How does the supplier size similarity affect trade credit?

Abstract

Suppliers’ bargaining power mainly comes from their market position or top supplier status. However, it is also affected by the horizontal interaction from top supplier size similarity based on the purchasing proportion of a buyer. Using a sample of listed companies in China, we find an inverted U-shaped relationship between the supplier size similarity with shared customers and trade credit provisions. As size similarity increases, suppliers may increase (decrease) trade credit provision to expand sales (for cash income). That is, based on the degree of supplier size similarity, the similarity may strengthen or weaken the supplier competition. We also find that if the business environment is poor, or if it is during a market crisis, the competition effect from supplier size similarity is not obvious, whereas a small board size of buyer promotes the supplier competition. In addition, the competition effect from supplier size similarity is not observed in state-owned enterprises (SOEs).