CPA Research Speaker Series (ACCTG) - Austin Sudbury, Carneige Mellon University
Friday, November 8, 2019
2:00 PM - 3:30 PM
TOPIC: Mitigating Supplier Default Risk: Information and the Demand for Trade Credit
ABSTRACT: We bring to light a beneﬁt of trade credit relationships in which large investment-grade ﬁrms borrow from their smaller suppliers despite the ability to secure less expensive ﬁnancing elsewhere. The use of trade credit allows a ﬁrm, which is wary of a supply disruption, to indirectly acquire information regarding the stability of a supplier. This information allows the ﬁrm to improve its sourcing decisions and to better protect against supply chain disturbances. We also show that the demand for trade credit increases with the probability that a supplier is unstable and with the cost of supplier failure to the focal ﬁrm. These results provide theoretical justiﬁcation for various empirical associations documented in the literature on trade credit. Paradoxically, we also show that a necessary condition for trade credit to arise in our setting is that a bank or other ﬁnancial intermediary holds a comparative advantage in lending over the other ﬁrms in our model. This result stands in contrast to much of the theoretical literature on trade credit which justiﬁes inter-ﬁrm lending by assuming the advantage in lending lies with a supplier.
Location:BUS 4-04 (CA Conference Room), Alberta School of Business