Buyer-Supplier Relationships and Trade Credit
HKUST Working Paper
49 Pages Posted: 16 Sep 2004
We create a database of supplier firms' principal customers from Compustat's Business Information File and examine the impact of principal customers on the provision of trade credit. The supplier firms' accounts receivable scaled by sales decreases in the proportion of sales accounted for by principal customers. This is consistent with the financing advantage or price-discrimination theories of trade credit, but less consistent with theories that view trade credit as a general subsidy to all customers to promote sales, as a guarantee of product quality, or as a manifestation of customer bargaining power. The underlying relationship, however, is non-linear, suggesting that transactions motives also affect trade credit. Long-term principal customers pay more promptly when the suppliers are in financial distress, suggesting the value of durable relationships. Accounts payable are also affected by the proportion of sales to principal customers - which suggests that firms match the maturity structure of their assets and liabilities by letting payables policy be determined, in part, by their receivables. Bigger firms offer more trade credit and also pay more promptly: a proportionate increase in sales and asset size increases accounts receivable more than proportionately, and accounts payable less than proportionately. Both accounts receivable and accounts payable are affected by the supplier firm's inventory, leverage, cash flows and profit margin in a manner that is mainly consistent with the financing advantage, the price-discrimination and the transactions cost theories.
Keywords: Trade Credit, Principal Customers
JEL Classification: G32, L22
Suggested Citation: Suggested Citation