Trade Credit Late Payment and Industry Structure

35 Pages Posted: 12 Oct 2020

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

Problem definition: Trade credit studies pay little attention to firms’ late payment behavior due to the lack of extensive panel data. From the perspective of industry structure, this paper is the first to empirically study firms’ trade credit late payment.

Academic/Practical Relevance: While the trade credit research has focused on credit issuance and terms of suppliers, the information content of trade credit is incomplete without understanding payment behavior of customers.
Methodology: We acquire a unique trade credit payment dataset from Dun & Bradstreet (D&B) Global Trade Plan to study how industry structure shapes the way firms delay payments to their suppliers.

Results: We show that a firm’s late payment behavior is positively associated with market power and downstream cost-shifting, and firms strategically choose to whom and for how long to delay their trade credit payment. We employ an instrumental variable approach to establish causality and conduct several robustness checks. We also examine several moderating factors, including a firm’s capacity to borrow and speed to borrow, inventory turnover, and prior contract breach record.

Managerial Implications: In addition to suppliers’ trade credit offer, our findings uncover the other half of trade credit practice—customers’ payment behavior. It suggests that managers of supplier firms should be cautious about late payments when they make trade credit contracts with customers. Regulators should also note that suppliers are in a weak position in terms of demanding payments compared to secured lenders such as banks.

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

Suggested Citation

Wu, Jing and Lee, Hsiao-Hui and Birge, John R., Trade Credit Late Payment and Industry Structure (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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