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Financial Constraints and Trade Credit as a Strategic Tool: Evidence from Small-Scale Reservation Reforms in India

68 Pages Posted: 25 Sep 2015 Last revised: 23 Aug 2017

Manpreet Singh

Georgia Institute of Technology

Date Written: August 22, 2017

Abstract

How financial constraints affect incumbent supplier firms choice of extending more trade credit vis-a-vis offering price discounts when facing increased threat of entry by competitors? Threatened incumbent supplier firms may extend more trade credit, ex-ante, to defend their market power, or they may reduce prices or both. I test these predictions by exploiting plausibly exogenous, staggered removals of product level entry barriers for Indian manufacturing firms, and find that an average incumbent supplier firm extends 11% more trade credit and lowers price by 8.6% with an increased threat of entry. Interestingly, firms with deeper pockets offer longer terms on trade credit, while constrained firms rely on price discounts. Also, I find that financially constrained customers to take credit offers while unconstrained customers take price discounts.I further confirm my results using various proxies of financial constraints and policy changes in the country that improved access to finance. Thus emphasize the role of trade credit as a strategic tool to defend market power, when firms face financial constraints.

Keywords: Trade credit, limit-pricing, entry threat, financial constraints

JEL Classification: G32, G38

Suggested Citation

Singh, Manpreet, Financial Constraints and Trade Credit as a Strategic Tool: Evidence from Small-Scale Reservation Reforms in India (August 22, 2017). Asian Finance Association (AsianFA) 2016 Conference. Available at SSRN: https://ssrn.com/abstract=2665032 or http://dx.doi.org/10.2139/ssrn.2665032

Manpreet Singh (Contact Author)

Georgia Institute of Technology ( email )

800 W Peachtree St NW
Room 4162
Atlanta, GA 30308
United States
+14043855330 (Phone)

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

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