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Interest Rates in Trade Credit Markets

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Author Info
Humberto Moreira
Walter Novaes
Klenio Barbosa

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Abstract

There is evidence that suppliers have private information about their customers' credit risk. Yet, interest rates in trade credit markets are usually industry-not-firm specific. Why? If the demand for intermediate products is inelastic, suppliers should raise interest rates until they reach their customers' outside option, which, by definition, cannot reflect information that is privy to suppliers. In contrast, a highly elastic demand induces suppliers with monopoly power to waive interest, making private information once more irrelevant to the trade-credit rate. By characterizing these two equilibria, we obtain implications on when trade-credit rates shouldn't vary with private information held by suppliers.

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 127.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:127

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Related research
Keywords: Trade Credit; Invariance of Interest Rates;

Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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References listed on IDEAS
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  1. Gregory E. Elliehausen & John D. Wolken, 1993. "The demand for trade credit: an investigation of motives for trade credit use by small businesses," Staff Studies 165, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. 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, 06. [Downloadable!] (restricted)
  3. Mian, Shehzad L & Smith, Clifford W, Jr, 1992. " Accounts Receivable Management Policy: Theory and Evidence," Journal of Finance, American Finance Association, vol. 47(1), pages 169-200, March. [Downloadable!] (restricted)
  4. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September. [Downloadable!] (restricted)
  6. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(4), pages 903-37.
  7. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March. [Downloadable!] (restricted)
  8. Benjamin S. Wilner, 2000. "The Exploitation of Relationships in Financial Distress: The Case of Trade Credit," Journal of Finance, American Finance Association, vol. 55(1), pages 153-178, 02. [Downloadable!] (restricted)
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