The Trade Credit Decision: Evidence of UK Firms
Trade credit ﬁnance and credit management are gradually gaining the research attention an area of such importance merits. One area, still far from resolved, is why trade credit is extended by non-ﬁnancial ﬁrms to customers. This paper seeks to identify the generic forces behind the trade credit oﬀer and to explore the empirical support for 20 propositions on credit motives derived from the literature and the implications of such motives to credit policies.The paper reports ﬁndings from a survey of senior ﬁnance oﬃcers involved in credit management in large UK companies. It assesses the degree to which theoretical explanations for granting trade credit are experienced in practice and whether observed diﬀerences attaching to credit motives among ﬁrms are associated with variations in credit policies and debtor days.The study found strong empirical support for seven propositions linked to competitiveness, pricing, investment and ﬁnancing, and weaker support for a number of other theoretically- derived motives for trade credit extension. Factor analysis suggested a more insightful approach to classifying trade credit motives, covering investment in customers, customer’s operating and ﬁnancial beneﬁts, supplier’s marketing/operational beneﬁts and market pressure to conform. In addition, two factors - customer relations and pricing ﬂexibility - were extracted as motives for varying credit terms. Consistent with our hypothesis average debtor days were found to be signiﬁcantly higher for those ﬁrms emphasising the ﬁnancing, investment, and pricing ﬂexibility propositions. These ﬁndings, and implications for future research, are explored.
Trade Credit, Credit Motives, Investment in Customers, Financial Benefits, Marketing Benefits, Customer Relations, Pricing Flexibility
Finance and Financial Management
Accounting Information System
Managerial and Decision Economics
Wiley: 24 months
CHENG, Nam Sang and PIKE, Richard.
The Trade Credit Decision: Evidence of UK Firms. (2003). Managerial and Decision Economics. 24, (6-7), 419-438. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/1524