Provision Of Trade Credit Research Articles

International evidence on the determinants of trade credit provision

PurposeThe purpose of this paper is to examine whether the level of financial credit available in a country influences the level of trade credit provided to customers.Design/methodology/approachThe authors examine the association between the supply of trade credit and the availability of country-level private financial credit using multivariate regression models that account for country-level heterogeneity, macroeconomic conditions and firm-specific characteristics. The data set is a pooled sample of publicly traded firms incorporated in 66 countries.FindingsSupporting the re-distributional view of trade credit, robust results suggest that suppliers incorporated in countries with increased access to financial credit provide increased trade credit to their customers. Further results indicate significant differences in trade credit usage across geographical regions. Consistent with existing research using samples of US firms, the use of trade credit is correlated with firm-level measures of financial constraints and product market dynamics.Originality/valueThe authors provide one of the first studies to examine differences in trade credit extension across a large number of countries.

Investor sentiment, market competition and trade credit supply

PurposeThe purpose of this paper is to study the influence of investor sentiment on the supply of trade credit, and further explores the difference of the effect of investor sentiment on the supply of trade credit in the environment of strong market competition and weak market competition.Design/methodology/approachThe authors use panel estimation techniques to examine the impact of investor sentiment in the Chinese securities market on the supply of corporate trade credit.FindingsThis paper finds that investor sentiment has positive impact on trade credit through three channels of motivation, willingness and ability. At the same time, this paper finds that investor sentiment has stronger impact on enterprises in strong market competition than enterprises in weak market competition.Research limitations/implicationsThis paper expands the research on the influence of virtual economy on the real economy, analyzes the difference of the influence of investor sentiment on the supply of trade credit under different market competition conditions.Practical implicationsThe paper perfects the mechanism of trade credit decision-making at this stage, and provides more evidence for the virtual economy to act on the real economy.Social implicationsThis paper provides a theoretical basis for the government functional departments to use the investor sentiment to play a positive role in trade credit to improve the market competition and guide the development of China’s capital market in the direction of rationalization and health.Originality/valueIn combination with market competition environment and industry characteristics, this paper investigates external irrational factors and studies how investor sentiment affects trade credit supply.

Demand for and Supply of Trade Credit in Africa

With African firms highly rationed out of credit markets, trade credit has become an important source of financing. Yet, not much is known about the drivers of trade credit demand and supply in the continent. This study fills this research gap by estimating trade credit demand and supply for a panel of listed firms in 19 African countries over a period of 29 years. Using dynamic and static structural equation modelling, the study finds short-term leverage, firm size and past experience in trade credit as simultaneous determinants of trade credit demand and supply. The study further finds turnover (inverse relationship) as the unique determinant of trade credit supply, and cash flows (inverse effect), raw material inventories (inverse effect) and investment in current assets (positive effect) as the peculiar determinants of trade credit demand. These determinants are robust to the control for endogeneity and non-separability, and to the inclusion of lagged value of the dependent variables, industrial classification and time dummies. These findings have important implications for trade credit policy in Africa.

Coordinating contracts under default risk control-based trade credit

This study considers a supplier–wholesaler channel in which providing trade credit to buyers incurs default risk. The motivation for this research stems from the apparel industry, where a supplier sells clothes to a wholesaler and multiple retail traders buy clothes from the wholesaler. The wholesaler provides a (down-stream) credit period to retail traders and makes optimal credit period and order quantity decisions under random and credit period dependent demand. The wholesaler assumes the risk in case they do not receive the payment for goods from a retail trader on time. In this situation, neither the wholesaler nor the supplier can receive the account owed for the same batch of clothes. Thus, the supplier provides the wholesaler a (up-stream) credit period, called default risk control-based trade credit, which decreases as the down-stream credit period increases. Based on the newsvendor model, we design coordinating contracts under default risk control-based trade credit. Our results show that trade credit policy cannot coordinate the channel, even if a buyback policy is provided simultaneously or the supplier's selling price is endogenously determined. To achieve channel coordination and Pareto optimality, two composite contracts based on partial trade credit (with buyback or quantity flexibility) are designed. Additionally, the wholesaler orders fewer product and provides a shorter credit period to retailers when the supplier considers default risk control in providing trade credit to the wholesaler. Overall, we show that the partial trade credit scheme plays an important role in channel coordination when considering default risk control-based trade credit.

