Trade credit and product market power during a financial crisis

Abstract

This paper investigates whether product market power affects trade credit decisions. We exploit the 2007-08 credit crisis in the U.S. as a source of variation in the importance of product market power for trade credit. We find that a one standard deviation increase in market power is associated to a decrease in payables of approximately four days during the crisis, showing that high market power firms alleviate financial constraints from their suppliers to avoid the loss of monopoly rents. Our inferences are robust to structural and non-structural measures of market power, both at the firm and at the industry levels, and the inclusion of controls to address potential confounding effects deriving from other firm features, including financial constraints, industry specific shocks and macroeconomic effects.Abstract: This paper investigates whether product market power affects trade credit decisions. We exploit the 2007-08 credit crisis in the U.S. as a source of variation in the importance of product market power for trade credit. We find that a one standard deviation increase in market power is associated to a decrease in payables of approximately four days during the crisis, showing that high market power firms alleviate financial constraints from their suppliers to avoid the loss of monopoly rents. Our inferences are robust to structural and non-structural measures of market power, both at the firm and at the industry levels, and the inclusion of controls to address potential confounding effects deriving from other firm features, including financial constraints, industry specific shocks and macroeconomic effects.Abstract: This paper investigates whether product market power affects trade credit decisions. We exploit the 2007-08 credit crisis in the U.S. as a source of variation in the importance of product market power for trade credit. We find that a one standard deviation increase in market power is associated to a decrease in payables of approximately four days during the crisis, showing that high market power firms alleviate financial constraints from their suppliers to avoid the loss of monopoly rents. Our inferences are robust to the use of structural and non-structural measures of market power, both at the firm and at the industry levels, and to the inclusion of controls to address potential confounding effects deriving from other firm features, including financial constraints, industry specific shocks and macroeconomic effects.

Decision making in trade credit financing: impact of loss aversion and power imbalance

“…Different in context and scope, we focus on studying how power imbalance influences trade credit contracting and the retailer's financing structure. Our work also provides analytical support to some recent empirical studies (e.g., Fabbri and Klapper, 2016; Gonçalves et al., 2018), which confirm that bargaining power affects the supply and decisions of trade credit.…”

“…The widespread usage of trade credit in practice spurs many studies on trade credit financing. Theoretical and empirical studies have associated trade credit with various firm‐specific characteristics, such as market competition among firms (Peura et al., 2017; Wu et al., 2019), accessibility to bank loans (Shenoy and Williams, 2017), bargaining power (Gonçalves et al., 2018), and credit ratings (Kouvelis and Zhao, 2018). However, research on the role of supplier/buyer behavior such as loss aversion in trade credit contracting is relatively limited.…”

Sustainable supply chain management towards disruption and organizational ambidexterity: A data driven analysis

“…Firms with higher market power likely to adore unchallenged leases, and any disruptions within the SC might threaten its maintenance ability. If suppliers involve financial suffering due to the credit crisis and struggle in fulfill market demands, they could suspend manufacture toward the SC and harm to downstream firms ( Gonçalves et al, 2018 ). Therefore, a SC finance-oriented thought is that maintaining systematic payment term extensions against suppliers would result in upstream SC disruptions and causing negative prevarications ( Wetzel & Hofmann, 2019 ).…”

The differential impact of leverage on the default risk of small and large firms

“…However, firms may not get the amount of trade credit they wish for. Indeed, supply of trade credit is affected by suppliers' competition (Chod et al, 2019), suppliers' bargaining power (Fabbri and Klapper, 2016), product market power (Goncalves et al, 2018), and supplier-customer relationships (Shenoy and Williams, 2017).…”