DP4823 What You Sell is What You Lend? Explaining Trade Credit Contracts

Author(s): Mike Burkart, Tore Ellingsen, Mariassunta Giannetti
Publication Date: December 2004
Keyword(s): collateral, contract theory, moral hazard, trade credits
JEL(s): G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4823

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.