Product Risk, Asymmetric Information, and Trade Credit

Yul W. Lee and John Stowe

Journal of Financial and Quantitative Analysis, 1993, vol. 28, issue 2, 285-300

Abstract: The purpose of this paper is to explain cross-sectional variations in trade credit terms across firms and industries. This study shows that there is a separating equilibrium in which the size of the cash discount conveys information about product quality. The driving forces of this equilibrium outcome are the risk-sharing motives of the producer and buyer as well as asymmetric information about product quality. The empirical implications of the model are derived and discussed in relation to industry practices.

Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:28:y:1993:i:02:p:285-300_00

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