Trade Credit, Cash Holdings, and Product Market Competition
Posted: 7 May 2019 Last revised: 31 Oct 2022
Date Written: April 25, 2020
We explore how trade credit complements cash holdings in product market competition. First, similar to cash to cash flow sensitivity (Almeida, Campello, and Weisbach 2004), we report that trade credit is sensitive to internal cash flows and this sensitivity is moderated by firms’ financial strength, market power, and relationship specific investments. We show that both trade credit and cash holdings are strategically valuable in product market competition and their valuations are moderated by a common set of factors. Using Differences-in-difference framework, we establish causality between trade credit practices and product market competition. We also show that the value of trade credit depends on whether suppliers are in relation with principal customers.
Keywords: Cash Holdings, Trade Credit, Product Market Competition, Market Power, Relation Specific Investments
JEL Classification: G30, G32.
Suggested Citation: Suggested Citation