Trade Credit Risk Research Articles

Assessment of associated credit risk in the supply chain based on trade credit risk contagion.

Assessment of associated credit risk in the supply chain is a challenge in current credit risk management practices. This paper proposes a new approach for assessing associated credit risk in the supply chain based on graph theory and fuzzy preference theory. First, we classified the credit risk of firms in the supply chain into two types, namely firms' "own credit risk" and "credit risk contagion"; second, we designed a system of indicators for assessing the credit risks of firms in the supply chain and used fuzzy preference relations to obtain the fuzzy comparison judgment matrix of credit risk assessment indicators, on which basis we constructed the basic model for assessing the own credit risk of firms in the supply chain; third, we established a derivative model for assessing credit risk contagion. On this basis, we carried out a comprehensive assessment of the credit risk of firms in the supply chain by combining the two assessment results, revealing the contagion effect of associated credit risk in the supply chain based on trade credit risk contagion (TCRC). The case study shows that the credit risk assessment method proposed in this paper enables banks to accurately identify the credit risk status of firms in the supply chain, which helps curb the accumulation and outbreak of systemic financial risks.

Trade Credit and Exchange Rate Risk Pass Through

Trade Credit and Exchange Rate Risk Pass Through

Research on Credit Algorithm of International Trade Enterprises Based on Blockchain

Lack of trust, lack of standards, and low efficiency are the three biggest problems in China’s trade financing at present. With the development and application of new generation technologies such as big data, cloud computing, artificial intelligence, and blockchain technology, China is in the stage of financial technology 3.0 under the deep integration of finance and technology. In the field of financial technology, the most concerned is the application of blockchain technology in trade finance business. With the successive construction of various blockchain platforms and the acceleration of the internationalization process, the international trade credit risk behind it is also increasing. Among many financial services, trade finance is the most closely integrated field with blockchain technology. In this context, preventing the risks in the business process of international trade enterprises, so as to reduce the cost of financial transactions, improve the effectiveness of financial services, and better serve the real economy is not only the internal development needs of enterprises, but also the national financial strategy needs. In view of the above problems, this paper analyzes the risk factors faced by multinational trading enterprises in the transaction process through the transaction data of some multinational enterprises on mobile phones, and constructs a credit evaluation system of international trading enterprises based on blockchain, in order to enhance the trade risk resistance ability of international trading companies.

Construction of Credit Assessment Model for International Import and Export Trade Based on Fuzzy Hierarchical Analysis

With the continuous expansion and development of import and export trade, the problem of credit risk faced by foreign trade enterprises has received increasing attention. This thesis focuses on the credit risk problem in import and export trade based on fuzzy hierarchical analysis; international import and export trade credit risk management risk is measured and evaluated to derive the ranking of key risk factors; the risk factors in the guideline layer are ranked from largest to smallest in order of legal risk, market risk, financial risk, and policy risk. The main purpose of this study is to build a fuzzy AHP international import and export trade credit evaluation model, which can provide reliable credit evaluation when enterprises conduct import and export trade and can better help enterprises to complete the trade. The analysis algorithm implemented in this study is a common and effective algorithm used for credit modeling, and more exploration and research on foreign trade credit modeling using existing modeling techniques are needed. The modeling techniques for credit evaluation of international import and export trade should be based on the credit information available to the enterprise to select the most appropriate modeling techniques and propose the most practical evaluation model. This study uses qualitative and quantitative, theoretical, and empirical comprehensive analysis methods based on fuzzy hierarchical analysis, draws on theories and models of credit risk management of 100 well-known enterprises around the world, and combines the actual situation of import and export trade. The credit evaluation model of international import and export trade based on fuzzy hierarchical analysis is constructed with certain operability and can make the credit evaluation of international import and export trade more accurate and reliable.

Evaluation of associated credit risk in supply chain based on trade credit risk contagion

The evaluation of associated credit risk in supply chain is a difficult problem in the current credit risk management practice. Based on graph theory and fuzzy preference theory, we put forward a new evaluation method of associated credit risk in the supply chain. First, the credit risk of enterprises in supply chain are divided into “self-own credit risk” and “credit risk contagion”. Second, the indicator system of self-own credit risk evaluation of enterprises in the supply chain is designed, and the fuzzy comparative judgment matrix of self-own credit risk evaluation indicator is obtained by using fuzzy preference relation, and the evaluation basic model of “self-own credit risk” is established. On the basis, the evaluation derivative model of “credit risk contagion” is established. Furthermore, by integrating the two kinds of evaluation results, the credit risk of enterprises in supply chain is evaluated comprehensively, and the contagion effect of associated credit risk in supply chain based on trade credit risk contagion (TCRC) is revealed.

