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Evidence on the Determinants of Credit Terms Used in Interfirm Trade
Author(s) -
Ng Chee K.,
Smith Janet Kiholm,
Smith Richard L.
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00138
Subject(s) - trade credit , payment , cash , quality (philosophy) , business , credit reference , product (mathematics) , credit enhancement , simple (philosophy) , credit history , economics , actuarial science , credit risk , finance , philosophy , geometry , mathematics , epistemology
Trade credit is created whenever a supplier offers terms that allow the buyer to delay payment. In this paper we document the rich variation in interfirm credit terms and credit policies across industries. We examine empirically the firm's basic credit policy choices: whether to extend credit or to require cash payment; and, if credit is extended, whether to adopt simple net terms or terms with discounts for prompt payment. We also examine determinants of variations in two‐part terms. Results are supportive primarily of theories that explain credit terms as contractual solutions to information problems concerning product quality and buyer creditworthiness.