product risk asymmetric information and trade credit 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

a pure financial explanation for trade credit this paper provided a pure financial explanation for the existence of trade credit and for the values of the credit terms offered to customers two motives for extending trade credit were identified the pure operating flexibility motive arises because the opportunity to change credit policy provides the seller an efficient way to respond to fluctuations in demand this motive was eliminated from consideration in this paper by assuming constant demand the seller must hold a liquid reserve when the financial markets are imperfect and the desire to earn an excess rate of return on this reserve explains the pure financial intermediary motive for trade credit the pure financial incentive to lend this liquid reserve to customers was examined by viewing a market borrowing rate of interest that exceeds the market lending rate of interest as a hindrance to trade or equivalently as a financial market tariff this tariff imposes a wedge between the market prices paid and received for the product plus a loan and thereby inflicts a loss of surplus on the seller and buyers trade credit lending enables the seller and or the buyers to recapture at least part of this loss when the source of the tariff does not apply to direct loans to customers financial market tariffs caused by transactions costs fulfill this requirement because the trade credit lender s familiarity with its customers and product provide it with information and collection cost advantages over financial intermediaries tariffs caused by financial intermediary rents fulfill this requirement as well because the parties to a trade credit loan do not employ the services of a financial intermediary increasing opportunity costs and financial market imperfections in addition to the ones described above establish the limits of credit policy the optimal amount of accounts receivable is derived from the condition that the marginal revenue of trade credit lending is equal to the marginal cost this condition combined with factoring costs produces a unique finite optimal credit period accrual accounting for income tax purposes imposes an additional restriction because the firm is taxed on the recovery of its opportunity costs these limitations on credit policy were examined separately in this paper for clarity but they are in effect simultaneously in practice

price movements and price discovery in futures and cash markets r isk transfer and price discovery are two of the major contributions of futures markets to the organization of economic activity working 1962 evans 1978 p 80 and silber 1981 risk transfer refers to hedgers using futures contracts to shift price risk to others price discovery refers to the use of futures prices for pricing cash market transactions working 1948 wiese 1978 p 87 and lake 1978 p 161 the significance of both contributions depends upon a close relationship between the prices of futures contracts and cash commodities this paper examines the characteristics of price movements in cash or spot markets and futures markets for storable commodities section ii presents an analytical model of simultaneous price dynamics which suggests that over short intervals of time the correlation of price changes is a function of the elasticity of arbitrage between the physical commodity and its counterpart futures contract greater elasticity fosters more highly correlated price changes and thereby facilitates the risk transfer function the elasticity of supply of arbitrage services is constrained by among other things storage and transaction costs thus futures contracts will not in general provide perfect risk transfer facilities over short time horizons the essence of the price discovery function of futures markets hinges on whether new information is reflected first in changed futures prices or in changed cash prices hoffman 1932 pp 258259 the model in section ii provides a framework for analyzing whether one market is dominant in terms of information flows and price discovery in section iii we develop a model based on section ii which is appropriate for estimating the lead lag relationship between cash prices and futures prices section iv presents empirical estimates of the parameters of the model for seven different storable commodities wheat corn oats frozen orange juice concentrates copper gold and silver the cost of arbitrage between cash and futures differs across these commodities for this reason we are not surprised to find inter commodity differences in the correlation of short run price changes and in the substitutability of futures contracts for cash market positions with respect to the price discovery function of futures markets we find that while futures markets dominate cash markets cash prices do not merely echo futures prices there are reverse information flows from cash markets to futures markets as well

the relationship between spot and futures oil prices do structural breaks matter abstract this paper examines the effect of structural breaks on the spot futures oil prices relationship we explore the impact of structural breaks on four critical issues including cointegrating relationships market efficiency under the expectation hypothesis and the no arbitrage rule causalities and forecasting performance of futures oil volatility as far as our empirical results exhibit the structural break we detect endogenously causes some influences on these issues which is in sharp contrast to the conclusions of existing studies our findings offer some implications and suggestions to researchers investors and policymakers

