Download or read book Three Essays on Trade Credit Theory and Empirical Evidence from Agro food Firms in Africa and United States written by Stanley Kojo Dary and published by . This book was released on 2017 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt: In a quest to understand the motives for use of trade credit in inter-firm trade, many theories have been put forward. The empirical literature on trade credit are largely focused on understanding firms' motives for use of trade credit, by testing these theories with micro- and macro-level data. Against the background that the extent and motives for use of trade credit in the agro-food industry is less understood, this dissertation extends the frontiers of knowledge on trade credit use by examining trade credit theories and empirical evidence from agro-food firms in Africa and the United States. The dissertation consists of three essays. The first essay examines trade credit contracts, trade credit theories and empirical evidence in support of or otherwise of the theories via review and analysis of the theoretical and empirical trade credit literature. The second essay examines the motives for trade credit supply in the African agro-food manufacturing industry, employing survey data from eight African countries - Burundi, Malawi, Mauritania, Namibia, Nigeria, Senegal, South Sudan and Sudan. Premised on the fact that there are benefits and costs of investing in trade credit, the third essay examines investment in trade credit and firm profitability, using a panel of listed agro-food firms in the United States for the period 2001-2014. The review in essay one revealed a high use of trade credit in inter-firm trade, with variations across countries and industries. It is revealed that trade credit contracts are simple in nature and factors such as the shortness of credit periods, frequency of transactions, close proximity and interaction between suppliers and customers, and effective informal enforcement mechanisms may account for the simplified nature of trade credit contracts. However, the use of trade credit is a multidimensional phenomenon, driven by varied yet interconnected motives, thus making it complex to put forward a single theory to explain the use of trade credit in interfirm trade. Contrary to a long-held notion that trade credit is expensive relative to bank credit, evidence from the empirical literature suggests the opposite. In general, there is more empirical support for the theories of trade credit. The empirical results show a high participation of agro-food firms in trade credit activity in African countries and the United States. While within-industry variability in trade credit activity is not statistically significant in the African agro-food industry, there is significant within-industry variability in the United States. However, there is statistically significant variability in trade credit activity across agro-food firms in the African countries studied. The empirical results from essay two show that the level of trade credit supply increases with manager experience, degree of product diversification, overdraft availability from banks, trade credit from input suppliers and location in capital city. The results provide evidence in support of financing (particularly liquidity and redistribution) and commercial (particularly marketing and quality guarantee) theories of trade credit. Essay three found evidence of a non-linear (inverted U) relationship between trade credit investment and firm profitability, reflecting benefits and costs of trade credit investment. This finding suggest that agro-food firms should be guided by benefit-costs off in their trade credit investment decisions. The study found the threshold of trade credit investment beyond which the relationship between trade credit investment and firm profitability transition from positive to negative. In general, the empirical results show that trade credit is an important source of short-term financing for agro-food firms in African countries and the United States, and should be facilitated through policy.
Download or read book Essays in Trade Credit and International Trade written by Santiago Justel and published by . This book was released on 2020 with total page 217 pages. Available in PDF, EPUB and Kindle. Book excerpt: When a buyer and a seller meet in the market, both need to decide quantity and price. However, often they also argue when to transfer the payment. In one extreme, the seller may demand early payment before delivering the goods. In the other, the buyer can demand late payment after receiving the products/services. The former is sometimes called cash in advance, while the latter is called trade credit. Understanding the use of trade credit is essential because it is one of the main sources of short-term finance for firms. Additionally, since each trade contract specifies prices, quantities, and payment delay, the contract is implicitly defining who is responsible for financing the production and who bears the risk of default, which can itself be a deterrent to trade. My dissertation aims to study some of the novel factors that shape the use of trade credit and shed some light on its effects on a firm's decision to trade. The first chapter studies the firm-characteristics that shape the use of trade credit decisions in international trade. Trade credit is widely used in firm-to-firm transactions, domestically, and internationally. The literature has found that country-specific features, such as interest rates, legal institutions, the rule of law, and capital controls, affect the decision to extend trade credit. The literature has not studied additional features that might explain the trade credit provision in the international