Title: Impact of trade credit on supply chains with downgraded customers

Authors: Lan Luo; Yinfei Chen; Steve Liu

Addresses: Department of Management, Marketing and Entrepreneurship, Barney School of Business, University of Hartford, Auerbach 311B, 200 Bloomfield Ave., West Hartford, Connecticut 06117, USA ' Department of Finance, School of Business, Central Connecticut State University, Vance Hall, Room 463-02, 1615 Stanley Street, New Britain, CT 06050, USA ' Department of Business and Information Technology, College of Art, Science and Business, Missouri University of Science and Technology, 101 Fulton Hall, 301 West 14th Street, Rolla, MO 65409, USA

Abstract: Trade credit is the liquidity provision from suppliers to customers. In this paper, we examine the use of trade credit in the supply chain after customer firm's credit rating being downgraded. We find that trade credit is likely to decrease after customers getting downgraded credit ratings. We further show that suppliers and customers will be both better off in profitability if trade credit increases following customers' credit rating downgrades. Given that the use of trade credit generally has a significant positive effect on suppliers' and customers' profitability, we show that this effect is stronger when customers receive credit rating downgrades. The empirical evidence in our paper suggests that strengthening the financial collaborations in the supply chain is a superior strategy relative to shrinking the financial collaborations under the circumstance that customer firms suffer from a growing financial constraint and financial distress.

Keywords: trade credit; credit rating; credit rating downgrade; bond rating; supply chain management; supply chain efficiency; profitability; risk management; financial distress; financial collaboration; supply chain coordination.

DOI: 10.1504/IJLEG.2020.114799

International Journal of Logistics Economics and Globalisation, 2020 Vol.8 No.4, pp.354 - 374

Received: 16 Dec 2020
Accepted: 02 Feb 2021

Published online: 30 Apr 2021 *

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