The Implicit Costs of Trade Credit Borrowing by Large Firms

55 Pages Posted: 16 Mar 2012 Last revised: 13 Sep 2013

See all articles by Justin Murfin

Justin Murfin

Cornell SC Johnson College of Business

Kenneth Njoroge

University of Oregon

Date Written: June 26, 2013

Abstract

We examine a novel but economically important characterization of trade credit relationships in which large investment-grade buyers borrow from their substantially smaller, often credit- constrained, suppliers. Using variation in large retailers’ aggregate cash management policies as a shock to how quickly individual vendors are paid, we show that slower payment terms by important buyers are linked to cutbacks in important expenditures at the supplier level. By way of example, a one month delay in payment by Wal-Mart is associated with 1.2% reduction in capital expenditures for the representative Wal-Mart supplier. We find limited evidence of adjustment along financial margins. The effects are sharpest during periods of tight bank credit and for firms which we might otherwise characterize as facing credit constraints, suggesting that the opportunity cost of extending credit to one’s buyers is positive and increasing in the financial frictions facing a firm. Meanwhile, using novel data on warranty claims and the length of buyer-supplier relationships, we find support for the hypothesis that uncertainty regarding product quality for new suppliers drives slow payment, in spite of the dead weight losses it imposes on these often constrained firms. Thus, the simultaneous financial and product market frictions commonly facing small, young firms may make trade credit extension both necessary and costly.

Keywords: Trade credit, investment

JEL Classification: G32

Suggested Citation

Murfin, Justin and Njoroge, Kenneth, The Implicit Costs of Trade Credit Borrowing by Large Firms (June 26, 2013). Available at SSRN: https://ssrn.com/abstract=2023409 or http://dx.doi.org/10.2139/ssrn.2023409

Justin Murfin (Contact Author)

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Kenneth Njoroge

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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