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We study a seller's trade credit provision decision in a situation of repeated contracting with incomplete information over the buyer's payment propensity when the enforceability of formal contracts is uncertain. The payment terms of a transaction are selected in an inter-temporal trade-off between improving the quality of information acquisition and mitigating relationship breakdown risks. When contract enforcement institutions are weak, the optimal within-relationship provision dynamics of trade credit can be uniquely determined and depend on the share of patient buyers in the destination market as well as their access to liquidity. We obtain empirical evidence showing that in developing countries the relevance of trade credit in buyers' payment schedules has risen over-proportionally in recent years.

This paper examines the impact of trust on informal financial development. We isolate the inherited component of trust for 19 countries using US census data and relate it to firms’ access to trade credit. We discover that trust disproportionately elevates the use of trade credit by companies that face obstacles to obtaining funds from formal channels. Further analyses show that the effect is more pronounced in finance-dependent industries and that better access to trade credit promotes sales growth. Our results are robust to alternative samples, different estimations of inherited trust and various model specifications.

This work analyzes the relation between the judicial system and financial constraints, investigating whether inefficiency in enforcing credit rights can amplify companies' difficulties in collecting resources on the capital market, limiting their access to the funds needed to support investments and environmental sustainability. Considering the Italian manufacturing industry and according to the selected insolvency procedures, our results suggest that, if the time necessary to settle cases decreases by 20%, we can expect an increase in the financial debt ratio between 0.92% and 5.08% and a decrease in the trade credit ratio between 0.81% and 2.71%, as well as an increase in investments between 0.46% and 3.22%. These results are robust under a variety of tests and support the hypothesis that judicial inefficiency represents a barrier to environmental sustainability, preventing investments in key technologies able to support green strategies, as well as the key role of trade dynamics as alternative funding strategy for their business. The economic implications of our evidence could be far-reaching for the whole economy, not only reducing the competitiveness and financial stability of the national system but also triggering a cascade effect on the market and undermining environmental strategies.

With over half a trillion dollars in trade credit flowing between firms in the United States, it is critically important for managers to understand how the trade credit that their firm receives and provides affect its value. Trade credit is a strategic investment in supply chain relationships that allows the recipient to make payment later rather than at the time of the sale. A firm provides trade credit to its downstream business customers and also receives trade credit from its upstream suppliers. Although research has shown that provided trade credit builds a firm’s shareholder value, it has not examined what effect, if any, received trade credit has on the firm’s value. As a result, one might assume that received trade credit affects firm value in the same manner as provided trade credit. We argue otherwise and show that received trade credit and provided trade credit have differential effects on firm value. Received trade credit has a negative direct effect and a positive indirect effect (through profit), whereas provided trade credit has a positive direct effect and a negative indirect effect. The difference in direct effects hinges on the disparate nature of dependence in the supply chain. Provided trade credit increases customers’ dependence on the firm, building the firm’s value. In contrast, received trade credit increases the firm’s dependence on its suppliers, destroying the firm’s value. Empirical results using a sample of 2804 firms from 1986 to 2017 provide robust support for the hypotheses. They show that managers risk overestimating the value of a 1 SD increase in received (provided) trade credit by $284.74 ($74.95) million, on average, if they do not consider both the direct and indirect effects it has on their firm’s value.

This study investigates the linkage between trade credit demand and corporate innovation. The estimations are robust to a series of covariates, fixed‐effect, instrumental variable modeling, and the difference‐in‐difference approach. Our findings reveal that the nexus between enterprise innovation and trade credit demand is positive and statistically significant. The said attachment is more visible in private, financially constrained, small, and high‐tech enterprises. The study also found that innovative firms relied heavily on trade‐credit financing after the financial crisis of 2008. Managers should carefully design trade‐credit agreements because operating suppliers have an important role in the enterprises' radical growth activities.

