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Product Risk, Asymmetric Information, and Trade Credit

Published online by Cambridge University Press:  06 April 2009

Yul W. Lee  and
John D. Stowe
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 28 , Issue 2 , June 1993 , pp. 285 - 300
Copyright
Copyright © School of Business Administration, University of Washington 1993

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