context; it also has not proposed additional theories. To fill this gap, I exploit transaction-level data from Chilean customs. This data set, available for exporters and importers, includes information that describes if a given transaction was paid in advance or paid post-shipment (trade credit). Additionally, I merge this data with firm-level details provided by the Chilean Internal Tax Service. Using this data, I document new facts. Namely, large firms measured by several metrics are most likely to use trade credit compared to small firms. Motivated by these facts and to guide my empirical strategy, I propose a theory for the use of trade credit. The model has the critical assumption that firms, buyer and seller, may default on their contracts due to liquidity shocks. Depending on the size of the shock, the firm can deplete all its assets, which means it will default. This simple assumption will imply that larger firms will be less likely to default since they have enough assets to absorb the liquidity shock. The predictions of the model are confirmed using regression analysis; therefore, not only country-specific attributes but also firm characteristics affect the contract decision: large exporters (importers) are 15% (40%) more likely to sell (buy) under trade credit compared to small exporters (importers). I also find that a small exporter matched with a large importer is 3-10% more likely to sell under trade credit. In the second chapter, we propose a theory for the use of trade credit that connects the markup that the exporter charges to the decision of extending trade credit. The key idea is that under pre-payment, the buyer needs to pay the full amount to the seller before receiving the goods. This payment requires liquidity equal to the total invoice, which in turn corresponds to the production cost plus a markup. In contrast, extending trade credit might be cheaper since the seller only needs to cover its production costs in advance, which is lower than the intermediate price due to the presence of markups. If financial intermediation is costly and the lending interest rate is greater than the deposit rate, then this difference in liquidity needs between pre-payment and trade credit affects profits, affecting the decision to provide trade credit. We test the implications of the theory using Chilean data. First, we construct markup estimates at the firm-product level, using detailed data on inputs and outputs of Chilean plants using the methodology developed by De Loecker, Goldberg, Khandelwal, and Pavcnik (2016). We then use transaction-level Customs data with information on the payment choice to test the model's predictions. We find that trade credit use increases in the markup and that this effect is larger, the bigger the difference between the buyer's borrowing rate and the seller's deposit rate is. the final chapter proposes and tests an alternative theory. Trade credit is used as a quality guarantee. There are two main facts in existing theories that explain the use of trade credit. First, all these theories focus on explaining the extension of trade credit or not, but not the length of the contract. Secondly, and most importantly, some empirical evidence does not speak to these models. Particularly, most of the existing theories conclude that trade credit is used due to access to cheaper credit or as an enforcement mechanism, then restricting the credit period, say to 30 days maximum, should not alter those incentives. However, the finance literature has found that this type of regulation has effects on the economy. Some authors have found that limiting the trade credit period to 30 days has positive effects, from the seller's perspective, through more competition due to the increase in firm entrance and a decrease in exit rates. However, in the same literature, other papers have shown that these laws also have adverse effects, namely, a reduction in the likelihood and volume of trade. The previous evidence indicates that the length of trade credit is also essential to understand the decision and its impact on the firm's behavior. Following Long, Malitz, and Ravid (1993), I propose the theory that trade credit serves as a signal for the quality of the product. In a nutshell, the model assumes that when the quality is not observable, but verifiable ex-post, trade credit can serve as a signal of the product's quality. The logic of the theory is that a buyer will not pay the transaction until she is sure that what she bought is what was agreed upon. Additionally, in this model, trade credit maturity serves a quality guarantee. Longer maturities imply that the buyer has more time to verify the contracted quality. This theory has the main prediction that the provision and maturity of the trade credit are positively related to the quality of the product. To test these predictions, I use a data set from the Chilean Customs. This transaction-level data set has a unique feature: the number of days at which a transaction was paid, on the addition of the usual measures such as destination, price, and quantity. As for quality measures, I will follow two strategies. First, I will use an off-the-shelf methodology that infers quality from prices and quantities, assuming a particular demand elasticity. Secondly, I will focus my attention on a specific industry, wine. For wine, I web-scrapped information of ratings, awards, and retail prices under the assumption that this data captures wine quality. The data confirms the main predictions of the model. I find that high-quality goods are more likely to be sold under trade credit. Moreover, regarding the other predictions, I find that high-quality products have 20 more days of trade credit, out of an average of 100 days.
