Shareholder Returns from Supplying Trade Credit

Authors


  • We thank two anonymous referees, Janet Kiholm Smith, Lorenzo Preve (Discussant), Bill Christie (Editor), and conference seminar participants at the 2010 FMA Annual Meeting (New York) for helpful comments and suggestions. All remaining errors are our own.

Matthew D. Hill is an Assistant Professor and the J. Ed Turner Chair of Real Estate in the Department of Finance at the University of Mississippi, University, MS. G. Wayne Kelly is an Associate Professor in the Department of Finance, Real Estate, and Business Law at the University of Southern Mississippi, Hattiesburg, MS. G. Brandon Lockhart is an Assistant Professor in the Department of Finance at the University of Nebraska—Lincoln, Lincoln, NE.

Abstract

We examine shareholder wealth implications of supplying financing to customers. Robust results suggest that excess returns and changes in trade receivables are directly and significantly related. Further evidence indicates the value of receivables is higher for suppliers with stronger motives relating to operating and contracting costs. The results also suggest a discounted value of receivables for financially unconstrained firms. Overall, we conclude that investors recognize trade credit as an effective instrument in mitigating frictions hindering sales growth. Thus, certain suppliers are positioned to derive increased strategic benefits from credit policy.

Ancillary