Trade credit and supplier competition |
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Authors: | Jiri Chod Evgeny Lyandres S Alex Yang |
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Institution: | 1. Carroll School of Management, Boston College, Chestnut Hill, MA 02467, United States;2. Questrom School of Business, Boston University, 595 Commonwealth Avenue, Boston, MA 02215, United States;3. London Business School, Regent’s Park, London NW1 4SA, UK |
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Abstract: | This paper examines how competition among suppliers affects their willingness to provide trade credit financing. Trade credit extended by a supplier to a cash constrained retailer allows the latter to increase cash purchases from its other suppliers, leading to a free rider problem. A supplier that represents a smaller share of the retailer’s purchases internalizes a smaller part of the benefit from increased spending by the retailer and, as a result, extends less trade credit relative to its sales. In consequence, retailers with dispersed suppliers obtain less trade credit than those whose suppliers are more concentrated. The free rider problem is especially detrimental to a trade creditor when the free-riding suppliers are its product market competitors, leading to a negative relation between product substitutability among suppliers to a given retailer and trade credit that the former provide to the latter. We test the model using both simulated and real data. The estimated relations are consistent with the model’s predictions and are statistically and economically significant. |
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Keywords: | Trade credit Competition Product substitutability G32 |
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