Bargaining Power and Trade Credit

This paper investigates how the supplier’s bargaining power affects trade credit supply. We use a novel firm-level database of Chinese firms with unique information on the amount, terms, and payment history of trade credit extended to customers and detailed information on product market structure and clients-supplier relationships. We document that suppliers with weak bargaining power towards their customers are more likely to extend trade credit, have a larger share of goods sold on credit, and offer a longer payment period before imposing penalties. Important customers extend the payment period beyond what has been offered by their supplier and generate overdue payments. Furthermore, weak bargaining power suppliers are less likely to offer trade credit when credit-constrained by banks. Our findings suggest that suppliers use trade credit as a competitive device in the product market. * Corresponding author. We thank an anonymous referee, Arturo Bris, Vicente Cun͂at, Mariassunta Giannetti, Luc Laeven, Inessa Love, Max Maksimovic, Robert Marquez, Jeffry Netter (the editor), Rohan Williamson, Chris Woodruff, and participants at the 2009 Financial Intermediation Research Society (FIRS) Conference on Banking, Corporate Finance and Intermediation in Prague, the “Small Business Finance–What Works, What Doesn’t?” Conference in Washington, DC, the Second Joint CAF-FIC-SIFR Conference on Emerging Market Finance in Stockholm, and the 4 Csef-Igier Symposium on Economics and Institutions in Capri and the participants to seminar at the EBRD for valuable comments, and Taras Chemsky for excellent research assistance. The opinions expressed do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. The paper was previously circulated with a different title, “Trade Credit and the Supply Chain”.