Trade Credit Late Payment and Industry Structure

Abstract

Problem Definition: Trade credit is essential for short-term financing in supply chains. While existing empirical and theoretical research focuses on how upstream suppliers provide trade credit, little attention has been paid in the literature to the payment behavior of downstream customers owing to the paucity of data. By leveraging unique trade credit payment data from Dun & Bradstreet (D&B), this paper is the first empirical study of firms’ delayed payments on trade credits, supporting the flexibility benefit of trade credit and filling an important gap in the literature.

Methodology/Results: We show that a firm’s late payment behavior is positively associated with its market power position and downstream cost-shifting incentive. To provide further support, we use an instrumental variable approach to examine a possible causal interpretation of our results and conduct various robustness tests (e.g., varying alternative measures, using different time windows, and changing data frequency). Furthermore, we show that firms strategically choose to whom and for how long to delay their trade credit payments. An analysis of supply chain contract litigation supports the late payment of trade credit as a constant business culture in firm operations. Finally, we show that more late payment experiences are associated with higher inventory turnovers and deteriorated profitability.

Managerial Implications: Our findings have important implications for managers and regulators. Corporate managers of supplier firms should stay cautious about the heterogeneous late payment behavior of their downstream firms – besides the variations in these downstream firms’ characteristics, the difference between being a major versus an average supplier and the payment behavior of partners across the supply chain layers also matter. While we reveal the role of flexibility in trade credit, regulators should notice that trade credit payments are often delayed, and suppliers are in a weaker position to demand extended payments than secured lenders such as banks.

Keywords: Trade Credit; Late Payment; Market Power; Downstream Cost Shifting