Network Centrality of Customers and Suppliers

We construct network centrality measures for customer and supplier industries in the U.S. economy. Consistent with Ahern, et al. (2014), we find central suppliers have higher levels of systematic risk than central customers and therefore more exposed to sectoral shocks. We posit that central suppliers have incentives to channel funds to their customers via trade credit. Our empirical results are consistent with such a view. We find that the cash to cashflow sensitivity and value of cash is significantly higher for central suppliers than non-central firms, even among those financially unconstrained. In contrast, central customers have no cash to cash flow sensitivity, consistent with supplier trade credit redistribution helping to relieve customers’ financial constraints. Using the 2008 financial crisis as an exogenous shock, we document that central suppliers with high pre-crisis liquidity decrease their investment, while only customers without central suppliers are sensitive to the crisis. Similarly, only customers without central suppliers are sensitive in their payable days to the crisis.

Shock Propagation Through Trade Credit: Evidence From Operation Weak Flesh

We investigate whether and how shocks propagate through trade credit. We exploit a large negative liquidity shock to firms in the Brazilian food industry, resulting from the announcement of a fraud investigation named Operation Weak Flesh. Using a differences-in-differences analysis, we show that quarterly accounts payable of the affected firms drop by 20-30 percent. Their suppliers reduce the provision of trade credit by 5-6 percent. The evidence suggests that risk mitigation concerns dominate business relationship concerns or bargaining power effects. Suppliers mitigate the increased credit risk in the supply chain rather than supporting their customers with additional trade credit.

Do Bank Bailouts Affect the Provision of Trade Credit?

We document that borrowers of banks that received capital support under TARP/CPP significantly increased their quarterly provision of trade credit (accounts receivable) during the crisis by 5.2 percent, while borrowers of other banks did not. The effect is strongest in 2008Q4, and larger for pre-crisis riskier, growth-oriented and bank-dependent firms and for firms that borrow from pre-crisis smaller, less profitable and better capitalized CPP banks. Our difference-in-differences analysis shows that the effect is caused by CPP and not by heterogeneity between firms, banks and time periods. Our study provides novel evidence that suggests a beneficial multiplier effect of bank bailouts.

Trade credit and supplier competition

This paper examines how competition among suppliers affects their willingness to provide trade credit financing. Trade credit extended by a supplier to a cash constrained retailer allows the latter to increase cash purchases from its other suppliers, leading to a free rider problem. A supplier that represents a smaller share of the retailer’s purchases internalizes a smaller part of the benefit from increased spending by the retailer and, as a result, extends less trade credit relative to its sales. In consequence, retailers with dispersed suppliers obtain less trade credit than those whose suppliers are more concentrated. The free rider problem is especially detrimental to a trade creditor when the free-riding suppliers are its product market competitors, leading to a negative relation between product substitutability among suppliers to a given retailer and trade credit that the former provide to the latter. We test the model using both simulated and real data. The estimated relations are consistent with the model’s predictions and are statistically and economically significant.

Financing preferences and performance for an emission-dependent supply chain: Supplier vs. bank

Many small and middle-sized enterprises (SMEs) with capital constraints have two primary short-term financing modes: internal financing (supplier) and external financing (bank). We consider an emission-dependent supply chain with one supplier and one emission-dependent manufacturer that are capital-constrained and in need of short-term financing. We investigate the financing preferences of the supply chain from a competitive bank or supplier when demand is uncertain and consumers have low-carbon preferences. Under the cap-and-trade system, we show that the existence of investments in carbon abatement will have no impact on the selection of financing mode. We find that the supplier's trade credit financing serves as a unique financing equilibrium for manufacturers regardless of whether investments in carbon abatement are considered. Irrespective of the chosen financing equilibrium, if a manufacturer chooses to invest in carbon abatement, the dominant supplier will offer a wholesale price to prompt the manufacturer to choose the largest feasible carbon emission reduction and maximize his profit. In addition, we present a set of numerical analyses to compare the results of different financing modes and the financing equilibrium with and without carbon abatement, and we analyze the impacts of key parameters on the performance of supply chain members.

Legal System and Trade Credit: Evidence from Emerging Economies

ABSTRACTUsing a large-scale, firm-level dataset from 68 emerging economies for the period of 2002–2006 compiled by the World Bank, we find that legal systems have a positive and significant impact on the provision of trade credit. This result is robust to the inclusion of conventional controls used in the literature, to alternate specifications that address endogeneity and measurement error problems, and to different measures of trade credit and legal systems. Legal systems have a larger impact on trade credit for firms with overdraft facilities than for those without overdraft facilities, and the impact of legal systems on trade credit is significant in more developed countries but not in less developed countries.

