Taxes and the Theory of Trade Debt

Authors

  • IVAN E. BRICK,

  • WILLIAM K. H. FUNG

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    • Graduate School of Management, Rutgers University. We would like to thank Jack Broyle, Ian Cooper, Julian Franks, Stewart Hodges, E. Han Kim, Stephen Schaefer, Bob Schwartz, and David Whitcomb for helpful suggestions. Comments from a referee of this Journal are gratefully acknowledged. We, of course, retain full responsibility for any errors. An earlier version of this paper was presented at the ninth annual meeting of the European Finance Association, Jerusalem, Israel, 1982.

ABSTRACT

In this paper, we show that taxes motivate the flow of trade credit without involving the assumption of credit market imperfections. The direction of trade credit flow depends on the distribution of marginal tax rates among buyers and sellers. In equilibrium, the trade credit decision follows a tax-induced clientele on both the supply and demand side.

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