Provision Of Trade Credit Research Articles

Trade credit, group affiliation, and credit contraction: Evidence from the 1997 Korean financial crisis

The literature shows that, during a credit crunch, liquid firms provide more trade credit to their client firms. However, the literature neglects the possibility that a firm may be affiliated with a business group. A group-affiliated firm may make different trade credit provision decisions based on whether its clients are affiliated with them, especially during a credit crunch. Thus, to fill the gap, this study investigates the trade credit behaviors of Korean firms affiliated with business groups during the 1997 Korean financial crisis. I find evidence that group-affiliated firms with high liquidity increase trade credit provision only to their affiliates, while they decrease financial assistance to unaffiliated client firms. Financially distressed firms receive less trade credit from unaffiliated suppliers. These findings suggest that business groups tend to exploit trade credit as an emergency liquidity source within intra-group liquidity markets during the financial crisis.

Inter-Firm Relationships and the Special Role of Common Banks

Using a novel dataset that combines information on customer-supplier trade relationships with information on firm-bank lending relationships, we show that common banks that lend to firms at both ends of a trade link grow and strengthen such trade relationships. To establish causality, we use bank mergers, which generate exogenous variations in the presence of common banks, and show that common bank relationships between customers and suppliers increase trade relationships by 41.5%. We find that the role of a common bank is greater when it is more informed and when supply chains suffer from larger information and holdup problems. We also document that suppliers with common banks face lower bankruptcy spillover risks from a distressed customer, adopt a focused customer base, and invest more in relationship specific assets. Lastly, we show that common banks play a central role in facilitating provision of trade credit by suppliers during periods of systemic distress (e.g., the Great Recession). Overall, our findings show the unique role of banks in driving inter-firm growth and investment by mitigating information and holdup problems, which arguably leads to greater economic growth.

Financial Reporting and Trade Credit: Evidence from Mandatory IFRS Adoption*

ABSTRACTWe investigate the effect of mandatory IFRS adoption on trade credit. We document that firms in countries that adopt IFRS receive more trade credit from their suppliers, consistent with improved financial reporting quality and comparability playing a role in facilitating informal financing. This increase is larger for countries with a low level of societal trust, a poor pre‐IFRS‐adoption information environment, and stronger legal enforcement. These cross‐sectional results suggest that the conditions under which higher‐quality information is made publicly available affect suppliers' decisions to provide trade credit. This increase is also larger for firms with greater exposure to foreign markets, a finding that highlights the importance of more comparable international financial reporting standards in facilitating cross‐country trade credit. We also find that IFRS adoption has a stronger positive effect on trade credit for firms with greater liquidity needs. Finally, we find that firms in countries that adopt IFRS also extend more trade credit to their customers. Overall, our results support the notion that financial reporting can have a causal effect on trade credit.

Credit Redistribution by Listed Manufacturing Firms in Pakistan and the Moderating Role of Financial Depth

An enhancement in the financial depth (FD) increases the availability of formal credit to firms. Resultantly credit redistribution (CR) by firms is likely to be reduced as they require less trade credit (TC). To provide evidence, how do managers respond to changes in financial depth while making adjustments in their trade credit policy, this paper aims to study the impact of financial depth on credit redistribution by listed manufacturing firms (LMFs). For the firm-level variables, we used a data set of 327 firms listed on PSX for the period 2005 to 2018. Private credit to GDP ratio and market capitalization to GDP ratio are used as proxies for financial depth. Unlike earlier studies, we applied a two-step System GMM estimator to control the endogeneity. The results of the regression analysis display a positive relationship between the use and the supply of trade credit by LMFs. It reveals that LMFs redistribute credit to their customers through trade credit channel. We found a significant and negative impact of FD on the supply of TC by LMFs. Further, we established that financial depth as a moderator has a buffering impact on the credit redistribution by listed firms. The study highlights the moderating role of FD and suggests the financial policymakers of firms to modify their credit policies in response to changes in financial depth. For future research, we suggest the investigation of the effect of financial policy interventions on credit redistribution by small and non-listed firms.

