Downstream Value from Upstream Finance

Abstract:     
We examine market value implications of managing liquidity via supplier financing. Results suggest a direct and significant link between shareholder wealth and use of trade credit, and the relation exhibits significant cross-sectional variation. In particular, the market value of trade credit varies with the liquidity of goods sold and competition in product markets. Evidence also indicates the value-supplier financing association strengthens with financial constraint, which supports the financing motive for trade credit. Further findings support the transactions cost motive. Overall, we conclude that shareholders value the strategic benefits associated with supplier financing and that downstream firms’ characteristics influence this value.

Number of Pages in PDF File: 45

Keywords: trade credit, working capital, liquidity, shareholder wealth

working papers series