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

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. 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; Late Payment; Market Power; Downstream Cost Shifting