Trade credit, product quality, and intragroup trade: Some European evidence

Long, Malitz, and Ravid (1993) proposed a model based on the idea that the major purpose of trade credit is to allow buyers to assess the quality of the firm's products before paying. In this paper, we apply a similar methodology not only using a sample of industrial firms, but also a sample of Belgian wholesale distribution firms. Furthermore, we develop and test two additional hypotheses, based on the observation that industrial and financial groupings play an important role in the Belgian economy. While our results partially confirm the four hypotheses of Long et al., we find evidence that a firm selling to a linked customer extends trade credit for reasons other than assessing product quality. We find that when a firm has a shortage of cash, investment in accounts receivable from linked firms is reduced. An excess of cash does not seem to influence trade credit policy.