We investigate the effect of mandatory IFRS adoption on trade credit. We document that firms in countries that adopt IFRS receive more trade credit from their suppliers, consistent with improved financial reporting quality and comparability playing a role in facilitating informal financing. This increase is larger for countries with a low level of societal trust, a poor pre‐IFRS‐adoption information environment, and stronger legal enforcement. These cross‐sectional results suggest that the conditions under which higher‐quality information is made publicly available affect suppliers' decisions to provide trade credit. This increase is also larger for firms with greater exposure to foreign markets, a finding that highlights the importance of more comparable international financial reporting standards in facilitating cross‐country trade credit. We also find that IFRS adoption has a stronger positive effect on trade credit for firms with greater liquidity needs. Finally, we find that firms in countries that adopt IFRS also extend more trade credit to their customers. Overall, our results support the notion that financial reporting can have a causal effect on trade credit. Information financiere et credit commercial : constats issus de l'adoption obligatoire des IFRS Les auteurs etudient l'incidence de l'adoption obligatoire des IFRS sur le credit commercial. La documentation qu'ils rassemblent etablit que les societes des pays qui adoptent les IFRS obtiennent davantage de credit commercial aupres de leurs fournisseurs, ce qui confirme que l'amelioration de la qualite et de la comparabilite de l'information financiere contribue a faciliter le financement non structure. Cette hausse est plus importante dans le cas des pays ou le niveau de confiance sociale est faible, dont le cadre d'information anterieur a l'adoption des IFRS est deficient et ou l'application de la loi est plus rigoureuse. Ces resultats transversaux semblent indiquer que les conditions dans lesquelles de l'information de qualite superieure est mise a la disposition du public ont une incidence sur les decisions des fournisseurs quant a l'octroi de credit commercial. Cette hausse est egalement plus importante pour les societes qui sont davantage exposees aux marches etrangers, une observation qui met en relief a quel point des normes internationales d'information financiere davantage comparables facilitent le credit commercial entre pays. Les auteurs constatent egalement que l'adoption des IFRS a une incidence positive plus marquee sur le credit commercial pour les societes dont les besoins de liquidites sont plus eleves. Enfin, ils notent que les societes de pays qui adoptent les IFRS accordent davantage de credit commercial a leurs clients. Dans l'ensemble, ces resultats viennent etayer la notion selon laquelle l'information financiere peut avoir un lien de cause a effet avec le credit commercial.

We evaluate the substitution effect between formal and informal institutions based on a natural experiment in China, i.e., the targeted reserve requirement ratio cut (TRRRC) policy. TRRRC creates a large and persistent discontinuity affecting loan availability for small and micro‐enterprises (SMEs) with sales below specific cut‐offs. Using the regression discontinuity design, we show that the trade credit of SMEs is significantly lower for firms with sales below the cut‐offs, indicating a substitution effect of banking loan on trade credit. Our findings are more pronounced for firms with poor product market performance, weak mortgage capability, young age, and poor financial environment.

We study the impact ofQuickpay, a federal reform that indefinitely acceleratedpayments to small business contractors of the U.S. government. We find a strong di-rect effect of the reform on employment growth at the firm-level. Importantly, how-ever, we also document substantial crowding out of non-treated firms’ employmentwithin local labor markets. While the overall net employment effect was positive,it was close to zero in tight labor markets – where crowding out was stronger. Ourresults highlight an important channel for alleviating financing constraints in smallfirms, but also emphasize the general-equilibrium effects of large-scale interventions,which can lead to lower aggregate outcomes depending on labor market conditions.

This paper focuses on whether the rule of law or capital market development can explain observed differences in working capital levels and trade credit in SMEs from 13 EU countries. Our findings indicate that the working capital levels are lower and working capital management is thus more efficient in countries with safer legal systems and better investor protection. We also find that operating in a market‐based capital system has a negative effect on the cash conversion cycle (CCC). This implies that firms operating in countries with a market‐based system as opposed to a bank‐based system have better opportunities to manage their working capital. Our findings indicate that country‐level legal instruments explain much of the cross‐country differences observed in working capital. The results also suggest that working capital practices and the extent to which trade credit is used are a product of the legal system and the financial systems in place in each country. If the financial system changes, the trade credit practices can also be expected to change.