firm valuation earnings expectations and the exchange rate exposure effect consistent with previous research we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar we investigate the possibility that this failure is due to mispricing lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms suggesting that mispricing does occur a simple trading strategy based upon these results generates significant abnormal returns corroborating evidence from returns around earnings announcements as well as errors in analysts forecasts of earnings is also provided it is a widely held view that exchange rate movement should affect the value of a firm standard economic analysis implies that the profitability and value of most u s firms with foreign sales or operations abroad should increase decrease with an unexpected depreciation appreciation of the dollar as expected foreign currency cash flows translate into larger smaller u s

interfirm relationships and informal credit in vietnam trading relations in vietnam s emerging private sector are shaped by two market frictions the difficulty of locating trading partners and the absence of legal enforcement of contracts examining relational contracting we find that a firm trusts its customer enough to offer credit when the customer finds it hard to locate an alternative supplier a longer duration of trading relationship is associated with larger credit as is prior information gathering customers identified through business networks receive more credit these network effects are enduring suggesting that networks are used to sanction defaulting customers

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

trade credit and informational asymmetry commonly used trade credit terms implicitly define a high interest rate that operates as an efficient screening device where information about buyer default risk is asymmetrically held by offering trade credit a seller can identify prospective defaults more quickly than if financial institutions were the sole providers of short term financing the information is valuable in cases where the seller has made nonsalvageable investments in buyers since it enables the seller to take actions to protect such investments traditional explanations for the widespread use of trade credit fall into two categories the financing motive holds that capital market imperfections enable sellers to finance buyer purchases at lower cost than financial institutions ferris 4 argues that trade credit provides payment flexibility and thus reduces the overall need for buyers and sellers to maintain precautionary balances emery 3 contends that noncompetitive rents of financial institutions can be circumvented by sellers and buyers through provision of trade credit however the financing motive is not sufficient to explain why small suppliers offer trade credit the wide cross sectional variation in terms or why large buyers often take the prompt payment discount late a second set of explanations is best described as pricing motivations for trade credit provision nadiri 10 argues that availability of alternative payment terms can increase product demand but does not indicate why the offered terms could not be duplicated by financial institutions schwartz and whitcomb 14 argue that trade credit is used to circumvent robinson patman and similar prohibitions on price discrimination the correctness of this position depends on the charge to users of trade credit exceeding the cost of provision by the seller although the explanation is possible in principle an empirical question remains as to why variations in actual credit terms appear to be based on product market rather than buyer characteristics the literature also contains analyses of the impact of changing macroeconomic conditions on trade credit terms and aggregate credit flows schwartz 13 for example employs a financing motive for trade credit to conclude that restrictive monetary policy can be partly mitigated by liberalization of trade credit terms by firms with relatively easy access to capital markets however a microeconomic

on dynamic linkages of the state natural gas markets in the usa evidence from an empirical spatio temporal network quantile analysis we empirically investigate the dynamic linkages of the state level natural gas markets in the usa by introducing a novel spatio temporal network quantile econometric model we can estimate the dynamic cross state dependency or market integration of the state level natural gas markets and the dependence of the state natural gas markets on the national crude oil market at different quantile levels we find that significant local dynamic neighbouring market integrations exist in the natural gas markets not only in the eastern and central states as evidenced in the literature but also in some western and southwest states our results also show that there are significant linkages of the state level natural gas markets to the national crude oil market through the lagged price shocks and the long run price equilibrium with the national gas markets under varying price shock propagations the results can help local government and energy users to mitigate the negative impacts from the expected or unexpected fluctuations in the oil and the neighbouring natural gas markets which will enact appropriate state level price discovery and energy policy and investment decision makings

