Buyer-Supplier Relationships and Trade Credit

HKUST Working Paper

49 Pages Posted: 16 Sep 2004

See all articles by Shantanu Banerjee

Shantanu Banerjee

Lancaster University - Management School

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR

Yungsan Kim

Hanyang University

Abstract

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

Banerjee, Shantanu and Dasgupta, Sudipto and Kim, Yungsan, Buyer-Supplier Relationships and Trade Credit. HKUST Working Paper, Available at SSRN: https://ssrn.com/abstract=590482 or http://dx.doi.org/10.2139/ssrn.590482

Shantanu Banerjee (Contact Author)

Lancaster University - Management School ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Yungsan Kim

Hanyang University ( email )

Seoul 133-791
Korea

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