Trade Credit Terms: Asymmetric Information and Price Discrimination Evidence from Three Continents

• Main Authors: Pike, Richard, CHENG, Nam Sang, Cravens, Karen, Lamminmaki, Dawne
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2005
• Subjects: Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/689; http://dx.doi.org/10.1111/j.0306-686X.2005.00627.x
• Institution: Singapore Management University

Trade credit terms offer firms contractual solutions to informational asymmetries between buyers and sellers. The credit period permits buyers to reduce uncertainty concerning product quality prior to payment, while the seller can reduce uncertainty concerning buyer payment intentions by prescribing payment before/on delivery or through two 2010 part payment terms and other mechanisms. Variation in trade credit terms also offers firms price discriminating opportunities. This study, drawing on the responses of 700 large firms in the US, UK and Australia, explores trade credit terms through the twin objectives of reducing information asymmetries and discriminatory pricing. Support is found for both theories.