price discovery and volatility spillovers in index futures markets some evidence from mexico abstract this paper investigates the hypotheses that the recently established mexican stock index futures market effectively serves the price discovery function and that the introduction of futures trading has provoked volatility in the underlying spot market we test both hypotheses simultaneously with daily data from mexico in the context of a modified egarch model that also incorporates possible cointegration between the futures and spot markets the evidence supports both hypotheses suggesting that the futures market in mexico is a useful price discovery vehicle although futures trading has also been a source of instability for the spot market several managerial implications are derived and discussed

bank information monopoly and trade credit do only banks have information about small businesses according to previous studies a bank can set a higher interest rate for small firms by establishing a lending relationship since information asymmetry limits competition between banks therefore the bank can acquire monopoly rent from small firms however if small firms can use trade credit which is another financial source the bank cannot extract monopoly rent in this article we examine whether small firms can use trade credit if the bank sets a higher interest rate using panel data of small firms in japan our analysis shows that when the interest rate the bank sets is too severe or worsened for the borrower the ratio of trade payables increases and the bank loses its amount of loans this result implies that trade creditors alleviate the problems of bank information monopolies in japan

trade credit and bank relationships evidence from pre world war i belgium we investigate the determinants of trade credit granted by suppliers in a historical environment which was characterized by high information asymmetries and strong banks focusing on the role of bank firm relationships our results which are based on a unique sample of 535 firm year observations for 125 listed belgian firms in four dominant industries in the period 1905 to 1909 are generally consistent with the financing role of trade credit they suggest that trade credit was a tool for channelling funds from firms with close bank ties to other firms which is consistent with findings for contemporary developing countries

cointegration between oil spot and future prices of the same and different grades in the presence of structural change the purpose of this study is to examine whether crude oil spot and futures prices of the same and different grades are cointegrated using a residual based cointegration test that allows for one structural break in the cointegrating vector and high frequency data we choose the us wti and the uk brent as the representative crudes for this analysis since these two crudes have well established spot and futures markets we find that spot and future prices of the same grade as well as spot and futures prices of different grades are cointegrated we examine potential causes of structural change as revealed by the cointegration test in terms of events that have impacted on world oil markets as well as discuss the implications of the results for hedge managers investors and regulators

integration of physical and futures prices in the us natural gas market this paper examines the integration between the prices of different types of physical upstream end use and futures contracts of natural gas in the us for the period of june 1990 dec 2014 to examine the equilibrium relationship between physical and futures prices several cointegration tests are applied the study finds that a futures prices are cointegrated with wellhead power industrial and citygate prices b ng1 futures prices granger cause all physical prices c upstream physical prices granger cause futures prices d shocks to wellhead prices are the only ones among physical prices with persistent long term effects e shocks to futures prices have persistent effects on all physical prices f futures contracts with a longer time to maturity explain a larger portion of commercial gas price variations and g commercial and residential prices show different behavior compared to other physical prices in multiple tests

trade credit and credit rationing asymmetric information between banks and firms can preclude financing of valuable projects trade credit alleviates this problem by incorporating in the lending relation the private information held by suppliers about their customers incentive compatibility conditions prevent collusion between two of the agents e g the buyer and the seller against the third e g the bank consistent with the empirical findings of petersen and rajan 1995 firms without relationships with banks resort more to trade credit and sellers with greater ability to generate cash lows provide more trade credit finally small firms react to monetary contractions by using trade credit consistent with the empirical results of nilsen 1994 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

trade credit and the bank lending channel the bank lending channel theory posits that during monetary contractions banks restrict some firms loans thus reducing their desired investment independently of interest rates previous research finds small firms reduce while large firms accelerate loan growth we find that small firms increase trade credit a substitute credit indicating a strong loan demand it supports the bank lending channel they do not voluntarily cut bank loans since they increase a less desirable alternative using trade credit is propitious since unlike commercial paper investigated by previous researchers it is widely used by the small firms suffering the loan decline surprisingly we also find large firms increase trade credit a puzzle since they are typically assumed to have wide access to other credit using individual manufacturing firm data we find the reasons large firms use trade credit are financial in nature those without a bond rating increase trade credit that is without access to open market credit as relatively few firms have this mark of quality it implies that more firms are affected by credit constraints than previously believed

in kind finance a theory of trade credit it is typically less profitable for an opportunistic borrower to divert inputs than to divert cash therefore suppliers may lend more liberally than banks this simple argument is at the core of our contract theoretic model of trade credit in competitive markets the model implies that trade credit and bank credit can be either complements or substitutes among other things the model explains why trade credit has short maturity why trade credit is more prevalent in less developed credit markets and why accounts payable of large unrated firms are more countercyclical than those of small firms

