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Customer Market Power and the Provision of Trade Credit

2007 Access to Finance
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Release : 2007
Genre : Access to Finance
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Book Synopsis Customer Market Power and the Provision of Trade Credit by : Neeltje van Horen

Download or read book Customer Market Power and the Provision of Trade Credit written by Neeltje van Horen. This book was released on 2007. 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.

Customer Market Power and the Provision of Trade Credit

2016
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Release : 2016
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Book Synopsis Customer Market Power and the Provision of Trade Credit by : Neeltje van Horen

Download or read book Customer Market Power and the Provision of Trade Credit written by Neeltje van Horen. This book was released on 2016. 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.

Market Power and the Matching of Trade Credit Terms

2016
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Release : 2016
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Book Synopsis Market Power and the Matching of Trade Credit Terms by : Daniela Fabbri

Download or read book Market Power and the Matching of Trade Credit Terms written by Daniela Fabbri. This book was released on 2016. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the decision of firms to extend trade credit to customers and its relation with their financing decisions. The authors use a novel firm-level database of Chinese SMEs 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). The analysis shows that suppliers with relatively weaker market power are more likely to extend trade credit and have a larger share of goods sold on credit. Examination of the importance of financial constraints reveals that 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 quot;match maturityquot; 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). These results highlight the importance of supply chain financing for market competition and risk management in credit constrained firms.

Market Power and the Matching of Trade Credit Terms

2008 Credit
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Release : 2008
Genre : Credit
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Book Synopsis Market Power and the Matching of Trade Credit Terms by :

Download or read book Market Power and the Matching of Trade Credit Terms written by . This book was released on 2008. Available in PDF, EPUB and Kindle. Book excerpt: "This paper studies the decision of firms to extend trade credit to customers and its relation with their financing decisions. The authors use a novel firm-level database of Chinese SMEs 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). The analysis shows that suppliers with relatively weaker market power are more likely to extend trade credit and have a larger share of goods sold on credit. Examination of the importance of financial constraints reveals that 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). These results highlight the importance of supply chain financing for market competition and risk management in credit constrained firms."--World Bank web site.

formal versus informal finance: evidence from china

2008 Access to Finance
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Release : 2008
Genre : Access to Finance
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Book Synopsis formal versus informal finance: evidence from china by : Vojislav Maksimovic

Download or read book formal versus informal finance: evidence from china written by Vojislav Maksimovic. This book was released on 2008. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: China is often mentioned as a counterexample to the findings in the finance and growth literature since, despite the weaknesses in its banking system, it is one of the fastest growing economies in the world. The fast growth of Chinese private sector firms is taken as evidence that it is alternative financing and governance mechanisms that support China's growth. This paper takes a closer look at firm financing patterns and growth using a database of 2,400 Chinese firms. The authors find that a relatively small percentage of firms in the sample utilize formal bank finance with a much greater reliance on informal sources. However, the results suggest that despite its weaknesses, financing from the formal financial system is associated with faster firm growth, whereas fund raising from alternative channels is not. Using a selection model, the authors find no evidence that these results arise because of the selection of firms that have access to the formal financial system. Although firms report bank corruption, there is no evidence that it significantly affects the allocation of credit or the performance of firms that receive the credit. The findings suggest that the role of reputation and relationship based financing and governance mechanisms in financing the fastest growing firms in China is likely to be overestimated.

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