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Reverse trade credit or default risk? Explaining the use of prepayments by firms

Simona Mateut

Journal of Corporate Finance, 2014, vol. 29, issue C, 303-326

Abstract: This paper provides a detailed empirical study on the use of advance payments by firms. It establishes that some trade credit theories can also be applied to prepayment. The results, obtained from a large panel dataset, suggest that a series of factors affect prepayments. First, financially stronger customers finance the production of their financially weaker suppliers. Second, advance payments also occur as a response to transaction risk in both domestic and international transactions. Finally, besides financial and warranty reasons, the trading partners' relative bargaining power influences payment terms as well.

Keywords: Prepayment; Trade credit; Financing constraints; Warranty; Bargaining power (search for similar items in EconPapers)
JEL-codes: F10 G31 G32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:29:y:2014:i:c:p:303-326

DOI: 10.1016/j.jcorpfin.2014.09.009

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