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Evidence on the Determinants of Credit Terms Used in Interfirm Trade

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  • Chee K. Ng
  • Janet Kiholm Smith
  • Richard L. Smith

Abstract

Trade credit is created whenever a supplier offers terms that allow the buyer to delay payment. In this paper we document the rich variation in interfirm credit terms and credit policies across industries. We examine empirically the firm's basic credit policy choices: whether to extend credit or to require cash payment; and, if credit is extended, whether to adopt simple net terms or terms with discounts for prompt payment. We also examine determinants of variations in two‐part terms. Results are supportive primarily of theories that explain credit terms as contractual solutions to information problems concerning product quality and buyer creditworthiness.

Suggested Citation

  • Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, June.
    • Handle: RePEc:bla:jfinan:v:54:y:1999:i:3:p:1109-1129
    DOI: 10.1111/0022-1082.00138
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