Effects of financial distress and financing constraints on trade credit provisions

PurposeExisting studies that documented the effect of financial distress on trade credit provisions did not include measures financial constraint. It is possible that financial distress is tie to financial constraints, and both financial distress and financial constraints mutually reinforce each other in their effects on trade credit provision. The purpose of this study is to evaluate the effects of financial constraint and financial distress on trade credit provisions in the UK FTSE 350 listed firms.Design/methodology/approachThis study employs panel data in the estimation of the determinants of accounts payables and accounts receivables of the UK FTSE 350 firms from 2009 to 2017.FindingsThis study finds that financial distress has significant positive effect on accounts payables and a significant negative effect on accounts receivables. Financial constraints have significant negative effect on accounts payables and a significant positive effect on accounts receivables.Practical implicationsTrade creditor desiring to maintain an enduring product-market relationship grant more concessions to customer in financial distress. The amount of trade credit that sellers provide to financially constrained firm is an increasing function of the buyer's creditworthiness. The urgent cash needs of financially distressed firms lead them to sell trade receivables to factoring company leading to reduction in trade receivables. Firm facing external financing constraints increase trade credit to customers in anticipation of cash flow inflow to enhance liquidity.Originality/valueThis study shows that financial distress and financial constraints mutually reinforce each other in their effects on trade credit provisions, and firm's financing condition contributes to divergence in trade credit policies.

Retailer’s ordering policies for time-varying deteriorating items with partial backlogging and permissible delay in payments in a two-warehouse environment

With the convergence of innovation, technology, and supply chain, the world has been shrinking, and the retail industry is one of the largest spread across the globe in the past few decades. Consumer expectations are on priority for the retailers. Most of the retail sector deals with the items whose usefulness declines with time and reaches the expiration date, resulting in a decrease in sales and eventually diminishing revenues for the retailers. In such cases, effective replenishment decisions and ordering policies may yield a significant increase in revenues. Further, with emerging retail trends, providing trade credit is considered a price reduction tool and an alternative to price discounts. Motivated by this, an inventory model developed and analyzed for items exhibiting time-varying deterioration with partially backlogged shortages and permissible delay in payment in the two-warehouse environment. The primary objective is to obtain the optimal ordering and backlogging policies for the retailer by minimizing the relevant cost. The optimal solution is obtained, solved analytically, and the inventory model validated with the help of numerical illustrations. The sensitivity analysis of the optimal solution with respect to key parameters and the managerial implications are also provided. The model is applicable to perishable items such as baked products, fruits, vegetables, groceries, meat, and seafood, where the deterioration is time-dependent and is perceived by its expiration date.

Trade Credit Contracts, Theories and their Applications: A Synthesis of the Literature

The paper studies theories relating to trade credit contracts as well as their applications and limitations, via review and synthesis of the trade credit literature. Using keywords and search phrases, the literature was identified from key economics, business and financedomains. Trade credit contracts are not complex, this can be explained by factors such as shortness of credit period, frequent transactions, proximity and interaction between trading parties, and effective informal enforcement mechanisms. In contrast to the longstanding conception that trade credit is more expensive than bank credit, trade credit is often cheaper than bank credit, hence its high incidence and level of use across countries. The high use of trade credit should warrant some policy attention, particularly trade credit regulation. Theories explaining trade credit are highly interconnected; most of them have received considerable empirical support in both developed and developing countries. The interconnected nature of the trade credit theories should inform methodological approaches to their empirical testing and present an opportunity for comprehensive theory development in the field.
 Keywords: Trade Credit, Trade Credit Contracts, Trade Credit Theories, Trade Credit Motives, Trade Credit Supply and Demand

The trade credit channel and monetary policy transmission: Empirical evidence from U.S. panel data

We investigate the US trade credit channel proposed by Meltzer (1960). We estimate reduced-form trade credit supply and demand models on quarterly firm-level data for most public corporations from 1988 to 2007. We use a novel method of distinguishing firms by access to funds using the indexes of Whited and Wu (2006) and Altman (1968). Tight monetary policy produced greater expansion of receivables than payables, expansion of receivables that varied by funds-access, and some expansion of payables by firms with poor access. Tight policy produced expansion of net trade credit by corporations which flowed to entities like private businesses, a major component of the channel.

