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Reverse trade credit or default risk? Explaining the use of prepayments by firms

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  • Mateut, Simona

Abstract

This paper provides a detailed empirical study on the use of advance payments by firms. It establishes that some trade credit theories can also be applied to prepayment. The results, obtained from a large panel dataset, suggest that a series of factors affect prepayments. First, financially stronger customers finance the production of their financially weaker suppliers. Second, advance payments also occur as a response to transaction risk in both domestic and international transactions. Finally, besides financial and warranty reasons, the trading partners' relative bargaining power influences payment terms as well.

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  • Mateut, Simona, 2014. "Reverse trade credit or default risk? Explaining the use of prepayments by firms," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 303-326.
    • Handle: RePEc:eee:corfin:v:29:y:2014:i:c:p:303-326
    DOI: 10.1016/j.jcorpfin.2014.09.009
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    More about this item

    Keywords

    Prepayment; Trade credit; Financing constraints; Warranty; Bargaining power;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F10 - International Economics - - Trade - - - General

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