An Agency Model for Trade Credit Policy
This article proposes an agency model to explain the trade credit offer to clients. Our model is based on the existence of asymmetric information between sellers and buyers, which results in the appearance of two phenomena known as adverse selection and moral hazard. The former has already been explored by other authors, but not the latter, i.e., the possibility of the buyer not paying the provider. The results obtained indicate that days of sales outstanding of firms are positively related to adverse selection and negatively related to moral hazard. In order to test the moral hazard hypothesis, we use three variables: variable cost, demand elasticity and bad debts. Variable cost and demand elasticity present the expected relation, but bad debts only presents the negative expected relation at low levels, which suggests that when a firm presents high levels of bad debts the risk of the portfolio of clients is also high. In this case, the clients are more likely to present a low liquidity situation and consequently do not take advantage of the use of cash discounts. Traditional models are also tested and compared with the proposed model. We did not find evidence to support tax theory or to support the operational argument of transaction cost theory. We find weak evidence to support the liquidity theory, while the asymmetric information theory was confirmed. A comparison between the agency model proposed and traditional models concluded that the Agency model reached better results in the explanation of the subject of study.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||Jun 2005|
|Publication status:||Published in Applied Economics, vol. 39, no. 20, november, 2007, pages 2631-2642.|
|Contact details of provider:|| Postal: Avda. Valle Esgueva, 6, 47011 Valladolid|
Phone: +34 983 420000 ext. 4392
Fax: +34 983 423899
Web page: http://www3.uva.es/empresa/
More information through EDIRC
|Order Information:|| Postal: Av. Valle de Esgueva, 6. E-47011-Valladolid (Spain)|
When requesting a correction, please mention this item's handle: RePEc:ntd:wpaper:2005-03. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fortuna-Lindo, Jose M.)
If references are entirely missing, you can add them using this form.