Reverse trade credit or default risk? Explaining the use of prepayments by firms |
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| Institution: | 1. 436 School of Business Administration, Portland State University, Portland, OR 97207, USA;2. Management Division, School of Graduate Professional Studies, Penn State University, 30 East Swedesford Rd., Malvern, PA 19355-1443, USA;1. Department of Financial and Management Studies, School of Oriental and African Studies, University of London, Thornhaugh Street, Russell Square, London WC1H OXG, United Kingdom;2. University of Plymouth, United Kingdom;3. University of the West of England, Nationwide Building Society, United Kingdom;1. UNSW Sydney School of Business, Australia;2. Western Sydney University, Australia;3. School of Mathematics and Statistics, UNSW Sydney, Australia;4. University of Sydney, Australia;5. University of Southern Denmark, Denmark;1. School of Management, Yale University, 165 Whitney Avenue, New Haven, CT 06511, United States\n;2. Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, United States\n;3. NBER, United States |
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| Abstract: | This paper provides a detailed empirical study on the use of advance payments by firms. It establishes that some trade credit theories can also be applied to prepayment. The results, obtained from a large panel dataset, suggest that a series of factors affect prepayments. First, financially stronger customers finance the production of their financially weaker suppliers. Second, advance payments also occur as a response to transaction risk in both domestic and international transactions. Finally, besides financial and warranty reasons, the trading partners' relative bargaining power influences payment terms as well. |
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