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Trade credit profitability measurement: application in a wholesalerdistributor case

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Author Info

  • Dany Rogers Silva

    (Federal University of Uberlândia)

  • Karem Cristina de Sousa Ribeiro

    (Federal University of Uberlândia)

  • Hsia Hua Sheng

    (Getulio Vargas Foundation)

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    Abstract

    Credit extension evaluation is traditionally marked by customer’s credit risk and his business potential, normally, the profitability that limit utilization may provide the company is not considered. Therefore, the purpose of this paper is to present a trade credit extension profitability measurement model. The literature used for the theoretical basis involves the profitability concept of the Theory of Restrictions (TOC) and the performance measure calculation as in RAROC model. Proposed model was applied in a wholesalerdistributor company and its results have enabled concluding that credit extension to customers rated as low risk is not always the most profitable option. The decision of companies that only take into consideration credit risk and customer size to set the credit limit may entail incorrect decisions that are decreasing the company’s gain instead of increasing the wealth of its owners.

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    Bibliographic Info

    Article provided by Fucape Business School in its journal Brazilian Business Review.

    Volume (Year): 8 (2011)
    Issue (Month): 2 (April)
    Pages: 22-41

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    Handle: RePEc:bbz:fcpbbr:v:8:y:2011:i:2:p:22-41

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    Postal: Fucape Business School Brazilian Business Review Av. Fernando Ferrari, 1358, Boa Vista CEP 29075-505 Vitória-ES
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    Related research

    Keywords: Trade credit; credit risk; theory of restrictions; RAROC.;

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    1. Ferris, J Stephen, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 96(2), pages 243-70, May.
    2. Bams, Dennis & Lehnert, Thorsten & Wolff, Christian C, 2002. "An Evaluation Framework for Alternative VaR Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3403, C.E.P.R. Discussion Papers.
    3. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, American Finance Association, vol. 43(5), pages 1127-41, December.
    4. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, American Finance Association, vol. 42(4), pages 863-72, September.
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