Trade Credit Contracts
This paper provides new evidence on the unique role of trade credit and contracting terms as a way for both sellers and buyers to mange business risk. The authors use a novel and unique dataset on almost 30,000 supplier contracts for 56 large buyer...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100601112020 http://hdl.handle.net/10986/3813 |
| Summary: | This paper provides new evidence on the
unique role of trade credit and contracting terms as a way
for both sellers and buyers to mange business risk. The
authors use a novel and unique dataset on almost 30,000
supplier contracts for 56 large buyers and more than 24,000
suppliers in Europe and North America. The sample of buyers
and suppliers includes firms of varying size, investment
grade, and sectors. The paper finds evidence in support of
four important, and not mutually exclusive, reasons for
trade credit: 1) as a method of financing; 2) as a means of
price discrimination; 3) as a bond assuring buyers of
product quality; and 4) as a screening mechanism to gauge
buyer default risk. In particular, the analysis finds that
the largest and most creditworthy buyers receive contracts
with the longest maturities, as measured by net days, from
smaller, investment grade suppliers. In comparison, early
payment discounts seem to be used as a risk management tool
to limit the potential nonpayment risk of trade credit.
Early payment discounts are generally offered to smaller,
non-investment grade buyers. The results suggest that
contract terms are jointly determined by supplier and buyer characteristics. |
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