Reverse Trade Credit or Default Risk? Explaining the Use of Prepayments by Firms

Abstract:     
This paper provides the first detailed empirical study on the use of prepayments by firms. Using large panels of firms, we find evidence supporting the production continuation theory of prepayment according to which customers prepay their suppliers when these would otherwise delay production and input supply. We also find that cash advance payments occur in both domestic and international transactions as a response to corporate default risk. Our results show that both firm characteristics (profitability, liquidity, bank loans, and size) and industry characteristics (the type of traded goods and industry concentration) influence the volume of prepayments.

Number of Pages in PDF File: 35

Keywords: prepayment, trade credit, inventories, international trade, export

JEL Classification: G31, G32, F10

Accepted Paper Series