Trade Credit and the Supply Chain

This paper studies supply chain financing. We investigate why a firm extends trade credit to its customers and how this decision relates to its own financing. We use a novel firm-level database of Chinese firms 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). We find that suppliers with relatively weaker market power are more likely to extend trade credit and have a larger share of goods sold on credit. We also examine the importance of financial constraints. 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). Similarly, firms lacking internal resources or external bank credit, are more dependent on the receipt of supplier financing in order to extend credit to their customers. * Corresponding author. We thank Mariassunta Giannetti, Vicente Cun at, Arturo Bris, Luc Laeven, Inessa Love, Max Macsimovic, Robert Marquez, 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 CAFFIC-SIFR Conference on Emerging Market Finance in Stockholm, and the 4 th Csef-Igier Symposium on Economics and Institutions in Capri 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.