What You Sell Is What You Lend? Explaining Trade Credit Contracts

We relate trade credit to product characteristics and aspects of bank--firm relationships and document three main empirical regularities. First, the use of trade credit is associated with the nature of the transacted good. In particular, suppliers of differentiated products and services have larger accounts receivable than suppliers of standardized goods and firms buying more services receive cheaper trade credit for longer periods. Second, firms receiving trade credit secure financing from relatively uninformed banks. Third, a majority of the firms in our sample appear to receive trade credit at low cost. Additionally, firms that are more creditworthy and have some buyer market power receive larger early payment discounts. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org., Oxford University Press.