Effects of demand uncertainty reduction on the selection of financing approach in a capital-constrained supply chain

This study investigates how demand uncertainty reduction (DUR) affects the decisional dynamics within a supply chain, which comprises a supplier and a capital-constrained retailer, who chooses between bank credit and trade credit financing. A comprehensive scenario analysis suggests the retailer should accept trade credit when DUR is high, trade credit risk premium is moderate, and wholesale price is exogenous and low. However, the retailer should adopt trade credit only when both DUR and production cost are not high, and wholesale price is set endogenously. We further relax the assumption on the bank’s risk attitude and find most results still hold.

Impact of Climate Risk on Firms’ Use of Trade Credit: International Evidence

ABSTRACT We examine the association between climate risk and trade credit. We predict that firms exposed to climate risk-driven liquidity shocks prefer to use less trade credit. Using the Global Climate Risk Index of 86 countries, we find that firms located in countries characterized by severe weather events prefer to use less trade credit. In additional analyses, we find that the negative association between trade credit and climate risk is more pronounced for firms with more volatile cash flow and less collateral. Our results are robust to the use of alternative climate risk measure, alternative econometric methods, and exclusion of outliers.

SMEs’ changing perspective on international trade credit risk management in China: a cultural values evolution approach

ABSTRACT Due to the globalization of business, historically developed business practices based on cultural values can suddenly become dysfunctional. Chinese exporters, particularly in small- to medium-sized enterprises (SMEs), for instance, are adopting new trade credit risk practices in response to unreliable international customers. Through 45 in-depth interviews, we investigated how Chinese SMEs are changing their perspectives on International Trade Credit Risk Management by employing a cultural values evolution approach. We explained why some Chinese exporters, but not others, shift from affect-based to fact-based risk management practices concerning trade credit. As a major outcome of our research, we identified and articulated four alternative stances towards credit risk: conventionalism, polycentrism, pragmatism, and rationalism.

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.

Credit Risk Assessment Model for Small and Micro-Enterprises: The Case of Lithuania

In this research, trade credit is analysed form a seller (supplier) perspective. Trade credit allows the supplier to increase sales and profits but creates the risk that the customer will not pay, and at the same time increases the risk of the supplier’s insolvency. If the supplier is a small or micro-enterprise (SMiE), it is usually an issue of human and technical resources. Therefore, when dealing with these issues, the supplier needs a high accuracy but simple and highly interpretable trade credit risk assessment model that allows for assessing the risk of insolvency of buyers (who are usually SMiE). The aim of the research is to create a statistical enterprise trade credit risk assessment (ETCRA) model for Lithuanian small and micro-enterprises (SMiE). In the empirical analysis, the financial and non-financial data of 734 small and micro-sized enterprises in the period of 2010–2012 were chosen as the samples. Based on the logistic regression, the ETCRA model was developed using financial and non-financial variables. In the ETCRA model, the enterprise’s financial performance is assessed from different perspectives: profitability, liquidity, solvency, and activity. Varied model variants have been created using (i) only financial ratios and (ii) financial ratios and non-financial variables. Moreover, the inclusion of non-financial variables in the model does not substantially improve the characteristics of the model. This means that the models that use only financial ratios can be used in practice, and the models that include non-financial variables can also be used. The designed models can be used by suppliers when making decisions of granting a trade credit for small or micro-enterprises.

