Market Power and the Matching of Trade Credit Terms

52 Pages Posted: 20 Apr 2016

See all articles by Daniela Fabbri

Daniela Fabbri

University of Lausanne - Institute of Banking and Finance (IBF)

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Date Written: October 1, 2008

Abstract

This paper studies the decision of firms to extend trade credit to customers and its relation with their financing decisions. The authors use a novel firm-level database of Chinese SMEs with unique information on market power in both output and input markets and on the amount, terms, and payment history of trade credit simultaneously extended to customers (accounts receivable) and received from suppliers (accounts payable). The analysis shows that suppliers with relatively weaker market power are more likely to extend trade credit and have a larger share of goods sold on credit. Examination of the importance of financial constraints reveals that access to bank financing and profitability are not significantly related to trade credit supply. Rather, firms that receive trade credit from their own suppliers are more likely to extend trade credit to their customers, and to "match maturity" between the contract terms of payables and receivables. This matching practice is more likely used when firms face strong competition in the product market (relative to their customers), and enjoy strong market power in the input market (relative to their suppliers). These results highlight the importance of supply chain financing for market competition and risk management in credit constrained firms.

Keywords: Access to Finance, Bankruptcy and Resolution of Financial Distress, Debt Markets, Economic Theory & Research, Banks & Banking Reform

Suggested Citation

Fabbri, Daniela and Klapper, Leora F., Market Power and the Matching of Trade Credit Terms (October 1, 2008). World Bank Policy Research Working Paper No. 4754, Available at SSRN: https://ssrn.com/abstract=1293167

Daniela Fabbri (Contact Author)

University of Lausanne - Institute of Banking and Finance (IBF) ( email )

CH-1015 Lausanne
Switzerland
+41 21 692 3369 (Phone)
+41 21 692 3435 (Fax)

HOME PAGE: www.hec.unil.ch/dfabbri

Leora F. Klapper

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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