The Economics of Trade Credit: Risk and Power

Abstract

Trade credit is differentiated from other lending channels by the underlying sales relationship. Using a unique hand-collected dataset of customer-supplier-matched trade credit, I examine how the importance of a customer’s sales to its supplier affects trade credit decisions. Contrary to predictions of customers using bargaining power to extract trade credit concessions, I find an inverse relationship between a supplier’s sales dependence on a customer and trade credit. Evidence points to bank monitoring causing suppliers to avoid customer credit concentrations. Results only hold for suppliers with a major banking relationship, and are stronger with more intense bank monitoring.