We analyse the macroeconomic effects of exogenous contractions in bank lending to non-financial corporations in the Euro Area, Germany, France, Italy and Spain using a Bayesian vector autoregressive model with endogenous hyperparameter selection and identification via sign restrictions. We focus on the behaviour of firms' external financing sources alternative to bank loans, such as financing via equity, debt securities, trade credit and lending from non-banks. We investigate whether these alternative financing sources are complements to or substitutes for bank lending using the joint posterior distribution of their impulse responses with that of bank loans. For the Euro Area our results show equity, debt securities and non-bank loans to be substitutes for bank loans with negative responses to a positive loan supply shock while trade credit is a complement and responds positively. We show that the substitution relationship with respect to bank loans is more clearly visible in the joint distribution of the financing sources reactions than when focusing only on the marginal impulse responses. Quantitatively, the developments in bank loans and trade credit dominate the response of the overall sum of the external financing. This result also holds in most cases at the country level. However, whether and which of the alternative financing sources are substitutes for or complements to bank loans differs across countries.

We examine how economic policy uncertainty (EPU) impacts on Chinese firm’s trade credit. We find a significant negative relationship between EPU and both firm’s account payable (receiving) and account receivable (offering). These results were more pronounced for non-state-owned enterprises, firms located in high marketisation and high trust regions, and survived after the endogeneity tests.

This study uses a comprehensive panel of tax returns to examine the financial reporting choices of medium‐to‐large private U.S. firms, a setting that controls over $9 trillion in capital, vastly outnumbers public U.S. firms across all industries, yet has no financial reporting mandates. We find that nearly two‐thirds of these firms do not produce audited GAAP financial statements. Guided by an agency theory framework, we find that size, ownership dispersion, external debt, and trade credit are positively associated with the choice to produce audited GAAP financial statements, while asset tangibility, age, and internal debt are generally negatively related to this choice. Our findings reveal that (1) equity capital and trade credit exhibit significant explanatory power, suggesting that the primary focus in the literature on debt is too narrow; (2) firm youth, growth, and RD and (3) many firms violate standard explanations for financial reporting choices and substantial unexplained heterogeneity in financial reporting remains. We conclude by identifying opportunities for future research.

Using a large sample of US data, we examine the relation between trade credit and cost behaviour and further investigate the moderating effects on this relation of agency problem, product market competition, and customer concentration. We find that firms using high levels of trade credit exhibit lower cost stickiness and this is prevalent in the high agency problem sub‐sample. In addition, in a non‐competitive market, where the agency problem arises owing to lack of competition, trade credit plays an external monitoring role by attenuating cost stickiness. However, high customer concentration curtails this monitoring ability.

Several recent studies have used the upper echelons theory to explain the impact of personal traits of top executives on various corporate policies. In this, first of its kind, study we find that older executives invest more in working capital; take longer to convert inventories to cash; and pay their suppliers sooner. These findings are consistent with the argument that risk aversion increases with executive age. Our findings indicate that executive age has significant bearing on working capital management policies. This study also initiates new avenues in research relating behavioral aspect of executives with short‐term financial management.

This paper identifies seasonal firms and their peak seasons to provide empirical evidence of the approach these firms take to finance seasonal operations. The seasonal use of funds, which builds before seasonal revenue, is largely financed with transitory sources of credit, such as credit lines, trade credit, and commercial paper. Permanent financing is used only moderately to meet seasonal needs. However, both weak credit market conditions and firm‐level financial constraints limit the ability of seasonal firms to use debt as transitory financing. These frictions result in a partial shift to permanent financing but reduce the seasonal use of funds overall.

