The trade credit decision: evidence of UK firms

Nam Sang Cheng · Richard H. Pike

125 citations0/0 files storedManagerial and Decision Economics

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Working Capital and Financial Performance Corporate Finance and Governance Supply Chain and Inventory Management

Abstract

Abstract Trade credit finance and credit management are gradually gaining the research attention an area of such importance merits. One area, still far from resolved, is why trade credit is extended by non‐financial firms to customers. This paper seeks to identify the generic forces behind the trade credit offer and to explore the empirical support for 20 propositions on credit motives derived from the literature and the implications of such motives to credit policies. The paper reports findings from a survey of senior finance officers involved in credit management in large UK companies. It assesses the degree to which theoretical explanations for granting trade credit are experienced in practice and whether observed differences attaching to credit motives among firms are associated with variations in credit policies and debtor days. The study found strong empirical support for seven propositions linked to competitiveness, pricing, investment and financing, and weaker support for a number of other theoretically‐derived motives for trade credit extension. Factor analysis suggested a more insightful approach to classifying trade credit motives, covering investment in customers, customer's operating and financial benefits, supplier's marketing/operational benefits and market pressure to conform. In addition, two factors—customer relations and pricing flexibility—were extracted as motives for varying credit terms. Consistent with our hypothesis average debtor days were found to be significantly higher for those firms emphasising the financing, investment, and pricing flexibility propositions. These findings, and implications for future research, are explored. Copyright © 2003 John Wiley & Sons, Ltd.

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References

1979Transaction-Cost Economics: The Governance of Contractual Relations 1990Zero defections: quality comes to services.1987Trade Credit and Informational Asymmetry 1999Evidence on the Determinants of Credit Terms Used in Interfirm Trade 1993Trade Credit, Quality Guarantees, and Product Marketability 1992Accounts Receivable Management Policy: Theory and Evidence 1974An Economic Model of Trade Credit 1981A Transactions Theory of Trade Credit Use

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