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Bargaining power and trade credit: The heterogeneous effect of credit contractions

Author

Listed:
  • Wang, Wenya
  • Xu, Qiyu
  • Yang, Ei

Abstract

High-bargaining-power (low-bargaining-power) customer (supplier) firms borrow (lend) more trade credit according to the literature. We study whether this bargaining power effect strengthens or weakens when credit tightens. We construct a Nash bargaining model of trade credit and show that the effect weakens if the suppliers' financing costs increase more than that of the customers and strengthens if the opposite is true. We find support for model predictions using a unique database of listed firms in China that discloses firms' transaction information with important customers and suppliers. Interest-rate sensitive suppliers, proxied by a non-state ownership, a high debt rollover risk, and a high financial constraint index, reduce trade credit to their high-bargaining-power customers during credit contractions, while interest-rate sensitive and high-bargaining-power customers, proxied by similar indices, borrow more trade credit.

Suggested Citation

  • Wang, Wenya & Xu, Qiyu & Yang, Ei, 2024. "Bargaining power and trade credit: The heterogeneous effect of credit contractions," Journal of Banking & Finance, Elsevier, vol. 161(C).
    • Handle: RePEc:eee:jbfina:v:161:y:2024:i:c:s0378426624000293
    DOI: 10.1016/j.jbankfin.2024.107109
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    More about this item

    Keywords

    Trade credit; Bargaining power; Credit tightening; Interest-rate elasticity;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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