Using a new and representative data set of Chinese household finance, this paper documents household access to and costs of finance, along with their correlates. As in most developing countries, informal finance is a crucial element of household finance, and wealth tends to be associated with better access to formal and informal finance. Better financial knowledge shifts loan portfolios toward formal sources relative to informal ones. Connections to the Communist Party are associated with significantly better access to finance in rural areas but not in urban areas. A larger social network is positively associated with access to informal finance. Controlling for household characteristics, rural residents pay interest rates on loans similar to urban residents. Younger residents pay higher rates, while households on firmer economic footing face lower rates. Taking financial classes and college education is associated with higher interest rates for urban residents, suggesting perhaps that financial knowledge coincides with greater demand for credit in areas with more economic opportunity. Overall, the findings suggest that Chinese residents face dual credit markets, with the poor, young, those with poor financial knowledge, and those with larger family sizes relying much more on informal finance, while others are better able to access formal finance.

In this study we find that firms’ use of trade credit significantly facilitates their access to bank loans in the future, suggesting a complementary relationship. Such a relationship is more profound for firms with higher perceived agency costs, i.e., firms with opaque corporate information, firms located in regions with less developed external institutions, and firms at an early stage of existence. Firms switch from trade credit to bank loans as the main source of debt financing as they age. However, the process is slower for firms with a greater level of corporate information opacity and firms located in regions with weak external institutions.

This paper presents a model for designing a trade credit contract between a supplier and a retailer that would coordinate a supply chain in the presence of investment opportunity for the retailer. Specifically, we study a newsvendor model where the supplier offers a trade credit contract to the retailer who, by delaying the payment, can invest the accounts payable amount and earn returns. We find that when the channel partners have symmetric information about the retailer's investment return, a conditionally concessional trade credit (CTC) contract, which includes a wholesale price, an interest‐free period, and a minimum order requirement, can achieve channel coordination. We then extend the model to the information asymmetry setting in which the retailer's investment return is unobservable by the supplier. We show that, although the CTC contract cannot achieve the coordination in this setting, it can effectively improve channel efficiency as well as profitability for individual partners.

We propose that, by financing their own product sales through captive finance subsidiaries, durable goods manufacturers commit to higher resale values for their products in future periods. Using data on captive financing by the manufacturers of heavy equipment, we find that captive‐backed models have lower price depreciation. The evidence is consistent with captive finance helping manufacturers commit to ex‐post actions that support used machine prices. This, in turn, conveys higher pledgeability for captive‐backed products, even for individual machines financed by banks. Although motivated as a rent‐seeking device, captive financing generates positive spillovers by relaxing credit constraints.

We consider how trade credit can coordinate a two-echelon supply chain in the presence of supplier moral hazard and costly working capital financing. While trade credit resolves moral hazard problems in the absence of working capital financing costs, we show that this is not necessarily true when financial frictions make financing trade credit costly. We then show that trade credit along with an appropriately designed reverse factoring program can restore supply chain efficiency.

Close supply chain relationships are sometimes detrimental to the partnering firms, and short sellers recognize this before the rest of the market. Suppliers and customers that are in linked, close supply chain relationships have higher short interest on average. Further, higher short interest increases the likelihood of large, linked customers reporting negative earnings surprises, whereas suppliers with high short interest are more likely to report negative earnings surprises, irrespective of the supply chain structure. Short selling is informative to capital markets because these suboptimal relationships eventually lead to dependent suppliers being delisted from a stock exchange for financial distress reasons.

We study a supply chain of a manufacturer selling to two asymmetric retailers engaged in inventory (order quantity) competition in the presence of demand uncertainty and an exogenously given retail ...

Using the firm-level data over 1989-2012 from 53 countries, we find religiosity in a country is positively associated with trade credit use by local firms. Specifically, after controlling for firm- and country-level factors as well as industry and year effects, we show that trade credit use is higher in more religious countries. Moreover, both creditor rights and social trust in a country enhance the positive association between religiosity and trade credit use, while the quality of national-level disclosure mitigates the aforementioned positive association. These results are robust to alternative measures of religiosity, alternative sampling requirements, and potential endogeneity concerns.

