Product Risk, Asymmetric Information, and Trade Credit
- 1 June 1993
- journal article
- Published by JSTOR in Journal of Financial and Quantitative Analysis
- Vol. 28 (2) , 285
- https://doi.org/10.2307/2331291
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.Keywords
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