Trade Credit and Supplier Competition

75 Pages Posted: 9 Oct 2016 Last revised: 10 Feb 2018

See all articles by Jiri Chod

Jiri Chod

Boston College

Evgeny Lyandres

Boston University

S. Alex Yang

London Business School; The University of Hong Kong - Faculty of Business and Economics

Date Written: December 11, 2017

Abstract

This paper examines how competition among suppliers affects their willingness to provide trade credit financing. Trade credit extended by a supplier to a cash constrained retailer allows the latter to increase cash purchases from its other suppliers, leading to a free rider problem. A supplier that represents a smaller share of the retailer's purchases internalizes a smaller part of the benefit from increased spending by the retailer and, as a result, extends less trade credit relative to its sales. In consequence, retailers with dispersed suppliers obtain less trade credit than those whose suppliers are more concentrated. The free rider problem is especially detrimental to a trade creditor when the free-riding suppliers are its product market competitors, leading to a negative relation between product substitutability among suppliers to a given retailer and trade credit that the former provide to the latter. We test the model using both simulated and real data. The estimated relations are consistent with the model's predictions and are statistically and economically significant.

Suggested Citation

Chod, Jiri and Lyandres, Evgeny and Yang, S. Alex, Trade Credit and Supplier Competition (December 11, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2849641 or http://dx.doi.org/10.2139/ssrn.2849641

Jiri Chod

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Evgeny Lyandres (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)

S. Alex Yang

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://faculty.london.edu/sayang/

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Register to save articles to
your library

Register

Paper statistics

Downloads
545
Abstract Views
1,864
rank
48,963
PlumX Metrics