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

commodity convenience yield and risk premium determination the case of the u s natural gas market this paper contributes to the understanding of commodity pricing issues by measuring and modeling two of the most important concepts in the storable commodity markets the convenience yield and risk premium an emphasis is placed on the empirical determination of these factors in the u s natural gas market we find that the convenience yield and risk premium are measurable and economically significant while we find that the determination of the convenience yield is largely consistent with economic theories the evidence regarding the determination of the risk premium is mixed

optimal hedging in the us natural gas market the effect of maturity and cointegration abstract we use the us natural gas market as the rich experimental context to test multiple features of hedging performances first we compare the hedging effectiveness of a single futures contract i e henry hub used for hedging six different physical price positions second we examine the performance of hedging when one uses a futures contract with time to maturity beyond the hedging horizon i e a non matching hedging strategy finally we quantify the effect of accounting for cointegration and also the time varying volatility in the calculation of optimal hedge ratios as a robustness check we conduct our analysis using both ex ante out of sample and ex post in sample methods our findings suggest that using longer maturity contracts may improve the hedging effectiveness we also find that accounting for cointegration and time varying prices has minimal effect on the hedge ratio and hedging effectiveness for almost all physical prices our findings can inform businesses exposed to commodity price risks in on making better risk management decisions

did j p morgan s men add liquidity corporate investment cash flow and financial structure at the turn of the twentieth century this article presents evidence suggesting that the relationship that existed between the partnership of j p morgan and its client firms partially resolved the latter s external financing problems by diminishing the principal agent and asymmetric information problems i estimate and compare investment regression equations for a sample of morgan affiliated companies and a control group of nonaffiliated companies the econometric results seem to indicate that companies not affiliated to the house of morgan were liquidity constrained

a transactions theory of trade credit use this paper derives a transactions theory of trade credit use from the motives of trading partners to economize on the joint costs of exchange in the formal analysis uncertain delivery time is used to generate a demand by firms to hold inventories of both goods and money trade credit is viewed as a mechanism that separates the exchange of money from the uncertainty present in the exchange of goods by forewarning both trading partners of the timing of money flows credit permits a reduction in precautionary money holdings and the more effective management of net money accumulations

price interactions and discovery among natural gas spot markets in north america recent advances in modeling causal flows with time series analysis are used to study relationships among eight north american natural gas spot market prices results indicate that the canadian and us natural gas market is a single highly integrated market further results indicate that price discovery tends to reflect both regions of excess demand and supply across north america malin hub in oregon chicago hub illinois waha texas and henry hub louisiana region are the most important markets for price discovery opal hub in wyoming is an information sink in contemporaneous time receiving price information but passing on no price information aeco hub in alberta canada receives price signals from several markets and passes on information to opal and the oklahoma region

market integration and price transmission in the u s natural gas market from the wellhead to end use markets abstract examination of the upstream downstream pricing behavior in u s natural gas industry reveals that a natural gas markets are integrated but subject to regime shifts and asymmetric adjustments suggesting market imperfections b demand and supply side shocks play important roles in determining short run price movements as evidenced by tests of causality and impulse response functions c the response of end use prices to deviations from equilibrium with wellhead prices vary electrical industrial and city gate prices adjust fast while commercial and residential prices adjust slowly consistent with the role of administered pricing in later markets d long run variations in end use prices are primarily due to their own shocks while long run variations in wellhead prices are due to innovations in residential and electrical prices these findings point to the importance of demand shocks as the primary determinant of natural gas prices in the long run

