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The Exploitation of Relationships in Financial Distress: The Case of Trade Credit

The Exploitation of Relationships in Financial Distress: The Case of Trade Credit This paper develops optimal pricing, lending, and renegotiation strategies for companies in relationships where one firm is highly dependent on the other. Long‐term trade—creditor firm relationships induce dependent trade creditors to grant more concessions in debt renegotiations than nondependent creditors. Anticipating these larger renegotiation concessions, not only do less financially stable firms prefer trade credit, but all firms agree to pay a higher interest rate for trade credit. The model also explains the existence of “teaser” interest rates and convenience classes. Findings are consistent with those of the relationship‐lending literature. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

The Exploitation of Relationships in Financial Distress: The Case of Trade Credit

The Journal of Finance , Volume 55 (1) – Feb 1, 2000

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References (42)

Publisher
Wiley
Copyright
© American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/0022-1082.00203
Publisher site
See Article on Publisher Site

Abstract

This paper develops optimal pricing, lending, and renegotiation strategies for companies in relationships where one firm is highly dependent on the other. Long‐term trade—creditor firm relationships induce dependent trade creditors to grant more concessions in debt renegotiations than nondependent creditors. Anticipating these larger renegotiation concessions, not only do less financially stable firms prefer trade credit, but all firms agree to pay a higher interest rate for trade credit. The model also explains the existence of “teaser” interest rates and convenience classes. Findings are consistent with those of the relationship‐lending literature.

Journal

The Journal of FinanceWiley

Published: Feb 1, 2000

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