Download or read book Three Essays on Trade Credit written by Fatih Altunok and published by . This book was released on 2012 with total page 218 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Trade Credit and the Effect of Macro Financial Shocks written by Mr.Yungsan Kim and published by International Monetary Fund. This book was released on 2003-06-01 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: Many studies examine why firms are financed by their suppliers, but few empirical studies look at the macroeconomic implications of such financial arrangements. Using disaggregated panel data, we examine how firms extend and use trade credit. We find that, controlling for the transactions or asset management motive, both accounts payable and receivable increase with tighter policy, implying that trade credit helps firms absorb the effect of a credit contraction. A comparison of S&P 500 firms with smaller firms, however, provides no evidence that when policy is tightened, large firms play the role of credit suppliers more actively than small firms.
Download or read book Customer Market Power and the Provision of Trade Credit written by Neeltje van Horen and published by World Bank Publications. This book was released on 2007 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: Statistics show that the sale of goods on credit is widespread among firms even when they are capital constrained and thus face relatively high costs in providing trade credit. This study provides an explanation for this by arguing that customers who possess strong market power are able to increase their customer surplus by demanding to purchase the goods on credit. This gain in customer surplus increases with the degree of asymmetric information between buyer and seller with respect to product quality. Therefore, firms that are perceived as risky are especially subject to the market power of the customer and have to sell their goods on credit. Using detailed firm-level data from a large number of firms in Eastern Europe and Central Asia, this study finds evidence consistent with this hypothesis. It finds a strong positive correlation between customer market power and trade credit provision. Furthermore, this relationship is especially strong when the supplier is more risky and in countries with limited financial sector development or a weak legal system.
Download or read book Trade Credit and Bank Credit written by Inessa Love and published by World Bank Publications. This book was released on 2005 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: "The authors study the effect of financial crises on trade credit in a sample of 890 firms in six emerging economies. They find that although provision of trade credit increases right after the crisis, it consequently collapses in the following months and years. The authors observe that firms with weaker financial position (for example, high pre-crisis level of short-term debt and low cash stocks and cash flows) are more likely to reduce trade credit provided to their customers. This suggests that the decline in aggregate credit provision is driven by the reduction in the supply of trade credit, which follows the bank credit crunch. The results are consistent with the "redistribution view" of trade credit provision, in which bank credit is redistributed by way of trade credit by the firms with stronger financial position to the firms with weaker financial stand "--World Bank web site.
Download or read book Two Essays on Trade Credit written by Terence Mallon Kennedy and published by . This book was released on 2005 with total page 214 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Trade Credit written by Mitchell A. Petersen and published by . This book was released on 1996 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: In addition to borrowing from financial institutions, firms may be financed by their suppliers. Although there are many theories explaining why non-financial firms lend money, there are few comprehensive empirical tests of these theories. This paper attempts to fill the gap. We focus on a sample of small firms whose access to capital markets may be limited. We find evidence that firms use trade credit relatively more when credit from financial institutions is not available. Thus while short term trade credit may be routinely used to minimize transactions costs, medium term borrowing against trade credit is a form of financing of last resort. Suppliers lend to firms no one else lends to because they may have a comparative advantage in getting information about buyers cheaply, they have a better ability to liquidate goods, and they have a greater implicit equity stake in the firm's long term survival. We find some evidence consistent with the use of trade credit as a means of price discrimination. Finally, we find that firms with better access to credit from financial institutions offer more trade credit. This suggests that firms may intermediate between institutional creditors and other firms who have limited access to financial institutions.
Download or read book Dependency and Trade Credit written by Alexander Oeing and published by . This book was released on 2016 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: By citing 101 medium-sized German industrial companies, this study demonstrates that supplier credit is often characterised by different individual and mutual dependency factors. In this way it supports the theories which highlight that product and finance related determinants stipulated by both suppliers and customers play a role in shaping supplier credit.
Download or read book Trade Credit in Supply Chains Theory and Empirical Evidence written by Song Yang and published by . This book was released on 2010 with total page 152 pages. Available in PDF, EPUB and Kindle. Book excerpt: 1The term "inventory financing" throughout this thesis applies to firms' decisions on how to finance inventory instead of how to use inventory as collateral to gain more loans.
Download or read book Trade Credit Policy written by Rafael Bastos and published by . This book was released on 2009 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes an agency theory to explain trade credit policy. According to this theory we have developed an agency model based on the adverse selection and moral hazard phenomena arising from the relation between sellers and buyers. This model has been estimated by using panel data methodology applied to UK companies. Our findings strongly support our agency model. We find that smaller firms, those with a smaller proportion of fixed assets, and those that are less profitable extend more trade credit, whereas firms with a high proportion of variable costs and high percentage of bad debts extend less.