Firm size effects in trade credit supply and demand

Abstract By investigating trade credit usage among SMEs and large companies following the macroeconomic shock of the financial crisis of 2007/08, we identify a firm size effect, which is genuine in the sense that it cannot be entirely explained by financial constraints, external finance dependence or creditworthiness. We find that (i) SMEs, in contrast to large firms, do not display evidence for the inter-firm liquidity redistribution hypothesis. Especially large vulnerable firms did cut down trade credit provision to the detriment of small vulnerable firms. (ii) We document a general substitution effect between bank and trade credit and show that it has strengthened during the crisis among large firms, but not among SMEs. (iii) We provide evidence that the shift in trade credit financing had adverse real effects on investment behaviour of SMEs.

Co-patent, financing constraints, and innovation in SMEs: An empirical analysis using market value panel data of listed firms

Abstract We have studied how small and medium-sized firms (SME) can overcome the liability of smallness ( Clegg et al., 1996 ; Thorgren et al., 2012 ) and obtain value from co-patents. We examined the relationship between the co-ownership of the patent and the firm's market value, along with the moderating role of government subsidies and upstream supplier's trade credit. The study finds that co-patent intensity is negatively correlated with the SME's market value. Further, supplier financing mitigates the negative relationship between the co-patent intensity and the market value of SMEs while the government subsidies strengthen the negative relationship between the co-patent intensity and the market value of SMEs. The results above imply that because the patent needs to be shared among the partners, this raises capital market' perception of the SME's commercial uncertainty and has a negative impact on the market value of SMEs. However, like general patent in which it signals the strength of SMEs in R&D, co-patent also reduces the external market's perception of an SME's technological uncertainty. The SME thus attracts more external funding. These findings provide us a more comprehensive understanding of the motivation of SMEs in co-patenting and how SMEs overcome the liability of smallness in capturing value from the co-patent.

Operating performance and aggressive trade credit policies

Abstract We examine the operating performance improvements associated with the extension of trade credit. Our results suggest a positive and significant relation between future profitability and contemporaneous trade credit provision. Further findings indicate significantly higher margins, revenues and market shares for firms that extend more trade credit than industry competitors with similar characteristics, operational necessities and financial distress levels. These inferences are robust to several econometric concerns such as the joint determination of trade credit extension and firm performance. Overall, our results imply that aggressive trade credit policies can provide firm management with a unique channel to improve product market performance.

Don’t throw in the towel, throw in trade credit!

The literature has documented how firms adjust to increased competitive pressures arising from globalization. This paper demonstrates a new margin of adjustment, namely, provision of trade credit. A simple model predicts that an increase in competitive pressures will lead exporters to provide trade credit and lower prices and that the price adjustment will be attenuated by trade credit provision. These predictions are tested in the context of an exogenous shock, the end of the Multi-Fiber Arrangement (MFA), a quota system governing trade in textiles and clothing until the end-2004. The analysis focuses on Turkey which was not subject to quotas in the EU and thus faced an increase in competition after the quotas on China had been removed. The results suggest that in the post-MFA period Turkish exports of products with binding MFA quotas prior to the shock saw an increase in the provision of trade credit and a drop in prices relative to the other products. There is also evidence that provision of trade credit generated a dampening effect on the price response to the increase in competition.

State Ownership and Trade Credit

Recent events, most notably the Global Financial Crisis and the COVID-19 pandemic, have made it increasingly apparent that liquidity is synonymous with corporate survival. In this paper, we explore how governments can fulfill an important need as suppliers of liquidity. Building on the financing advantage view of state ownership, we theorize how state-owned enterprises (SOEs) may provide capital by offering trade credit to customer firms. The data indicate a positive relation between the level of state ownership and the provision of trade credit. Using an institution-focused framework, we further determine that the nation’s institutional environment systematically affects the opportunities and motivations for SOEs to grant trade credit. Specifically, we find that SOEs grant more trade credit in countries with less developed financial markets, weaker legal protection of creditors, less comprehensive information-sharing mechanisms, more collectivist societies, left-wing governments, and higher levels of unemployment. Firm-level factors also influence the credit-granting decisions of SOEs, with SOEs with lower levels of state ownership and higher extents of internationalization offering lower amounts of trade credit. Overall, our study offers novel insights regarding the important role of state-owned firms as providers of liquidity.

