CFCM 17/04: Customer financing, bargaining power and trade credit uptake

Summary

Given the risks faced by the granting suppliers, the large amounts of trade credit on firms' balance sheets are somewhat puzzling. This paper uses a panel quantile regression approach to establish whether different motives are relatively more important at different levels of trade credit taken. The analysis is conducted on a panel dataset for French firms, which makes it perfectly suited for their purpose. Trade credit is much more prominent as a source of external funding in France than in the US, as bonds and commercial paper represent a negligible fraction of French firms' total debt. As small unquoted firms are well represented in the sample, the authors' analysis can therefore properly explore the financing motive of trade credit. They suggest a new proxy of customer relative bargaining power based on the firm's sales market share used in conjunction with measures of industry concentration. The intuition is that the same market share gives a customer-firm a relatively stronger bargaining power if it operates in a less concentrated industry.

Mateut and Chevapatrakul's results shed light on the relevance of the financing theory of trade credit across firms: the substitution between trade credit and bank loans strengthens at higher quantiles and for larger firms. They also find that firms with a high market share operating in less concentrated industries have higher account payables to assets ratios, supporting the customer bargaining power theory. The relationship, however, disappears beyond the 70th quantile of the trade credit distribution. The results suggest that, while both theories can explain the uptake of trade credit, only the financing reason prevails at the higher quantiles.

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Authors

Simona Mateut and Thanaset Chevapatrakul

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