Trade Credit Late Payment and Industry Structure

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