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Trade credit and customer relationships

Author

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  • Barbara Summers

    (Accounting & Finance Division, Leeds University Business School, University of Leeds, Leeds LS2 9JT, UK)

  • Nicholas Wilson

    (Credit Management Research Centre, Leeds University Business School, University of Leeds, Leeds LS2 9JT, UK)

Abstract

Trade credit is an important economic phenomenon, and a variety of theories have been put forward to explain the decisions firms make on credit extension. The ways in which credit can be used as a strategic tool to support corporate objectives has not, however, been fully discussed. The results presented here provide some support for the extant theory on trade credit extension and for recent empirical papers in this area (e.g. Ng et al., 1999; Petersen and Rajan, 1994). However, our results suggest that trade credit granting has a set of subtle and complex motivations over and above those predicted by standard theory. In particular trade credit extension can be used as a many-faceted marketing|relationship management tool and|or as a means of signalling information to the market or to specific buyers about the firm, its products and its future prospects|commitment. Much of credit extension can be seen as customer focused; for example, encouraging frequent purchasers which offer the potential for relationship development or accommodating customers' demand for credit to help finance their production period. The requirements|bargaining power of large customers can influence a firm to extend more credit. Firms will vary terms in anticipation of capturing new business, to attract specific customers and in order to achieve specific marketing aims. Copyright © 2003 John Wiley & Sons, Ltd.

Suggested Citation

  • Barbara Summers & Nicholas Wilson, 2003. "Trade credit and customer relationships," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(6-7), pages 439-455.
  • Handle: RePEc:wly:mgtdec:v:24:y:2003:i:6-7:p:439-455
    DOI: 10.1002/mde.1041
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    References listed on IDEAS

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    1. Michael S. Long & Ileen B. Malitz & S. Abraham Ravid, 1993. "Trade Credit, Quality Guarantees, and Product," Financial Management, Financial Management Association, vol. 22(4), Winter.
    2. Nadiri, M Ishaq, 1969. "The Determinants of Trade Credit in the U.S. Total Manufacturing Sector," Econometrica, Econometric Society, vol. 37(3), pages 408-423, July.
    3. 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.
    4. Smith, Janet Kiholm, 1987. "Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-872, September.
    5. Schwartz, Robert A., 1974. "An Economic Model of Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(4), pages 643-657, September.
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    Cited by:

    1. Daisuke Tsuruta, 2013. "Customer relationships and the provision of trade credit during a recession," Applied Financial Economics, Taylor & Francis Journals, vol. 23(12), pages 1017-1031, June.
    2. Werner Bönte & Sebastian Nielen, 2010. "Innovation, Credit Constraints, and Trade Credit: Evidence from a Cross-Country Study," Schumpeter Discussion Papers sdp10005, Universitätsbibliothek Wuppertal, University Library.
    3. D. Eric Boyd & F. Javier Sese & Sebastian Tillmanns, 2023. "The design of B2B customer references: A signaling theory perspective," Journal of the Academy of Marketing Science, Springer, vol. 51(3), pages 658-674, May.
    4. Domenico Delli Gatti & Mauro Gallegati & Bruce Greenwald & Alberto Russo & Joseph Stiglitz, 2009. "Business fluctuations and bankruptcy avalanches in an evolving network economy," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 4(2), pages 195-212, November.
    5. Yangyang Huang & Zhenyang Pi & Weiguo Fang, 2021. "Trade Credit with Barter in a Capital-Constrained Supply Chain," Sustainability, MDPI, vol. 13(20), pages 1-15, October.
    6. Massimo Omiccioli, 2005. "Trade Credit as Collateral," Temi di discussione (Economic working papers) 553, Bank of Italy, Economic Research and International Relations Area.
    7. Ketskeméty, László & Pálinkó, Éva & Szabó, Márta, 2010. "Kereskedelmi hitelt alakító paraméterek a magyarországi feldolgozóipari vállalatok körében [Parameters for commercial credit among Hungary's manufacturing companies]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 994-1012.
    8. Frederic Boissay & Reint Gropp, 2007. "Trade Credit Defaults and Liquidity Provision by Firms," Working Paper Series: Finance and Accounting 179, Department of Finance, Goethe University Frankfurt am Main.
    9. Van den Bogaerd, Machteld & Aerts, Walter, 2015. "Does media reputation affect properties of accounts payable?," European Management Journal, Elsevier, vol. 33(1), pages 19-29.
    10. Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Russo, Alberto & Stiglitz, Joseph E., 2010. "The financial accelerator in an evolving credit network," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1627-1650, September.
    11. Farah Saerens & Stefanie Ceustermans, 2021. "Abbreviated or Micro-Entity Accounts? Effect of Financial Reporting Format on the Availability of Trade Credit," Sustainability, MDPI, vol. 13(15), pages 1-18, July.
    12. Dariusz Nowak & Sławomir Gorczynski, 2020. "A Qualitative Approach to Trade Credit in Business Organisations," Business Management, D. A. Tsenov Academy of Economics, Svishtov, Bulgaria, issue 1 Year 20, pages 25-41.
    13. Xing Yu & Huaizhe Chen & Kongzhuo Xiang & Zhongkai Wan, 2021. "Supply chain financing mechanism with guarantee insurance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(2), pages 308-318, March.

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