The Hidden World of Trade Credit: The Flexibility Role of Late Payments

26 Pages Posted: 12 Oct 2020 Last revised: 30 May 2024

See all articles by Jing Wu

Jing Wu

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Hsiao-Hui Lee

National Chengchi University (NCCU) - Department of Management Information Systems

John R. Birge

University of Chicago - Booth School of Business

Date Written: August 11, 2020

Abstract

Trade credit research mainly focuses on the suppliers' provision of trade credit, leaving downstream firms' payment behavior less explored. This study offers a fresh perspective within this area in examining trade credit late payment behavior among downstream customers. By leveraging the unique trade credit payment data from Dun & Bradstreet (D&B), our analysis reveals that late payment behavior is positively correlated with a firm's downstream cost-shifting incentives. We also demonstrate that firms strategically determine the duration of their trade credit payment delays. Moreover, we provide evidence that suppliers rarely take legal actions against prevalent short-term late payments. Finally, we show that more late payment are associated with higher inventory turnovers but lower profitability. Our findings have important implications for both managers and regulators: Firms can utilize trade credit's payment flexibility for working capital management, but should avoid exploiting suppliers with excessive late payments. Regulators should not over-regulate short-term overdue payments as they may reflect behavior that enhances supply chain coordination, as only long-term delays may damage relationships and harm suppliers. In sum, our findings provide fresh insights into the role of flexibility in trade credit, particularly in terms of extended payment, which provides valuable information for future research and business practice.

Keywords: Trade Credit, Customer Payment, Downstream Cost Shifting, Flexibility

Suggested Citation

Wu, Jing and Lee, Hsiao-Hui and Birge, John R., The Hidden World of Trade Credit: The Flexibility Role of Late Payments (August 11, 2020). Available at SSRN: https://ssrn.com/abstract=3671400 or http://dx.doi.org/10.2139/ssrn.3671400

Jing Wu (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.jingwulab.org

Hsiao-Hui Lee

National Chengchi University (NCCU) - Department of Management Information Systems ( email )

No. 64, Section 2, Zhǐnán Rd
Wenshan District
Taipei City
Taiwan

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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