Trade Credit , Late Payment and Asymmetric Information Richard

working papers are produced by the Bradford University School of Management and are to be circulated for discussion purposes only. Their contents should be considered to be preliminary. The papers are expected to be published in due course, in a revised form and should not be quoted without the author's permission. The literature offers numerous motives for extending trade credit. A major economic rationale for the decision to integrate into credit provision rather than rely on market mechanisms rests on the superior ability of firms to reduce human opportunism through hierarchical controls. Transaction costs associated with information and monitoring are incurred when informational asymmetries between buyer and seller are present, reputations are hard to establish, and a high level of specialised investment is involved. Where these costs are significant, the seller is more likely to extend credit to the buyer. Trade credit can be viewed as a contractual solution to information problems concerning product quality and buyer creditworthiness. Imperfect information creates uncertainty in exchange relationships, potential for opportunism and moral hazard problems that, in turn, impose transaction costs on both parties. Buyers who pay before or on delivery cannot be sure that the quality of goods received will meet expected standards. This uncertainty is reduced if the seller provides guarantees or seeks to develop or retain a good reputation. The extension of trade credit provides an opportunity for buyer firms to inspect product quality before making payment, especially for products or services that take longer to verify. The paper argues that trade credit offers are more likely, and for a longer period, when there are significant informational asymmetries between buyer and supplier, when sizeable transaction costs and economies of scale arise, when sellers look to discriminate between buyers on price, and when a high degree of specialized investment is at stake. The paper draws on these theories in seeking to explain the level of accounts receivable in corporate balance sheets and the main determinants of late payment. The study draws on the responses of 700 accountants and finance managers in the United Kingdom, United States and Australia. Country differences are explored. Findings are presented and discussed.