In this article, we consider and investigate the cases when the retailer's capitals are restricted and when the supplier offers another kind of 2-level trade credit. This means that the supplier offers 2-level trade credit for the retailer to settle the account and the retailer's capitals are restricted, so the retailer decides to pay off the unpaid balance as follows: Firstly, the retailer decides to pay off the unpaid balance at the end of the first credit period if the retailer can pay off all accounts and, in addition, the retailer can use the sales revenue to earn interest throughout the replenishment cycle time. Secondly, the retailer decides to pay off all accounts either after the end of the first credit period, but before the second credit period, or after the second credit period if the retailer cannot pay off the unpaid balance at the end of the first credit period. Additionally, the delay will incur interest charges on the unpaid and overdue balance due to the difference between the interest earned and the interest charged. Consequently, the main purpose of this article is to characterize the optimal solution processes and (in accordance with the functional behavior of the cost function) to search for the optimal replenishment cycle time. Finally, numerical examples are given to illustrate the theoretical results which are proven in this article by means of mathematical solution procedures.

Research summary This article provides a review of the entrepreneurial finance literature in the surprisingly not very well integrated entrepreneurship and finance journals. Entrepreneurial finance encompasses venture capital, private equity, private debt, trade credit, IPOs, angel finance, and crowdfunding, among other forms of finance. We analyze trends in citation activity to these topic areas across 16 journals that publish at least somewhat regularly on these topics, and we show there has been a rise in citations on venture capital, private equity, and IPOs post-2006. We highlight an unfortunate degree of segmentation in the literature, as well as topics that have been the subject of scholarly focus, and identify promising topics for future research. Managerial summary Who does research in entrepreneurial finance—entrepreneurship or finance scholars? And which types of journals are more likely to publish research in entrepreneurial finance? In this article, we provide an overview of the literature on topics that include venture capital, private equity, private debt, trade credit, IPOs, angel finance, and crowdfunding. Our review of the literature shows some elements of segmentation by the specific topic, which we explain is partly due to the fact that datasets on entrepreneurial finance themselves are often segmented and do not include information on more than one form of entrepreneurial finance at a time. Further, we show citation patterns are segmented by the type of journal, with finance journals being much less likely to refer to entrepreneurship journals. Copyright © 2017 Strategic Management Society

This study investigates the association between trade credit financing and stock price crash risk within China's context. We find that firms using more trade credit financing have significantly lower future stock price crash risk. This negative association is more pronounced for firms with greater information asymmetry and for firms located in less developed financial markets. This finding is robust to the endogeneity concern, alternative measures of stock price crash risk, and the inclusion of other factors identified in prior studies that might affect stock price crash risk. Further evidence suggests that both the monitoring mechanism and the disclosure mechanism drive the documented relation. Our study suggests that access to trade credit can significantly reduce the likelihood of crash risk in a country like China with less developed formal bank financing. Our study also suggests that investors can effectively avoid stock price crash risk by using the trade credit information disclosed in financial statements.

We present evidence that restrictions to the set of feasible financial contracts affect buyer-supplier relationships and the organizational form of the firm. We exploit a regulation that restricted the maturity of the trade credit contracts that a large retailer could sign with some of its small suppliers. Using a within-product difference-in-differences identification strategy, we find that the restriction reduces the likelihood of trade by 11%. The retailer also responds by internalizing procurement to its own subsidiaries and reducing overall purchases. Finally, we find that relational contracts can mitigate the inability to extend long trade credit terms.

Long payment terms are a strong impediment to the entry and survival of liquidity-constrained firms. To test this idea and its implications, I consider the effect of a reform restricting the trade credit supply of French trucking firms. In a difference-in-differences setting, I find that trucking firms' corporate default probability decreases by 25% following the restriction. The effect is persistent, concentrated among liquidity-constrained firms, and not offset by a decrease in profits. The restriction also triggers an increase in the entry of small trucking firms.