Trade credit and supplier competition

By Jiri Chod, Evgeny Lyandres, S. Alex Yang. Journal of Financial Economics, 2019

260 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/e1b98be16bd5ae2deaadda76ec8445f26bbd5ce7

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Citations in the corpus

Trade Credit, Risk Sharing, and Inventory Financing Portfolios (2017, background): “On the theory side, we refer to Giannetti et al. (2011), Klapper et al. (2012) and Chod et al. (2016) for extensive reviews on the literature of trade credit theories.”
The differential impact of leverage on the default risk of small and large firms (2020, background): “Indeed, supply of trade credit is affected by suppliers’ competition (Chod et al., 2019), suppliers’ bargaining power (Fabbri and Klapper, 2016), product market power (Goncalves et al.”
A Trade Credit Model with Asymmetric Competing Retailers (2018, background): “The work on modeling the linkage of credit with limited liability includes examinations of the interactions between ﬁnance and economics (Brander and Lewis 1986, Peura et al. 2016, Showalter 1995) and the interactions between ﬁnance and operations (Chod 2016, Chod et al. 2016, Yang et al. 2015).”