Trade credit supply in African agro-food manufacturing industry: determinants and motives

PurposeThe purpose of this paper is to examine the determinants and motives for supply of trade credit among agro-food manufacturing firms in African countries.Design/methodology/approachThe paper uses a subsample of food manufacturing firms from World Bank Enterprise Survey in eight African countries in 2014. Two-limit Tobit models are specified for the determinants of trade credit supply (TCS) and the motives for TCS are inferred from the determinants. An instrumental variable two-limit Tobit model is estimated to check the endogeneity of trade credit received (TCR) in relation to trade credit supplied.FindingsThe level of TCS is significantly related with degree of product diversification, manager experience, level of TCR and overdraft availability. From the results, financing motives (particularly liquidity and redistribution) and commercial motives (particularly marketing and quality guarantee motives) for TCS are implied.Research limitations/implicationsThe parameter estimates may contain both demand and supply effects as the two effects cannot be separated due to absence of information on firms’ customers in the data set. The results should be interpreted in this context.Originality/valueThe motives for TCS by agro-food firms is less understood in the agricultural finance literature and this paper makes an important contribution in this regard. In particular, the paper shows the degree of product diversification is directly associated with TCS, a relationship which has not been explored in the trade credit literature.

Supplier Financing and Stock Price Crash Risk: Monitoring versus Concession?

Supplier financing, or trade credit, is an increasingly important source of financing for a company. This paper tests two alternative views on the relation between trade credit and future stock price crash risk: monitoring and concession. We present robust evidence that supplier financing is negatively associated with stock price crash risk, consistent with the former view that suppliers can effectively monitor buyers through the provision of trade credit and therefore constrain their bad-news-hoarding behavior. Further analyses reveal that the role of trade credit in mitigating stock price crash risk is more pronounced among buyers with weaker market power and those that require more monitoring, such as firms with higher distress risk or weaker governance due to limited monitoring by institutional investors and banks. Overall, our results shed light on how trade credit shapes managers’ disclosure incentives and firms’ extreme negative stock returns.

Modeling of a two echelon inventory system under trade credit with finite production rate

The present competitive business situation, it has become typical of providing trade credit by the supplier (may be a manufacturer) to the vendor (may be a retailer) as part of improving the sales revenues. In this particular paper, development of a two echelon inventory model is proposed by considering a one supplier supplying a one kind of product to a one vendor under trade credit with finite production rate. The important aim of the proposed model is to exemplify the optimality of cycle time, inventory levels and total supply chain variable costs of the coordinated model. Ordering costs, carrying costs and transportation costs are considered for the proposed development of the model. The mathematical model is formulated in two fold: the expressions for total variable cost of the vendor and supplier are developed first and then for the entire supply chain. A solution procedure is developed and a MATLAB computer program is written to solve the model along with the sensitivity analysis is carried out.

Trade credit: a benefit to get, a “must” to give? Motives behind trade credit use in Poland

Abstract The paper analyses the motives behind trade use credit in the Polish enterprise sector, based on the results of the 2016 NBP Annual Survey. It verifies the conclusions stemming from trade credit theories regarding both the main motives driving supply and demand for trade credit, as well as explaining the variation in their relevance across companies. The analysis shows that trade credit supply in Poland is driven to a large extent by suppliers’ desire to win and maintain their customers: allowing deferred payments creates attractive terms of sale and is often a requirement set by clients with strong bargaining power. These results indicate high willingness of customers to settle their payments on a deferred basis, which could mirror an important fact uncovered by the survey: contrary to the assumptions made in many theories, trade credit proves to be a relatively cheap form of financing for the majority of the surveyed firms. As a consequence, trade credit could be perceived by firms as an attractive, standard tool used in day-to-day business rather than an expensive form of financing used only to address specific problems or achieve other benefits that would outweigh its high costs. Survey results provide some confirmation for this explanation of trade credit demand.

Cheap Trade Credit and Competition in Downstream Markets

Using a unique dataset with information on 20 million inter-firm transactions, we provide evidence that suppliers offer trade credit to high-bargaining-power customers to ease competition in downstream markets in which they have a large number of other clients. Differently from price discounts, trade credit targets infra-marginal units and does not lower the marginal cost of high-bargaining-power customers. As a consequence, the latter do not gain market share and the supplier can preserve profitable sales to low-bargaining-power customers. We show that empirically trade credit is not monotonically increasing in past purchases, as is consistent with our conjecture that it targets infra-marginal units. In addition, the supplier grants trade credit to high-bargaining-power-customers only when it fears the cannibalization of sales to other low-bargaining-power clients. Our results are not driven by differences in suppliers' ability to provide trade credit, customer-specific shocks, or endogenous location decisions.