Brennan is from Graduate School of Management, University of California, Los Angeles. Maksimovic and Zechner are from Faculty of Commerce and Business Administration, University of British Columbia. We would like to thank James Brander, Rob Heinkel, Gordon Sick, Joseph Williams, an anonymous referee, and the participants of the UBC Finance Workshop for their comments. We are responsible for all remaining errors.
Article first published online: 30 APR 2012
1988 The American Finance Association
The Journal of Finance
Volume 43, Issue 5, pages 1127–1141, December 1988
How to Cite
BRENNAN, M. J., MAKSIMOVICs, V. and ZECHNER, J. (1988), Vendor Financing. The Journal of Finance, 43: 1127–1141. doi: 10.1111/j.1540-6261.1988.tb03960.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper shows that, even in the presence of a perfectly competitive banking industry, it is optimal for firms with market power to engage in vendor financing if credit customers have lower reservation prices than cash customers or if adverse selection makes it infeasible to write credit contracts that separate customers according to their credit risk. We analyze how the advantage of vendor financing depends on the relative size of the cash and credit markets, the heterogeneity of credit customers, and the number of firms in the industry.