Essays on Trade Credit

Abstract

This dissertation investigates how variation in trade credit standards play a role in firm maturation. In Chapter 1, I survey existing research in trade credit. Following this, I identify lifecycle trends in supplier trade credit policy in Chapter 2. Young suppliers assume greater risks in trade credit provision early in their lifecycles in order to advance growth and product market agendas. There is a peak around a supplier's IPO in the riskiness of trade credit supplied, measured by doubtful receivables and the length of credit provided (receivables length). I find that young firms in industries where customer-supplier relationships are more significant have higher doubtful receivables, consistent with suppliers varying trade credit standards to build relationships. Additionally, young suppliers with more complex products (as measured by R&D intensity) offer longer duration loans compared to suppliers of similar age. Offering riskier trade credit terms affects economic outcomes. In Chapter 3, I study if varying trade credit standards for the purpose of relationship building is a viable strategy for all firm maturities. I use the incidence of a major free trade agreement to study firm responses to a major disruption in existing supplier-customer relationships. Chapter 3 posits both supplier driven as well as customer driven explanations for the observed responses, finding evidence consistent with older suppliers have a reduced incentive as well as capacity to engage in relationship building.