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Product Risk, Asymmetric Information, and Trade Credit
Yul W. Lee and John D. Stowe
The Journal of Financial and Quantitative Analysis
Vol. 28, No. 2 (Jun., 1993), pp. 285-300
Published by: Cambridge University Press on behalf of the University of Washington School of Business Administration
Stable URL: http://www.jstor.org/stable/2331291
Page Count: 16
You can always find the topics here!Topics: Cash discounts, Trade credit, Business orders, Risk aversion, Cash, Prices, Credit risk, Investment risk, Payments, Cash sales
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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.
The Journal of Financial and Quantitative Analysis © 1993 University of Washington School of Business Administration