is proxied by cumulative non-operating accruals and a novel conservatism score, both of which tend to considerably reflect unconditional conservatism. Second, we find that the cost of debt increases with the level of accounting conservatism. Third, we observe that relationship lending positively affects the amount of trade credit. Suppliers seem to interpret the existence of a lending relationship as an indication of a firm's creditworthiness. The results suggest that unconditional conservatism goes hand in hand with lending relationships even controlling for taxation issues. Our findings match the theoretical literature on implicit lending contracts. This literature claims that relationship lenders attempt to retain superior information to realize information rents that compensate for losses when lending to young firms and to firms in financial distress. Unconditional accounting conservatism may be used as a tool to retain superior information and to enhance implicit contracting.