Management Science and Information Systems#39 Seminar(2013-04)

Title:The Roles of Bank and Trade Credits: Theoretical Analysis and Empirical

Evidence.

Speaker:Dr. Gangshu Cai，Santa Clara University.

Time:Friday, 21 June,2013, 02:00-04:00pm

Location：Room354, Guanghua Building 2

Abstract:

This paper investigates the roles of bank and trade credits in asupply chain with a capital constrained retailer facing demand uncertainty. We evaluate the retailerrsquos optimal order quantity and the creditorsrsquo optimal credit limits and interest rates in two scenarios. In the single-credit scenario, we find the retailer prefers trade credit, if the trade credit market is more competitive than the bank credit market otherwise, the retailerrsquos preference of a specific credit type depends on the risk levels that the retailer would divert trade credit and bank credit to other risky investments. In the dual-credit scenario, if the bank credit market is more competitive than the trade credit market, the retailer first borrows bank credit prior to trade credit, but then switches to borrowing trade credit prior to bank credit as the retailerrsquos internal capital declines. In contrast, if the trade credit market is more competitive, the retailer borrows only trade credit. We further analytically prove that the two credits are complementary if the retailerrsquos internal capital is substantially low but become substitutable as the internal capital grows, and then empirically validate this prediction based on a panel of 674 firms in China over the period 2001ndash2007.

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