Impact of Economic Policy Uncertainty on Trade Credit Provision: The Role of Social Trust

This paper explores the impact of economic policy uncertainty (EPU) on trade credit while taking into account the interactive role of social trust. The analysis is based on the panel data econometric model with fixed effects. Using firm-level data across 16 economies from 1995Q1 to 2015Q1, we find that (i) there exists a negative and highly significant relationship between economic policy uncertainty and the provision of trade credit; (ii) this relation is weaker for firms in countries with higher levels of social trust; and (iii) the effects of EPU and social trust are both more substantial for firms in more financially constrained industries. The impact of social trust is not a result of people’s high confidence in government, an effective legal system of enforcing contracts, a high-quality institutional system or an excellent system of protecting shareholders. Our result is robust if we exclude business cycle effects or use an alternative measure of financial constraints.

Industry Structure and the Strategic Provision of Trade Credit by Upstream Firms

Abstract Trade credit can serve as a collusion mechanism for competing supply chains to increase producer surplus in medium concentrated industries. We analyze theoretically how this form of financing influences retailers’ behavior in the product market, study incentives to deviate, and show evidence consistent with the model’s predictions. Trade credit use is inversely U shaped in industry concentration, and this pattern is more pronounced in industries more prone to collusion and when incentives to deviate are smaller.

Manufacturer's optimal pricing and lot‐sizing policies under trade‐credit financing

In the year 2006, Teng et al considered an appropriate economic production quantity (EPQ) model in which the manufacturer receives the supplier's trade credit and provides trade credit to the customer simultaneously. The following two payment methods were discussed by Teng et al:The main purpose of this paper is summarized below:Finally, with a view to further motivating the interested researchers for using the methodology and mathematical analytic techniques in several other contexts in the field, we have chosen to include, in Section 12, a number of related recent works in the field.

The Effect of Business Group Affiliation on Trade Credit Financing: Evidence from Korean Firms

This paper examines how trade credit demand and supply are determined in Korea, where large business groups are dominant in most of the segments and hierarchies of many industries. In particular, we investigate the effects of business group affiliation on trade credit financing, finding that a firm’s affiliation with a large business group has a positive effect on trade credit demand but a negative effect on trade credit supply. The results suggest that the extra bargaining power of large business groups enables group affiliates to provide substantially less trade credits but to demand more when they face financial constraints. However, we do not find evidence that trade credit financing functions as an instrument to subsidize member firms through the internal capital markets within a business group. These findings explain the effects of business group affiliation on trade credit demand and supply in short-term debt markets from the perspective of the unique characteristics of the Korean economy.

Suppliers' listing status and trade credit provision

We show that public suppliers extend more trade credit than their private counterparts. The impact of stock market listing on accounts receivable is more pronounced among firms that are financially more constrained or more reliant on external finance. Moreover, firms significantly increase their trade credit provision following equity issuances in stock exchanges. These results are consistent with the argument that stock market listing status improves firms' access to external sources of financing, especially equity capital, thus enhancing their ability to offer more trade credit to customers.

Loss-averse supply chain decisions with a capital constrained retailer

<p style='text-indent:20px;'>In real-world transactions, capital constraints restrict the rapid development of the enterprises in the supply chain. The loss aversion behaviors of enterprises directly affect the decision making. This paper investigates the optimal decisions of both the supplier and the capital constrained retailer being loss aversion decision makers under different financing strategies. The capital constrained retailer may borrow from a bank or use the supplier's trade credit to satisfy uncertain demand. With a wholesale price contract, we analytically solve the unique Stackelberg equilibrium under two financing schemes. We derive the critical wholesale price that determines the retailer's financing preference. We identify the impacts of the loss aversion coefficients and initial capital level on the operational and financing decisions. Numerical examples reveal that there exists a Pareto improvement zone regarding the retailer's loss aversion coefficient and initial capital level.

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%, 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.

Effect of Credit Rating on Trade Credit: Empirical Evidences from Pakistani Non-financial sector

The study investigated how non-financial businesses use trade credit in the context of borrowing restrictions in developing economies. Despite the tremendous changes in the trend, trade credits still have huge usage. Buyers and suppliers have moved from traditional trading systems to advancing automated and sophisticated business methods. Multi-dimensional aspects of business strategy also include trade credits. Trade credit has a huge change in supply and demand. Trade credit is used as the main source of financing in almost all regions of the world. World-renowned companies have access to financial lending, but they prefer trade credit because it provides them an edge against collateral held at financial institutions. This research includes some factors like trade credit and credit rating. In this study has unbalanced panel data from non-financial sector of Pakistan. The data range consists of 2008 to 2016 for 38 non-financial firms. Here, by using the fixed effect model examined how credit rating affects the trade credit supply and demand in case of large and small firms. The results show that account receivables and payables both increase in the case of large firm credit rating. They can easily use the trade credit process. In case of small firms, they also join this process or trade credit agreement for smoothing their business function, but they feel some difficulties from both sides.

