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Interest Rates in Trade Credit Markets
Author(s) -
BARBOSA KLENIO,
MOREIRA HUMBERTO,
NOVAES WALTER
Publication year - 2017
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12369
Subject(s) - trade credit , moral hazard , financial distress , competition (biology) , interest rate , sample (material) , credit risk , economics , monetary economics , business , letter of credit , credit crunch , financial system , actuarial science , finance , microeconomics , incentive , ecology , chemistry , chromatography , commercial bank , biology
All things equal, interest rates should increase with the borrower's risk. And yet, Klapper, Laeven, and Rajan (2012) cannot find such a positive relation in a broad sample of trade credit contracts. We shed some light on this puzzle by arguing that competition between informed and uninformed suppliers weakens the link between the trade credit cost and the borrower's creditworthiness. Our model implies that trade credit rates are more likely to increase with the borrower's risk if suppliers are less profitable, have high cost of funds, or sell inputs to firms plagued by moral hazard and financial distress.