Trade Credit, Relationship-Specific Investment, and Product-Market Power

60 Pages Posted: 16 Aug 2010 Last revised: 26 Oct 2015

See all articles by Nishant Dass

Nishant Dass

Georgia Institute of Technology - Scheller College of Business

Jayant R. Kale

Northeastern University

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 27, 2011

Abstract

The extant literature on trade credit emphasizes its financing role wherein financially sound firms provide trade credit to ease the credit constraints of weaker trading partners. We offer an alternative, though not mutually exclusive, perspective in which trade credit serves as a commitment device. We develop a simple model to argue that an upstream firm commits to making the appropriate level of relationship-specific investment (RSI) by offering trade credit to the downstream firm. Our model predicts that trade credit will increase in (i) the level of the upstream firm's RSI, (ii) the relative bargaining power of downstream firms, (iii) the economic importance of the vertical relationship, and (iv) the cost and difficulty of verifying RSI. Using firm R&D, innovation activity, and production of differentiated goods and services to proxy for RSI, we find strong support for these predictions in a large panel of publicly listed firms. We show that trade credit is increasing in RSI proxies and decreasing in the market power of upstream firms. Further, these relationships are stronger when information frictions are greater: for example, when the upstream firm has had a shorter relationship with its downstream customer, the upstream firm is further away, is younger, or not NYSE-listed.

Keywords: Trade Credit, Relationship Specific Investment, Vertically Related Industries, Market Power, Incomplete Contracts

JEL Classification: G10, G30, G32

Suggested Citation

Dass, Nishant and Kale, Jayant Raghunath and Nanda, Vikram K., Trade Credit, Relationship-Specific Investment, and Product-Market Power (June 27, 2011). Available at SSRN: https://ssrn.com/abstract=1659702 or http://dx.doi.org/10.2139/ssrn.1659702

Nishant Dass (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-5109 (Phone)

HOME PAGE: http://scheller.gatech.edu/dass

Jayant Raghunath Kale

Northeastern University ( email )

Boston, MA 02115
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
136
Abstract Views
1,082
rank
73,174
PlumX Metrics