The Information Content of Trade Credit
42 Pages Posted: 15 Mar 2010 Last revised: 4 Feb 2015
Date Written: December 3, 2011
During 1992–2007, suppliers financed almost 10% of the total assets of U.S. listed firms. This intensive usage of trade credit is puzzling in the light of its high (implicit) costs. By arguing that trade credit use provides valuable information to outside investors, we first derive a theoretical model that predicts a positive correlation between trade credit use and the quality of the firm’s investments. Then, using several proxies for firm’s investment quality (Z-score, return on assets, and long-run abnormal returns), we show that this prediction receives strong support from a large sample of U.S. firms.
Keywords: Trade credit, Signaling, Z-score, Long-run abnormal returns
JEL Classification: G32
Suggested Citation: Suggested Citation