| This research investigates the determinants of the firm's decision to offer trade credit to customers in intermediate goods markets. Empirical implications are derived and tested using a unique database constructed from over 600 survey responses of manufacturing firms combined with firm specific financial data from Compustat. The survey data contain the payment and/or credit terms offered by each firm as well as information on the nature of the relationship between buyer and seller including the extent of specific investment; product characteristics; customer attributes; seller attributes and credit management practices. This allows the testing of alternative theoretical explanations for the existence of trade credit: financial, transaction costs, price discrimination and information production motives. The analysis suggests that trade credit is used to reduce the cost of monitoring accounts, to act as an implicit guarantee of quality and to elicit prompt payment when the collateral value of the good diminishes rapidly over time. The implicit interest rate associated with a two-part credit offer is found to be positively related to the frequency of orders and information collected as a by-product of the sales function. |
