Trade Credit as a Signal of Quality
41 Pages Posted: 14 Oct 2008
Date Written: April 2008
Trade credit is a major source of financing. Over the past decade, it has represented more than 20% of the total assets of US listed firms. Different arguments have been suggested in the academic literature to explain why there is a strong industry pattern to trade credit usage (including the nature of the firm's assets, the degree of liquidity of the firm's inputs, and the degree of competition among suppliers), but little is known about the factors underlying the variance of trade signal of quality. Our theoretical predictions are empirically verified using a large sample of US firms observed during the 1977-2005 period.
Keywords: trade credit, signaling
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