Trade Credit: Contract-Level Evidence Contradicts Current Theories

Riksbank Research Paper Series No. 139

Sveriges Riksbank Working Paper Series No. 315

40 Pages Posted: 19 May 2016

See all articles by Tore Ellingsen

Tore Ellingsen

Stockholm School of Economics - Department of Economics; Norwegian School of Economics (NHH) - Department of Economics

Tor Jacobson

Sveriges Riksbank - Research Division

Erik L. von Schedvin

Sveriges Riksbank

Date Written: January 2016

Abstract

We study 52 million trade credit contracts, issued by 51 suppliers over 9 years to about 199,000 unique customers. The data contain information on contract size, due dates, actual time to payment, and firm characteristics. Our empirical analysis contradicts the conventional view that trade credit is an inferior source of funding. Specifically, while we replicate the usual finding that payables are negatively related to customers’ financial strength, our disaggregated data reveal that improvements in customers’ financial conditions are primarily associated with a reduced value of input purchases rather than smaller trade credit usage. In fact, customers’ financial conditions are unrelated to agreed contract duration and only modestly affect overdue payments. Moreover, the customer’s size and share of the supplier’s sales both have a positive impact on the due date. Overall, the evidence indicates that customers prefer trade credit over other available sources of funding and thus calls for a new theory of short-term finance.

Keywords: Trade credit, Credit contracts, Financing constraints

JEL Classification: G32, G33

Suggested Citation

Ellingsen, Tore and Jacobson, Tor and von Schedvin, Erik L., Trade Credit: Contract-Level Evidence Contradicts Current Theories (January 2016). Riksbank Research Paper Series No. 139. Available at SSRN: https://ssrn.com/abstract=2780410 or http://dx.doi.org/10.2139/ssrn.2780410

Tore Ellingsen

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
Sveavagen 65
S-113 83 Stockholm
Sweden
+46 8 736 9260 (Phone)
+46 8 31 3207 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

Tor Jacobson (Contact Author)

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden
+46 8 787 0000 (Phone)

HOME PAGE: www.riksbank.com

Erik L. Von Schedvin

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

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