Squeezing Suppliers or Liquidity Shortage?

Abstract

This paper investigates whether the late payment problem exists among corporations in the US. Our results suggest that liquidity shortage and strategic intention are the main causes of late payments. While large firms deliberately take advantage of their market power to “squeeze suppliers”, we do not find any evidence that the same intuition exists among small firms. Instead, liquidity shortages are the main driver behind slow payments in small firms. This paper also finds that financially distressed firms are better off deferring trade credit repayment to avoid potential bankruptcy if they were paying to bank creditors late. As the legal repercussions of doing so are less severe than defaulting on other corporate bond or bank obligations.

Keywords: Supplier, Trade credit, Late payment

JEL Classification: G33