Wisdom of Crowds along the Supply Chain: Causal Evidence from Trade Credit

HEC Paris Research Paper No. ACC-2023-1498

Posted: 5 Oct 2023 Last revised: 21 Apr 2024

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

Simon Fraser University; City University of Hong Kong

Albert Mensah

HEC Paris - Accounting and Management Control Department

Vicki Wei Tang

Georgetown University - Department of Accounting and Business Law

M.H. Franco Wong

University of Toronto - Rotman School of Management

Date Written: August 30, 2023

Abstract

Using the Twitter setting, we examine whether social media data about trade debtors’ prospects are informative for assessing their creditworthiness. We employ a regression discontinuity design to exploit the random, discrete variation in the debtors’ consumer satisfaction scores around discontinuities created by exogenous, pre-determined rounding rules. We document an increase in supplier-awarded trade credit (by about 1.3 [0.4] percent of the cost of goods sold [assets]) in response to a rounding-induced 1-point surge in these scores, which have a 0-100 range. In the cross-section, we find that this effect holds mainly when: (i) trade debtors fall within the “inconclusive region” of a key traditional financial health metric; (ii) uncertainties about trade debtors’ future earnings and future cash flows are high; (iii) there is no previous debtor-supplier relationship; and (iv) debtors have strong negotiation power. Overall, our evidence suggests that suppliers use alternative data to mitigate uncertainties about trade debtors’ prospects.

Keywords: supply chain, trade credit, information asymmetry, alternative data, social media

JEL Classification: D83, G14, G21; G32, M41

Suggested Citation

Kim, Jeong-Bon and Mensah, Albert and Tang, Vicki Wei and Wong, M.H. Franco, Wisdom of Crowds along the Supply Chain: Causal Evidence from Trade Credit (August 30, 2023). HEC Paris Research Paper No. ACC-2023-1498, Available at SSRN: https://ssrn.com/abstract=4567815 or http://dx.doi.org/10.2139/ssrn.4567815

Jeong-Bon Kim

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Albert Mensah (Contact Author)

HEC Paris - Accounting and Management Control Department

Jouy-en-Josas
France

HOME PAGE: http://https://www.hec.edu/en/faculty-research/faculty-directory/faculty-member/mensah-albert

Vicki Wei Tang

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

M.H. Franco Wong

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-0729 (Phone)

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Wong.aspx

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