does trade credit redistribution thwart monetary policy evidence from italy italy is an ideal candidate for testing the credit view of the transmission mechanism because of a bank centred financial structure a sizeable trade debt and an economy titled towards small firms an empirical analysis of trade credit and debt on averaged panel data shows that small firms act as financially constrained and cycle sensitive whereas large ones aim at smoothing sales adopt an integrated management of inventories and receivables and have a higher trade debt to purchases elasticity on balance the net trade credit channel does not as implied by the credit view shield small firms from a monetary squeeze

an optimal financial response to variable demand this paper develops a positive theory of trade credit based on its use as a financial response to deterministic variations in demand the operating alternatives to trade credit which include the use of storage or additional capacity are modeled using results from the peak load pricing literature the paper shows that the extension of credit partitions the buyer s inventory cost and permits specialization at incurring the components of this cost this specialization is economical when the seller has an advantage at incurring the financial cost and does not have an advantage at incurring the operating cost of accommodating variable demand conditions that provide these necessary and sufficient cost relationships are described the paper also shows that a reduction in costs rather than an increase in revenues is the source of both the buyer s and seller s increase in wealth

does bank affiliation mitigate liquidity constraints evidence from germany s universal banks in the pre world war i period this paper compares two similar samples of mining and steel corporations in pre world war i germany one sample consists of corporations that were affiliated to one or more of the german universal banks and the second sample consists of companies that had to rely on other sources of finance statistical analysis conducted in the framework of a linear fixed effects model indicates that the non affiliated companies were liquidity constrained the paper also sets out the corporate control structure as laid down in the trade law reform of 1884 and traces the origins of the current german dual board system as well as the origins of several other aspects of the institutions that tied the german banking system to industrial concerns

explaining exchange rate risk in world stock markets a panel approach using a garch approach we estimate a time varying two factor international asset pricing model for weekly equity index returns of 16 oecd countries a trade weighted basket of exchange rates and the msci world market index are used as risk factors we find significant currency risk exposures in country equity index returns we then explain these currency betas using several country specific macroeconomic variables with a panel approach we find that imports exports credit ratings and tax revenues significantly affect currency risks in a way that is consistent with some economic hypotheses similar conclusions are obtained by using lagged explanatory variables and thus these macroeconomic variables may be useful as predictors of currency risk exposures our results are robust to a number of alternative specifications

an agency model to explain trade credit policy and empirical evidence this article explains trade credit policy based on the agency theory according to this theory we have developed an agency model based on the adverse selection and moral hazard phenomena arising from the relation between sellers and buyers this model has been estimated by using panel data methodology applied to uk companies our findings strongly support the model proposed we find that smaller firms those with a smaller proportion of fixed assets and those that are less profitable extend more trade credit whereas firms with a high proportion of variable costs and high percentage of bad debts extend less

the role of underground storage in the dynamics of the us natural gas market a threshold model analysis abstract natural gas is an important source of energy in the global economy hence understanding the drivers of its prices is of significant interest for the many economic agents this paper investigates the role of inventories for the dynamics of the u s natural gas market our contribution is twofold first within the threshold structural var framework we demonstrate that in a low inventory regime spot prices are more responsive to economic fundamentals in comparison to situation in which the inventories are high second we present evidence that the level of natural gas inventories have a significant effect on the relationship between spot and futures prices

when do trade credit discounts matter evidence from italian firm level data italian firms are top users of trade credit in an international comparison the paper offers some clues to the determinants of this stylized fact exploiting the answers of about 1900 manufacturing firms on a wide range of contractual features separately for domestic and foreign customers the main finding of the univariate analysis is that with the almost totality of transactions made on credit there is no evidence that this way of financing is more expensive than loans an econometric investigation shows that discounts offered have the expected effect of reducing payment delays mostly for customers located abroad where customary credit periods are shorter and creditors rights protection is more effective the result is consistent with the poor explanatory power of discounts received in regressions for the trade debt period of domestic firms