Bargaining equilibrium in a two-echelon supply chain with a capital-constrained retailer

We investigate the bargaining equilibrium in a two-echelon supply chain consisting of a supplier and a capital-constrained retailer. The newsvendor-like retailer can borrow from a bank or use the supplier's trade credit to fund his business. In the presence of bankruptcy risk for both the supplier and retailer, with a wholesale price contract, we model the player's strategic interactions under the Nash and Rubinstein bargaining games. In both financing schemes, the Nash bargaining game overcomes the double marginalization effect under the Stackelberg game and achieves supply chain coordination. The Rubinstein bargaining game realizes the Pareto improvement of the supply chain. The player with stronger bargaining power always prefers to initially offer a contract under the Rubinstein bargaining game to obtain greater expected profit. Furthermore, we characterize the conditions under which bargaining power and discount factor affect the bargaining equilibrium. We numerically verify our theoretical results.

Chinese culture, materialism and corporate supply of trade credit

PurposeThe purpose of this paper is to investigate how cultural value in materialism affects corporate supply of trade credits.Design/methodology/approachUsing a sample of 14,710 firm-year observations of Chinese listed firms from 1998 to 2012, the authors examine the influence of regional materialism on accounts receivable.FindingsThe authors find that listed firms within more materialistic tend to extend less trade credit to their customers, in particular in long-term categories of trade credit. Such negative effects can be significantly mitigated by state control, suggesting the effects are more pronounced in privately controlled listed firms. The negative effects of materialism still hold after controlling for other regional factors, such as trust, GDP per capita or institutional development.Research limitations/implicationsThe authors show materialism as a cultural construct varies across Chinese regions, and it could have important impact on corporate supply of trade credits, besides the previous found effects on consumer use of credit.Originality/valueThis paper expands the literature about the influence of materialism on economic decision making from the individual level to the corporate level.

Corporate social responsibility and provision of trade credit

In this article, we identify and examine three different views of corporate social responsibility (CSR) and the relationship between CSR and firms’ provision of trade credit. The trust view of CSR argues that CSR and trade credit provision are related positively, because CSR, as a trust-enhancing device, complements the incomplete contract nature of trade credit. The CSR literature shows that CSR firms tend to have higher cash holdings. With this in mind, the precautionary motive view of CSR suggests that cash holdings serve as a hedge against trade credit risk, while, on the other hand, the substitution view of CSR predicts that cash hoarding discourages the provision of trade credit. Using a dataset of 20,591 firm-year observations from 1991 to 2015, we find strong evidence that supports both the trust and substitution views of CSR but not the precautionary view of CSR.

The Impact of Trade Credit Provision on Retail Inventory: An Empirical Investigation Using Synthetic Controls

Over the last decade, trade credit has been subject to increasing government regulation in many countries. Though such policies could improve suppliers' financial sustainability, they may negatively affect supply chain performance by limiting positive operational roles of trade credit. In this study, we examine the potential negative implication of limiting trade credit on inventory decisions at the retailer level. Using an empirical strategy that leverages: (i) an exogenous shock imparted by the French government's intervention to impose a ceiling on trade credit repayment; (ii) a triple difference-in-differences identification strategy; and (iii) Synthetic Controls, we estimate the causal impact of trade credit on firms' inventory stocking decisions. We find that, in retail sectors affected by the French regulation, the decrease in trade credit led to both an economically and statistically significant decline in firms' inventory levels. For example, in the hardware retail sector, the regulation reduced the trade credit level, as measured by payable days, by 16%, which in turn caused an 11% decline in inventory days. Put differently, a 1% reduction in trade credit led to a 0.67% decrease in inventory. In combination with industry-calibrated parameters, these estimates indicate a decline of up to 2.2% in retail profits and 3.0% in fill-rate on the account of the imposed ceiling. Our findings offer direct evidence that trade credit is an indispensable financing source for inventory procurement. Equally importantly, they also inform policymakers that limiting trade credit below equilibrium levels could harm supply chain efficiency and consumer welfare.