Clientele Credit: Theories and Evidence

Abstract

Clientele credit is a firm’s collection of payments from customers based on the firm’s unfulfilled obligations on the future delivery of services or goods. This paper is the first to document that clientele credit is an economically important but overlooked liquidity resource and has a material impact on corporate liquidity management activity. One-third of Compustat firms carry a balance of unfulfilled obligations, and their pre-collected clientele credits account for, on average, 16.8% of their non-cash assets. Many theories potentially explain the sizeable usage of this obligation-based credit, but few comprehensive empirical tests have been conducted. This paper fills the gap. Using the novel, hand-collected data from the off-balance sheet information in 10-K, I test the financing advantage hypothesis and document the following supportive findings. First, creditworthy firms are offered those credits, and the offering is not conditional on information from the bank. Second, the demand for clientele credit centers on firms without access to other credit, such as bank line of credit or trade credit. Third, a firm with better access to finance and with an information advantage is more likely to be the credit provider. Using COVID-19 as a natural experiment that caused a sudden increase in demand for liquidity, I find that constrained firms increase the clientele credit balance on an asset by 4.07% more than non-constrained firms, controlling for other demand for funding. Empirical results overall support the notion of the credit redistribution view and suggest that clientele credit is a viable liquidity alternative.

Keywords: Corporate Liquidity Management, Trade Credit, Contracts with Customers, COVID-19 Economy, Supply Chain Finance

JEL Classification: G21, G23, G32