Download or read book The Quality of Trade Credit written by Martin H. Seiden and published by . This book was released on 1964 with total page 160 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Does Trade Credit Facilitate Access to Bank Finance Empirical Evidence from Portuguese and Spanish Small Medium Size Enterprises written by Ana Paula Matias Gama and published by . This book was released on 2016 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines if trade credit is as a substitute and/or a complement to bank credit in order to assess the existence of credit rationing. Using a panel dataset of 468 and 7019 Portuguese and Spanish small medium size enterprises for the period 1998-2006, and controlling for endogeneity problems by using GMM estimators, the results confirm the existence of credit rationing, since the substitution hypothesis is confirmed. This effect is particularly strong for firms that maintaining an exclusive relationship with one bank, which indicate a greater severity of adverse selection problems for those firms. Although the substitution hypothesis is confirmed, the results also indicate that the substitution and complementary hypothesis are not mutually exclusive, especially for a specific group of firms: the younger and smaller firms. In line with the theories that emphasize the informational role of trade credit, due the informative advantage of suppliers, our empirical results confirm that trade credit allow the younger and smaller firms to improve their reputation, as trade credit reveals the private information of the supplier to the bank, in turn, banks can update their beliefs about customer default risk and agree to increase bank credit.
Download or read book Trade Credit Theories and International Trade Finance Practices written by Roger Muri and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis sheds light on the wide variety of primarily domestic trade credit theories and empirically researches international trade finance practices. It aims at figuring out how international trade credit theories and practices differ from domestic ones, as well as how cross-country variations in the importer country and relational differences affect the financing mode selection for cross-border transactions. The empirical analyses resort to transaction-level data from three Swiss enterprises operating in the home appliance, beverage and building supplies industries. Descriptive statistics and model specifications with a binary dependent variable delimiting the payment mode are employed to estimate the likelihood of trade credit use. Empirical evidence shows that the probability of a transaction to occur on post shipment payment terms is significantly higher for domestic compared to international transactions. This result is supported by theoretical investigations revealing that domestic and international trade finance practices follow non-identical rules. Concerning export transactions, empirical findings show that especially stronger contractual enforcement and higher international and mutual trust significantly increase the likelihood of post shipment payment terms. In addition, geographic proximity is able to alleviate negative effects of weak contractual enforcement and low international trust on the likelihood of post shipment payment terms. Finally, the overall results reveal that cultural, administrative, geographic and economic proximity positively influences the likeliness of post shipment payment terms.
Download or read book Trade Credit Financial Intermediary Development and Industry Growth written by Raymond Fisman and published by World Bank Publications. This book was released on 2001 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: Where do firms turn for financing in countries with poorly developed financial markets? One source is trade credit. And where formal financial intermediaries are deficient, industries that rely more on this source of financing grow faster.
Download or read book Does Trade Credit Substitute Bank Credit Evidence From Firm Level Data written by Mr. Guido De Blasio and published by International Monetary Fund. This book was released on 2003-08-01 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper examines micro data on Italian manufacturing firms'' inventory behavior to test the Meltzer (1960) hypothesis according to which firms substitute trade credit for bank credit during periods of monetary tightening. It finds that their inventory investment is constrained by the availability of trade credit. As for the magnitude of the substitution effect, however, this study finds that it is not sizable. This is in line with the micro theories of trade credit and the evidence on actual firm practices, according to which credit terms display modest variations over time.
Download or read book When Trade Credit Facilitates Access to Bank Finance written by Eric Severin and published by . This book was released on 2004 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: While trade credit is traditionally considered as a substitute for bank loans, recent theoretical papers (e.g. Biais and Gollier (1997)) suggest that bank debt and trade credit can also be considered as two complementary sources of financing. By using US small businesses data (NSSBF 1998), this paper provides an empirical analysis of these hypotheses. The empirical findings are consistent with the hypothesis that trade credit helps firms to improve their reputation. The results show that trade credit can work as a signal about firm's quality and thus facilitates access to bank debt.Keywords: Bank, Trade credit, Informational asymetry.
