Citation

Discussion Paper Details

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Title: What You Sell is What You Lend? Explaining Trade Credit Contracts

Author(s): Mike Burkart, Tore Ellingsen and Mariassunta Giannetti

Publication Date: December 2004

Keyword(s): collateral, contract theory, moral hazard and trade credits

Programme Area(s): Financial Economics

Abstract: We use a broad range of contractual information to assess the empirical relevance of different financial theories of trade credit. The common feature of all financial theories is that suppliers have an advantage over other lenders in financing credit-constrained firms. While the reasons for the financing advantage differ across theories, they are usually related either to product characteristics or to market structure. We propose a novel identifying strategy that exploits this insight to analyse the trade credit volume and the contract terms. Our analysis suggests that the most important product characteristic for explaining trade credit volume and contract terms is the ease with which the seller?s product can be diverted. Market power in input and output markets also contributes to explain trade credit patterns.

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Bibliographic Reference

Burkart, M, Ellingsen, T and Giannetti, M. 2004. 'What You Sell is What You Lend? Explaining Trade Credit Contracts'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4823