Trade Credit Policy: Theory and Empirical Evidence
22 Pages Posted: 12 Nov 2004
Date Written: September 2004
Abstract
This paper proposes an agency theory to explain trade credit policy. According to this theory we have developed an agency model based on the adverse selection and moral hazard phenomena arising from the relation between sellers and buyers. This model has been estimated by using panel data methodology applied to UK companies. Our findings strongly support our agency model. We find that smaller firms, those with a smaller proportion of fixed assets, and those that are less profitable extend more trade credit, whereas firms with a high proportion of variable costs and high percentage of bad debts extend less.
Keywords: Trade Credit, Agency Theory, Adverse Selection, Moral Hazard
JEL Classification: G30
Suggested Citation: Suggested Citation
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