Trade Credit and Informational Asymmetry

Janet Smith

Journal of Finance, 1987, vol. 42, issue 4, 863-72

Abstract: Commonly used trade credit terms implicitly define a high interest rate that operates as an efficient screening device where information about buyer default risk is asymmetrically held. By offering trade credit, a seller can identify prospective defaults more quickl y than if financial institutions were the sole providers of short-ter m financing. The information is valuable in cases where a seller has made nonsalvageable investments in buyers since it enables the seller to take actions to protect such investments. Copyright 1987 by American Finance Association.

Date: 1987
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