The Economics of Trade Credit: Risk and Power

While trade credit theories predict suppliers are forced to extend more trade credit to important customers with bargaining power, diversification principles would suggest suppliers limit large credit exposures with significant customers. Using a unique hand-collected dataset of trade credit at the customer-supplier level, I examine whether suppliers extend more trade credit to more important customers. Contrary to expectations from existing literature, I find that suppliers limit trade credit concentrations, with relative trade credit decreasing in the supplier's sales dependence on the customer. I find evidence of a bank monitoring mechanism, as the results only hold for suppliers with outstanding bank loans. Results are strongest in cases where bank monitoring is expected to be more intense.