Trade credit in Europe

The study of trade credit is well justified by its importance as a source of finance for the corporate sector in most western countries. Trade credit is special, however, because its use may be driven by different factors compared to other sources of finance. Trade credit may follow the flow of goods and services through a company, and thus be sensitive to operational rather than financial factors. Further, firms that supply trade credit assume the role of financial intermediaries. This role is commonly considered to be based on the possibilities to resolve market imperfections in the normal course of business and not as a separate activity. This may eliminate, or even reverse, the effect of market imperfections compared to other forms of financialintermediation such as banking. This paper addresses these issues from a theoretical as well as an empirical point of view. It discusses the theories of trade credit found in the literature and the market imperfections on which they are based. Their conclusions are summarized in a number of hypotheses that are tested empirically. The data used in the study refer to different European countries. To our knowledge, trade credit has not been studied on this European wide scale before. The main conclusion of this paper is that receivables and payables generally are not influenced in opposite directions by the determinants suggested in the literature, but in the same direction. Further a strong industry influence is found in the use of trade credit.