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Trade Credit Terms: Asymmetric Information and Price Discrimination Evidence From Three Continents
Author(s) -
Pike Richard,
Cheng Nam Sang,
Cravens Karen,
Lamminmaki Dawne
Publication year - 2005
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.0306-686x.2005.00627.x
Subject(s) - payment , trade credit , information asymmetry , quality (philosophy) , business , product (mathematics) , economics , monetary economics , microeconomics , finance , philosophy , geometry , mathematics , epistemology
Trade credit terms offer firms contractual solutions to informational asymmetries between buyers and sellers. The credit period permits buyers to reduce uncertainty concerning product quality prior to payment, while the seller can reduce uncertainty concerning buyer payment intentions by prescribing payment before/on delivery or through two‐part payment terms and other mechanisms. Variation in trade credit terms also offers firms price discriminating opportunities. This study, drawing on the responses of 700 large firms in the US, UK and Australia, explores trade credit terms through the twin objectives of reducing information asymmetries and discriminatory pricing. Support is found for both theories.