The impact of corporate distress along the supply chain: evidences from United States

PurposeThe aim of the study is to provide evidence on the distress in the supply chain and its impact on the trade credit policy, firms’ performance and risk and their growth opportunities. Trade credit creates a strict relation between suppliers and customers that cannot be easily substituted over time. The linkages established between firms in a supply chain are a key value added for all members that could represent a competitive advantage over independent market players. In the event of a supply chain disruption, all members could suffer from a decrease in profitability and an increase in risk. Nonetheless, no empirical evidence exists on the expected economic and financial effects on pertinent suppliers and customers.Design/methodology/approachThis paper examines the US market and evaluates the impact of a supply chain member’s default on the other members, looking at both the customers’ and suppliers’ default. The sample considers all firms in the USA disclosing entry into bankruptcy proceedings through EDGAR filings that were not classified as financial intermediaries between 2012 and 2016. The analysis considers the effect of distress on the supply chain (suppliers or customers) on the trade credit policy, performance, risk and growth perspectives of connected firms.FindingsThe results show that a supply chain disruption not only modifies the trade credit policy but also affects firm risk and profitability and the financing sources available to support firm growth. Empirical evidence shows that the bankruptcy of a member of the supply chain affects the trade credit policy of all the other members. The costs related to default are economically and financially relevant to all supply chain members and affect the resiliency of the supply chain beyond the short term.Originality/valueThis paper uses an original and innovative database to empirically test the impact of corporate distress on supply chain financing, performance, risk and growth opportunities.

The Incentive Model in Supply Chain with Trade Credit and Default Risk

Trade credit is widely used for its advantages. However, trade credit also brings default risk to the manufacturer due to the uncertain demand. And moral hazard may aggravate the default risk. The purpose of this paper is to investigate the role of moral hazard in trade credit and explore incentive contract under uncertain demand and asymmetric information. We consider a two‐echelon supply chain consisting of a risk‐neutral retailer ordering a single product from a risk‐neutral manufacturer. Market demand is stochastic and is influenced by retailer’s sales effort which is his private information. Incentive theory is used to develop the principal‐agent model and get the incentive contract from the manufacturer’s perspective. Results show that the retailer will reduce his effort level to get more profit and the manufacturer’s profit will be reduced, in the case of asymmetric information. Facing this result, the manufacturer will reduce the order quantity in incentive contract to lessen his losses. Numerical examples are provided to illustrate all these theoretical results and to draw managerial insights.

Is Thailand’s credit default swap market linked to bond and stock markets? Evidence from the term structure of credit spreads

When the term structure of credit spreads is used in a panel vector autoregression model, Granger causality tests provide strong evidence of bi-directional relationships among CDS, bond and stock markets. This study argues that extant research using only a 5-year credit spread tends to understate intermarket linkages since in practice investors are able to trade credit risk over the entire term structure of credit spreads. Interestingly, this study produces new empirical evidence that the term structure of CDS-bond basis displays a monotonically increasing trajectory. As the maturity lengthens, the arbitrage opportunity of companies with negative (positive) CDS-bond basis decreases (increases).

Two-period supply chain with flexible trade credit contract

This paper studies a two-period supply chain that consists of a retailer and a supplier. A newsvendor-like retailer is capital constrained and orders products using a supplier's trade credits to satisfy uncertain market demand. Most existing studies show that the retailer always postpones payment until the due date. To recall the loans earlier, we present a case in which the supplier, as a Stackelberg leader, offers an incentive of a discounted wholesale price in the second order to entice the retailer to choose flexible early payment. The proposed incentive is related to the retailer's early payment time in the first period. In the presence of bankruptcy risks for both the retailer and supplier, we propose a continuous newsvendor model of a two-period supply chain to analyze the decisions involved in the flexible trade credit contract. The analytic forms confirm that such an incentive can improve the decentralized supply chain efficiency and decreases the supplier's trade credit risk. The retailer always prefers early payment to payment around the due date to increase revenues. Furthermore, the action of paying early might help the retailer adjust cash flow between the two periods. We also find that a revenue sharing contract significantly affects the retailer's payment behavior and supplier's wholesale price. The numerical simulations support our results.

Trade Credit Risk Management: The Role of Executive Risk‐Taking Incentives

AbstractIn this study we investigate how executive equity incentives affect companies’ risk‐taking behavior in relationships with their customers. We hypothesize and find that executive risk‐taking incentives provided by options are positively related to the degree of trade credit riskiness measured both as the amount of total trade credit a firm extends to all its customers and as the amount of trade credit a firm extends to customers with a high probability of default. We also find that the measures of trade credit riskiness are positively related to the firm's future stock return volatility, suggesting that the customer default risk inherent in customer‐supplier trade credit relationships represents an important economic source of the overall supplier‐firm riskiness. The findings of the study provide insights into why firms facing financial difficulties are not denied trade credit.

