Trade credit, collateral liquidation, and borrowing constraints

Assuming that firms’ suppliers are better able to extract value from the liquidation of assets in default and have an information advantage over other creditors, the paper derives six predictions on the use of trade credit. (1) Financially unconstrained firms (with unused bank credit lines) take tra...

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Bibliographic Details
Published in:Journal of financial economics 2010-06, Vol.96 (3), p.413-432
Main Authors: Fabbri, Daniela, Menichini, Anna Maria C.
Format: Article
Language:English
Subjects:
Asset tangibility
Borrowing
Collateral
Corporate finance
Credit
Credit policy
Creditor protection
Financial constraints
Industrial organization
Lines of credit
Liquidation
Studies
Trade credit
Trade credit Collateral Financial constraints Asset tangibility Creditor protection
Trade relations
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Summary:Assuming that firms’ suppliers are better able to extract value from the liquidation of assets in default and have an information advantage over other creditors, the paper derives six predictions on the use of trade credit. (1) Financially unconstrained firms (with unused bank credit lines) take trade credit to exploit the supplier's liquidation advantage. (2) If inputs purchased on account are sufficiently liquid, the reliance on trade credit does not depend on credit rationing. (3) Firms buying goods make more purchases on account than those buying services, while suppliers of services offer more trade credit than those of standardized goods. (4) Suppliers lend inputs to their customers but not cash. (5) Greater reliance on trade credit is associated with more intensive use of tangible inputs. (6) Better creditor protection decreases both the use of trade credit and input tangibility.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2010.02.010