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 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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Bibliographic Details
Main Authors: Laeven, Luc, Klapper, Leora, Rajan, Raghuram
Language:English
Published: 2010-06-01
Subjects:ACCESS TO CREDIT, ACCESS TO FINANCING, ACCOUNTS PAYABLE, ACCOUNTS RECEIVABLE, ACCOUNTS RECEIVABLES, AFFILIATED ORGANIZATIONS, ALTERNATIVE FINANCING, ASYMMETRIC INFORMATION, BALANCE SHEET, BANK ACCOUNT, BANK CREDIT, BARGAINING POWER, BILATERAL CONTRACT, BOND, BONDS, BORROWING, BORROWING COSTS, BUSINESS RISK, CAPITAL STRUCTURE, CENTRAL BANK, COLLATERAL, COMPETITIVENESS, CREDIT CONSTRAINED FIRMS, CREDIT CONTRACT, CREDIT CONTRACTS, CREDIT COSTS, CREDIT DEFAULTS, CREDIT MARKET, CREDIT PROVISION, CREDIT RATIONING, CREDIT RELATIONSHIPS, CREDIT TERMS, CREDITWORTHINESS, CURRENCY, CUSTOMER RELATIONSHIPS, DEBT, DEBT COLLECTORS, DEBT MATURITY, DEFAULT RISK, DEPENDENT, DEVELOPING COUNTRIES, DISCOUNT RATE, DISCRIMINATION, DUMMY VARIABLE, EXPLOITATION, EXTERNAL FINANCING, FEDERAL RESERVE, FINANCIAL CRISES, FINANCIAL DISTRESS, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIARIES, FINANCIAL INTERMEDIARY, FINANCIAL MANAGEMENT, FINANCIAL MARKETS, FINANCIAL SHOCKS, FINANCIAL STUDIES, FINANCIERS, FINANCING CONSTRAINTS, FINANCING COSTS, FIXED COSTS, FOREIGN COURTS, INFORMAL CREDIT, INFORMATION ASYMMETRIES, INFORMATIONAL ASYMMETRIES, INFORMATIONAL ASYMMETRY, INSURANCE, INTEREST RATE, INTERNATIONAL BANK, INTERNATIONAL FIRMS, INVENTORY, INVENTORY MANAGEMENT, JURISDICTIONS, LARGE FIRMS, LIQUIDITY, LOCAL BANK, MARKET COMPETITION, MARKET POWER, MATURITIES, MATURITY, MERCHANDISE, MERCHANDISE TRADE, MONETARY FUND, MULTINATIONAL, MULTINATIONAL FIRMS, NONPAYMENT, PAYMENT TERMS, PERISHABLE GOODS, PREPAYMENT, PRICE DISCRIMINATION, PRODUCT QUALITY, PROMPT PAYMENTS, PROPRIETARY INFORMATION, PURCHASING, RETAIL, RETAIL INDUSTRY, RETAILING, RISK MANAGEMENT, RISK MANAGEMENT TOOL, SALES, SHORT-TERM FINANCING, SMALL BUSINESS, SMALL BUSINESS FINANCING, SPREAD, SUPPLIER, SUPPLIERS, SUPPLY CHAIN, TOTAL SALES, TRADE CREDIT, TRANSACTION, TURNOVER, WORKING CAPITAL,
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
https://hdl.handle.net/10986/3813
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