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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
DOI: 10.2307/2331291
Stable URL: http://www.jstor.org/stable/2331291
Page Count: 16
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Product Risk, Asymmetric Information, and Trade Credit
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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.

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