Trade Credit Risk in the Business of Agricultural Enterprises in the Middle Pomerania Region

The aim of the research presented in this article is to assess the risks associated with granting trade credit at a group of agricultural enterprises on the example of businesses located in Middle Pomerania. This assessment of the risk involved in extending credit to business partners in the agricultural sector was conducted in stages. The first task was to describe the sample of farms, with particular emphasis placed on the effects of their financial decisions. This was followed by a presentation of the activity of agricultural holdings in respect of the granting of trade credit, whose main aims were to evaluate the tendency to postpone the maturity dates of customer payments and to assess the characteristics of price discount policies. Counterparties’ credit risk was measured as the proportion of total sales revenue lost by agricultural businesses due to non-repayment of trade credit.

Reverse trade credit or default risk? Explaining the use of prepayments by firms

This paper provides a detailed empirical study on the use of advance payments by firms. It establishes that some trade credit theories can also be applied to prepayment. The results, obtained from a large panel dataset, suggest that a series of factors affect prepayments. First, financially stronger customers finance the production of their financially weaker suppliers. Second, advance payments also occur as a response to transaction risk in both domestic and international transactions. Finally, besides financial and warranty reasons, the trading partners' relative bargaining power influences payment terms as well.

Assessment of trade credit risk in business companies

The article‘s topic is relevant, because the importance of trade credit constantly increases. Trade credit can be one of the most important preconditions for the competitiveness of the enterprise and business development. There is a lack of scientific sources in the field of estimation of trade credit risk – there is no any particular, simple to use methodology to assess company trade credit risk. 
 The aim of the article – to compose a methodology of assessment company trade credit risk for Lithuanian small and medium enterprises.
 In the article, following scientific sources approach, the advantages, risks and key financial and non-financial trade credit risk factors were identified. Based on the scientific sources and expert evaluation, the methodology of company trade credit risk assessment was created. The methodology is based on 10 key indicators identified by the experts. 12 financial ratios and non-financial indicators are being used – current and quick ratio, gross and net profit margin, Altman Z model, debt ratio, stock and debtors turnover, enterprise age, reputation, number and dynamics of employees. The indicators have been scored. The highest possible score is 100.
 The research approves that the methodology suits to be used in practice. It is simple, reliable, cheap, non-time consuming; it is easy to collect data, the data is being formalized and quantified. The disadvantages of methodology – the data is not always reliable and some ratios are of different importance in the different economic sectors. The methodology should be modified to adapt for the different sectors of business.

The implications of credit risk transfer for the credit channel

Growth in new instruments designed to trade credit risk has significant implications for the conduct of monetary policy through banks. This paper considers the effects of three credit risk transfer instruments - securitised assets, secondary market syndicated loans, and credit derivatives - on the credit channel of the transmission mechanism. With alternative funding opportunities, a new theoretical framework focuses on the ability of monetary policy to impact the financial condition of banks as borrowers in credit markets. Evidence of the credit channel is tested for in a factor–augmented vector autoregression (FAVAR) model. The results show no support for the existence of a traditional bank lending channel that functions through deposits and the supply of bank credit but demonstrate credit channel effects in higher bank funding costs, which are passed on to bank business loan and nonbank commercial mortgage borrowers. The results suggest that credit risk transfer has transformed some credit markets so that monetary policy remains effective through the cost of credit.

REIKŠMINGŲ NEFINANSINIŲ RODIKLIŲ NUSTATYMAS VERTINANT EKSPORTO PREKINIO KREDITO RIZIKĄ

In the global market every small and opened economy depends strongly on the volume of export. Exporting companies, striving to get a competitive advantage, provide their customers (importers) with trade credits. On the other hand, such involvement into financial relations with importers is very risky for exporters themselves. The abundance of given trade credits may even cause insolvency and bankruptcy of the exporter itself. Despite this importance literature on modelling the trade credit risk in the case of export is scarce. Exporters should take into account both financial and non-financial risk factors of the partners and country risk, while providing trade credit to their foreign partners. Both the foreign country risk and customer’s financial analysis are researched extensively. However, the problem arises when significant non-financial indicators of foreign customer’s credit risk have to be set. The aim of the paper is to make an empirical research and estimate the most significant non-financial indicators when assessing trade credit risk in the case of export. In order to estimate the significant non-financial indicators in the analysis of export trade credit risk, the method of expert evaluation was applied. DOI: http://dx.doi.org/10.5755/j01.em.17.3.2112