Trade Credit: Suppliers as Debt Collectors and Insurance Providers

Posted: 17 Jul 2008

See all articles by Vicente Cuñat

Vicente Cuñat

London School of Economics & Political Science (LSE) - Financial Markets Group

Date Written: March 2007

Abstract

This article examines how in a context of limited enforceability of contracts suppliers may have a comparative advantage over banks in lending to customers because they are able to stop the supply of intermediate goods. Suppliers may act also as liquidity providers, insuring against liquidity shocks that could endanger the survival of their customer relationships. The relatively high implicit interest rates of trade credit are the result of insurance and default premiums that are amplified whenever suppliers face a relatively high cost of funds. I explore these effects empirically for a panel of UK firms.

JEL Classification: G30, M130, D920

Suggested Citation

Cuñat, Vicente, Trade Credit: Suppliers as Debt Collectors and Insurance Providers (March 2007). The Review of Financial Studies, Vol. 20, Issue 2, pp. 491-527, 2007. Available at SSRN: https://ssrn.com/abstract=1161662 or http://dx.doi.org/10.1093/rfs/hhl015

Vicente Cuñat (Contact Author)

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://www.vicentecunat.com

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